25.2.1 In general terms, the Contractor will be expected to insure in accordance with good industry practice.422 However, in addition to the statutory insurances, there will be a number of required insurances which the Authority will want to know are being taken out and maintained by the Contractor, to ensure that insurance proceeds are available to cover certain types of claims. Such required insurances should include third-party liability insurance, Contractors' 'all risks' insurance and property damage insurance during operation.
25.2.2 Only those risks which are to be covered by the Required Insurances and insurances required by law (see Clause 25.2(a) and (b)) will attract uninsurability protection (see Section 25.10). It is therefore important that apart from delay in start up and business interruption insurance (see Section 25.2.3 below), only those insurances from which the Authority derives a benefit as a co-insured party should be designated Required Insurances. Furthermore, in respect of those risks that the Contractor is required to insure against, the Authority should ensure that the uninsurability protection423 does not extend to cover risks if it would have the effect of undermining the essence of the commercial principle that the risk being covered is a risk that the Contractor is required to manage. For example, if professional indemnity insurance or non-vitiation424 protection become unavailable, the Authority should not provide such cover since it would insure the Contractor against claims relating to the Contractor's (or its Sub-Contractors') negligence. Authorities should therefore ensure that any professional indemnity insurance does not feature as a Required Insurance and non-vitiation protection is carved out of the uninsurability protection provided under Clause 25.10.
25.2.3 The Senior Lenders will require the Contractor to take out delay in start-up and business interruption insurance. The effect of these insurances is to ensure that during any period of reinstatement of physical damage to the Project, the Contractor will be able to meet its unavoidable running costs and fund debt service obligations on its Senior Debt. If such insurances become unavailable in the market and material damage to the Project subsequently arises, the Contractor may (depending on the period of reinstatement) default under the terms of the Senior Financing Agreements. Without the benefit of uninsurability protection for delay in start-up and business interruption insurances,425 Senior Lenders are likely to require contingencies to be put in place by the Contractor to cover such eventualities. Due to the unique arrangements in relation to terrorism in Northern Ireland, Senior Lenders may also require comfort that the Contractor would have sufficient continued income stream to enable it to meet its debt servicing after a terrorism event. It is thus preferable that the Authority should, on value for money grounds, extend uninsurability protection in the Contract to cover business interruption insurance and delay in start-up insurance,426 but this should exclude protection for Distributions. The Authority may be named as an additional insured under these two policies to the extent that it too has a demonstrable insurable interest. This is likely to be limited to any additional increase in the cost of working further to a loss which may form part of the cover, and will not extend to loss of revenue. It is important to remember that delay in start-up and business interruption insurances only respond in circumstances where an underlying policy covering material damage to the Project also responds, or would have responded in the case that this cover is also unavailable.
25.2.4 Insurance requirements should reflect the degree of risk transfer, the ability of the Contractor to make the premium payments (relative to the size of the risks), value for money considerations and the specifics of the Project. There are, of course, standard insurances that are required during the construction and operating phases of all projects, although the full scope of cover (e.g. the insured risks, the exclusions, the endorsements, the amounts of cover and the deductibles) will vary from project to project and from sector to sector.427 Whilst the construction phase insurances typically cover the whole of the construction phase, the operational insurance are renewed periodically (mostly annually). It is important that the renewal process starts well in advance of the renewal date.
25.2.5 Because of significant increases in the cost of insurance in recent years, Authorities need to become more proactive in assessing insurance requirements. There are a number of ways in which the Authority could seek to reduce premia and, at the same time, encourage insurers to enter the Northern Ireland insurance market. For example, certain insurers referred to in Section 25.1.6(c) would offer significant discounts on material damage rates on educational establishments, if sprinkler systems were installed. Clearly, the appropriate risk management features, will vary from Project to Project. Authorities should not assume that Contractors will automatically include good design features which over the life of the Project may generate insurance cost savings which exceed the initial additional cost of incorporation. Accordingly such risk management features may need to be included in the Output Specification for the Project.
25.2.6 Insurers should inform the Authority of changes in the policy.
25.2.7 If the Authority wishes to increase the limits or scope of the insurances during the life of the Contract, then this should be treated as an Authority change in Service (see Section 13.2 (A Typology of Changes)).
25.2.8 As central Government generally self-insures, there should be no requirement for insurances to cover those risks retained under the Project by a central Government Authority. It is, however, reasonable to seek third-party public liability insurance where appropriate (this should be checked with the relevant policy unit within the Authority).
