T&C, smoke grenades and the bathtub curve

By David Outred

Many many years ago, when I was a young tradesman, I found myself working with a team designing smoke alarms for long distance passenger trains. You see, traditional smoke alarms can’t be used because the fumes from the train engine, even if too faint to be sensed by people, would set the alarms off. Finally, a solution was found, a sensor designed and manufactured and then installed in four carriages, each representing a different type in common use. It remained only to test them. A young engineer was given the task, and a smoke grenade, and sent off to the station yard where the newly modified carriages were parked alongside platform 4. Unfortunately, there was also another set of very similar carriages parked at platform 3, being readied for passengers, and indeed, some passengers had arrived early and already embarked. Obviously, this story does not have a happy ending, the grenade was placed in a carriage entrance and set off, and when the hapless passengers and staff ran screaming from the train, the engineer’s stomach turned to water.

It may be an extreme example, but the story is a demonstration of the pitfalls of Testing and Commissioning, and the potential for a simple T&C process to impact on a much wider scale than just the item being commissioned. Not all T&C losses are due to a gormless graduate equipped with explosive ordinance though; most arise when there is the initial application of energy to complex and expensive machinery, sometimes with unexpected and catastrophic results.

In a standard Contract Works policy, Machinery Breakdown, or Derangement is generally an exclusion. Testing and Commissioning is usually available as an endorsement, which effectively removes the policy Machinery Breakdown exclusions during the commissioning period. Underwriters will often want the T&C period well-defined, perhaps to the extent of nominating specific dates and specific commissioning processes, and it will generally carry a large deductible, to reflect the increased risk to plant during the commissioning period. And quite an increased risk it is too. The installation of complex plant and equipment is fraught with dangers. For starters, the machine may very well have left the factory with an inherent defect, which doesn’t manifest until some load is introduced, or the installation process may include a careless moment, or a fitting that is not quite right. The fact is that most machines are never more at risk than those moments when they are first switched on, or first experience load conditions, except as they near the end of their working life, when wear and tear starts to contribute to breakdowns.

This increased rate of breakdown at infancy and again at the end of the working life of a machine can be expressed graphically in what engineers commonly refer to as The Bathtub Curve, and I have included just such a graph below for you. The horizontal axis represents the age of the machine, the vertical, the failure rate for like machines. In terms of the infancy of the machine, it can be seen that the potential failure rate is extremely high at very early stages, then falls as the machine overcomes what may be referred to as teething problems and settles into a steady and efficient working life. If the curve was applied to, say, a refrigeration sealed unit compressor, the yellow section would span about 5 months, the green about 15 years. For a large electric motor running a relatively constant load, it would more likely be 1 month and 30 years. 

As I mentioned before, there are a number of factors which contribute to the increased failure rate of an infant machine and below are a few examples, from my own personal experiences, that might highlight those factors.

The Factory Fitted Fault: Commissioning of an air compressor in a medium sized workshop, installed, and power supplied. On start up, the compressor ran for a few seconds and then the cylinder head, about the size of a small suitcase, fragmented and exploded across the workshop. The largest piece slammed into an overhead crane cab and, unfortunately, a smaller piece travelled about 40 metres and sliced through tendons in the elbow of a workshop employee. Subsequent investigations revealed that an internal valve plate had been fitted back to front, although how it escaped quality control has never been adequately explained.

The Careless apprentice:  A very large Diesel powered generator set was being installed in a remote town. During erection, an apprentice was given the task of fitting lagging to the exhaust manifold, to quieten the engine a little. To make it easier to get access, he removed the governor linkages, attached the lagging, and then reattached the linkages – upside down. When the engine was started for the first time, because of the wrong linkage position, it immediately ran to full speed. By the time the kill switch was activated, the engine had almost self destructed, and had to be replaced. 

