Besides insurance policies that provide basic coverage, construction companies should take care to ensure coverage for damage to third parties and be on the alert for exclusion clauses that can void indemnification in the event of an accident.
Growth in the sector of construction in Brazil, and the consequent increase in the fleet of mobile equipment used at construction sites, is driving demand for insurance coverage for these machines. What we have here is a relatively new practice in the market, but a practice that has grown due to the ever increasing number of incidents such as accidents, damage to third parties/third-party property and even robbery or theft. Thus, this type of service resembles, more and more, what is done in the automotive sector, requiring knowledge to buy the ideal insurance so as to get proper compensation and ensure, in fact, coverage for the construction company’s assets.
At Galvão Engineering, which operates a fleet with an average of 1,100 wholly-owned and rented machines, the purchase of insurance is evaluated according to the company’s risk management policy. Thus, it is related to how much the company risks losing in the case of accidents. Silvimar Fernandes Reis, superintendent of logistics and supplies at Galvão, explains that the increase in demand for insurance is proportional to the growth in the construction company’s fleet.
“Based on this increase in and the movement of the equipment fleet, we calculate the aversion to risk, which varies from one contractor to another,” he says. This ‘relativity’ described by the expert also takes into account the history of operations, something that, for him, may allude to landmark cases such as the accident in the ‘Yellow Line’ of the São Paulo Metro in 2006, or even to the miners in Chile who were trapped underground in 2010. “In other words, when building a Metro, for example, one has to think twice before waiving insurance,” he summarizes.
The definition of risk factors that will determine which equipment in the fleet should be insured at Galvão Engineering further takes into account whether the region of operation is more or less dangerous as refers to accidents or theft, the working conditions at the site, and the history of accidents for the region and for the type of equipment.
In the opinion of Anselmo do Ó de Almeida, president of the Interbrok Group - an insurance broker specializing in equipment and operating in Brazil, Galvão is on track with regard to the careful assessment of risk. “When we talk about equipment insurance, we must divide the work of the construction company in ensuring the protection of their own assets and those that the contractor leases,” he explains.
As regards equipment that the company owns, Almeida says it is increasingly common for companies to purchase full annual policies capable of ensuring reimbursement whether the machine is anywhere in Brazil or even abroad. He notes that the contracting of specific insurance for operations at a particular project has fallen into disuse due to the constant need to mobilize and demobilize machines.
In the case of rented equipment, it is necessary first to examine the rental contract to see who is responsible for insuring the equipment. According to Almeida, construction companies usually opt for rental companies that already include insurance in the rental of the equipment, limiting its responsibility for the operation of the asset. “That's when the rental already excludes the involvement of the operator which, then, determines a complete exemption of the contractor from liability,” he says.
According to the expert at Interbrok, basic insurance coverage for equipment rental companies and contractors falls under the category of ‘Miscellaneous Risks’ and allows the inclusion of some details, such as the possible idleness/downtime of equipment. “If a machine is not in use for a few months out of the year, for example - something increasingly rare due to a heated construction market and the increased efficiency of fleet managers, it is possible to ‘dose’ the price of the policy according to its use.” Practices such as this one, he said, require proximity between the insurance broker and the construction company for the constant alignment of policy conditions with the insurer.
Fernanda de Melo Lopes, account executive at Aon, another brokerage firm specializing in insurance of equipment, reveals that basic coverage (Miscellaneous Risks) is the most widely adopted for construction equipment, and its annual cost is usually around 1% of the total cost of the equipment. “This kind of insurance provides coverage for damage to equipment in the case of accidents, theft, flooding, fires and even during transportation of the equipment by another carrier vehicle, whether by land (truck) or water,” she says.
Almeida of Interbrok adds that this coverage also extends to cases involving the assembly and disassembly of equipment. “In an operation that involves the mobilization of a crane, for example, the breaking of the boom while hoisting can result in damage to equipment that is being assembled and the insured party can be reimbursed for the asset that has been damaged.” The insurance specialist points out that he has already witnessed incidents of this kind.
