Schadenspiegel MAN SWO MS FHBFKJA AAJDND

Ageing infrastructure Engineering Marine
Series: Major loss Major loss in hydro- Nickel ore cargo

scenarios electric power plant sinks ships
EDITORIAL
Dear Reader,
“Infrastructure is not sexy” is a frequently used phrase in US politics. In other

words, investing in new roads, railways, sewage systems and electricity grids
will not win you many points with the electorate. Opposition from protest
groups, endless approval procedures and exorbitant costs are further deter-
rents. When he entered office, President Barack Obama wanted to change all
this: “We will build the roads and bridges, the electric grids and digital lines
that feed our commerce and bind us together”, he announced in his inaugural
speech in 2009. However, now even he has had to admit defeat. Infrastructure
simply does not have a strong enough lobby.
We see the consequences of this every day – not just in the USA but through-
out the entire world: poor roads, power cuts and decaying sewage systems are
just a few examples of the problems we face. Even wealthy industrialised
nations are guilty of seriously neglecting their infrastructure and this lack of
investment over a period of many years has created a major problem – with
enormous consequences for the insurance industry.
In our new series “Ageing infrastructure”, we present the full extent of this
highly topical subject. Other articles about a spectacular loss at a Russian
hydroelectric power station and decaying sewage systems clearly show just
how deep the problem goes. We present a range of different solutions, as ever
based on practical examples and actual losses.
These are just some of the topics dealt with in this issue of Schadenspiegel.
The authors or your client manager will be pleased to answer any questions
you may have.
We wish you a stimulating and informative read.
Your Schadenspiegel team

schadenspiegel@munichre.com
MUNICH RE Schadenspiegel 1/2011 1

CONTENTS
IN FOCUS CLAIMS MANAGEMENT
SERIES: AGEING INFRASTRUCTURE MARINE

Ageing infrastructure Nickel ore cargo sinks ships
Our new series offers an insight into Ships sink because mineral cargo was
major loss scenarios too damp
Page 4 Page 22
ENGINEERING/PROPERTY DAMAGE CLAIMS LITERATURE

Major loss in hydroelectric power plant The Liability Century
The RusHydro loss from an engineering Compulsory reading for liability insurers
perspective Page 29
Page 12
MOTOR INSURANCE
LIABILITY The latest car theft scams
Deepwater Horizon (1) More cars being stolen in spite of
Negligence or gross negligence? anti-theft devices
Page 18 Page 30
Deepwater Horizon (2) RENEWABLE ENERGIES

Purely financial losses Preventing fires in wind turbines
Page 20 Fire results in total loss
Page 32
IN FOCUS CLAIMS MANAGEMENT

An ageing bridge on Interstate 90 Mineral cargoes can cause ships
in Cleveland, Ohio. to capsize.
2 MUNICH RE Schadenspiegel 1/2011

CONTENTS
INDIVIDUAL LOSSES
BUILDINGS INSURANCE/
ALL-RISKS COVER
Discharge pipes
Up to 90% of private sewage pipes
in Germany are damaged
Page 36
ENVIRONMENTAL DAMAGE
Dam bursts in Hungary
Operating company’s insurance cover
was totally inadequate
Page 42
ENGINEERING
Built on sand
Ground subsides beneath a skyscraper
on the Gulf coast of Texas
Page 45
INDIVIDUAL LOSSES
The Mainz sewage system.

SERIES: AGEING INFRASTRUCTURE PART 1
Ageing infrastructure
Collapsing bridges, leaking pipes, bumpy roads and

continual disruptions in rail traffic: infrastructure in
the western industrialised nations is certainly not
getting any younger. This new series offers an insight
into the main loss scenarios.
An ageing bridge on Interstate 90 in Cleveland,

Ohio during the rush hour.

IN FOCUS
Prof. Dr. Ina Ebert and Harald Ochsenkühn All these problems would be solvable if the existing
infrastructure had been promptly and adequately
Many factors have contributed to the woeful state of upgraded to meet the new requirements. But even in
today’s infrastructure throughout the world. The the wealthiest industrialised countries, this has not
steady rise in world population intensifies the use of been the case. Even there, economic and financial cri-
existing infrastructure. Mobility of people and goods ses have put the squeeze on public funds that usually
becomes more and more essential. Increasingly have to finance the most elementary infrastructure
numerous and heavy vehicles throng onto roads and measures. The need to set clear priorities in govern-
bridges, subjecting them to a strain they were origin- ment spending frequently means that investments in
ally not designed to withstand. infrastructure are neglected.
This is accelerating the wear and tear on these trans- Infrastructure lobbies are few and far between as long
port routes. Industrialisation in the emerging econo- as no serious or spectacular losses occur. Replacing
mies, new technologies in industrial nations and the transformers or sewage pipes is an expensive busi-
rise in living standards in many countries over recent ness, but wins few points with the public. Or, as this is
years have led to mounting energy and water con- usually phrased in the USA: “infrastructure is not
sumption. This trend is reinforced by increasing sexy”. Voters expect a smoothly functioning infra-
urbanisation with more and more people crowding structure, but they are slow to reward this at the ballot
into a very small area. In the western industrialised box. Tax hikes for such purposes are considered just
nations, this development peaked roughly 40–50 as unacceptable as the price increases by private sup-
years ago; today, it plays a central role in Asia in par- pliers. As a result, major infrastructure investments
ticular, but also in Africa. Almost half the world popu- are often only made when they involve new technolo-
lation already lives in urban areas today; by 2050 it gies or are associated with popular, more general
will be two-thirds. developments, or if they also bring short-term bene-
fits to local economies or the labour market.
Another factor is that new technologies often spread
within a very short space of time. For example, many Extent of the problem
water supply and sewage systems in western Europe
date back to the early days of industrialisation. More Although ageing infrastructure is a global problem,
than one hundred years down the line, almost all the there are distinct regional differences. Western
facilities associated with these systems are now Europe still comes off best. Infrastructure is relatively
simultaneously starting to show their age. The com- intact here, for the region has been densely populated
prehensive rehabilitation needed is hampered by the for a long time, population levels have remained
considerable costs involved, as well as the immense almost constant in recent decades and the (social)
inconvenience the work would cause to industry and state, which is still relatively well financed, is a high
the general public. The same also applies to urban priority. However, considerable shortcomings are
transport systems and roads, many of which were emerging in this region, too.
built in the 1920s and 1930s. In many cases, the
safety standards applied when these roads and sys-
tems were built quite simply no longer meet today’s
requirements, especially where modern technologies
are involved.
Meanwhile, the growing number of major natural

catastrophes not only subject the existing infrastruc-
ture to more wear and tear, but also create new
demands which it cannot meet. This is particularly
evident in the case of river and sea dykes, which have
proved inadequate to deal with floods resulting from
rising sea levels.

IN FOCUS
1 2
1. Many railway lines are old and

need to be replaced.
2. Potholes damage cars and can

even cause accidents.
Dilapidated roads and bridges, overloaded railways traffic safety are causing increasing flight delays. The
and airports, overtaxed air traffic control systems and study has estimated the cost of rehabilitating the
badly pitted roads pose the main problems. The infrastructure at almost US$ 2.2 trillion over the next
development of renewable energy sources is making five years. However, probably only about US$ 900bn
comprehensive modernisation of our electricity grids will be invested in US infrastructure during this
a necessity: because such energies depend on wind period.
or sunlight, they do not produce electricity at a con-
stant rate. For this reason, “intelligent” switches The situation in newly industrialised and developing
based on assumed user consumption levels are countries is even more dramatic. In eastern Europe,
needed to prevent the grids being overloaded or old structures may have been toppled, but a new
undersupplied. The situation in Germany is further infrastructure has often yet to rise from the ashes,
aggravated by the fact that maintenance of the infra- especially in rural areas. In India and China, it is above
structure in the western German states has often all the water supply that cannot keep pace with the
been neglected since reunification. booming population and continuing spread of indus-
trialisation. To a much greater extent than in the west-
Things look a good deal worse in the USA: overtaxed ern industrialised nations, the ailing infrastructure is
roads and bridges, totally insufficient local public not only jeopardising the economy, but also directly
transport systems, inadequate dams and, particularly, threatening public health.
the water supply. A 2009 study by the American
Society of Civil Engineers came to the conclusion that
one-quarter of all US bridges are defective or unservice-
able. This applies to 42% of all bridges in New York
State, as well as to 50% of the bridges in Pennsylva-
nia and 56% of the bridges in Massachusetts. Leaking
pipes constantly allow large quantities of clean drink-
ing water to trickle away unused, while effluent flows
into the environment unfiltered. The US population
spends around 4.2 billion hours per year in traffic
jams on inadequate US roads. Although the use of
public transport increased by 25% between 1995 and
2005, almost one-half of all US households still have
no access to bus or rail systems. Shortcomings in air

IN FOCUS
Ageing infrastructure and the insurance industry

Regular maintenance and
Ageing infrastructure hits the insurance industry first
and foremost in the property sector: fire, water and servicing can extend the
storm losses are becoming more frequent and have
more serious consequences as buildings collapse, life cycle of some plants
leading to business interruptions.
well beyond their design
However, liability scenarios can also ensue. When
ageing buildings, pipes and cables result in third- life.
party losses, it is often found that the loss has not only
been caused by wear alone, but also that some of the
parties responsible have neglected their duties, be it
through faults in engineering, defects in the products
used, poor maintenance, incorrect instruction of
employees or non-compliance with safety regulations.
Errors during rescue and salvage operations can also
give rise to liability on the part of those involved. In 3
addition to general liability insurance, claims can con-
sequently be filed in all liability lines.
3. Rusting sewage pipe in

Mexico City.
4. Pipework at an old factory in

St Louis, Missouri, USA.

