6.5.1  Insurance policies

Insurance is a cost to alliance projects that is directly or indirectly borne by the state. Directly and indirectly the Owner will pay of the order of 1 -2% of TOC by way of premiums for the various alliance insurances. In the last five years this amounts to some $300- $600 million based on alliance infrastructure delivered by governments. Not only is it costly but the effectiveness of alliance insurance is problematic given a lack of case law and successful claims are believed to be minimal. It is also technically and commercially complex and can have significant implications on the risk profile of the alliance and the commercial framework (risk/reward mechanism) for NOPs.

Insurance for traditional construction projects is complex54, involving:

•  various parties with potentially misaligned commercial interests

•  specialist advisers, brokers, risk consultants

•  specialist lawyers

•  various insurance underwriters (who may overlap in their individual cover)

•  complex legal concepts

•  statutory obligations (e.g. Insurance Contracts Act).

Insurance in the alliancing context adds further complexity by raising a multitude of special options and further difficult issues that need to be understood and responsibly considered if VfM is to be optimised.

Traditional insurance products hinge on findings of 'liability' and 'fault'. More specifically, the liability of the insurer under traditional insurance products and terms is not triggered without the existence of a liability of one or more relevant insured parties.

However, these concepts of liability are generally not part of the collaborative relationships established in alliancing. On the contrary, alliance participants employ no blame/no dispute principles and terms in their alliance agreements to block any such liability between them.

As a result, traditional insurance policy terms may not be triggered and, therefore, alliance parties may find that there is no effective insurance cover. While this typically is not problematic in relation to project works and public liability cover it is a significant issue for professional indemnity insurance and is often overcome by project specific insurance. This in turn raises the issue of who controls the various insurances.

Efforts to overcome this difficulty have included special drafting, through which alliance participants aim to provide a carve out from no suit terms for claims for which insurance will respond or for specific categories of claim, such as a contribution arising out of a professional negligence claim made by a third party against a participant in connection with the alliance project works. However, these approaches remain complex and uncertain in operation where the alliance agreement contains no express risk allocation terms or mechanism, and are therefore fraught with potential issues and arguments about how the terms might operate in the context of a dispute.

Insurance in alliancing also raises the possibility of adverse risk transfer and loss of value to the state through:

•  The commercial behaviour of project participants (particularly if they feel the project has been de-risked due to their participation in a no fault, no blame arrangement).

•  The risk profile of the project/program for both the state and the NOPs.

•  Each party's insurance history, insurance premium costs and the future cost of insurance.

•  Factoring of premiums into project costs.

•  Outcomes which are best for the insurance industry, best for NOPs, but not necessarily best for the state in either a project or whole of government context.

The true effectiveness of insurance is tested when a claim is made and a policy responds. To date Australian alliance projects do not have a history of claims experience and therefore the effectiveness of the insurance has generally not been rigorously tested. It raises the question of the effectiveness of the cover obtained - if there have been no claims, and a substantial volume of projects have been delivered then what risks are being insured and how is VfM being optimised by insurance?

The broader issue of insurance in an alliance context is the manner in which insurance costs will be allocated. If insurance is a project cost, it still needs to be managed to ensure that policies are affected on appropriate terms, at appropriate levels and at appropriate times, and maintained. Importantly, if insurance costs will be an alliance budget reimbursable item that has no impact on NOPs, then VfM will be adversely impacted if:

•  Insurances are not managed effectively.

•  Relevant claim and other information required from or in relation to NOPs is not available or is not forthcoming.

•  Insurance costs are adversely impacted by a poor claims history of one or more NOPs becoming known.

The overall objective in procuring insurance is to optimise VfM. This may mean that less project insurance is more appropriate because the state is either comfortable assuming certain risks or that it already carries the risk. This is different to a best for project approach which would generally require that all identifiable project risks are insured at the project level.

It is not clear from the findings whether VfM is being optimised on a whole of government basis for insurance cover and indications are that there may have been significant VfM erosion.