1  Definitions

1.1  For the purposes of this Schedule, the following words and expressions shall bear the following meanings:

"Actual Relevant Insurance Cost"  means the aggregate of the annual⁴⁵⁹ insurance premiums reasonably incurred by the Contractor 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 Date⁴⁶⁰ 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 Services Commencement 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"  shall bear the meaning ascribed to it in Schedule [ ] (Required Insurance Schedule);⁴⁶¹

"Construction Period Insurance" means the Required Insurance in respect of the period from the date of this Contract to the Service Commencement Date;

"Contract Period" means the period from and including the date of this Contract to the Expiry Date, or if earlier, the Termination Date;

"Contractor Related Party"  means the Contractor's agents and contractors (including without limitation the Construction Sub-Contractor and the Operating Sub-Contractor) and its or their sub-contractors of any tier and its or their directors, officers, employees and workmen in relation to the Project and any person on or at any of the [sites] at the express or implied invitation of the Contractor (other than the Authority or any [Authority related party]);⁴⁶²

"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;⁴⁶³

"Insurance Cost Decrease"  means the Insurance Cost Differential if the value thereof is less than zero, multiplied by minus one;⁴⁶⁴

"Insurance Cost Differential" shall, subject to the Insurance Review Procedure, be determined as follows:

Insurance Cost Differential = (ARIC - BRIC) - (±PIC)⁴⁶⁵

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;⁴⁶⁶

"Insurance Cost Index" means any index introduced by the United Kingdom Government or the Office of National Statistics after the date of this Contract 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 Contract Period, in which case the Insurance Review Date shall be the last renewal date of the Relevant Insurance prior to the end of the Contract Period;

"Insurance Review Procedure" means the procedure set out in paragraph 2 of this Schedule [A];

"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 Contract Period, 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 Contract Period;

"Joint Insurance Cost Report" shall bear the meaning ascribed to it in paragraph 2.2 of this Schedule [A];

"PFI" means the United Kingdom's Private Finance Initiative;

"Portfolio Cost Saving"  means any insurance cost saving which arises from the Contractor changing the placement of the Required 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;⁴⁶⁷

"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 the Contractor or any Contractor Related 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 maximum⁴⁶⁸ in Schedule [  ] (Required Insurance Schedule);⁴⁶⁹

(c)  any other issue or factor other than circumstances generally prevailing in the Relevant Insurance Market, except for any Portfolio Cost Saving.⁴⁷⁰

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 Required Insurance and any other insurances as may be required by law other than:

(a)  Construction Period Insurance;⁴⁷¹

(b)  Business Interruption Cover except to the extent that it relates to Unavoidable Fixed Costs;⁴⁷² and

(c)  [any ancillary insurances];⁴⁷³

"Relevant Insurance Inception Date" means the date on which the Relevant Insurance is first providing active insurance cover to the Contractor, being a date no earlier than the Service Commencement 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];

"Required Insurance"  shall bear the meaning ascribed to it in the Contract;⁴⁷⁴ and

"RPI" [shall bear the meaning ascribed to it in the Contract].

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459  Typically insurance premiums are payable annually.

460  The Bid Date is the date on which the Contractor has fixed its price prior to appointment as the winning 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 Authority 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.

461  See Annex 3.

462  This definition may need to be tailored on a project specific basis, depending on the sector in which the project is let.

463  The first insurance review takes place 12 months and 1 day following the Relevant Insurance Inception Date. The costs considered at the time of the first review will be:-

  the insurance premium payable to cover the first year of operation; and

  the insurance premium payable to cover the second year of operation.

With the exception of the last review, which, depending on Contract Period, may also occur after a shorter period, all other reviews will take place biennially.

464  The Insurance Cost Decrease is always a positive sum (if not zero).

465  In accordance with the definition of Project Insurance Change, the PIC may have either a positive or a negative value. In the event that the PIC is positive then the PIC is subtracted from the difference of the ARIC and the BRIC. If the PIC is negative, then the double negative means that the value of the PIC (ignoring the negative sign) is added to the difference of the ARIC and the BRIC.

466  The Insurance Cost Increase is always a positive sum (if not zero).

467  An Authority may not be compelled to join a portfolio solution which places it in a worse position than if insurance is placed on a separate stand-alone basis.

468  The Authority, in conjunction with its advisors, should set the maximum deductibles in the Required Insurance Schedule (see Annex 3) at the highest acceptable level.

469  The effect of this clause is to incentivise the Contractor to manage and optimise the trade-off between insurance premium and deductible levels for deductible levels below the maximum stipulated within the Authority Required Insurances, whilst providing protection in two specific circumstances: the first is where, due to circumstances generally prevailing in the Relevant Insurance Market, the cost of maintaining deductibles at the maximum stipulated in the Required Insurance Schedule has increased; and the second is where, due to circumstances generally prevailing in the Relevant Insurance Market, the Required Insurances can only be purchased with deductible levels above the maximum stipulated in the Schedule, wherein two principles apply: (a) the Contractor is given relief from breach by virtue of the provisions which deal with terms and conditions that become unavailable (see 25.11); and (b) the additional cost of purchasing insurances even at these increased deductible levels is eligible as an Insurance Cost Differential.

470  This means that in addition to portfolio cost savings, changes which are attributable to a general movement in insurance costs across the entire PFI market will be taken into account.

471  This is assumed to be covered under fixed-price arrangements and so not subject to variation.

472  In addition to senior debt service costs, the Contractor may incur other unavoidable costs if the start of the operational period is delayed or in the event of an interruption to the operation of the project, e.g. any fixed cost for the provision of utilities. These unavoidable costs will vary from project to project. Unavoidable Fixed Costs is defined in Part 5 of Annex 3 and excludes Distributions.

473  If the Required 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.

474  This will comprise the insurances in the required insurance schedule contained in the Contract, which should be based on the Standard Required Insurance Schedule (see Section 25.12 and Annex 3).