IN FOCUS
Bathtub curve
Failure rate
Life cycle curve
Phase A Phase B Phase C

Commissioning Random failures possible Increasing failure rate
+ +Hours of operation
Source: Munich Re
Example: Roads and bridges bridge’s piers had been built in the 1950s, ultimately
causing them to subside. Experts also found that, in
A closer look at loss scenarios in the past shows just addition to inadequate maintenance and inspection,
how serious the situation really is where roads and the riprap installed to prevent scouring did not meet
bridges are concerned. The critical state of the current requirements.
nation’s roads and bridges was finally brought to the
attention of the US public when the I-35 bridge in The collapse of a road bridge in Montreal in Septem-
Minneapolis collapsed in August 2007. Too weak to ber 2006 above all raised doubts about the design
withstand increasing traffic loads over the decades, concept employed in 1970. It evidently did not provide
the bridge’s truss joints finally gave way. The accident adequate access to the bridge construction, thus
claimed 13 lives1. making proper inspection of the bridge impossible.
After the collapse, errors in execution of the construc-
Although less striking, the findings of a study in Octo- tion work were identified as further causes leading to
ber 2009 on the 666-metre-long Lake Champlain the loss.
Bridge in New York State were equally alarming: the
bridge, which had been opened to traffic in 1929, was Example: Power supply
immediately closed and demolished after divers
revealed the deplorable underwater condition of its Power generation: In the field of conventional power
piers. plants, ageing phenomena can be illustrated using
what is known as a “bathtub curve”: teething troubles
A disaster had already struck in the area back in April associated with the plant’s construction are frequent
1987, when the 165-metre-long Schoharie Creek during the first phase after commissioning the plant,
Bridge collapsed and fell 25 metres, claiming five but decrease rapidly with increasing age. A character-
lives. Over the decades, the flow of water had under- istic feature of the subsequent operating phase with
mined the inadequate foundation on which the comparatively few problems is that relatively new
1 Cf. the article "Bridge collapse due to design and inspection errors?"
in Schadenspiegel 2/2010, also available at
http://www.munichre.com/de/reinsurance/magazine/
publications/default.aspx.

IN FOCUS
1. The I-35W bridge in Minnesota,

1
which collapsed in August 2007.
2. Lake Champlain Bridge, opened

in 1929, had to be demolished
because of the deplorable under-
water condition of its piers.
3. These old pylons near Münster

buckled under snow loads in 2005.
components are used which have all completed their

trial phase. Depending on the type of plant concerned,
the incidence of damage to, and failure of, individual
components increases more or less strongly towards
the end of the plant’s life.
Just when this age- and wear-related increase begins 3

depends to a large extent on the care exercised when
operating the plant. Regular maintenance and servic-
ing can extend the life cycle of some plants well
beyond their design life. Conversely, cutting back on
maintenance can result in massive losses long before
the end of a plant’s useful life.
The 2009 accident in the over 30-year-old Russian

hydroelectric power plant Sayano-Shushenskaya,
which killed 75 workers and caused an enormous
loss, is a good example of the close links between the
fault susceptibility of older plants and the quality of
their maintenance (cf. the article “Sayano-Shushen-
skaya” on page 12). One of the causes leading to the
accident was the high degree of wear on production
components in the power plant. According to press
reports, the entire Russian power supply might be
jeopardised. And there is no improvement in sight, at
least not in the medium term.

in FOcUS
Many power supply plants are also well past their prime:
an old electricity generating plant near Washington D.C.
Power distribution: A similar situation prevails Transformers: Substations and transformers are
throughout the power supply sector, as illustrated by another risk for power distribution, in addition to the
a total outage of power in St. Petersburg which lasted transmission cables. After roughly 30 years of oper
almost 40 minutes in August 2010, due to a worn ation, there is a significant rise in the number of
cable in a substation. In Germany too, there are short- losses in this area. These losses are in part due to
comings in the supply system: when numerous pylons faults in the insulation, but also to defects in design or
in the Münsterland region buckled under the enormous manufacture, or inadequate maintenance, which only
snow load in November 2005, this was ascribed – become apparent after a longer period of time. If a
among other things – to the fact that some of the steel replacement transformer is not available, the add
structures were 75 years old. In February 2009, the itional business interruption loss puts a considerable
Australian State of Victoria experienced its most extra strain on the insurance industry.
devastating wildfires in decades. The fires killed 173
people. One of the main causes leading to the fires Example: Oil and gas platforms
was that high-voltage cables, having reached the end
of their service life, were no longer able to withstand Ageing infrastructure also causes problems in the
the wind loads and toppled over. production of raw materials. Where oil platforms in
the Gulf of Mexico are concerned, the explosion on
Deepwater Horizon dominated the news recently2.
Despite this, however, the production facilities, which
have been a striking part of the US south coast land-
scape since the 1940s, should not be forgotten: the
sea here is strewn with antiquated and in some cases
disused oil and gas platforms. Over the decades,
strong currents, corrosive seawater and hurricanes
have caused considerable corrosion-related damage.
What is more, as the facilities have repeatedly been
resold to increasingly smaller firms, adequate servic-
ing has become ever
2 Cf.the article about Deepwater Horizon on page 18, and the article
in Schadenspiegel 2/2010 or at www.munichre.com/mr-publica-
tions.

IN FOCUS
more sporadic. Even if the size of the facilities is FURTHER INFORMATION

nowhere near that of modern production facilities, the
A further article on ageing infrastruc-
losses which they cause can nevertheless impose a
ture can be found on page 36 of this
considerable burden on property and liability policies.
issue: "Discharge pipes – an invisible
Rising oil prices and high scrapping costs will add- risk?".
itionally ensure that they remain a potential source of
loss for a long time to come.
Conclusion
Today’s problems with ageing infrastructure are

only the beginning. Six trends in particular will make
losses due to ageing infrastructure both more
frequent and more extensive:
– Continuing population growth in most countries
– Growing energy and water consumption, especially

in the newly industrialised and developing countries
– Increasing mobility and urbanisation
– Increasingly frequent exposure of densely popu-

lated areas to major natural catastrophes
– Public spending cutbacks in the wake of economic

and financial crises, preventing timely renewal of
the infrastructure
– Rising cost of maintenance for antiquated and

hence increasingly unprofitable technologies
OUR EXPERTS
Prof. Dr. Ina Ebert specialises

in liability law and emerging
risks. She is a senior consultant
in Munich Re’s Global Clients/
North America Division.
iebert@munichre.com
Harald Ochsenkühn is a legal

counsel and claims manager
and is responsible for property
claims in the Global Clients/
North America Division.
hochsenkuehn@munichre.com

ENGINEERING/PROPERTY DAMAGE
Major loss in hydroelectric

power plant
Sayano-Shushenskaya is one of the world’s biggest hydro
power plants. Years of overloading the turbines and inadequate
maintenance were probably behind the major accident in 2009.
Could greater care have prevented the catastrophe?
Bernhard Richter and Klaus Wenselowski 540 m above sea level, the reservoir has a water area
of 621 km2, with a catchment area of 179,900 km2.
On 17 August 2009, a running turbine unit was torn The lake is 320 km long and more than 10 km wide in
out of its anchorage by fluctuating water pressure some parts. Its impounded water totals 31.3 billion
and catapulted into the air in the Sayano-Shushen- cubic metres.
skaya hydroelectric power plant in Russia. Weighing
in at around 2,000 tonnes, the turbine destroyed the Ten turbines commissioned between 1978 and 1985
27-m-high roof of the turbine hall, as well as several generated a total output of 6,400 MW. The plant was
nearby structures and plant parts. Propelled by the originally designed to generate base load electricity.
pressure of a 200-m water column, an incredible Despite this, the turbines were increasingly used to
360 cubic metres of water per second shot through meet peak load requirements in Russia, as well as to
the entire turbine hall, including the lower floors, compensate fluctuations in grid frequency. Water
causing numerous short circuits and immediate fail- flows to the turbine through ten pressure pipes
ure of the power plant. Those units which were still in known as “penstocks”. Each of these penstocks
operation sustained various degrees of mechanical delivers up to 360 cubic metres of water per second.
and electrical damage. All in all, 75 people were killed By way of comparison: at this rate, an Olympic swim-
and many others injured. ming pool measuring 50 x 25 x 3 m could be filled
within the space of just ten seconds. The water intake
The Sayano-Shushenskaya hydroelectric is exclusively regulated electro-hydraulically by
power plant means of guide blades installed at the inlet to the tur-
bine rotor.
The hydro power plant is the largest in Russia and one
of the biggest worldwide. It is located in the Republic In an emergency, they can be closed, stopping the
of Khakassia in southern Siberia, 32 kilometres from flow of water to the turbine. However, the intake gates
Sayanogorsk, below the Sayano-Shushenskoe reser- in Sayano-Shushenskaya were not equipped with an
voir. Construction of the plant started in the late automatic emergency mode or “fail safe mode”. This
1960s. The arch-gravity dam is 242 m high with a
crest 1,074 m long. The head, i.e. the difference
between headwater and tailwater, equals 220 m.
More than nine million cubic metres of concrete went
into its construction altogether. At a normal height of

IN FOCUS
meant that they could not close automatically in the

event of a power outage. Inside the plant itself, major
plant parts were powered electrically and there were no
diesel-powered emergency generators to take over in
the event of an outage or break in the power supply.
The turbine covers on each turbine unit were anchored
in the foundation of the turbine hall by 80 bolts of
industrial steel with a diameter of 8 cm and size M80
nuts.
Cause and effect
The damaged turbine unit was extensively overhauled

in 2000 and 2005, followed by a minor overhaul in the
spring of 2009. At the same time, a new control system
The hydroelectric power plant is was installed so that the hydro power plant could be
located below the Sayano-Shushenskoe controlled externally in line with grid requirements.
reservoir in the Republic of Khakassia
This system was not adapted exactly to the installed
in southern Siberia.
turbines.
Concrete dam and power house. The electric gantry

cranes on the crest of the dam were used to open the
spillway gates after the incident.

IN FOCUS
View of the damaged turbine cover

and severed yellow turbine rotor
shaft. The holes accommodating the
80 bolts are clearly visible around the
outer circumference. The wicket gate
assembly is mounted in the large After being taken back into service again, the vibra-
holes.
tions measured in the turbine rotor were only just
below the maximum permitted by the manufacturer.
However, in the following weeks and months, these
vibrations did not stabilise, but instead increased
steadily, presumably exceeding the permitted max-
imum by June 2009. Like other units which had also
exceeded the maximum permitted vibration levels at
times, the turbine remained in operation.
This subsequently caused fatigue cracking of varying

magnitude in the retaining bolts. The bolts sheared as
soon as the water pressure was sufficiently high to
cause residual forced rupture. The turbine cover with
turbine rotor and generator weighing around 2,000
tonnes altogether lost its anchorage in the foundation,
causing the accident on 17 August 2009.
In order to stem the vast torrent of water pouring into

the turbine units, the intake gates had to be closed
manually. For this purpose, the men had to make their
way up to the crest in order to manually trigger the
hydraulic closing mechanisms. This took almost an
hour, during which water continued to gush into the
building. Then the spillway gates had to be opened in
order to prevent a catastrophic overflow of the con-
crete dam. This took a few hours. Several more days
passed before the downstream stop-logs could be
positioned to prevent the inflow of river water. The
task additionally required the work of divers. Only
then was it possible to pump all the water out of the
hydro plant. Several tonnes of oil also spilled into the
river, causing damage to fish farms there.

