(a) Government will not share in increases in the cost of design and construction insurances other than in exceptional circumstances, such as where there is a very long construction period and the cost of insurances for the whole period cannot be fixed up front.
(b) Although operational insurances will not be reviewed or market tested like other 'soft' services,99 government will share with the private party cost increases of certain categories of required operational insurances100 identified in the project agreement. The cost of such insurances will be reviewed at regular intervals (e.g. annually) on a forward-looking basis to determine whether and by how much the actual costs of insurance for the following year will vary from the projected costs of insurance applicable to the forthcoming operating year. The service fee will be adjusted to reflect the change in cost of those insurances.
(c) The "cost" of insurance refers to the premium only. It does not, for example, include increases in broker's fees and commissions, or the cost of any modifications required by an insurer.
(d) Any increase in the cost of insurance which government shares must be due to circumstances generally prevailing in the Australian and overseas insurance market for the relevant class of insurance. Government will not be liable for insurance cost increases caused by the private party, its sub-contractors or any member of the consortium (including the claims history of each such party). Government will not share in cost increases solely due to general inflation.
(e) Government will not share in the increased cost of insurances which cover risks the private party is required to bear (such as loss of profit, professional indemnity and non-vitiation insurances).
(f) The private party must obtain and submit to government at least three separate quotations from reputable insurance brokers with respect to the annual premium costs of obtaining the shared operating insurances for the first year of the operating phase, and must notify government of the private party's preferred quotation and insurer. Government and the private party will then agree the insurer to be selected, including the terms and conditions of the proposed insurance. If the government and the private party fail to reach agreement on the preferred approach to, and cost of, obtaining the shared operating insurances, the matter may be referred to an independent expert for determination.
(g) At least three months prior to each anniversary of the operations commencement date, the private party must repeat the above procedures in respect of shared operating insurances to be taken out for the ensuing year. If government and the private party fail to reach agreement on the most suitable insurer, premiums and other terms and conditions of the shared operating insurances, the matter may be referred to an independent expert for determination.
(h) Government may share any change in eligible insurance costs on a threshold basis. The precise arrangement will be determined on a project-specific basis, so that the private party's incentive to prudently manage insurance costs is preserved. In particular, government will consider what percentage of the overall operating costs is represented by insurance costs and the risk and magnitude of likely insurance cost changes (in the light of the market conditions at the time). Government may wish to invite variant bids based on the size of thresholds and frequency of review periods.
(i) In circumstances where this sharing approach is used for increases in insurance costs, the private party will, in all circumstances, be liable for the original fixed cost of the insurance.
___________________________________________________________________
99 Accordingly, the cost of required insurances is (subject to inflation) fixed for the term of the project at Financial Close. It is not 're-set' as a result of any review.
100 Government will not share the cost of insurances which cover risks the private party is required to bear (such as loss of profit, professional indemnity and non-vitiation insurances).