If an insured event under one of the Physical Damage Policies occurs and the Assets need reinstating then a choice has to be made as to whether the insurance proceeds should be applied to reinstate the Asset or used to pay off the funders thereby leaving the Authority with a need to procure a new long term solution to its residual waste management needs. The WIDP Contract (Clause 56) sets out the procedure for agreeing how this should be done.
For incidents where any damage is valued in excess of an agreed level (index linked), and subject to the Economic Reinstatement Test mentioned below, the WIDP Contract contains a process for the Contractor and Authority to agree the terms of any reinstatement in a Reinstatement Plan.
It is important to ensure that the proceeds of a claim are used correctly, in accordance with the agreed Reinstatement Plan. The Contract Manager should involve the Authority's Legal Department when applying the reinstatement provisions.
If the insurance proceeds payable under a Physical Damage Policy exceed a minimum level, those proceeds should be paid into a joint bank account - the Joint Insurance Account - from which the Contractor can withdraw sums to fund the Reinstatement Works. This right applies up to the point of an early termination or expiry of the Contract. After that point, the Authority has the right to make such withdrawals. This ensures the Authority can continue to reinstate the Project using the insurance proceeds.
Subject to the indemnity provisions, the Contractor is responsible for any shortfall between the amount of the insurance proceeds held in the Joint Insurance Account and the amount of money needed to meet the cost of reinstatement. On a project specific basis, the Authority may have agreed to include an Economic Reinstatement Test. Senior Lenders often require this test as a way of assessing whether or not reinstatement (where there has been total or near total destruction) will enable them to recover their outstanding debt in full. The test in the WIDP Contract is based on the default senior loan life cover ratio. In other words, if the test shows it is still feasible to service the debt, the Senior Lenders do not have the option to appropriate the insurance proceeds in preference to reinstatement.