IN FOCUS
Increase in vibrations in the damaged turbine following

its last overhaul
in
microns
1,400
The curves show how vibra-
1,300
tions increased with time,
1,200 from the last minor overhaul
1,100 until the bolts sheared.
1,000
900
800
Maximum vibration
700
values
600 Mean vibration
500 values
400 Maximum load tolerated
by the manufacturer
300
200
Source: Rostekhnadzor
100
report (public domain)
0 2009, Russia
21.4. 28.4. 5.5. 12.5. 19.5. 26.5. 2.6. 8.6. 16.6. 23.6. 30.6. 7.7. 14.7. 21.7. 28.7. 4.8. 11.8.
2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009
Turbine technology
After starting from standstill, every water

turbine passes through two speed ranges
before reaching the third range, its actual
working (nominal) speed. In the second
speed range, the turbine reaches its
resonant frequency. From a technical point
of view, it is very important to pass
through this speed range quickly in order Generator
to minimise the load imposed on the unit
by the vibration of its mechanical parts. Rotor
The generators in a hydro power plant are Stator
stopped automatically if they begin to run
at excess speed. However, there is no
similar mechanism to stop turbines Shaft
vibrating excessively at their resonant
frequency. Many manufacturers or oper-
ators specify just how long a turbine can Turbine
run in this second speed range and how
often it can run through this range.
Turbine cover
Wicket gate
assembly
Water intake
Turbine blades
Source: Munich Re

IN FOCUS
The plant’s operator plans to

completely replace all ten turbines
between 2011 and 2014.
1. Before the accident, each of the

ten turbines generated 640 MW of
electricity.
2. The devastated turbine hall after

the fateful deluge.

IN FOCUS
Investigation of the causes
Even today, it is unclear why neither the plant man-

agement nor the operators halted the turbine which
had been vibrating strongly for many months. Many
documents are still in the hands of the judiciary.
Others were reputedly washed away by the water.
After the water had been pumped out of the turbine
hall, 49 of the 80 retaining bolts were subjected to
metallographic analysis. Six bolts were found without
the associated nut. These nuts may have been forgot-
ten when the turbine was last serviced. Investigations
by the public prosecutor are still ongoing. One year
after the accident, charges were filed against the
people responsible in the plant operating company
and in the maintenance companies. The plant’s oper-
ator plans to completely replace all ten turbines
between 2011 and 2014.
Conclusion
The turbines were not operated in basic load mode

as specified.
Basic principles ensuring trouble-free operation, such

as investigation of the causes leading to the increase
in vibrations, were disregarded here.
Even when the vibrations had increased to five times

the permitted level, the damaged unit was still not
switched off. Necessary maintenance work was evi-
dently not performed or only performed inadequately.
OUR EXPERTS
Bernhard Richter is a claims

manager in our Europe and
Latin America unit.
brichter@munichre.com
Klaus Wenselowski is head of the

Property Claims Management
unit for Global Clients.
kwenselowski@munichre.com

LIABILITY
Deepwater Horizon (1)

Negligence or gross negligence?
It is still not entirely clear just what caused the Deepwater
Horizon explosion. One of the most contentious issues is
whether the parties involved were “ordinarily” negligent or
whether they can be accused of “gross” negligence.
Prof. Dr. Ina Ebert Consequences of gross negligence
What is the difference between ordinary negligence In the immediate aftermath of the Deepwater inci-
and gross negligence and why is it so important to the dent, the key point at issue was whether or not BP had
insurance industry in the Deepwater Horizon case? been grossly negligent. The Oil Pollution Act, on
which most claimants have based their claims, caps
Anyone who fails to exercise due care, who does not liability at US$ 75m for all losses except clean-up
act as a reasonably sensible person would have done costs. This cap is disregarded in certain exceptional
in the same circumstances, is guilty of negligence. At cases, especially in the case of gross negligence.
this stage, it seems clear that this applies to several However, BP declared early on that it would pay all
of the parties involved in the Deepwater incident: BP valid claims regardless of this cap.
and its subcontractors, such as Halliburton and
Transocean, had come under considerable pressure to Nevertheless, the question of gross negligence may
save time and money. This repeatedly led them to opt still be of significance in other respects: for one thing,
for quicker rather than safer alternatives in order to the amount of fines and penalties imposed depends
speed up the work on the oil platform. on the degree of fault. The Clean Water Act, for
instance, imposes fines of up to US$ 1,100 per barrel of
However, the threshold for gross negligence is much oil spilled in cases of negligence and up to US$ 4,300
higher. It requires recklessness, unusual and extreme in cases of gross negligence. Also, if gross negligence
behaviour and a degree of fault that comes very close applies, punitive damages could be awarded in add-
to intent. Whether and to what extent the individuals ition to the damages claimed by private individuals.
involved in the Deepwater Horizon case acted negli-
gently is still unclear. In its report published in January Secondly, the question of whether anyone was grossly
2011, the National Commission set up by the US negligent is important for the dispute between the
President to investigate Deepwater Horizon came to parties involved in the incident: in accordance with
the conclusion that the root causes of the incident customary industry practices, BP and its two partners
had been systemic. It found that the explosion was Anadarko and Mitsui had agreed on joint and several
not the result of reckless conduct of rogue individuals liability. This, however, would not apply if BP were
but rather the consequence of systemic failures in risk guilty of gross negligence: such losses would then
management, failures of government to provide
effective regulatory oversight and shortcomings typ-
ical of the industry.

IN FOCUS
Workers on the drill floor of the Development Driller II,

drilling a relief well near the site of the Deepwater
Horizon oil spill in the Gulf of Mexico off
the coast of Louisiana.
have to be indemnified by BP alone, without the

possibility of subrogation. Exactly the opposite
applies in the relationship between BP and its sub-
contractors: here, BP is obliged by a “hold harmless”
agreement to pay all damages claims alone –
unless the subcontractors have committed gross
negligence.
Conclusion
A great deal depends on whether gross negligence

can be established and if so, in regard to whom. Along
with the lawsuits brought by injured parties, this issue
will therefore without doubt preoccupy the com-
panies involved in Deepwater Horizon and their liabil-
ity insurers, as well as courts and arbitrators, for many
years to come.
OUR EXPERT
Prof. Dr. Ina Ebert specialises in liability
law and emerging risks. She is a
senior consultant in Munich Re’s
Global Clients/North America Division.
iebert@munichre.com

LIABILITY
Deepwater Horizon (2)

Purely financial losses
Industrial accidents, such as the explosion on the Deepwater

Horizon oil platform, always make for a mixed bag of personal
injury and property losses, environmental losses and purely
financial losses. Indeed, purely financial losses are playing an
ever greater role in the expanding field of liability law.
Christian Lahnstein BP’s US$ 20bn fund, to request Harvard Professor

John Goldberg to investigate the legal situation on the
Culpable perpetrators of personal injuries or damage basis of the Oil Pollution Act (OPA).1
to third-party property are almost always obliged to
pay damages. But the situation is different when The report presents examples highlighting the limits
purely financial losses are concerned: the universal imposed on liability by the Oil Pollution Act. Loss of
right to pursue profit is a central tenet of the free mar- income by fishermen is consequently indemnifiable if
ket economy. Any player successfully selling its prod- the waters in which they normally fish have become
ucts on the market can be said to be inflicting finan- polluted; the same also applies in the case of hotels if
cial losses on its competitors. This is a permissible neighbouring beaches which they do not even own
and even desirable state of affairs. However, there are have been polluted and these are normally used by
limits to the extent of protection given to freedom of hotel guests. Reductions in wages and salaries of
action. Each legal system has different provisions on such hotels’ employees must also be indemnified.
where exactly these limits lie. The limits of liability for
purely financial losses are unclear. In some cases, the Borderline cases for indemnification include that of a
loss category does not exist, the scope of liability barge operator when the river forming his normal
being determined by causal criteria. In others, liability route is closed to shipping for decontamination. It is
for purely financial losses is opposed on principle or argued that this operator’s right of access to navig-
only permitted within very narrowly defined param- able waterways is not a commercial right-of-use, as
eters. This makes it difficult to pinpoint the boundary required by the OPA, but one to which everyone is
line. Any party causing financial losses to third parties entitled. Moreover, he does not belong to the groups
and breaking laws designed to protect the rights of which legislators considered to require particular pro-
the damaged parties will usually also be held liable for tection. A restaurant owner whose customers typic-
purely financial losses. ally include fishermen and harbour workers, or an
estate agent selling or letting properties in the
In the case of Deepwater Horizon, a deep-pocketed affected area are more likely to be associated with
perpetrator has raised expectations which liability such groups, namely fishermen or beach-front prop-
law can only meet to a limited extent. This prompted erty owners. However, even they do not have any
Ken Feinberg, the man responsible for distributing “commercial user right of property or resources dam-
aged or lost”.
1 Goldberg, Liability for Economic Loss in Connection with the

Deepwater Horizon Spill, 22 November 2010.

