The Project Insurance Option in Infrastructure Procurement (5)

Conclusions 

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The project insurance concept is designed to address many of the shortcomings of the traditional insurance arrangements. The most common form of this type of insurance entails the project owner taking out one policy in which all the members of the project’s supply chain are recognised as co-insured with the project owner. In principle, therefore, there is no need for litigation or other dispute resolution procedures to determine which member of the supply chain is liable for any loss or damage suffered. The available literature suggests that the main driver for growth in the use of project insurance has been innovation in procurement requiring greater supply-chain integration than has been the norm.

The construction industry in the UK has had significant but patchy experience of projects on which project insurance had been implemented, with more than 60 per cent those surveyed in this study reporting participation on such projects. Most of the projects reported were large PFI projects in the public sector. However, most of the respondents expressed disagreement with the proposition that only large projects are suitable for the implementation of project insurance.

The Project Insurance Option in Infrastructure Procurement

Respondents largely agreed with the comparisons between traditional insurance and project insurance widely made in the literature from expert commentators. They ranked reduced need for litigation to determine members of the supply chain liable for the relevant loss/damage as the most valued feature of project insurance. The second and third most valued features were coverage of projects that cannot be accommodated within annual policies and ability to purchase customised cover for special projects, respectively.

The Trend Towards Collaborative Procurement (4)

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The search for better procurement of construction in the UK dates back to the 1930s. Murray and Langford (2003) chronicle the major initiatives in this quest. From the mid- 1990s the departments of government responsible for construction have taken special interest in integration of the construction project supply chains (Ndekugri and Corbett, 2004).

The Levene (1995) report on construction procurement by government concluded: “Government is not yet getting all-round value for money, nor is it a best practice project owner. Even its best projects and systems have substantial room for improvement”. 

Project Insurance (3)

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It has been argued that the arrangement whereby contractors, sub-contractors and professional teams take out and maintain policies on the same project is unnecessarily expensive to the project owner, who ultimately pays the cost of all these policies. Project insurance, or “controlled”, “consolidated”, “wrap-up” or “portfolio” insurance (Lew and Overholt, 1999; Schexnayder et al., 2004; El-Adaway and Kandil, 2010), is designed to reduce the waste by having a single policy covering the contracts works and public liability of the project owner, contractors, designers, sub-contractors and suppliers. Cover against environmental liability and political risk may also be purchased as part of the project insurance package. A developer’s ability to obtain such comprehensive cover considerably improves its access to project finance (Percopo, 1999; Smith et al., 2001).

A theme running through most of the literature on project insurance is that it is most suitable for large and complex projects involving large numbers of project participants (Wright, 2002, 2005). Examples of projects on which it has been used include the Thames Barrier Scheme (Bunni, 2003); the Singapore Deep Tunnel (Schexnayder, 2002); the Eurotunnel Project (Bunni, 2003); and the Taiwan High Speed Rail Project (Lu et al., 2010). Schexnayder et al. (2004) report use of project insurance by transportation agencies in many states in the USA on projects with construction cost 4$100 million. The use of this risk management technique is not limited to the construction and engineering industries. The high technology risks and large financial investment requirements necessitating world-wide investor participation in commercial satellite projects make the use of project insurance on such projects an attractive option (Wong, 1998).

Traditional Insurance Arrangements (2)

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Performance of construction projects entails use of certain types of insurances. Hogarth (2008), Bunni (2003), Cunningham and Fischer (1998), Eaglestone (1996) and Levine and Wood (1991) identify one or more of the following as the main insurance products bought in the construction industry:

1. Employer’s Liability Insurance;
2. Public Liability Insurance;
3. Contractor’s All Risk (CAR) Insurance;
4. Combined Policies;
5. PI Insurance;
6. Design and Build PI insurance;
7. Motor Vehicles and Movable Plant Insurance;
8. Latent Defects Insurance;
9. Insurance Against Loss of Delay Damages; and
10. Terrorism Cover.

The Project Insurance Option in Infrastructure Procurement (1)

Introduction

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Procurement of infrastructure presents considerable risk of personal injury, damage to existing property and financial loss. An important plank of any effective risk management strategy is to ensure that insurance cover is available against certain risks. Most of the myriad of contracts entered into to procure a construction project impose obligations on certain contractual parties, particularly prime contractors, sub-contractors and designers, to take out and maintain insurance against specified risks. Commentaries by expert practitioners with direct experience of the construction insurance industry suggest that the traditional arrangements for providing the required insurance cover add unnecessarily to project costs. One source of this unnecessary cost is duplication in cover arising from the different stakeholders taking out and maintaining policies that overlap in the risks that they cover (Madine, 2002; Bunni, 2003; Kelly, 2004). The Design and Build Foundation of the UK, an organisation comprising project owners, contractors, designers, sub-contractors, suppliers and professional advisors set up to promote design-led integration of design and construction, estimated the level of duplication of cover at about £1 bn or 1.5 per cent of the normal turnover of the construction industry (Madine, 2002). The fact of low profit margins in the construction industry, even at the best of times, puts in context the scale of the wasted cost from duplication in insurance cover.