1.1 For the purposes of this Section 4 of Part 21 of the Schedule, the following words and expressions shall bear the following meanings:
Actual Relevant Insurance Cost means the aggregate of the [annual]152 insurance premiums reasonably incurred by Project Co to maintain the Relevant Insurance during the Insurance Review Period but excluding insurance premium tax and all broker's fees and commissions;
Base Cost means £ [ ] being the amount as agreed at the Bid Date153 and set out in the Financial Model which represents the insurance costs (which excludes amounts in respect of insurance premium tax and all brokers' fees and commissions) which are proposed to be incurred to maintain the Relevant Insurance in each year following the Actual Completion Date, expressed in real terms as at the Bid Date;
Base Relevant Insurance Cost means, the aggregate of the Base Costs which were (at Bid Date) projected to be incurred to maintain the Relevant Insurance during the Insurance Review Period indexed by actual RPI from the Bid Date up to the dates on which the Relevant Insurance was placed or renewed either immediately before or during the Insurance Review Period (as applicable in respect of the year in question) less any Base Relevant Insurance Reduction;
Base Relevant Insurance Reduction the reduction to be made to the Base Relevant Insurance Cost in respect of a risk which has become Uninsurable or a term or condition which is no longer available and shall be an amount that is either:
(a) the amount by which the Base Relevant Insurance Cost would have been a lesser amount had such a risk been Uninsurable or such a term or condition been unavailable at the Bid Date (which amount, for the avoidance of doubt, can be £0); or
(b) if it is impossible to determine an amount pursuant to paragraph (a) above, an amount that is reasonable to be deducted from the Base Relevant Insurance Cost having due regard to:
(i) the amount by which the Actual Relevant Insurance Cost is less than it would have been as a result of the risk becoming Uninsurable, or the term or condition becoming unavailable (the "Actual Reduction");
(ii) the size of the Actual Reduction as a percentage of the Actual Relevant Insurance Cost immediately prior to the risk becoming Uninsurable, or the term or condition becoming unavailable; and
(iii) the effects of RPI since the Bid Date;
Business Interruption Cover means the Insurance referred to in paragraph 2 of Section 2 of this Part 21 of the Schedule;
Construction Period Insurance means the Insurances in respect of the period from the date of this Agreement to the Actual Completion Date detailed in Section 1 of this Part 21 of the Schedule;
Exceptional Cost means, for an Insurance Review Period, the extent to which there is an Insurance Cost Increase which exceeds in amount 30% of the Base Relevant Insurance Cost for that Insurance Review Period;
Exceptional Saving means, for an Insurance Review Period, the extent to which there is an Insurance Cost Decrease which exceeds in amount 30% of the Base Relevant Insurance Cost for that Insurance Review Period;
First Insurance Review Date means the first Business Day following the first anniversary of the Relevant Insurance Inception Date;
Insurance Cost Decrease means the Insurance Cost Differential if the value thereof is less than zero, multiplied by minus one;
Insurance Cost Differential shall, subject to the Insurance Review Procedure, be determined as follows:-
Insurance Cost Differential = (ARIC - BRIC) - (±PIC)
where:
ARIC is the Actual Relevant Insurance Cost
BRIC is the Base Relevant Insurance Cost
PIC is any Project Insurance Change
Insurance Cost Increase means the Insurance Cost Differential if the value thereof is greater than zero;
Insurance Cost Index means any index introduced by the United Kingdom Government or the Office of National Statistics after the date of this Agreement and which is anticipated to be published annually to provide an independent and objective measure of changes in prevailing market insurance costs;
Insurance Review Date means the First Insurance Review Date and, thereafter, each date falling on the second anniversary of the previous Insurance Review Date, except where such date lies beyond the end of the Project Term, in which case the Insurance Review Date shall be the last renewal date of the Relevant Insurance prior to the end of the Project Term;
Insurance Review Procedure means the procedure set out in paragraph 2 of this Section 4 of Part 21 of the Schedule;
Insurance Review Period means a two year period from the Relevant Insurance Inception Date and each subsequent two year period commencing on the second anniversary of the Relevant Insurance Inception Date except where the end of such period lies beyond the end of the Project Term, in which case the Insurance Review Period shall be the period from the end of the penultimate Insurance Review Period to the last day of the Project Term;
Joint Insurance Cost Report shall bear the meaning ascribed to it in paragraph 2.2 of this Part 21 of the Schedule;
Portfolio Cost Saving means any insurance cost saving which arises from Project Co changing the placement of the Insurances from being on a stand-alone project-specific basis assumed at Financial Close and reflected in the Base Cost, to being on the basis of a policy (or policies) also covering risks on other projects or other matters which are outside the scope of the Project so as to benefit from portfolio savings A Portfolio Cost Saving is defined to be a positive sum and cannot be less than zero;
Project Insurance Change means any net increase or net decrease in the Actual Relevant Insurance Cost relative to the Base Relevant Insurance Cost, arising from:
(a) the claims history or re-rating of Project Co or any Project Co Party;
(b) the effect of any change in deductible unless the following applies:-
i. such change is attributable to circumstances generally prevailing in the Relevant Insurance Market; and
ii. the deductible, further to such change, is either greater than or equal to the maximum detailed in Sections 1 and 2 of this Part 21 of the Schedule;
(c) any other issue or factor other than circumstances generally prevailing in the Relevant Insurance Market, except for any Portfolio Cost Saving.
For the purpose of determining the Insurance Cost Differential, in the event that there is a net increase, the Project Insurance Change shall have a positive value. In the event that there is a net decrease the Project Insurance Change shall have a negative value.
Relevant Insurance means the Insurances and any other insurances as may be required by law other than:
(a) Construction Period Insurance;
(b) Business Interruption Cover except to the extent that it relates to Unavoidable Fixed Costs; and
(c) [any ancillary insurances]154;
Relevant Insurance Inception Date means the date on which the Relevant Insurance is first providing active insurance cover to Project Co, being a date no earlier than the Actual Completion Date;
Relevant Insurance Market means the insurance market which insures the majority of all PFI projects across all of the PFI sectors (as determined by the number of PFI projects). At the date of this Contract, the Relevant Insurance Market is in the [United Kingdom];
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152 This will depend on the frequency of payment of insurance premiums.
153 The Bid Date is the date on which the Contractor has fixed its price prior to appointment as Preferred Bidder. The Base Cost in bidders' models should be set at a long run median level such that the probabilities of the outturn costs being higher or lower in the future (after adjusting for RPI inflation) are the same. This is to ensure that the approach is consistent with the symmetrical sharing of Insurance Cost Differentials (i.e. +/- 30% thresholds etc.). Furthermore, the median level should be held constant in real terms (year on year) and not profiled, as this will help to ensure that the symmetrical cost sharing band works as intended. Authorities and their advisers must take care to avoid accepting artificially depressed Base Cost figures which will underestimate the outturn unitary charge payment profile and simply lead to the Board paying compensation above the upper 30% threshold during the Contract term. Conversely, they should not rely on the sharing of future cost reductions, below the lower 30% threshold, as justification for an overestimated Base Cost still representing value for money.
154 If the Insurance contains any supplementary (i.e. non-standard) insurances, for which Insurance Premium Risk Sharing is not being provided, these must also be referred to here.