6.14 For projects with particular risk characteristics, a new approach will be explored under PF2 whereby authorities may offer to cover certain risks themselves, instead of requiring the contractor to insure these in the market. This would apply to Material Damage and Business Interruption insurances in the operational phase of PF2 projects (but not to third party or other insurances). This does of course affect the balance of risk in the contract and will only be appropriate for projects with the following risk characteristics:
• dispersed asset base; and
• reduced risk of single catastrophic claim; or
• specialist assets or assets used in hazardous situations such as some Ministry of Defence assets (where the market may not be deep or efficient).
6.15 It is recognised that local authorities, without the funding resources of Government Departments, would only wish to pursue an indemnity approach where the risk of catastrophic loss was remote. Road projects and housing projects may fall into this category. The scale of losses on roads projects in particular tends to be small, predictable and recovery rates (from third parties causing damage) high. Government Departments with national programmes may, however, wish to consider such an approach.
6.16 Adjusting the insurance arrangements on PF2 contracts to move to an indemnity basis, is, however, complicated from a risk management, regulatory, contractual and value for money perspective and should initially, therefore, be taken forward on a pathfinder basis. For more detail on insurance see Chapter 17 of Standardisation of PF2 Contracts.