IN FOCUS
The start of the first shrimp season in Louisiana

since the BP oil spill.
According to Goldberg, cases such as the following

will not be indemnified: loss of sales by the operator
of an inland amusement park whose main customers Conclusion
are coastal tourists, or the loss of sales by tour opera-
tors due to declining demand for tours even in areas The knock-on effects of purely financial losses result-
which are not contaminated; also the loss of income ing from industrial accidents are only compensated
by fish restaurants due to the loss of public appetite within narrow limits under liability law. Making these
for fish which is generally suspected of having been limits plausible in individual cases remains a challeng-
contaminated. A restaurant owner in an area threat- ing task when adjusting losses.
ened with contamination will similarly be unable to
claim loss of sales; however, this would be possible if
the authorities were to bar access to the area on
account of the potential danger.
This last example highlights the problems surround-

ing the political handling of the precautionary prin-
ciple and the associated conflicts of interest: what
serves environmental interests, what is activism and
which commercial interests are threatened or pro-
moted? In crisis situations, public pressure and a pre-
cautionary approach often prompt politicians and
companies to make quick-fire decisions on such
issues as plant closures and recall campaigns.
Responses made in the hope of avoiding personal
injury or environmental losses can often lead to genu-
ine economic losses instead, transferring the burden
from personal injury and environmental losses and OUR EXPERT
onto purely financial losses. The report also shows Christian Lahnstein is respon-
sible for the analysis of funda-
how important it is to keep in mind the purpose of the
mental issues relating to liability
specific environmental laws concerned. The extent to
and insurance law, and to social
which US courts will follow the principles outlined influences on liability and
here remains to be seen. insurance.
clahnstein@munichre.com

MARINE
Nickel ore cargo sinks ships
Three tragic losses at sea within the space of five

weeks have once again fuelled debate over the
hazards of carrying ore by sea. Excessively damp
mineral cargoes can upset the vessel’s stability within
minutes. Yet this could so easily be prevented by more
careful checks and proper handling of the cargo.
The Nasco Diamond sank in November 2010, en route from

Indonesia to China. An excessively damp cargo was presum-
ably the cause of the vessel’s sudden disappearance.

CLAIMS MANAGEMENT
Benedikt Funke and Olaf Köberl within a very short space of time. Within just five
weeks, from 27 October to 3 December 2010, three
On 9 November 2010, the Panamanian-flagged bulk bulk carriers bringing ore from Indonesia sank on
carrier MS Nasco Diamond was on its way from their way to China. Of the 74 crew members involved
Kolonodale (Indonesia) to Lianyungang (China) carry- altogether, 44 tragically lost their lives through these
ing 55,000 tonnes of nickel ore. The weather was three incidents.
calm as it sailed through the South China Sea roughly
180 nautical miles off the southern tip of Taiwan. In Transport
the afternoon, the ship’s master noticed that the ves-
sel was listing heavily and radioed the Taiwanese Transporting bulk goods by sea has always been
authorities. Radio contact broke off towards midnight fraught with danger, due among other things to the
on the night of 9 November. The coastguard was risk of cargo shifting caused by the swell of the sea.
alerted, but found only an oil slick and empty lifeboats For this reason, the holds of vessels are designed to
in the area. Only four of the 25 Chinese crew mem- stop this from happening. Bulk goods can also be pre-
bers were rescued. vented from shifting by levelling and trimming the
cargo, i.e. uniformly distributing it in the hold. In the
The bulk carrier MS Hong Wei, built in 2001, suffered case of mineral cargoes, however, this is not always
a similar fate barely four weeks later, on 3 December successful, as they may become fluid or slurry-like (a
2010. The Chinese bulk carrier went down in heavy process known as liquefaction) on account of the
seas en route to Dalian (China). It too sank south of moisture within the minerals.
Taiwan, carrying nickel ore from Indonesia.
Why did the Nasco Diamond and Hong Wei sink?
The causes are still being investigated and will prob-

ably never be fully explained, in view of the few surviv-
ing witnesses and the vessels’ total loss.
What is clear, however, is that the vessels were carry-

ing nickel ore and suddenly capsized. Numerous ves-
sels carrying iron ore and particularly nickel ore had
already been lost in the past. The most worrying
aspect here, however, is the number of incidents
SINKINGS CAUSED BY MINERAL CARGOES
17 July 2009 9 September 2009 27 October 2010 10 November 2010 3 December 2010
MS Asian Forest MS Black Rose MS Jian Fu Star MS Nasco Diamond MS Hong Wei
Sank in bad weather with Sank only a few miles out Sank south of Taiwan en Sank 180 nautical miles Sank north of the Philip-
a cargo of 13,000 tonnes of port with a cargo of route from Indonesia to south of Taiwan, en pines, en route from Indo-
of iron ore two hours after 23,000 tonnes of iron ore Quingdao (China) with a route from Kolonodale nesia to Dalian (China)
leaving port in Mangalore en route from Paradip cargo of 43,000 tonnes of (Indonesia) to Lianyun- with a cargo of 40,000
(India) en route to China. (India) to China. One nickel ore. 13 seamen gang (China) with a cargo tonnes of nickel ore.
seaman missing. missing. of 55,150 tonnes of nickel Ten seamen missing.
ore. 21 seamen missing.

CLAIMS MANAGEMENT
1 What is liquefaction?
Anyone who has ever shaken a bottle of ketchup

before pouring it is familiar with the principle of
liquefaction. As in a bottle of ketchup, the moisture
contained in the cargo of compact, fine-grained ore is
distributed more evenly when subjected to vibrations
and the ship’s motion, thus reducing friction within
the cargo. The higher the cargo’s moisture content,
the greater the risk of an originally solid cargo devel-
oping a slurry-like consistency and behaving like a
2 liquid in the hold.
Bulk carriers are generally not designed to transport

liquid cargoes and are therefore at great risk of com-
promising their stability if their cargo becomes lique-
fied (Fig. 2, page 27). Unlike tankers, bulk carriers
have large holds without bulkheads. OBO (oil, bulk
and ore) carriers are a compromise between tankers
and bulk carriers, and can also transport liquids due
to the different arrangement of tanks and partitioning
of the hold. On account of their considerably higher
operating and maintenance cost, they failed to
1. Nickel ore after loading.
2. Liquefied nickel ore. become widely established after the 1980s.
International conventions and regulations
International conventions and regulations have been

introduced to minimise such risks when transporting
hazardous goods by sea. The most important frame-
work of regulations governing the safety of ocean-
going vessels – the SOLAS Convention (International
Fig. 1 Liquefaction due to compression of the cargo
Convention for the Safety of Life at Sea) – was issued
in 1913 in response to the sinking of the Titanic and
has been amended several times since then by the
International Maritime Organisation (IMO). The fifth
amendment of 1974 has now been ratified by almost
all countries together with numerous supplementary
protocols. The most important binding regulations
under the SOLAS Convention governing the transport
of dry bulk cargoes are contained in the International
Source: Brookes Bell Maritime Solid Bulk Cargoes Code (IMSBC Code). It
classifies typical bulk cargoes into different categor-
In the beginning (left), the cargo is held together ies, including a category A for cargoes with a ten-
by friction due to physical contact between dency to liquefy.
the individual particles. Due to the ship’s motion,
the cargo is compressed and the liquid which
To ensure the safe transportation of ores, the ISMBC
it contains is distributed throughout the cargo
(right). Code provides for special tests for category A cargoes
for the verification of their safety. First of all, the Flow
Moisture Point (FMP) is determined for each cargo
unit, i.e. the maximum moisture content at which the
cargo liquefies. The Transportable Moisture Limit
(TML) of relevance for loading and transport is then
defined at 90% of the FMP in accordance with the
IMSBC Code.

CLAIMS MANAGEMENT
3. Nickel ore before loading.

3
4. 5. 6.
Flow table test – A sample is
subjected to jolts at different mois-
ture levels. The flow moisture point
is established in this way.
The Code describes three standard test methods for

determining the aforementioned values: the Flow
Table Test, Penetration Test and Proctor/Fagerberg
Test.
5
In all three tests, the point at which the particles no
longer adhere to one another and liquefaction occurs
is established by adding liquid and then subjecting
the samples to jolts or vibrations.
Who is liable?
Who is liable for damage to the vessel and its cargo,

including total loss, as well as for dead or injured
crewmen and pollution damage? In view of the differ-
ent parties involved in transport by sea and the con-
tractual relations between shipowners, charterers, 6
shipper and other parties interested in the cargo, the
question of liability can be exceedingly intricate and
problematic.
The main risk is borne by the shipowner and the char-

terer. This applies particularly in the case of the last
charterer in the usual time charter chain, especially if
it has handed the vessel over to the voyage charterer
or shipper to transport the cargo on the basis of a voy-
age charter. In this case, the charterer’s liability insur-
ance (often referred to as Charterers P&I) is relevant.

CLAIMS MANAGEMENT
The shipper is basically liable to the freighter for

direct and indirect losses attributable to incorrect
Nickel ore information concerning the nature and properties of a
hazardous cargo. In many cases, however, it is not
Chemically speaking, nickel is a solid transition metal easy to pursue claims against the shipper or voyage
which is used above all in the manufacture of alloys. charterer, be it on account of the difficulty of furnish-
The manufacture of stainless steel accounts for two- ing proof, especially following the loss of vessel and
thirds of worldwide demand for nickel, which is also cargo, or because a lack of financial means raises
used in the chemical industry, as well as in the pro- uncertainty as to the success of such a recourse.
duction of jewellery and coins.
Under the usual time charters (e.g. NYPE 1946), the
The mineral is very rarely found in its elementary charterer consequently remains liable to the ship-
form, by far the majority of deposits being nickel- owner for physical damage and losses caused by the
bearing ores. Russia and Canada are the main mining cargo taken on board. In addition, most charter con-
and production countries, but nickel ore is also exten- tracts and the international conventions governing
sively mined in Indonesia. As Indonesia lacks the the transport of goods (Article IV 6 Hague/Hague-
necessary processing industry, it is then shipped by Visby Rules) provide for strict liability of the charterer
bulk carrier to large smelters in China and Japan. when transporting hazardous cargo. Even if no ruling
has been agreed by and between the charter parties,
Due to the growing demand for stainless steel and English law provides for an “implied obligation” to
positive developments in the price of nickel, these take only safe cargo on board.
shipments have increased in recent years.
In order to avoid possible gaps in liability and
Known as laterites, the nickel ores shipped from Indo- recourse, it is therefore eminently important for the
nesia have a relatively high moisture content of charterer to ensure uniform contractual obligations
between 25% and 35% due to the local climate. This towards the shipowner where the cargo is concerned
value can fluctuate depending on weather and stor- and to pass these on a back-to-back basis down the
age conditions. Particularly during the monsoon sea- time charter chain right through to the shipper/voy-
son, this can lead to the absorption of considerable age charterer. The only possibility for the charterer at
moisture when in storage. the end of the chain is to seek recourse against the
shipper or voyage charterer.
Nickel output per country (tonnes per annum)
However, liability risks may arise for the charterer at
Country Output Reserves the moment of accepting the cargo. This may be the
1 Russia 276,000 6,600,000 case, for instance, if the captain recognised the
2 Canada 250,000 4,900,000 potential danger inherent in the cargo while it was
being loaded and therefore refused to ship the cargo
3 Indonesia 211,000 3,200,000
while still in the port of loading. Sometimes, it is not
4 Australia 180,000 26,000,000 possible for the vessel to discharge or unload the
cargo in the port of loading, with the result that the
Source: vessel may be tied up in port for months on end. The
United States Geological Survey, 2008 associated costs must initially be borne by the char-
terer in the hope of recovering them from the shipper.

