Insuring Infrastructure Projects in Latin America

By and Bob Opitz | November 17, 2014

With its aging infrastructure, growing population and successful bids for mega-sports events like the 2016 Summer Olympics in Brazil, Latin America is offering the construction industry billions of dollars of opportunities in infrastructure projects.

Growth Brings Opportunity

Savvy contractors from around the world are tapping into schemes as diverse as elevated highways in Mexico City, bridges that connect the Route of the Sun in Barranquilla, Colombia, and hydroelectric power plants in Chile’s Aysen region. These projects aim to meet the everyday needs of a population nearing 600 million and is expected to grow, according to World Bank estimates, by about 3 percent this year and next. High-profile sporting events add to Latin America’s pent-up demand for roads, bridges, airports, ports, dams and other infrastructure projects that were put on hold during the 2009 global fiscal crisis.

Brazil, for example, funneled more than $3.5 billion into stadiums for the 2014 FIFA World Cup, and the Summer Olympic Games being held in Rio de Janeiro in 2016 are generating billions of dollars worth of development projects for stadiums, housing and infrastructure, as well as new transportation systems for the host city. According to a report by CG/LA Infrastructure, a consulting firm based in Washington D.C., the value of the top 100 strategic projects now under construction or expected to kick-off in the coming year throughout Latin America will tally $138.5 billion. Brazil tops the list with $48.1 billion in projects, followed by Chile with $20.6 billion and Colombia with $16.8 billion

Latin America is offering the construction industry billions of dollars of opportunities in infrastructure projects.

Consider the Environment

In a Latin American country, contractors should be prepared to face different business practices, including different contractual obligations and labor laws, and even the more widespread use of undocumented workers. Corruption and the theft of equipment may be more prevalent than in the United States or Europe, and the nature and scope of surety bonds can differ.

In addition, protests by indigenous people and other citizens opposed to the development of dams and other endeavors that will alter the dynamics of a community or rural area can cause project delays or stoppages. Even if all environmental regulatory paperwork is approved by the proper authorities, contractors need to be prepared.

Make Local, Knowledgeable Contacts

Cristian Peters, editor of Construccion Latinoamerica in Santiago, Chile, notes that civil societies (i.e., any organization or group outside of the government such as environmental or community organizations, unions, etc.) are gaining more power throughout the region, and contractors in Latin America need to work closely with the community to avoid problems. “Explain what you want, what impact the project will have, how [the community] will benefit. Try to hire a local workforce, etc.,” Peters says. “Involve the community and work along with them.”

Contractors should work with a sophisticated insurance advisor well-versed in the intricacies of insuring an infrastructure venture — an entity whose scope can be constantly shifting. Unlike securing property insurance for a building that is already standing or liability insurance for a company with a fairly static number of employees, the parameters of a building site and the participants involved may frequently change.

Program Options

To meet these intricacies, insurers can issue a “wrap up” or controlled insurance program (CIP). The CIP hands the responsibility for insurance procurement to one of the construction project’s primary participants. If the project owner is the controlling entity, the program is referred to as an owner-controlled insurance program. If the general contractor acts as the controlling entity, the program is known as a contractor-controlled insurance program. Either way, the wrap-up program intends to protect, or wrap around, all the participants involved in the project: the developer, general contractor and subcontractors. Construction managers, the principal suppliers of construction materials, or private inspectors can be insured through a wrap-up.

The goal of the program is to avoid a string of endless lawsuits — and subsequent legal costs and delays in compensation to injured parties — that can follow disputes over the responsibility for a loss if claims are made with a traditional insurance mechanism. In a more traditional insurance program, each participant in the project procures its own insurance policy and then includes the cost in their bid. With a wrap-up program, the cost of each insured participant’s bid typically excludes the cost of their insurance. An insurance broker usually serves as administrator of the wrap-up program and can help minimize the potential for claims by laying out the program details to each insured party.

To help mitigate potential lawsuits and be sure contractual obligations are met, a contractor or developer should hire a qualified attorney, well-versed in local laws, customs and nuances, to review all contracts and legal documents.

An experienced project manager is crucial to avoid unwieldy and contentious labor issues that can delay or derail a project’s completion or generate costly lawsuits filed by unions or individual workers. The contractor should hire a project manager with in-depth knowledge of the local labor market and laws and working conditions. Issues such as compensation and benefits, the ability to lay off workers and dealing with the use of undocumented workers need to be understood for both contractors and their subcontractors.

The project manager should also be familiar with the laws surrounding compensation for workers injured or disabled on the site, an insurance area handled very differently than in the United States and that can vary throughout Latin America.

Surety Bonds

Surety bonds, a type of financial instrument being used with increasing frequency throughout Latin America, are not traditional insurance contracts and represent just a fraction of total written premiums in the Latin American market.

Sureties are divided into two categories, contract and commercial bonds.

Contract bonds, such as bid bonds, performance bonds and advance payment bonds, are used in construction projects. Contractors are required to post these bonds during the bidding process and execution of a construction project to ensure the work is done properly and on time. Given the growing social and infrastructure needs in Latin America, the need for contract bonds should grow.

It is essential that contractors know the ins-and-outs of the local market in surety bonds. For example, in Latin America, these bonds may be conditional, as in the United States, or on demand, which means an owner may be able to demand payment without proof of contractor default.

Another important distinction is that, in many instances, performance bonds in Latin America are “low penalty” obligations, meaning the amount of the bond is less than 100 percent of the contract price — generally 10 percent to 30 percent of the contract price. In the United States, performance bonds are generally in the amount of the bonded contract (i.e., the amount of the bond is equal to 100 percent of the contract price). The key to a successful insurance plan is making sure all the components — builder’s risk, liability insurance and surety bonds — are thought through and handled properly, in advance of construction.

About Kathleen Ellis

Ellis is a senior vice president of Chubb & Son and manager of Multinational Risk Group - Global Accounts. More from Kathleen Ellis

About Bob Opitz

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Insurance Journal West November 17, 2014
November 17, 2014
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