Pipeline construction hit the headlines in 2021 with the cancellation of the Keystone XL project. The revocation of the license was one of the first acts of the new Biden administration and led to the owner’s eventual abandonment of the project in June 2021, with only 8% of its length completed. The project had been in planning since 2008 and its cancellation was seen as signs of increasing influence of climate change campaigners on North American energy policy decisions. Nevertheless, the levels of pipeline construction globally remain high.
Key areas of interest for insurers
Whilst pipeline construction is generally viewed as low risk, there are key areas of interest for insurers including:
- Flood exposure along the right of way
- Trenchless crossings of rivers, roads, rail lines and areas of cultural or environmental sensitivity
- Difficult terrain requiring special construction methods, pipe specifications or design
- Conditions of service with respect to fluid composition, gas velocity, pressure, temperature, and dew point which influence the design and specification.
Additionally, as the energy transition progresses, commercialisation of hydrogen fuel cells, in particular fuel cell vehicles, will require development of an extensive hydrogen infrastructure comparable to that which exists today for oil and natural gas. This will bring additional risks into consideration when designing and specifying pipelines such as hydrogen gas embrittlement and hydrogen stress cracking.
Defective design, specification or workmanship
A common cause of loss is defective design, specification or workmanship. In these circumstances the coverage available is normally dictated by one of two standard market exclusions; LEG 2/96 or LEG 3/06.
One of the key elements of both clauses is the statement that the mere presence of a defect does not mean that the pipeline has suffered any damage, which is generally defined as a detrimental change in state of the project works. On this basis a pipeline cannot be considered damaged for the purpose of the policy simply because it is defective, cannot be used or is unfit for its purpose. Therefore, if a defect alone in a pipeline is discovered, it would be at the cost of the insured to repair with no recourse to insurers.
Should a pipeline suffer loss or damage because of a defect, the amount of recovery that can be made will differ depending on which clause is included in the policy.
- Where LEG 2/96 is applied, an assessment must be made as to how much it would have cost to repair the defect prior to the event that caused the damage. These costs will be deducted from the total amount of the claim.
- Where LEG 3/06 is applied, should it be deemed that a better material or design should have originally been used, the additional costs of betterment in comparison to the original procedure will be excluded from the claim but all other costs would be covered. Where the original material or procedure was deemed satisfactory and the defect was caused by faulty manufacture or workmanship, the entire claim would be indemnifiable.
A pipe is installed in a trench and the trench backfilled. During subsequent hydrostatic testing, the pipe is unable to maintain pressure. The insured instigates excavation of the pipe and locates a weld which was incorrectly completed and was leaking. The insured then repairs the weld, backfills the trench and hydrostatic tests the pipe again at which point the pipe holds pressure and passes the hydrostatic test.
Under this scenario, as there was no damage, no recourse to the insurance can be made, irrespective of whether LEG 3/06 or LEG 2/96 applies.
A pipe is installed in a trench and, during hydrostatic testing, a weld suddenly fails and a large crack is caused through the weld allowing an escape of water. The insured instigates excavation of the pipe and locates the damaged weld. The weld failure is identified as being due to slag inclusion caused by faulty execution of the weld. The insured then repairs the weld, backfills the trench and hydrostatic tests the pipe again at which point the pipe holds pressure and passes the hydrostatic test.
If LEG 2/96 is applied, we need to identify the notional cost of rectifying the defect immediately prior to the damage occurring, as this cost is excluded. This would involve the costs incurred to excavate the pipe and locate the damaged weld and then repair the weld, backfill the trench and test. This is essentially the same as the remedial cost and as a result the claim would be excluded either largely or in full.
If LEG 3/06 is applied, assuming the weld specification is correct, and the slag inclusion was due to faulty workmanship, there is no improvement in the weld design or material is required and therefore none of the costs incurred would be excluded.
Leak search costs coverage
This is an additional coverage that is readily available and aims to bridge the gap between LEG 2/96 and LEG 3/06. However, it does add certain conditions and there is a monetary limit as to how much can be claimed in any one policy period.
Coverage states that insurers shall indemnify the insured for:
- Leak search costs following a hydrostatic test (including the cost of leasing special apparatus, cost of operation and transport of such apparatus)
- Earthwork on a trench not damaged in itself, such earthworks becoming necessary in the search for and repair of leaks, e.g., excavation, uncovering of the pipeline, backfilling
- The leak has been caused by an indemnifiable event or is attributable to faulty execution on site, and
- 100% of the welding seams have been X-rayed and any deficiencies discovered thereby have been removed properly.
In the case of example 1 above, the costs to locate the leak would be covered under this extension whereas the cost to actually repair the weld would not. In example 2 above, the costs that would be excluded under LEG 2/96 for locating the leak and making the weld accessible would be covered via the leak search costs extension, but again not the actual cost of repairing the weld.
What should I do if I am looking to insure a pipeline project?
- Engage a specialist construction insurance broker who understand the risks and underwriter concerns. This will enable you to present the project in its best light to the right insurers.
- Be prepared to enter into dialogue with the insurance market to explain how the project is risk managed in relation to these areas.
- Leave sufficient time to arrange project insurance as the market appetite for these risks is considerably reduced.
If you would like any more information, help or advice in relation to pipeline construction insurance, please get in touch.