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The policies required in contracts are available from different insurers and in different wordings. Bunni (2003) highlights the complexity of the insurance arrangements and the high transaction costs of ensuring compliance with the insurance requirements in the many contracts entered into to realise even a project of modest size. The multiplicity of policies, insurers and insured parties often engulf the process of claiming on a policy in time-consuming and costly disputes. As the large volume of case law suggests, the disputes concern which of the actors on the project caused the occurrence of the risk, whether the risk is within the wording of the policy and subrogation rights against members of the project supply chain (Mead, 2002; Bishop, 2003; Sarakis, 2006; Mead, 2008; Ndekugri and Rycroft, 2009). Wright (2002) explains that the effect of time-consuming litigation to determine where liability should ultimately fall is such that a large proportion of the amount paid out by insurers goes to meet the legal costs of such litigation. It has been estimated that for every £5 paid by parties and the insurers in the process of resolving a professional indemnity (PI) claim, £4 goes to lawyers and expert witnesses engaged in the related litigation, with just £1 going to compensate the insured for the underlying loss (Bunni, 2003). A FIDIC report (FIDIC, 2004) on developments in the insurance of large civil engineering projects paints a similar picture of unacceptable dissipation of funds from traditional insurance products. FIDIC is the Geneva-based international federation of national associations of consulting engineers. It is therefore the voice of the consulting engineering profession globally.
UK Governments have advocated increased use of collaborative procurement strategies in construction. The term “collaborative procurement” is used here as a generic label for procurement employing mechanisms for the integration of not only design and construction but also the interests of the entire project supply chain as advocated in the Rethinking Construction (Egan, 1998) and the Accelerating Change (Egan, 2002) reports and the UK Government Construction Strategy (Cabinet Office, 2011). The complexity of the traditional insurance arrangements may also present obstacles to the achievement of this policy objective. Kilgallon (2006a, b) argues that, whilst any team can collaborate whilst things are going well, teamwork often evaporates when problems arise, as everybody scrambles to dust off their insurance policies to fight the resulting claims. The concern about barriers to innovation in procurement arrangements has not been limited to the UK for it is opined in the FIDIC report that insurance practice was counter-productive to the progress of the construction industry towards supply-chain integration.
A review of the literature showed that most of the published material relevant to the subject matter of this paper comprised mostly commentaries by expert practitioners in textbooks (Levine and Wood, 1991; Bunni, 2003; Hogarth, 2008) and practitioner-centred journals (e.g. Bishop, 2003; Mead, 2002, 2008; Wright, 2002, 2005) on the comparisons between the traditional insurance products and project insurance. Based on feedback from its members, FIDIC (2004) also prepared and published successive reports highlighting shortcomings in insurance practice, that were presenting barriers to innovation in the procurement of projects, and advocating project insurance as a remedial strategy. The most serious concern expressed in these report was that the practice of insuring the liabilities of individual project participants, rather than project risks, was leading to increasing premium levels for large projects, gaps in cover for the project owner’s risks and defensive attitudes on the part of the project participants and their respective insurers.
Considering the importance of project insurance to new developments in the procurement of projects, it was disappointing that only a few relevant research studies of an empirical nature were uncovered. One of the earliest studies was by Lew and Overholt (1999) and involved interviewing construction industry senior managers and insurance industry representatives to obtain background and descriptive information, including case studies, on project insurance and applying them to actual construction projects to assess its feasibility. They concluded that project insurance, which they refer to as “managed” or “wrap-up” insurance, could yield significant cost savings and provide broader cover than traditional insurance. El-Adaway and Kandil (2010) came to the same conclusion by performing simulations based on data on risks on five projects. The remaining studies were detailed studies into the use of project insurance on landmark projects: Schexnayder (2002) described its use on the Singapore Deep Tunnel Project whilst Lu et al. (2010, 2011) did the same for the Taiwan High Speed Rail Project. Schexnayder et al. (2004) conducted an exploratory study into the use of owner-controlled insurance programmes (another label for project insurance in the USA) by Departments of Transportation in the USA and found that whilst project owners who had used it reported attractive cost savings and improved job safety, contractors were less positive.
The review found no reported research at all on the use of project insurance in the UK construction industry. This outcome highlighted the need for an exploratory study into the UK experience of the risk management technique as the necessary start of more detailed studies. This paper reports such an exploratory study aimed at developing the necessary knowledge and understanding for dissemination to industry. The objectives of the research were: to explore the shortcomings of traditional insurance arrangements and how project insurance avoids them; to understand why project insurance policies are not more widely used within the industry; and to assess whether, in the growing trend towards collaborative procurement, they should become the insurance arrangement of first choice. The specific question answered towards meeting the research aim and objectives was: what is the UK’s experience of project insurance? This task entailed investigation of the UK construction and insurance industries’ practitioners’ awareness and direct experience of project insurance and their views on the attributes claimed for it in the literature, particularly its advantages and disadvantages over the traditional insurance arrangements.
The paper is structured in four sections. The first section describes the traditional insurance arrangements within the construction industry to highlight how project insurance compares with them. An overview of the trends towards collaborative procurement in the UK is provided in the second section. The third section outlines the design of the research and the methods used in collecting and analysing data. The fourth section presents the main findings of the research. The conclusions of the study are then drawn up.
To cite this document:
Issaka Ndekugri, Hannah Daeche, Diwei Zhou, (2013) "The project insurance option in infrastructure procurement", Engineering, Construction and Architectural Management, Vol. 20 Issue: 3, pp.267-289, doi: 10.1108/09699981311324005
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