Who Needs Instructions: A large freezer installation was finally finished, and although it was late on a Friday, it was decided to give it a quick test. The control panel was energized and the compressors operated and everything cooled down nicely. It was knockoff time so the plant was then shut down and everybody left the site, for the weekend, overlooking the fact that the control panel still had power to it. In that control panel was a timer, in that timer was a small plastic pin, attached to that small plastic pin was a tag, which read for factory testing only, remove before commissioning. As nobody had read the instructions, the pin remained in place, allowing the defrost heaters to run all weekend, melting the insulated sandwich panel forming the walls of the freezer rooms.

You Forgot WHAT?:  A ball mill was erected at a gold mine and had been tested without load. It was then loaded with dead weight and the bearing deflection calculated, and the bearings set up accordingly. The Mill had a capacity of 50 Tonne and so 50 Tonne of deadweight was used. The test engineers overlooked however, that the mill still hadn’t had its liner installed, which weighs another 10 Tonne, so their calculations were out by that amount. When it was commissioned with a full load, the bearings failed and the repairs took 4 months, triggering a major Advanced Loss of Profits claim.

Is it any wonder then, that Insurers and reinsurers exercise great caution when endorsing a policy for T&C? Brokers and their clients are well advised to ensure a T&C endorsement is given consideration for every Contract Works policy written where the works include anything where mechanical, hydraulic or electrical forces are applied. They should also have a thorough understanding of the T&C process and how timelines will impact on policy response and premium. In some cases, an independent pre-construction survey may be invaluable in getting the right cover.

What's in a statement?

By Stefan Lakomy

From the viewpoint of a Liability Adjuster, a well written Statement goes a long way in verifying the facts of a case and “putting the pieces of the puzzle together”.

A Statement is a first person account of a subject’s knowledge of an incident; a means of recording the subject’s “recollection of events”. For that reason, a Statement is considered by the courts to be a reliable tool of evidence.

Comments in the Statement should be limited to fact, and comments based upon opinion should be kept to a minimum. The Statement must be in the subject’s own words, no matter how unusual or grammatically incorrect the word or the phrase may be. In fact, the language that the subject uses will add body and authenticity to it.

A “good” statement will not only capture a first hand account of the circumstances of the incident, but will also provide a background to the events leading up to it, therefore providing for a “total picture” of what has occurred. As an example, take the scenario where a contractor is excavating below ground with a directional drill and impacts with a telecommunication cable. Not only do we want to substantiate the actual happening of the event, but we also want to establish why the contractor was excavating at the site, who the contractor was undertaking the excavation for, what measures were taken by the contractor (or any other party) to check for the location/existence of underground utilities, under what instructions the contractor was undertaking the drilling (and by whom), and a series of other facts which need to be established to determine liability, and in most cases, proportionate liability.

A Statement will add “weight” to an investigation (without shying away from the significance of the traditional factual report), as the information contained within a Statement is a direct witness account and in most cases, will preclude any uncertainty.

In many cases, especially where conflicting opinions exist, a Statement is invaluable. It is important, therefore, to ensure that the Statement is accurate and comprehensive as possible.

A Statement is generally signed with a “statement of truth”, essentially an oath to validate its authenticity. Proceedings for contempt of court may be brought against a witness who makes, or causes to be made, a false Statement. Section 335 Crimes Act (NSW) provides penalty of up to five years imprisonment for giving a false statement or believing it not to be true.

Oil Spill Remediation in a Very Cold Climate

By Nick Ackers

Two years ago this December, Tasmanian-based Loss Adjuster Nick Ackers left Hobart on the  Antarctic supply vessel “Aurora Australis” for Casey Station, Antarctica, along with 24 crew and 53 expeditioners.

Nick travelled as a guest of the Australian Antarctic Division (AAD) which Commonwealth Government Agency is responsible for managing activities in the Australian Antarctic Territory, as part of the 100 year anniversary to celebrate Sir Douglas Mawson’s first Australian led expedition to Antarctica. 

Casey Station is situated some 3,500kms south-west of Hobart on the eastern coast of Antarctica just outside the Antarctic Circle. Whilst limited air travel is available to Casey via the Wilkins Ice Runway, the AAD’s invitation to travel by sea enabled Nick to gain a much better perspective of the environmental and logistical challenges faced when operating in Antarctica.

