Insurers averse to mechanical failure cover

Insurers averse to mechanical failure cover

New Delhi: No insurer has offered to cover the Dabhol power project against high-risk mechanical failures that have plagued the Maharashtra-based utility, though eight firms have bid to offer it cover for natural calamities, fire, terror attacks and theft, officials said.

Cash-strapped Ratnagiri Gas and Power Pvt. Ltd (RGPPL), which runs the project, has been trying to get a combined liability cover of Rs600 crore against the failure of its six gas turbines.

Each of the project’s three blocks has two gas and one steam turbines. The gas turbines have suffered five failures, including three major ones.

The capacity of the project has been derated from 2,150 megawatt to 1,940MW after the gas turbines, supplied by General Electric Co., failed to work at their optimal capacity, as reported by Mint on 15 October 2008.

Insurers had asked RGPPL to run the project for a year without a cover for mechanical failure. They had offered other types of insurance, for which the firm is paying an annual premium of around Rs10 crore.

These were due for renewal on 19 April. In March, RGPPL had floated tenders for a complete insurance package, including mechanical breakdown.

But while Oriental Insurance Co. Ltd, National Insurance Co. Ltd, ICICI Lombard General Insurance Co. Ltd, Reliance General Insurance Co. Ltd and Cholamandalam General Insurance Co. Ltd, among others, have once again offered to cover for losses under other categories, they are still not willing to insure mechanical failure.

RGPPL managing director A.K. Ahuja told Mint that general bids have been opened and price bids will be opened soon. “They (bidders) have stated that they will not cover any machinery breakdown and only want to continue with the exisiting cover which is for natural calamities, fires, terrorist attacks and theft."

Insurers said covering mechanical failure was too much of a risk.

“We are concerned about the malfunctioning of the turbines," said an official at one of the insurers named above. He did not wish to be named as he is not the firm’s authorized spokesman. “Since the risks are very high in this case, we preferred not to provide a cover against mechanical failure for the project."

Every time a turbine fails, there is a loss of at least Rs100 crore, said an official with another insurer, who also did not want to be identified.

“We can provide a cover against mechanical failure for them, but the tariff will be high... The premium will be high and they have to agree to pay this if they want a cover against mechanical failure for the project," the official said.

Their reluctance to cover mechanical breakdowns also stems from the unwillingness of reinsurers such as General Insurance Corp. of India Ltd (GIC) to share the risk. Reinsurers underwrite risks taken by insurance firms and share the premium with them.

“We have provided them (Oriental Insurance and National Insurance) rates and terms for covers against fire and loss of profit. But for cover against mechanical failure we have not given them the rates yet," Yogesh Lohiya, chairman and managing director, GIC, had earlier told Mint.

“There have been many issues about the project in the past due to discontinuation of operation, and we may need to look into the matter carefully before providing reinsurance for mechanical failure cover," he said.

Ahuja of RGPPL said his company’s officials had met GIC earlier to ask it to offer the reinsurance. “We will meet GIC again to resolve the issue," he said.