The government is piloting a new way of insuring projects that is hoped will result in more collaborative and less adversarial outcomes. May Looi, solicitor at Kennedys, reports.
The success of the government’s Construction Strategy, and in particular the mandate to implement Level 2 BIM by 2016, largely centres around a more collaborative culture in the industry. However, the current insurance framework in the construction industry arguably does not promote such a collaborative, blame-free culture.
The established approach is to pass risk down the supply chain, leaving it to those bearing the risks to insure the risk under their own policies — professional indemnity, contractors all risks, latent defects or third party liability. By their nature, these policies lead to adversarial positions being taken in the event of an issue or problem in the project.
The reality is that construction team members frequently adopt a cautiously defensive attitude to protect their positions and avoid invalidating their own insurance policy cover for potential claims.
The industry is cautiously embracing new forms of cover: for example, several large infrastructure projects, including Crossrail, are insured under a single owner-controlled policy.
In November 2010, the Specialist Engineering Alliance put a proposal forward to the government which became the basis for a new approach that goes further — integrated project insurance. This led to the Cabinet Office announcing on 10 February 2012 a series of pilot projects, the first being the MOD’s new-build training rooms for the Royal Marines at Lympstone, near Exeter. If the pilot projects prove successful in helping to cut costs and programme, the government will then endeavour to roll out the IPI models across the public sector.
The success of the government’s Construction Strategy, and in particular the mandate to implement Level 2 BIM by 2016, largely centres around a more collaborative culture in the industry. However, the current insurance framework in the construction industry arguably does not promote such a collaborative, blame-free culture.
The established approach is to pass risk down the supply chain, leaving it to those bearing the risks to insure the risk under their own policies — professional indemnity, contractors all risks, latent defects or third party liability. By their nature, these policies lead to adversarial positions being taken in the event of an issue or problem in the project.
The reality is that construction team members frequently adopt a cautiously defensive attitude to protect their positions and avoid invalidating their own insurance policy cover for potential claims.
The industry is cautiously embracing new forms of cover: for example, several large infrastructure projects, including Crossrail, are insured under a single owner-controlled policy.
In November 2010, the Specialist Engineering Alliance put a proposal forward to the government which became the basis for a new approach that goes further — integrated project insurance. This led to the Cabinet Office announcing on 10 February 2012 a series of pilot projects, the first being the MOD’s new-build training rooms for the Royal Marines at Lympstone, near Exeter. If the pilot projects prove successful in helping to cut costs and programme, the government will then endeavour to roll out the IPI models across the public sector.
Mark Bourke, Arthur J Gallagher
The insurer’s view: We’re already convinced
Integrated Project Insurance (IPI) both is and isn’t new. The idea of pain/gain share is fairly normal, it means that the parties involved are in effect partnering to some degree. Normally where you have [single] project insurance, you make it clear that the contractor has a responsibility to manage the risk to limit mistakes and not to be perverse in making claims. But with IPI, the idea of pain/gain share as a mechanism to incentivise the contractor is novel.
Target pricing is also familiar, but at a project level there’s never been a significant connection to insurance, so that’s a new issue for construction managers. At present, a contractors all risks policy would operate somewhere in the background, but with IPI construction managers will be dealing regularly with the insurer’s technical and financial advisers.
One problem could be that designers’ PI insurance tends to run annually, and is linked to their claims history and the sectors they operate in. So it’s unlikely a designer would be able to “switch off” its premiums for the IPI project and will end up paying double.
IPI would also cover latent defects, and because of the insurers’ longer liability, they would need the additional set of eyes [on the design and construction] from the independent assessors or surveyors.
We have a similar system of advisers on PFI/PPP projects, and we know from experience that it leads to a better-managed project. So the construction industry is familiar with the various parts of this, but the novelty is bringing them together.
Crossrail has the first ever nine-year construction project insurance policy to be placed in the global market, where fixing the price of the insured risks was a significant achievement. The Thames Tideway Tunnel and the Forth Replacement Crossing have also gone down the path of single project insurance. It means there are no gaps in cover, better claims coordination, better risk management and closer team working.
We’re already convinced of the benefits of single project insurance.
Mark Bourke is MD for Scotland at broker Arthur J Gallagher. The firm acquired Heath Lambert, which negotiated the insurance deal for Crossrail, in May 2011.
