NHS Construction Project Update

The five hospitals identified constructed of RACC which is now at the end of its intended design life are:

• Airedale General Hospital, Keighley
• The Queen Elizabeth Hospital, King’s Lynn
• Hinchingbrooke Hospital, Cambridgeshire
• Leighton Hospital, Mid Cheshire
• Frimley Park Hospital, Surrey

The NHS has requested government to prioritise the rebuilding of these five hospitals by 2030 given the safety risks posed to NHS employees and patients.

These hospitals projects have been added to the Government’s existing £20bn building programme to invest in NHS infrastructure and create 40 new hospitals by 2030¹. Projects include those noted below which are currently under construction and mental health hospitals as part of a commitment to eradicate dormitory accommodation and put mental health on par with physical health facilities.

• Greater Manchester Major Trauma Hospital – Northern Care Alliance NHS Foundation Trust
• Bath Cancer Hospital – Royal United Hospital Bath NHS Foundation Trust
• Midland Metropolitan Hospital – Sandwell and West Birmingham Hospitals NHS Trust

Despite buildings cost inflation and the prioritisation of the RACC hospitals, the government confirmed it was on track to meet its commitment.

Insurance and Contract Risk Considerations

NHS Trusts and Foundation Trusts must ensure their interests and those of the wider public purse are suitably protected during all phases of a procurement. Contracting authorities should not rely on insurance alone to provide this protection.

Insurance Contract Due Diligence:

Contractual Risk allocation is a fundamental part of any agreement between major parties involved in a significant construction project. Gallagher have extensive experience in advising a broad range of clients with contract risk, with experience relating to all major forms of contract such as NEC3, NEC4, PF2 and JCT, as well as being very familiar in dealing with bespoke forms.

Through our specialist Public Entities contract due diligence team we offer advice on:

1. Allocation of insurable risk to the party best able to manage the insurable risk most cost effectively.
2. Protection of your separate interests through a robust required insurances regime and its contractual articulation.
3. Compliance with relevant governmental/public sector guidance and best practice on treatment of insurance.
4. Efficient and economical contractual insurable risk transfer relative to prevailing insurance market conditions and availability.
5. Procedures and processes to identify risk issues and solutions relating to insurance in your procurement/contracting process.
6. 6Insurance obligations are capable of being met by your existing insurance policies, taking out new specific insurances, or self-indemnification arrangements.
7. Monitoring of supplier compliance with its contractual obligations to avoid supplier default or inadequate insurance in the event of any claim or loss in connection with the contract.

By engaging Gallagher early in the project, you can bring clarity to negotiations and avoid delays later due to inappropriate or ineffective contract drafting. Both are usually the root cause of contractual disputes and rarely can these be resolved once the contract has been signed.

Gallagher will support your project team in advance of a procurement, working alongside your insurance team to draft the insurance related section of the contracts. This will enable contractors to have a clear understanding from day one of the contractual and insurance requirements expected, enabling them to identify and comment on any areas they cannot or do not wish to comply with. The Trust can then evaluate to decide if they are commercially acceptable, with Gallagher advising on what contractors are generally able to accept in the market based on our experience.

Insurance Consideration

The NHS Resolution Property Expenses Scheme (PES) and Liability to Third Parties Scheme (LTPS) is unlikely to provide sufficient cover for a large construction contract.

PES covers existing structures subject to a £1,000,000 limit any one claim and contracts works subject to a £1,000,000 limit any one claim.

Joint Names – PES will only cover the interest of the Trust, not the contractor. A number of construction contracts (particularly involving work to existing structures) require the insurances to be arranged in the joint names of the employer (i.e. the Trust) and the contractor, in this scenario, the Trust cannot rely on the PES coverage or additional commercial ‘top up’ property damage insurance (at least in its standard format).

By agreeing to joint names coverage, insurers of the existing structures would effectively lose their subrogation rights following a claim incident (e.g. rights to recover their costs against the negligent contractor). As this increases their exposure they may be unwilling to grant this cover / charge an additional premium.

Where possible, we would suggest the Trust not entering contracts containing the joint names provision and instead validating contractors’ insurance requirements ensuring their third party liability insurance coverage is sufficient to provide protection against damage to existing hospital buildings.

During the construction phase, for larger contracts we would recommend Owner Controlled Insurance Programmes (OCIP) are considered. An OCIP arrangement places the responsibility of insuring a construction contract on the employer rather than the contractor and brings the following benefits.

• All contractors and sub-contractors can be named on the programme, to avoid gaps in cover and sufficient indemnity limits are procured.
• The Trust’s interests as the employer are sufficiently protected, rather than relying on cover procured by the contractor.
• As large contracts are likely to fall outside of a contractor’s annual contract works policy, a project specific policy will be required, the costs for which are likely to be passed onto the Trust as part of overall contract value.
• The Trust will maintain control and ownership of the policy, providing protection against contractor default. In this event the policy will remain in force and be assigned to the replacement contractor. This situation was highlighted by Carillion falling into administration and leaving a number of incomplete hospital structures such as the Midland Metropolitan Hospital.

Insurance Placement:

Gallagher arrange insurance programmes that compliment but are not designed to duplicate the coverage provided by the NHS Resolution risk pooling schemes (PES, LTPS and CNST).

Gallagher has placed a number of large scale construction and infrastructure projects on behalf of publicly funded organisations including NHS Trusts. We support clients in all major construction sectors, placing combined annual premiums in excess of USD 280m into the construction insurance market. The team possess expertise across all construction themes, including: Public Private Partnerships: Subcontractor default insurance; Tender & Contract analysis; Wrap-ups (OCIPs/CCIPs rolling and project specific); Captives.

We can help place property damage insurance programmes when the construction contract finalises and the completed assets are handed to the Trust. We have arranged insurance programmes covering hospital estates of all profiles including single sites subject to reinstatement values in excess of £600m, multi-location estates (in excess of 50 separate sites), mental health hospitals and sites requiring significant investment/risk improvement.

To help ensure insurer capacity is generated for larger exposures at optimal premium rates, Gallagher undertakes property loss control surveys and compiles detailed underwriting reports highlighting construction materials used including external cladding specifications, site layout, fire separation and prevent measures and provide our estimated maximum loss opinion.

If you have any questions or would like to discuss these topics in more details, please don’t hesitate to contact a Gallagher representative.