CLAIMS MANAGEMENT
Preventive measures
As a result of the liability risks arising for the charterer

in conjunction with the shipment of ore, particularly
for
– considerable losses due to delay,
– costs incurred for additional loading work

(subsequent unloading of a hazardous cargo),
– and in the worst case, liability for the full value of

the ship, the value of the cargo as well as for dead
and injured crewmen,
liability insurers are once again urgently drawing the

attention of charterers and shipowners to the risks
involved and to the necessary preventive measures.
Fig. 2 Ship stability
FA
FA FA
G G B
G
B B
FG FG
FG
Liquefied
Bulk goods Righting arm bulk goods Righting arm Heeling arm
Stability describes the ability of a ves- right angles between the weight-force and sinks. In tankers, for example, this
sel to return from an inclined position and buoyancy in the centre of gravity effect – known as the free surface
to an upright position. (Fig. 2, left). effect – is minimised by fitting add-
itional bulkheads and filling the tanks
With regard to its transverse stability, The problem with a slurry-like lique- as completely as possible in order to
i.e. reaction when heeling (listing) to fied bulk cargo is that the centre of prevent the centre of gravity becom-
one side, two forces in particular act gravity is displaced towards the sub- ing displaced.
on the vessel, namely the weight-force merged side of the vessel by the shift-
drawing it perpendicularly downing liquefied cargo, thus shortening
wards in the centre of gravity (G) and the righting lever arm (Fig. 2, middle).
the buoyancy due to the displacement In addition, as the angle of inclination
of water. This force acts perpendicu- increases, the centre of buoyancy
larly upwards in the centre of the dis- moves back towards the middle line
placed water volume or centre of due to the altered submerged volume
buoyancy (B). When heeling, the (Fig. 2, right). As a result, the vessel is
centre of buoyancy is displaced unable to return to an upright pos-
towards the submerged side of the ition, the righting arm becomes a
vessel and a righting arm is created at heeling arm and the vessel capsizes Source: Munich Re

CLAIMS MANAGEMENT
In some cases, the recent disasters have prompted

insurers to generally exclude liability for shipments
of nickel ore or to permit transport exclusively on
condition that they have conducted their own inspec-
tions. Improving the storage conditions before load-
ing would be one way to make transport safer before
setting out to sea. Better storage conditions would
prevent the cargo absorbing too much moisture,
especially in the monsoon season. Investigation pro-
cedures should also be standardised and specified
in more detail. Finally, effective emergency measures
on board a ship and a crew suitably trained in hand-
ling emergencies are essential for preventing such
catastrophes.
Conclusion
With a responsible awareness of the hazards associ-

ated with the cargo, there should be no problem con-
tinuing to transport mineral ores by sea in the future.
The long-term aim must be to make such shipments
safer and to minimise the risk factors. Experience
has shown that the information provided with regard
to the properties of the cargo is not always correct,
particularly where cargoes of nickel ore from Indo-
nesia are concerned. The moisture values declared by
the producers when examining the cargo before it is
shipped are often incorrect and usually too low.
In view of the liability risks described, a captain’s or

charterer’s refusal to take on the cargo can only be the
last resort. There have been reports of cases in which
crews were threatened with violence if the cargo was
refused. One effective measure could be for liability
insurers to demand the obligatory attendance of a
supercargo to examine the cargo before it is accepted,
to supervise its loading and to liaise with the crew.
Availability of such qualified experts could prove
problematic considering the remote location of ore
mines and ore ports.
OUR EXPERTS
Raising the risk awareness of shipowners, charterers
Benedikt Funke is an industrial
and their crews, as well as improving their training
engineer specialising in maritime
and qualifications, can help to prevent such catas- transport with practical experience
trophes due to liquefaction when transporting min- on many different ocean-going
eral cargoes by sea in future. vessels. He has worked for Marine
Claims at Munich Re since 2010.
bfunke@munichre.com
Olaf Köberl is a master mariner and

lawyer. He has professional experience
as a deck officer on tankers and
container vessels worldwide.
He has headed the newly founded
Marine Claims Centre of Competence
since January 2010.
okoeberl@munichre.com

CLAIMS MANAGEMENT
The Liability Century

Compulsory reading for liability insurers
Christian Lahnstein
Kenneth Abraham explores the development of noteworthy. According to Abraham, the historical
tort law, third-party liability and first-party insur- mission underlying workers’ compensation will
ance in the USA from the late 19th century to remain unfulfilled until this has been achieved.
11 September 2001.
The US market still has an immense influence world-
The work also highlights the social background wide. The myth and the reality of US tort law have
underlying these developments. Like many publica- been baffling the companies, investors and insurers
tions by US lawyers with a social sciences bias, this involved around the world for decades. Meanwhile,
book is not addressed exclusively to professionals. the interminable internal dispute between proponents
Abraham shows the often hidden influence of liability and opponents of tort reform obscures any realistic
insurance on tort liability practice. He gives a critical appraisal of tort liability practice. In this respect too,
view of US motor insurers’ negative attitude towards this is a useful, neutral and historically based presen-
insurance obligations. In many states, this attitude tation of the situation.
has led to low limits of indemnity which have been
further devalued by inflation and has consequently
resulted in a contradictory tort liability practice more
symptomatic of developing countries. At the same
time, however, Abraham also encourages liability
insurers to take a more active stance in dealings with
the “deep pockets”, those mega-corporations which
would appear to be capable of compensating the
damage they have caused.
Abraham also describes the ways in which first-party

insurance can affect tort liability practice, for instance
in the case of personal injury. The more extensive the
cover being provided by health, disability and long
term care insurance, the less relevant an awareness of
liability claims becomes. At the same time, however,
such claims mount when asserted as recourse claims,
as is happening more and more.
Ever since the first and so far most radical tort reform
which brought the laws on workers’ compensation in
1910, “no-fault” models – where insurance cover
Kenneth Abraham:
replaces liability – have remained a recurring theme in “The Liability Century”
US legal policy without ever managing to displace An examination of the development
tort law. Proposed for motor insurance in 1930 and interdependency of tort liability
(“Columbia plan”), they became established as a kind and insurance in the USA during the
of basic cover in some states, but never in medical 20th and 21st centuries.
malpractice or products liability insurance. The only
course of action available to the parties is hence to
keep attempting to negotiate insurance-like compen-
sation models in mass liability suits. Abraham’s sug-
gestion for more effective coordination of workers’
compensation, tort law and liability insurance is

MOTOR INSURANCE
The latest car theft scams
December 2008: a rep parks his three-month-old BMW X5 in

the underground car park of a Munich hotel. Checking out four
days later, he returns to his car, only to find that it has vanished.
An isolated case? Electronic anti-theft devices may be highly
advanced, but thieves are also keeping pace with technological
developments.
Eckhard Schäper The sharp drop in car thefts between 1993 and 2008
was largely due to the rise of electronic anti-theft
The BMW was fitted with the latest electronic anti- devices. Thieves found themselves left with only one
theft device. Had the owner faked the theft in order to option: hauling cars away by truck. These days, how-
pocket the insurance money? Initially, the motor ever, making off with entire vehicles is no longer the
insurer refused to pay up. But the competent higher sole aim and thieves are once again targeting radios
regional court demanded that the payment be made. or navigation systems. For several years now, there
The expert commissioned confirmed that a vehicle have been cases of interference with the remote lock-
secured in this manner can be started without the ing mechanism, preventing the vehicle from “recog-
original key, though the process is highly complex. nising” the correct signals. The central locking system
stops responding to the command to lock the doors,
Today, car break-ins have become almost as easy as which remain open even after the button on the
they were decades ago. For many years, electronic remote control has been pressed. Arnulf Thiemel
and mechanical security systems prevented vehicles from the technical centre of the German automobile
from being stolen. Classic break-in tools such as association ADAC in Landsberg makes the following
crowbars and screwdrivers are now obsolete, having appeal: “All motorist should be vigilant and be sure to
made way for electronic gadgetry. observe what their vehicle does when they lock it.” If
nothing happens after pressing the button, this may
Indeed, modern car thieves employ methods which mean at the very least that the remote control isn’t
are so advanced that experts are predicting a renewed working anymore.
surge in car theft figures. In 2009, for instance, the
number of cars stolen in Berlin was more than 38% However, the methods now favoured by car thieves
up on the previous year, while a leap of over 30% was are more electronically advanced than ever. Manfred
recorded in Brandenburg and Saxony. Göth from the forensic testing laboratory GÖTH
GmbH has reported a trick with which the latest key-
less entry systems of various car models can be
duped. The trick requires two thieves with two spe-
cially equipped briefcases, one of which contains an
antenna. The first thief must stand within about one
metre of the person holding the smart card. He can
then receive the card data and transmit it automatic-
ally by mobile phone from the briefcase to his

