The Project Insurance Option in Infrastructure Procurement (5)

Conclusions 

Post By: Insurance Top Stories

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 Project Insurance Option in Infrastructure Procurement (1)

Introduction

Post By: Insurance Top Stories

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.