25.2.9 The Authority should protect its position by being a co-insured for its own interests (where it has an insurable interest) and requiring its interests to be noted as appropriate on the insurances taken out by the Contractor. This should be acceptable to the Contractor.428
25.2.10 The Authority should consider the value for money benefits of requiring the Contractor to take out "non-vitiation" protection in respect of certain required insurances. Non-vitiation protection allows the Authority to claim as a co-insured under a policy even if the insurer would be able to avoid a claim made by the Contractor on the basis that the Contractor, for example, withheld material information from the insurer (e.g. the Contractor does not make the insurer aware that it is intending to use highly flammable substances during the construction period). The Senior Lenders may also require non-vitiation cover. However, absence of such cover shall not be covered by the uninsurability protection given to the Contractor in respect of unavailability of insurance cover.429
Suitable drafting is as follows:
25.2 Insurance
(a) The Contractor shall, prior to the Service Commencement Date, take out and maintain or procure the maintenance of the insurances described in [Part 1 of Annex 3 (Required Insurances)] and any other insurances as may be required by law. These insurances must be effective in each case not later than the date on which the relevant risk commences.430
(b) The Contractor shall during the Service Period take out and maintain or procure the maintenance of the insurances described in Part 2 of Annex 3 (Required Insurances) and any other insurances as may be required by law.431
(c) No party to this Contract shall take any action or fail to take any reasonable action, or (insofar as it is reasonably within its power) permit anything to occur in relation to it, which would entitle any insurer to refuse to pay any claim under any insurance policy in which that party is an insured, a co-insured or additional insured person.
(d) With the exception of any insurances required by law, the insurances referred to in paragraphs (a) and (b) shall:
(i) subject to paragraph (e) below, name the Contractor as co-insured with any other party maintaining the insurance;
(ii) [provide for non-vitiation protection in respect of any claim made by the Authority as co-insured in accordance with Endorsement [2] in Part 3 of [Annex 3];432
(iii) contain a clause waiving the insurers' subrogation rights against the Authority, its employees and agents in accordance with Endorsement [2] in Part 3 of [Annex 3];
(iv) provide for 30 days prior written notice of their cancellation, non-renewal or amendment to be given to the Authority433 in accordance with Endorsement [1] in Part 3 of [Annex 3]; and
(v) in respect of the Physical Damage Policies provide for payment of any proceeds received by the Contractor to be applied in accordance with Clause 25.6 (Reinstatement).
(e) Wherever possible, the insurances referred to in paragraphs (a) and (b) shall name the Authority as a co-insured for its separate interest.434
(f) The Contractor shall provide to the Authority:
(i) copies on request of all insurance policies referred to in paragraphs (a) and (b) (together with any other information reasonably requested by the Authority relating to such insurance policies) and the Authority shall be entitled to inspect them during ordinary business hours; and
(ii) evidence that the premiums payable under all insurance policies have been paid and that the insurances are in full force and effect in accordance with the requirements of this Clause 25.2 (Insurance) and Annex 3 (Required Insurances).
(g) Renewal certificates in relation to the insurances referred to in paragraphs (a) and (b) shall be obtained as and when necessary and copies (certified in a manner acceptable to the Authority) shall be forwarded to the Authority as soon as possible but in any event on or before the renewal date.
(h) If the Contractor is in breach of paragraphs (a) or (b) above, the Authority may pay any premiums required to keep such insurance in force or itself procure such insurance and may in either case recover such amounts from the Contractor on written demand.435
(i) The Contractor shall give the Authority notification within 30 days after any claim in excess of £[ ] on any of the insurance policies referred to in this Clause accompanied by full details of the incident giving rise to the claim.436
(j) Neither failure to comply nor full compliance with the insurance provisions of this Contract shall limit or relieve the Contractor of its liabilities and obligations under this Contract.
(k) The insurance premiums in respect of the insurances referred to in paragraphs (a) and (b) shall be the responsibility of the Contractor.
_________________________________________________________________
422 What constitutes good industry practice should be part of the advice sought by the Authority from its professional insurance adviser (see Section 25.1.3 above).
423 See Section 25.10 (Risks that become Uninsurable) below.
424 See Section 25.2.10 below.
425 See footnote 483 below.
426 This is sometimes referred to as advanced loss of profits insurance (ALOP) although as noted protection for Distributions should be excluded.
427 Salient information as to the scope of the required insurances specified in Section 25.2.1 should be included within the Standard Required Insurance Schedule to the Contract (see Section 25.12 below).
428 Where possible, the Authority should be a co-insured on the Contractor's insurance policies. This is a much stronger position for the Authority than being named as "loss payee" under the policy, as a co-insured can make the claim itself and is not (as in the case of a "loss payee") reliant on the insured party making the claim.
429 See Section 25.10 (Risks that become Uninsurable).
430 These are the construction or development phase insurances and must be Required Insurances. The insurance schedule should specify the dates by which these insurances should be effective.
431 These are the operational insurances and must be necessary insurances only. In some projects the operational phase may overlap with the construction phase (e.g. a grouped schools project) and insurance requirements will need to be tailored accordingly.
432 For certain projects where there is significant Authority interface it may be appropriate for the Employer's Liability Insurance Policy to contain a similar waiver of subrogation.
433 To the extent that the Authority has an insurable interest.
434 This will only be possible for policies in which the Authority has an insurable interest (not, for example, professional indemnity insurance) or where the policy has an "indemnity to principals" provision (for example, in an employers liability insurance).
435 These amounts can be set off under Clause 12 (Payment and Set-off).
436 On projects on which many claims are expected, the Authority can agree a minimum amount below which it is not notified. If this is done, it may be necessary for the Authority to be notified of important claims (e.g. accident and injury based claims).