Official bodies such the Infrastructure Projects Authority (IPA) (now known as the National Infrastructure and Service Transformation Authority) have published guidance to public authorities to help build knowledge, mitigate the risks of expiry and ease the transition process.
As part of this handback, insurance implications should also be considered.
“The guidance highlights the significance of procurement processes involving substantial assets and how crucial it is to start preparations well in advance of the expiry — the general recommendation is around seven years in advance of expiry. While the topic of insurance has not been viewed as a primary focus, there are some important considerations.”
- Alex Ross, Director — Government, Health and Due Diligence Advisory
Different operational and insurance risks
PFI/PPP projects vary, which means that each project carries distinct risks which require mitigation. The insurable risk exposures for PFI/PPP projects vary depending on the asset type and scope of the services. Insurance issues that arise will not be universal.
For example, the handover of a school may focus on the condition of the building and safety standards. Is it fit for continued educational use? For a hospital, considerations may include clinical-grade infrastructure and strict hygiene requirements. Waste facilities are seen as high risk due to the volume and value of claims, particularly fire incidents, resulting in challenging insurance placements.
The specialist public sector insurance advisory / contract due diligence team at Gallagher can work with the public sector body and the expiry team to ensure that insurance matters are addressed, and the separate interests of the public body remain protected.
The team is dedicated to supporting public entities in the consideration of insurance in contracts and procurements they enter into. Our contract due diligence team possess significant experience advising on PFI/PPP projects.
With a variety of regulatory frameworks and governance across the public sector, contract expiry planning for each project must be done with careful and timely consideration.
Insurance implications arising from PFI/PPP contract expiry
Insurance is a vital component of the Contractor's risk management strategy. The Authority will specify its insurance requirements in the agreement, outlining the minimum coverage that the Contractor must obtain and maintain.
The Authority will specify its insurance requirements in the agreement, outlining the minimum coverage that the Contractor must obtain and maintain.
For expiring PFI/PPP contracts, the Contractor must secure operational phase insurances annually, which generally cover physical damage, business interruption and legal liability.
Ensuring a smooth transition
As the UK enters this critical period of widespread PFI/PPP contract expiry, preparations must begin as early as possible. The risks involved in managing contract expiry are often underestimated; this is especially the case with regard to insurance aspects.
When these risks are overlooked, Authorities are more susceptible to liability concerns and operational disruptions. Key considerations include other pending contractual obligations, carefully assessing the condition of assets and drawing up appropriate asset management plans.
Insurance matters: Top five areas to consider
- Obtain insurance details from the contractor, including the historical identity of legal liability insurers. These can be valuable for future claims relating to past events due to occurrence-based policies.
- Gather and analyse relevant insurance data, such as the project's claims history, to assess the impact on future insurance plans and requirements.
- Review Joint Insurance Cost Reports during the project's final years.
- Look for ways to manage insurable risks and find suitable insurance arrangements when assets and personnel return to the Authority or Trust.
- Conduct thorough insurance due diligence, particularly if new services are needed following contract expiry.
For further information or an initial discussion on how to navigate your PFI and PPP contract expiry, please reach out to the contract due diligence team at Gallagher.
