Boiler Commissioning in Lahore: Defective Welding, Hot Testing and Liquidated Damages
Punjab Boilers is erecting a 40-tonne steam boiler for a textile mill in Lahore under a PKR 1.2 billion contract. It holds a Contractor's All Risks policy for the 24-month construction period, including a hot-testing endorsement for four weeks. During commissioning, a boiler tube fails along a weld made by a subcontracted welder. The failed tube and two adjacent superheater tubes are ruined; the total repair is PKR 25 million, of which PKR 3 million is the cost of replacing the single failed tube. A mill worker is burned and is off work for three months. Commissioning slips by eight weeks, and the mill claims liquidated damages of PKR 40 million under the construction contract.
1. Explain what the insurer is likely to pay for the physical damage, distinguishing the defective part from the resultant damage.
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The defective part. CAR wordings exclude the cost of rectifying the insured's own defective workmanship or materials. The PKR 3 million to replace the failed tube is the cost of remedying the defective weld and is excluded; the insured must bear it as a cost of doing the job properly.
Resultant damage. The two adjacent superheater tubes (PKR 22 million) were sound property damaged by the failure of the defective part. Under most CAR wordings this 'resultant damage' is covered, because the insurance is not intended to warrant the contractor's work but to protect the project against the consequences of a failure. The wording must be checked for the common qualification that damage to the component itself, or to property that would in any event have been replaced or rectified, is excluded.
Other exclusions to test. Wear and tear, corrosion, erosion and faulty design are often excluded; the surveyor should confirm the weld was a workmanship defect, not a design defect in the boiler specification.
Practical point. The insurer will usually pay the resultant damage and formally reserve the defective-part exclusion, so the insured does not later argue that the whole repair became one indivisible loss. The excess and any testing sub-limit are then applied to the admitted amount.
2. Does the hot-testing endorsement help, and is the PKR 40 million liquidated damages claim covered?
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Hot-testing endorsement. Standard CAR cover often stops short of testing and commissioning, so the endorsement is what brings the four-week commissioning period within the policy. It is normally subject to conditions – manufacturer's supervision, no overload, a defined testing period, and sometimes a separate sub-limit. The agent must check whether the endorsement conditions were met: was the welder qualified, was the manufacturer's representative present, and did the testing stay within the four-week window? If a condition was broken, the insurer may decline the testing loss specifically.
Liquidated damages. These are contractual penalties for late completion, not physical loss or damage to insured property. CAR policies exclude penalties, liquidated damages, performance guarantees and consequential loss. The PKR 40 million is not recoverable under the policy, even though the delay was caused by an insured event. The contractor's protection is either a delay-in-start-up (advanced loss of profits) extension, which is a separate purchase, or the contract terms.
Agent's advice. The insured should be told clearly and in writing that the policy does not act as a performance bond. If the mill insists on liquidated damages, the contractor needs a separate ALOP or contractual solution. Confusing a CAR policy with a guarantee is one of the most common misunderstandings in engineering insurance.
3. The burned mill worker seeks compensation from Punjab Boilers. How should the agent analyse the position under the CAR policy?
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Step 1 – Identify the legal route. The worker is employed by the mill, not by Punjab Boilers. His claim against Punjab Boilers would be in tort (negligence), and his own employer's liability/workmen's compensation cover may also respond.
Step 2 – Read the third-party section. CAR policies include a third-party liability section for bodily injury and property damage to third parties, but it typically excludes injury to the insured's own employees and often to employees of the principal or of other contractors on site. If the mill's worker falls within such an exclusion, the CAR policy does not respond and Punjab Boilers must rely on its own separate employer's liability or public liability policy.
Step 3 – Check the contractual allocation. The construction contract usually makes Punjab Boilers responsible for site safety and indemnifies the mill, or requires the mill to insure its own workforce. The agent should read the indemnity clause before answering the client.
Step 4 – Practical steps. Notify the liability insurer immediately, preserve the incident report and safety records, do not admit liability, and confirm whether the mill's own policy pays first. If the CAR third-party section does apply, the limit of indemnity and the deductible will govern, and defence costs may or may not be inside the limit.