CLAIMS MANAGEMENT
accomplice with the other briefcase. The accomplice Looking ahead

stands next to the car, which unlocks automatically in
response to the transmission. Electronic and mechanical anti-theft devices are all
very well, but car thieves are upgrading their technol-
“An even greater security risk is the possibility of clon- ogy and becoming increasingly adept at snatching
ing keys: an electronic copy is created by transmitting even well-protected cars. We are seeing a new
the data. However, the criminals do need to get hold approach to car thefts. Once opportunistic crimes,
of the real key, at least briefly. Rented cars are hence they are now planned with military precision by
typical targets of thefts using this method.” organised gangs who often spirit the goods abroad.
Another option is to manipulate the electronic system

of the vehicle directly from a laptop. According to
Göth, this does not pose a problem; in several trials,
the entire process was wrapped up within the space
of one minute and 45 seconds.
Conclusion
The expert and Munich Re agree that, added to the
growing level of criminal expertise, this wide array of After a pleasing fall in the number of thefts over the
possibilities can only indicate one thing: “The number course of many years, insurers and experts are cur-
of vehicle thefts is set to soar again.” rently seeing a reversal of the trend. The insurance
industry and car makers alike must now endeavour
Car thefts in Germany from 1990 to 2009 to advance anti-theft mechanisms and raise the
safety bar. Failing this, the rising loss amount result-
In 2009, a total of 37,964 vehicles were stolen – a ing from an increase in car thefts could push motor
figure which includes all motorised vehicles from insurance business even further into the red. A hike
mopeds and motorcycles to heavy-goods vehicles and in motor insurance premium rates would be the
cars. This represents a year-on-year increase of 0.9%. inevitable outcome.
The total amount of indemnity rose by almost 16% to
some €315m. The average amount of indemnity
climbed slightly in 2009 to €8,300.
Year Thefts Claims ex- Loss

penditure* frequency**
1990 39,935 260.0 1.7
1992 90,020 656.8 3.2
1993 105,543 800.0 3.6
1994 104,890 766.6 3.6
1995 89,072 587.4 3.1
2000 42,560 316.2 1.4
2005 23,771 253.3 0.7
2008 16,134 175.7 0.5
2009 18,215 219.0 0.5
* €m.
** Per 1,000 cars covered by own damage insurance.
Source: The German Insurance Association (GDV)
OUR EXPERT
Eckhardt Schäper is a fire-safety
engineer at Munich Re and an
expert on burglary/theft.
eschaeper@munichre.com

CLAIMS MANAGEMENT
RENEWABLE ENERGIES
Preventing fires in
wind turbines
On 21 November 2009, a wind turbine went into overspeed
and burst into flames in the state of Ceará in northeastern Brazil.
As is often the case with such losses, the damage was irrepar-
able. Fires in wind turbines are uncommon, but in most cases
they result in a total equipment loss.
Hamilton Ujikawa Accidents involving fires in wind turbines are uncom-

mon and effectively combating wind turbine fires is
The wind turbine was running at excessive speed. The an almost impossible task.
reason for this was an inadequately secured electrical
part inside the hub. These two facts, together with Risks associated with wind turbines
subsequent overheating of the mechanical parts,
probably caused the fire in the turbine’s nacelle. Wind turbines differ from traditional power gener-
Strong vibration in the equipment additionally caused ation systems through their high risk of total loss in
severe damage to the tower’s foundation. Repair the event of a fire. The main hazards include:
crews were unable to approach the now unstable
tower, resulting in a total equipment loss. It took more – High concentration of monetary value inside the
than eight months to replace the wind turbine; con- nacelle
crete base, tower and nacelle had to be collapsed. The
total equipment loss amounted to R$ 10m (over – Concentration of potential sources of ignition inside
€4.5m). the nacelle and vulnerability to atmospheric dis-
charges
In countries with large rural areas, such as Brazil,
wind power farms have multiplied in recent years. – Automated remote operation
Beyond the rapid geographic expansion, they have
also experienced a considerable increase in the size – Impossibility of fighting fire due to the machine’s
and power of the wind turbines, which can currently height
produce up to 7 MW per machine. The increased
power also means a higher monetary value, which in – Remote location of wind farms, especially in the
turn heightens the risks associated with operating case of offshore wind farms
wind farms.
In the event of a nacelle’s total loss, the cost of a
replacement can be equal to or even higher than the
original cost. This applies particularly when ordering
a single replacement from the manufacturer, but also
when considering the cost of using large, heavy-duty

CLAIMS MANAGEMENT
In the majority of cases, fire will result in a total equipment

loss, as happened here in Ceará in northeastern Brazil.
cranes to hoist the unit. In the case of Brazil, the aver- Typical causes of fire
age cost of a unit, including base and foundations,
was around €4.5m. Costs can be significantly higher – Atmospheric discharges: They do not always result
in the case of offshore wind turbines, due for instance in damage. When rotor blades are struck by light-
to the special ships or derricks that would be required. ning, they can generally be repaired by replacing the
damaged blades. However, if the atmospheric dis-
Business interruption losses charge causes a fire, this could spread quickly, as
the blades or even the nacelle are made of com-
Fire damage generally causes an appreciable inter- bustible material (e.g. fibreglass).
ruption in operation of the equipment lasting several
months. In the case of total loss of the nacelle, – Electrical defects: Numerous fires are due to
replacement can take from nine months to a year. defective components, faulty assembly, poor main-
Moreover, wind farms are often located in areas for tenance or operating reasons. The fire results from
which authorisation is needed from local government overheating due to overloading, short circuit or
authorities. The operating licence generally specifies faulty contact.
the type of equipment authorised for the location con-
cerned. If a wind turbine with higher power is needed, – Overheating of mechanical parts: In the event of a
this will require a new licence which can, in turn, lead flaw in the speed control system (which controls the
to further delays. In many cases, reconstruction work blade angle), excessive gearbox speed can cause the
can only be performed in favourable weather condi- hydraulic fluid to ignite. Moreover, poorly lubricated
tions and this can also lead to additional delays. generator and gearbox bearings, as well as rotating
components, are also ignition sources. Finally, leak-
ing oil or hydraulic fluid can also start a fire when it
comes into contact with the hot surface of the
mechanical brake.

CLAIMS MANAGEMENT
Schematic structure of a wind turbine
Anemometer
Rotor Nacelle Hydraulics systems Electronic

blades controller
Hub Gearbox Generator
Low-speed shaft High-speed shaft Yaw mechanism Cooling unit

and brakes
Source: Munich Re
Wind turbines consist of a reinforced Wind turbines operate within a predeter-

concrete base and a tower (generally mined wind speed range. At extreme wind
made of steel) supporting the nacelle speeds, the machines switch off. In this
(encasing), hub and rotor blades. The case, the rotor blades rotate about their
nacelle holds the main electromechanical own axis so that they are parallel to the
components such as the electric generator direction of the wind. This reduces the
and electronic control systems. Most wind rotational moment of the rotor and conse-
turbines currently in service use this quently its speed.
set-up. The rotor blades and hub with
blade pitch mechanism are directed Wind turbines generally have a gearbox
towards the wind. A monitoring system that multiplies the speed of the rotor axle.
automatically adjusts the rotor blades in Since the rotor is subject to structural
accordance with the wind direction. limitations as regards the maximum
A pitch control mechanism additionally speed, its axle rotates slowly (about
ensures that the rotor blades rotate about 16 rpm), making an increase in speed
their own axis. The aerodynamic profile of necessary so that the connected generator
the blades is regulated in accordance with can rotate faster (about 2,000 rpm). There
the wind speed, thus increasing the effi- are also models without a gearbox, in
ciency of their energy generation. which the rotor is instead directly
connected to the generator.
Finally, the voltage of the generated

electricity is stepped up by a transformer.

CLAIMS MANAGEMENT
Prevention of wind turbine fires In some cases, insurers have invested in regular
inspections by wind farm specialists. They believe that
The German Insurance Association recommends the the risk of premature component failure due to
following preventive measures to avoid fires in wind production or assembly defects can be significantly
turbines: reduced by paying more attention to the components’
faultless operation. These specialists can inspect the
– Use of non-flammable material wind turbines when they are commissioned and again
at the end of their guarantee period, for example. They
– Systems for rapid detection and extinguishing are also qualified to give an evaluation of the turbines’
of fires operational readiness.
– Regular maintenance and servicing
– Disconnection of turbines and their electrical

system when a fire risk has been detected
Conclusion
Further measures to prevent fire Although fires in wind turbines are rare, the likelihood
of a great loss when they do occur merits serious
– Adequate protection against lightning for the consideration of the risk. For this reason, the afore-
nacelle and rotor blades, as well as for the main mentioned analysis of risk scenarios, the subsequent
electrical devices and other parts equipment inspection by wind farm specialists and
particularly the implementation of preventive meas-
– Introduction of automated systems for monitoring ures as well as risk management measures can sub-
wind turbine operation, remotely controlled by com- stantially reduce the risk, bringing greater peace of
puters to reduce the risk of fire through rapid detec- mind to both the policyholder and the insurer.
tion and response systems that are triggered when
components fail. These systems monitor oil tem-
perature, current intensity, rotation and vibration of
the main components of every single machine,
which is then shut down whenever anomalies and
aberrations arise.
– Ideally, a fire-fighting system based on CO2 or inert

gas (optimal for confined spaces) should be
installed in the nacelle.
The high cost of installation is the main reason why

such systems are not used. According to specialists,
this investment pays off within about five years in
terms of risk and loss minimisation versus insurance
premiums paid. As the lifespan of these systems is
close to 20 years, the investment is certainly worth-
while.
OUR EXPERT
Hamilton Ujikawa is a civil
engineer. He works as a
specialist for property damage at
Munich Re in São Paulo, Brazil.
hujikawa@munichre.com

BUILDINGS INSURANCE/ALL-RISKS COVER
Discharge pipes –
an invisible risk?
Aged and unserviced sewage pipes pose a risk deep
underground. Up to 90% of the private sewage pipes
in Germany with a total length of roughly 1.5 million
kilometres are damaged.
Dilapidated sewage tunnel: A lot of water seeps into the

ground before it can enter the sewer.