According to Almeida, there are aggravating circumstances which may represent additional cost in insurance policies, such as operations near water or inside tunnels. Although not included in the coverage provided by a basic policy, you can include an addendum to cover these operations, something that the contractor should evaluate along with the broker. “Before getting insurance, the contractor should outline the complete planning of the use of the equipment throughout the year, notifying the broker, if necessary, of equipment’s operation under those aggravating factors.” He warns that failure to provide such information, in such cases, will result in denial of indemnification in the event of an accident.
Operation near water or in tunnels are some of the basic policy's exclusion clauses. These texts are presented in tiny little letters at the end of contracts and call for particular attention, according to Almeida. As a matter of concept, the expert explains that an insurance contract is characterized by the sudden and the unexpected; therefore, the absence of these two principles implies in non-reimbursement of the insured party. “In other words, the fleet manager should not know when and what will happen to his asset for the claim to be reimbursable.”
As an example, the specialist cites damage caused to equipment during shipping by sea, such as rusting of the equipment body. "In these cases, there is no indemnification since the insurer characterizes such damage as the result of lack of maintenance (inadequate painting) or a manufacturing defect, something that should be charged to the machine manufacturer in the latter case," he states.
When it comes to exclusion clauses, Carlos Bevilacqua, claims manager at Aon, calls our attention to the training of operators. He explains that insurance companies have tightened their siege on the indemnification of claims, requiring not only the qualification of the professional operating the equipment, but also a certificate that he has received a particular number of hours of training. “Last year we had cases of accidents involving construction equipment in which the insurers did not reimburse losses from damage to the machine and damage to third parties claiming a lack of operator qualification.”
Damage to third parties
Besides protecting their own assets, construction companies have paid closer attention to the practice of insuring against damage to third parties. Silvimar Reis of Galvão Engineering reveals that the risk of not insuring can be assumed for certain machines when the company determines that the cost of insuring them is not worth the cost that would result from their loss. “However, guarding against damage to third parties is a matter that is weighed more carefully. We usually get third party coverage for indemnification of material and bodily damage which may mean losses that by far exceed the total loss of the equipment,” he says.
Anselmo Almeida, of Interbrok, endorses the modus operandi proposed by the Galvão executive and points out that the greatest risks involving construction equipment insurance are related to damage to third parties who may be insured under a policy of “Responsabilidade Civil Facultativa” (Optional Third Party Liability Insurance). “A few years ago, Brazilian legislation was not as concerned with providing for the indemnification of third parties, but this scenario has changed and an accident involving citizens or even public property can result in the awarding of huge figures,” he says.
The specialist points out that the frequency of this type of accident has increased to a degree that some contractors have not yet realized. “This is a mistake, because unlike the insurance of equipment, in which risk is represented by a tangible value, damage to third parties represent unpredictable risks that can compromise the profitability of a project,” he adds. In addition, the new Brazilian Civil Code establishes that project managers themselves may be held liable for damages caused to third parties.” In other words, a suit may be brought upon both the corporate person and the individual, which has happened with some frequency and even involved a freeze on the personal assets of the project’s engineers.”
The cost of an Optional Civil Liability policy, he says, varies with the risk of the operation. "To provide for compensation to third parties of R$ 1 million (US$ 571.4 thousand) in an operation in urban centers where the rate of accidents is higher, the average cost is 3%, or about R$ 30,000 (US$ 17,143.00) a year," he says. "But when it comes to operating in a remote location away from large urban centers, the cost of the policy drops to less than 1%," he adds.
Fernanda de Melo Lopes, account executive at Aon, assesses that most Optional Civil Liability policies provide for reimbursement of R$ 100,000 (US$ 57,143.00) for material and bodily damage to third parties. "In that respect, most of the contracts managed by Aon are in the cost range of less than 1% per year," she concludes.