Nick’s role includes adjustment of losses arising from fuel oil spills in the Sub-Antarctic (Macquarie Island) and the 42% of Antarctica controlled by the Commonwealth of Australia. It must be borne in mind that Antarctica is the coldest, driest and windiest continent on which human activity takes place. Living in that environment brings with it many challenges many of which can be life threatening.

The AAD is now a world-leading authority on managing fuel oil spills in Antarctica. This has developed from the requirements of the Antarctic Treaty that each country operating within the Antarctic Continent be responsible for cleaning up their own contamination.         

     

Some seven days after leaving Hobart the Aurora Australis sailed into the bay overlooked by Casey Station situated on the ridge line above. However, due to deteriorating weather conditions and the poor anchor holding ability in the bay, the Aurora Australis headed out to sea again for two days to ride out the storm. This was Nick’s first example of weather-induced delays when operating in Antarctica. The Aurora Australis returned to Casey Station and commenced unloading materials, supplies, equipment and personnel by barge from the ship to the nearby wharf; although this process was further dramatically delayed due to an ice flow which had blown into the bay during the recent storm, impeding efforts to discharge the cargo.

Upon landing ashore pedestrians were required to walk about 1km up to the Station which is a series of coloured buildings, the largest of which comprises living quarters, dining, social and accommodation facilities known as the “Red Shed” given its bright red colour.

Once at Casey Station, Nick was met by a team of three scientists principally involved in managing the fuel spill remediation site, who were stationed at Casey Station for approximately three months.

The Casey Station fuel spill involved some 10,000 litres of “Bergen” fuel having leaked from a ruptured delivery pipe between the main generator building and a holding tank external to the building.  Bergen fuel is a heavier fuel which has since been replaced by SAB (Special Antarctic Blend) diesel. Fortunately the spill had not migrated far and was initially contained by installing an impermeable barrier within the permafrost to about 1 metre deep around the down hill sides of the spill area.

Eventually the contaminated ground was excavated and placed into mounds formed on prepared ground. Preparation of this ground involved constructing a geo-synthetic clay liner on which a high density (impermeable) poly liner was placed to prevent any escape of fluid.

Once the pads were constructed the contaminated material was placed/formed into mounds. Within the mounds were a series of pipes to provide aeration, and covering the mound is geotextile fabric.

Bioremediation involves the artificial stimulation of microbial activity to eat away hydrocarbons (fuel) within the contaminated material. Whilst the microbes are naturally occurring they are effectively dormant for most of the year due to the very low temperature. Therefore, and given the limited time available for this to occur (generally November – February), the AAD has developed a system of pumping hot air and adding fertiliser nutrients (both liquid and granulated) which are incorporated into the mounds. Furthermore, as the summer period temperatures reach above 0°C the mounds are mechanically turned to improve aeration. This can occur 2-3 times per season.  

Due to the limited time frame each season the bioremediation process can take anywhere between 7-10 years to sufficiently decontaminate the mounds during which time Scientists, at least during the summer season, are actively monitoring, sampling, turning and testing the extent of the contamination and ensuring no escape of hydro carbons occurs into the surrounding pristine area.

Nick was away in Antarctica or travelling to and from Hobart for a total of five weeks, spending 2 days and 3 nights on the Antarctic Continent. The restricted availability of accommodation at Casey Station during the summer period when staff numbers can be in excess of 100 is one of the main limiting factors in the performance of non-essential activities on the Antarctic Continent. However, the logistics of moving equipment from Australia to Antarctica, generally via the Hobart-based AAD and staff is a very costly exercise and one which requires detailed planning and budgeting to minimise costs and maximise returns.

The above is presented as an example of Technical Assessing’s expertise particularly with respect to handling major losses involving technically challenging cases in remote locations combined with long tail demands.

Why an oil transfusion can save you money and a lot of heartache

By Richard Kranz

People regularly have blood transfusions! Why do people have blood transfusions?  The people who have blood transfusions are those people who usually suffer from an illness that does not repair the blood or replenish various parts of the blood naturally.