INDIVIDUAL LOSSES
Holger Tausendfreund differences in legislation in the individual Länder. This

consequently makes it difficult to predict exactly
Every building owner is legally obliged to maintain which towns and cities will soon demand proof of the
the underground sewage pipes connected to their pipes’ leak tightness and just how vigorously they will
building. Now, however, many municipal authorities pursue implementation of the specified requirements.
are demanding proof of the leak tightness of sewage
pipes. Consumers are obliged to have their pipes It is therefore also difficult to forecast how long these
checked within a specified period of time. Many checks and the associated rehabilitation measures
German authorities have set a deadline as early as will continue and how high the resultant burden for
31 December 2015 for these checks, but in some the insurance industry will be.
German Länder the specified periods extend up to the
end of 2024 or 2025, indicating that the subject will Nor can anyone judge at present just how great the
become increasingly important in the years to come. risk of soil and groundwater contamination due to
discharge pipes actually is and to what extent the fear
Discharge pipes are often insured with the building of environmental damage or economic reasons justify
through endorsements, partly in combination with a estimated remediation costs of €150bn in Germany.
deductible and/or limit. In terms of frequency and The timescale and scope of the various rehabilitation
amount of loss, claims involving discharge pipes have measures are likewise unknown.
hitherto been just one of several possible types of
claim associated with the insurance of buildings. In High rehabilitation costs
most cases, the damage to the pipes was not dis-
covered until water damage occurred or the pipes The high costs which could be incurred are due to the
became blocked. Since the required checks will also length of piping installed underground and years of
reveal damaged pipes which have not yet caused any inadequate maintenance and rehabilitation. Roughly
water damage, insurers must expect a rise in the 1.5 million kilometres of private discharge piping are
number of claims filed by policyholders in the future. installed in Germany. Of these, between 50% and 90%
are thought to be damaged, i.e. burst or corroded, with
In view of the diverging legal conditions in the individ- damaged pipe sockets or penetrated by roots. The
ual Länder, the potentially high monetary exposure costs incurred by building owners and landowners
and the complex aspects to be considered when in- can differ considerably. First and foremost, they will
vestigating possible claims, this is a particularly acute depend on the length and condition of the piping.
problem which threatens to become an emerging risk However, other factors must also be taken into
for the insurance market. account here, such as accessibility of the piping and
any groundwater. Costs between €400 and around
Legal situation €5,000 can consequently be incurred per service con-
nection. In some cases, the costs may even be higher.
In Germany, legislation governing discharge pipes The total costs to be expected comprise the rehabili-
exists on a European, national and state (Land) level. tation costs for part of the roughly 500,000-km net-
Firstly, there is EU Directive 2000/60/EC, Water work of public sewers and the service connections for
Framework Directive, establishing a framework for roughly 18 million residential buildings.
the protection of inland surface water, transitional
waters, coastal water and groundwater. Then there
is Council Directive 91/271/EEC concerning urban
waste water treatment. German legislation includes
the Water Resources Management Act (WHG), the
State Water Act (only in North Rhine-Westphalia)
and the Self-Monitoring Ordinance (EKVO) in Hesse.
Municipal authorities are responsible for the execu-

tive implementation of these requirements within the
scope of their sewage by-laws. A comparison of the
various towns and cities shows that these require-
ments are handled very differently, due in part to the

INDIVIDUAL LOSSES
Munich Re has estimated that the resultant rehabili- The consequences for insurers depend on a variety of
tation of the discharge pipes from house sewage factors. These include the presence (or not) of caps
systems will cost around €100bn in Germany alone. and deductibles. According to a market survey by
The financial burden facing insurers depends on the Munich Re concerning claims for discharge pipes
underlying covers. According to a survey among some connecting buildings and sites to the municipal
German primary insurers, between 5% and 30% of sewage system, the burden may be in the order of
private building insurance policies which include €2bn with a clear upward trend. The claims filed by
mains water damage in their cover also cover industrial clients in conjunction with damage caused
discharge pipes. Discharge pipes are almost always by discharge pipes can certainly be high. One Ger-
included in the insurance for industrial and corporate man insurer, for instance, has already received a first
clients. In the case of older policies, they are covered loss estimate from an industrial client in the amount
through an inclusion for discharge pipes, while newer of €80m.
policies offer all-risks cover.
Damage due to defective installation of the pipes
The damage was only revealed when a blocked pipe 1

for combined sewage under a ground slab was
cleaned: the pipe had ruptured in two places. The
damage profiles indicated that both breaks had
occurred when the pipes were first installed. A single
loss event can be assumed on the basis of these
damage profiles. However, since the policyholder was
not yet insured with the present insurance company
at that time, the latter was not obliged to indemnify
the loss. Had the insurer been obliged to indemnify
the loss, however, the expert report could still have
helped to cut the costs:
2
– The quotation for rehabilitation amounted to

€8,500. The expert estimated the costs for remedy-
ing the damage at €5,000. Had the insurer been
obliged to indemnify the loss, it could have cut the
costs by roughly 40% with the help of the expert.
– It must be noted here that the expert report estab-

lished that both ruptures were attributable to a
single cause, meaning that the contractually agreed
limit of indemnity of €4,000 would only have been
payable once in this case. 3
1. Disruption
2. Disruption
3. Sealing ring protruding inside the pipe

INDIVIDUAL LOSSES
Investigation of claims
In addition to regional differences in the legal situ-

ation and the difficulty of assessing the losses in
monetary terms, insurers must also take various other
factors into account when settling the claims. Do the
claims filed constitute losses as defined by the terms
of insurance? When exactly did the damage occur?
Different covers may have been provided by various
previous insurers since the discharge pipes were first
installed. In many cases, each check will reveal sev-
eral cases of damage. If these cases of damage are
then attributable to several separate occurrences, it
will be difficult to determine the number of deduct-
ibles to be applied and to specify how often the max-
imum indemnity is to be paid. Care should also be
taken to differentiate between the cost of repairing
the insured damage and the cost of rehabilitation.
Roots in the pipe after decades of corrosion
When backwater accumulated in the ground floor of a 1

building, experts came to the following conclusion:
“The concrete sewage pipe installed outside the
building in around 1930 is severely corroded
throughout. As a result, roots have penetrated into the
pipe and the pipe wall is missing in one place. The
concrete pipe has most certainly been leaking for
several years or decades and the corrosion is the
result of a prolonged process.” The policyholder had
only concluded a policy with this insurer a few
months before the claim. The damage had clearly
occurred before the present insurance relationship
2
began. The insurer is consequently not obliged to
indemnify the loss.
Had the insurer been obliged to indemnify the loss,

however, the expert report could still have helped to
save €3,500. The quotation prepared by a rehabilita-
tion firm amounted to roughly €6,000. An expert who
visited the scene of the damage found that a new pipe
could have been installed at a cost of €2,500 in this
case.
1.–3. Corrosion and roots growing

inside a concrete pipe

INDIVIDUAL LOSSES
Another point to be noted here, too, is that the pipes

should only be checked and the rehabilitation work
carried out by duly trained and qualified personnel.
In the case of industrial clients with an all-risks policy,

it will not be possible every time to definitely establish
whether the claims are covered, as the “sudden and
unforeseen” element is lacking. The long periods of
time involved often make it difficult to determine the
exact cause of the damage and this is not always eco-
nomically feasible in view of the high costs charged
for expert reports.
The adoption of different procedures for corporate

and private clients may prove advantageous,
depending on the size of the portfolio and the policy-
holder. It may be possible to reduce loss ratios
through the use of technical support – for instance by
training the insurance company’s employees. The
insurer should also know to what extent rehabilitated
discharge pipes are still insurable. To avoid an inclu-
sion of historical losses in the cover, this point should
be taken into account and the absence of leaks in the
discharge pipes confirmed by the policyholder before
including cover for discharge pipes.
Conclusion
Calling in an expert to assess claims can possibly

help to cut costs considerably. It is also advisable to
provide further training for claims technicians so
that they are better able to decide whether it is
meaningful to call in an expert.
With its know-how in the field of water damage and

discharge pipes, Munich Re actively supports its
cedants and their clients by providing analyses on
loss potential, loss prevention and loss management.
OUR EXPERT
Holger Tausendfreund specialises in
damage to pipeline systems and
drinking water hygiene. He is a claims
engineer in Munich Re’s GAPA unit.
htausendfreund@munichre.com

Is your knowledge up to date?
* The formula on which all insurance is

based. Premium equals probability of
occurrence times insured sum at risk.
At Munich Re seminars, you can broaden your knowledge and learn

about the latest industry developments.
You can benefit from our experts’ outstanding specialist knowledge

and network with colleagues from other companies. Munich Re’s
seminar programme is sure to offer you what you are looking for.
To find out more about our seminar programme, contact your client
manager or visit our client portal at connect.munichre.com.
NOT IF, BUT HOW
41
ENVIRONMENTAL DAMAGE
Dam bursts in Hungary
On 4 October 2010, Hungary suffered an ecological disaster, when

highly corrosive sludge spilled from a ruptured storage reservoir at
an ore processing plant. The operating company’s insurance cover
was totally inadequate.
Dagmar Mayr and Monica Carbonara ing the final long-term damage and total cost of
the disaster at present. According to media reports,
The deluge of sludge inundated several nearby towns the loss has been estimated at around €200m by
and villages, engulfing roads and cars and devas- Hungary’s Interior Minister Sándor Pintér. A Hungar-
tating the environment. The red sludge which was ian insurer has estimated the probable loss for its
spilled here is a waste product produced in the clients at around €3.7m. Deplorable enough in terms
manufacture of aluminium. To produce the light of the devastation caused, the incident is above all
metal, ground bauxite is mixed with sodium hydrox- unacceptable from an insurance angle.
ide solution and the resultant aluminium hydroxide
then converted into aluminium oxide by dehydration. Press reports claim that the insurance cover of the
What remains is red sludge, a highly caustic sub- Hungarian company responsible for the damage
stance on account of its sodium hydroxide content. was totally inadequate and that it had been placed
under state control. It remains to be seen whether
Normally, this red sludge is rinsed and further pro- the company’s assets will suffice to cover the dam-
cessed in several stages until chemically neutralised. ages which may be claimed. Liability for the environ-
At the Hungarian ore processing plant, this does not mental damage caused may also apply in addition to
seem to have been done to the necessary extent. civil-law claims for the damage to property or health
Analyses by the Environment Agency Austria showed impairment.
that the red sludge contained arsenic and mercury in
particularly high concentrations, the high arsenic con- EU Environmental Liability Directive and its
tent being the greatest concern. implementation in Hungary
Consequences The EU Environmental Liability Directive came into

force on 30 April 2004, with a transition period for
The sludge spill not only claimed ten lives and injured implementation by the member states until 30 April
several people but also destroyed numerous homes 2007. The directive’s main aim was to introduce a
and buildings, seeping into the ground as well as
bodies of water. There is no way of accurately assess-

INDIVIDUAL LOSSES
comprehensive public-law regulation governing liabil- Hungary was one of the four member states which
ity for environmental damage in the EU, in particular translated the directive into national law before the
for pollution damaging protected species and natural deadline on 30 April 2007. The country also used
habitats, as well as water and soil. Civil-law claims for the scope available to introduce relatively strict
damages remain unaffected by the regulation. environment laws. Species and habitats which were
already protected under national or regional regula-
The underlying principle is that whoever causes tions were in some cases also included in the new
environmental damage within the scope of their pro- protection. What is more, Hungarian law defines the
fessional activities as the operator of a plant must term “operator” in relatively broad terms. Meanwhile,
also accept financial responsibility for remediating in order to enforce a stricter ruling at a national level,
this damage. Depending on the hazardousness of the it dispensed with an exclusion of liability for permit-
activity, liability may be strict or merely fault-based. ted normal operation (“permit defence”) and/or exclu-
The individual member states were permitted to sion of liability based on development risk (“state of
stipulate further details and specific defined excep- the art defence”). Liability is further tightened by the
tions and exclusions of liability when translating the inclusion of certain activities within the scope of strict
directive into national law. On a national level, they liability, although these were not listed in Annex II of
were also free to introduce mandatory financial the Environmental Liability Directive. Where the
security.
The picture shows the toxic waste spill following the

dam burst of 4 October 2010 16 km south of Budapest.
Over a million cubic metres of red sludge flooded
nearby towns and villages.

INDIVIDUAL LOSSES
financial security obligation prescribed by govern-

ment is concerned, the law contains provisions which
were to come into force by 2014, but which have not
yet been implemented.
In the European Commission Report of 12 October

2010 looking into the directive’s effectiveness, Hun-
gary is consequently listed as one of the countries
which is “quite advanced in terms of guidelines on
technical and economic valuation and legislative
guidelines”.
Conclusion
As the incident in Hungary on 4 October 2010 has

shown, some companies still do not ensure adequate
insurance cover for environmental liability, even when
possible losses could threaten their very existence.
Through the Environmental Liability Directive, the EU
Commission has established a public-law system of
liability for ecological damage and losses. In its report
of 12 October 2010, the EU Commission also states
that it may review the question of mandatory financial
security before the originally planned deadline in
2014. The different ways in which individual countries
have implemented the directive is problematical and
will create challenges for insurance companies, which
must develop compulsory cover products tailored to
the specific needs of each member state. Neverthe-
less, the insurance industry must now adequately pro-
vide corresponding insurance products for all mar-
kets. That is the only way to make use of the available
scope, some of which may be lost if uniform compul-
sory financial security provisions are introduced.
Munich Re assists its clients in this process with the

development of insurance products and by providing
reinsurance capacity. However, the companies must
also bring their safety standards into line with
insurability requirements. Companies in potentially
hazardous industries need to be aware of the risks
associated with their activities, as well as the
financial consequences. OUR EXPERTS
Dagmar Mayr is a claims lawyer

in the Europe/Latin America unit
and responsible for casualty
claims management in central and
eastern Europe.
dmayr@munichre.com
Monica Carbonara is a claims

lawyer in the Europe/Latin
America unit and a member
of the Environmental Liability
Topic Network team.
mcarbonara@munichre.com

ENGINEERING
Built on sand
A skyscraper on the Gulf coast of Texas was half-finished when

the ground subsided beneath it. The building with 147 luxury
residences was demolished in December 2009.
Pat Gleeson by less than half that amount. This difference in set-
tlement resulted in extreme stress in the building’s
“The finest quality built tower – in the best location ...” structural components, causing it to tilt visibly.
This sales pitch persuaded customers to invest in a
development project in a popular tourist resort on the As late as July 2008, the developers assured investors
Gulf coast of Texas. that, while the project would be delayed, the sky-
scraper would emerge “stronger and safer” than ori-
However, the developers responsible for the luxury ginally planned. Even when these problems had been
high-rise project also had to take account of the spe- overcome, there were still other construction issues
cial challenges facing every such project so close to and safety issues to be resolved. Until the differential
the sea. The corrosive environment consequently settling was corrected, workers were exposed to the
made it necessary to apply special coatings to risk of considerable physical injury if a column
exposed metals. Particularly high-quality glazing and cracked. What is more, the risk of total collapse could
special waterproofing are needed so that the glass not be excluded entirely. For this reason, all work on
doors and windows can withstand the often extreme the project ceased in September 2008. Half of the
winds. The project management team regularly moni- tower had been completed by this time. A complete
tored weather forecasts via job-site televisions. Struc- shoring project, (the bracing of columns) was now
tural testing for the 31-month project started in March scheduled.
2006, with construction beginning in June of the
same year. Then in November, the property’s investors received
the bad news from the project management firm: “We
In May 2008, developers noticed cracks in the are deeply disappointed to report that the construc-
columns supporting the parking garage. Tower and tion of Ocean Tower ... has been terminated with no
parking garage had been built so they were con- immediate prospects for completion.”
nected. It was found that the tower’s core had settled
by up to 40 cm on the clayey substrate, while the
parking garage to which it was connected had shifted

INDIVIDUAL LOSSES
The 115-m-high tower before and during its

demolition.
Investigation of the causes Insurance issues
Subsequent bore tests revealed poorly graded/silty Coverage was afforded under a standard US Builders
sand to a depth of about 9 m below the surface, fol- Risk Form with extensions for delay in completion,
lowed by a layer of clay to a depth of around 39 m and amongst other items. In terms of applicable exclu-
finally a layer of clayey sand. The use of pressure- sions, the provisions concerning indemnification for
grouted piles was recommended as an alternative to the “costs of making good” were of particular interest
drilled piers as a foundation for the tower. This type of in this case. These excluded from cover the “cost of
foundation is used when the substrate is too unstable making good”, as well as
to allow for the usual spread footing foundation.
– faulty or defective workmanship, processing or
The test piles had failed to demonstrate adequate material;
capacity in accordance with International Building
Code standards (IBC 2000): type and size of the piles – faults, defects, deficiencies or omissions in design
selected were unable to support the required loads. In or planning;
addition, the initial geotechnical report did not pro-
vide any estimate of total and differential settlement. – wear and tear, gradual deterioration, inherent vice,
The overall conclusion reached was that differential latent defects, corrosion, rust, dampness or dryness
settlement had occurred between the tower and the of the atmosphere.
parking garage causing severe structural distress,
particularly to the parking garage. These loads would In most cases, a detailed investigation of the failure is
lead to failure of the structural components and ultim- needed in order to establish whether the loss or phys-
ately to the building’s total collapse. ical damage is the direct result of a defect or merely a
subsequent loss. Most courts in the USA tend to con-
In September 2009, it was decided to demolish the firm coverage for damage to property resulting from
abandoned building. The 115-m skyscraper was defects in design or workmanship.
brought down with a controlled implosion on
13 December. At 55,000 tonnes, this was probably
one of the largest implosions of a reinforced concrete
structure in the world. The developers hoped to
recover at least some of their losses by recycling
materials used to build the tower.

INDIVIDUAL LOSSES
Consultant engineers were consequently retained to

investigate the losses. One of their tasks was to
establish which costs could be excluded as having
been incurred to rectify the defective works and
which would have to be indemnified under the policy
as consequential losses. In the end, it was found that
the damage had been caused by defects in design or
workmanship, or by a combination of both; a settle-
ment was reached following intensive negotiations
between all the parties involved.
Conclusion
Problems attributable to errors in the design and/or

workmanship are widespread in the construction
industry. Losses such as those incurred in this case
are difficult to avoid if the soil conditions cannot be
positively determined despite extensive testing. For
the outcome of the investigations, it was ultimately
irrelevant whether a pre-existing design flaw had
caused the structural problems. There was no
insurance to cover the loss. Most exclusions contain
words to the effect that, if defects in design, work-
manship or materials are discovered and there is no
consequential damage, then the existence and
discovery of such defects cannot be seen as damage
and the policy will not respond.
In the present scenario, the implementation of

LEG 2/96 (London Engineering Group model) would
have raised a number of interesting discussions, par-
ticularly whether demolition of the tower was the only
remedy possible following discovery of the defective
works. LEG 2/96 excludes from cover the cost which
would have been incurred if replacement or rectifica-
tion of the insured property had been put in hand
immediately prior to the said damage. Policies are
often extended to include architects and designers,
among others, for their “on-site activities” only. Con-
sequently, if the loss can be traced back to “off-site”
design work, then there should be a clear subrogation
route through to the errant designer. To protect this
route, the policy should contain a provision allowing
insurers to influence and possibly take action against
any contractual waivers entered into by the contract-
ing parties.
OUR EXPERT
Pat Gleeson is an expert in the field
of property and engineering losses.
He is Deputy Manager of Claims
and Wordings Shared Services at
Munich Re in London.
pgleeson@munichre.com

© 2011 Picture credits
Münchener Rückversicherungs-Gesellschaft Cover: Larry Downing/Reuters/Corbis
Königinstrasse 107 pp. 2 left, 4: AP Photo/Tony Dejak
80802 München pp. 2 right, 22: Steven Fritz
Germany pp. 3, 36: picture-alliance/dpa
Tel.: +49 89 38 91-0 p. 6 left: ddp_images/
Fax: +49 89 39 90 56 www.bildagentur-online.com
www.munichre.com p. 6 right: shutterstock/Four Oaks
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Ageing infrastructure Engineering Marine

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1. Many railway lines are old and

2. Potholes damage cars and can

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Ageing infrastructure and the insurance industry

3. Rusting sewage pipe in

4. Pipework at an old factory in

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Life cycle curve

Phase A Phase B Phase C

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1. The I-35W bridge in Minnesota,

2. Lake Champlain Bridge, opened

3. These old pylons near Münster

components are used which have all completed their

Just when this age- and wear-related increase begins 3

The 2009 accident in the over 30-year-old Russian

MUNICH RE Schadenspiegel 1/2011 9

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more sporadic. Even if the size of the facilities is FURTHER INFORMATION

Today’s problems with ageing infrastructure are

– Continuing population growth in most countries

– Growing energy and water consumption, especially

– Increasing mobility and urbanisation

– Increasingly frequent exposure of densely popu-

– Public spending cutbacks in the wake of economic

– Rising cost of maintenance for antiquated and

Prof. Dr. Ina Ebert specialises

Harald Ochsenkühn is a legal

MUNICH RE Schadenspiegel 1/2011 11

Major loss in hydroelectric

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meant that they could not close automatically in the

Cause and effect

The damaged turbine unit was extensively overhauled

Concrete dam and power house. The electric gantry

MUNICH RE Schadenspiegel 1/2011 13

View of the damaged turbine cover

This subsequently caused fatigue cracking of varying

In order to stem the vast torrent of water pouring into

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Increase in vibrations in the damaged turbine following

After starting from standstill, every water

MUNICH RE Schadenspiegel 1/2011 15

The plant’s operator plans to

1. Before the accident, each of the