The oil in an internal combustion engine such as a diesel engine, petrol engine or LPG fuelled engine is the life blood of your engine. The oil circulates throughout the engine providing lubrication to bearings, turbo charges, rings and the like and to a lesser extent cooling in some engines. When the oil is in poor condition containing contaminants such as water, excessive carbon deposits, acidic products among other nasties, then rapid wear and tear on the engine occurs and also the engine is not working to its desired level of efficiency.

In simple terms oil changes are absolutely necessary because the oil in an engine does not repair itself automatically or naturally like it does with many human beings. Oil changes need to be carried out on a regular basis. Generally oil changes are required on a time basis, such as every three months or six months or on usage of the engine, such as hours or kilometres travelled.

When the oil exceeds its shelf life, then it begins to deteriorate, thus not allowing the various parts of the engine to be adequately lubricated. The most important aspects are lubrication of the bearings in engines and when the oil has deteriorated it is no longer capable of providing adequate lubrication. Oil additives included with most oils are designed to protect the engine against corrosion, oxidation and wear and tear, so new oil protects the engine much better than old oil. Old oil that has gone past its shelf life starts to break down and also includes contaminants such as soot and carbon.  The oil starts to produce acidic products that cause damage to metal components within the engine. The viscosity of the oil also starts to deteriorate, thus meaning the oil no longer has lubricating qualities.

Manufacturers of engines in their guidelines to engine operation always have instructions regarding engine oil and engine oil filter replacement.

The engine oil that circulates throughout the various galleries of the engine passes through an engine oil filter. The engine oil filter is designed to capture many of the contaminants and unwanted products within the oil. After a given period of time the engine oil filter becomes clogged with the contaminants and the engine oil filter also needs to be replaced.

When changing the engine oil it is important to ensure that no oil is spilt and that the oil is disposed of correctly. The oil should never be thrown away in the rubbish bin, poured down a drain or thrown onto the ground. The oil should be captured and then returned to a suitable recycling facility. Oil is able to be recycled thus we are all looking after the environment by disposing of it correctly.

It is important to select the correct engine oil. Diesel engines require a different oil to a petrol engine. Often different oils are used in summer and winter. Because ambient temperatures are higher in summer it may be prudent to have a thicker oil to cope with high summer temperatures and conversely during winter it may be more expedient to have thinner oil so that the cold temperatures do not reduce the properties of the oil thus the oil becoming too thick.

Manufacturers’ guidelines need to be checked to ensure that the correct oil is used in terms of viscosity and performance characteristics. One also needs to ensure the oil is added to the correct level. Oil should never be filled up too high or too low. If the oil is too high in a sump then there is a danger that the crankshaft could touch the top of the oil surface, thus causing extensive damage to the engine and conversely if the oil level is too low, then insufficient oil circulates in the engine, this causing insufficient lubrication.

When doing oil changes it may also be necessary to use flushing oil that is poured into the engine once the old oil is removed. The engine is run for a certain period of time, as recommended by the manufacturer of the flushing oil. The flushing oil allows almost all the oil in the engine to be removed. The flushing oil then removed and this way most of the oil that was originally in the engine is removed.

New oil of the desired viscosity, and performance characteristics then needs to be added to the engine. When the oil level is at the correct mark then no further oil needs to be added. A certain period of time needs to be allowed so that all the oil is able to drain down to the sump. When the oil has drained to the sump and one can discern on the dipstick that the oil level is correct, then the engine can be started. The pressure gauge needs to be checked followed by a check of any leaks around  the engine.

Do your oil changes regularly and replace the filter regularly and you will get maximum life out of the engine.

This brings us to the insurance implications. Most insurance policies will not cover breakdown of internal combustion engines, however machinery breakdown policies may be selected by the owner of equipment and if the owner of equipment selects to have such a policy the underwriter needs to be certain that correct maintenance is undertaken. Good maintenance relates to fewer breakdowns, thus fewer claims.

Many insurance policies, specifically machinery breakdown policies will not cover the aspect that has deteriorated due to wear and tear/corrosion and general degradation. The policy covers the consequences of wear and tear/corrosion and gradual deterioration. In other words a 50 cent bolt may break, this causing extensive damage to the engine. The 50 cent bolt is not covered, however the resultant damages that the breaking of the bolt causes is covered under the policy. The consequences are very severe and expensive.

From a policy view point the oil that has deteriorated is not covered, however the consequences of the poor quality oil causing damage are high and this aspect may be covered under the policy, unless of course it can be shown the damage was due to continued wear and tear.

Before insuring internal combustion engines and other systems that use oil for lubrication such as compressors, steam turbines, gas turbines and hydraulic systems, it is prudent to make enquiries regarding maintenance undertaken and also ask for tax invoices and evidence that the maintenance has been carried out.

Just remember good maintenance results in fewer breakdowns, less downtime and fewer insurance claims. 

Contribution

By Steve Nance

Contribution between two policies applies when both policies tick all the right boxes, these boxes being that the same loss is covered against the same asset which is damaged, owned by the same insured and the like. Easily put, if two policies cover the same loss, then contribution can apply between the policies.

To avoid any confusion, this is addressed in Section 76 of the Insurance Contracts Act. It is quite clear. If there are two policies, then the insured is able to pick which policy he wishes to claim against, and once the insured is indemnified, then that insurer has a right of contribution against any other insurance which may have provided cover.

This is commonly encountered in construction policies, specifically as most construction policies cover a number of parties, either specifically or otherwise. As to who was covered, of course, will depend on the definition of “the Insured” under the policy. This in turn can sometimes depend on the “tier” of the party who has purchased the insurance. For example, a “Principals” policy will often include the Principal/Owner, the main contractor, subcontractors, and others. The main contractor’s policy is likely to do likewise, though may not include sub-contractors. However an annual contract works policy for, say, a plumbing subcontractor may only cover the plumber themselves. There may be cover for “Principals”, but maybe not to subcontractors. It is therefore important to look at who is covered under each policy when looking at the aspect of contribution.

The next thing to look at is  the insured property that is covered under each policy. For instance, the plumber’s policy will only cover the plumber’s works. The main contractor’s policy, however, will cover all of the works, including that of the electrician, plumber, Carpenter, concrete, and the like. From the standpoint of the main contractor’s policy, therefore, a number of applications for contribution would need to be made for any particular claim where multiple trades assets have been damaged.

This brings us to the interesting point of when contribution would not apply. Let’s say the main contractor’s policy has a “DIC” (Difference in Conditions) clause which, still commonly, says that if there is another policy of insurance (whether specified as being undertaken by a Principal or not) exists, then the policy will only act in excess of or as a difference in cover and/or difference in excess policy to that other policy. Ah yes, the discussions I’ve had.

Section 45 of the Insurance Contracts Act renders such “other insurance” clauses void, except if the other insurance is specified. This in turn raises the issue as to what the term “specified” means. There are a number of texts by various authors, and also a case from the New South Wales Court of Appeal, being HIH v Pluim. In this case the judge rightly pointed out that the second contract of insurance may not even have been formed at the time the first one was taken out, and as such could not be specified in any detail. He suggested that it is possible that a clearly defined class of insurance such as “X’s standard Construction Policy with an excess of Y” would suffice.

It seems from this that other means of satisfying Section 45 could include anything from specifying a policy number (of the other policy) to providing a brief description of that policy.

What is unlikely to satisfy Section 45 would be broad terms which do not indicate to a reasonable person that the author was aware of the existence of the other policy. Such possibly could include terms such as “any Principals policy”, or perhaps even “any policy that may have been purchased by the Principal of the XYZ project”, this being more a stab in the dark as opposed to specifying the policy which is known to exist.

Maybe one way of getting around this is to include a clause of a general nature which refers to an attached schedule which in turn  specifies the various contracts to which the DIC provisions would apply. It would also help if you could be shown that the premium paid for the DIC contracts were less than the full cover contracts, otherwise any sceptic could infer the schedule was nothing but an attempt to prevent contribution.

Clearly the above is not legal advice, which should be obtained when drafting such clauses.