17.5.1 If an insured event occurs and certain Assets require replacement or reinstatement, the Authority may decide to change the service requirement. If it does so, the cost of reinstatement may be more or less than the cost of exact replacement. Clearly there is no problem where the cost is less. Where insurance proceeds do not cover the full reinstatement, and the additional cost is due to an Authority change in Service (and not under-insurance by the Contractor of the original asset), then the extra cost must be funded by the Authority in accordance with the change in Service mechanism (see Section 11 (Change in Service)).
17.5.2 Although insurance should be available for full reinstatement, the Contractor should nonetheless arrange cover on terms which reflect the fact that the Authority's requirements may change after an insured event occurs and that it is possible that there will be a requirement for something other than full or exact reinstatement.21
17.5.3 In practice, the parties are likely to discuss and negotiate whether (and how) to reinstate the Project after the occurrence of an insured event. Accordingly, the Contract should set out provisions regarding how the parties will agree a plan for the reinstatement of the Project ("Reinstatement Plan"). The Contract must be clear as to the remedy in the event of disputes over reinstatement. The Authority should be aware that following any physical damage to the Project, the Contractor will only be permitted to claim under the delay in start-up and business interruption insurances if the insurer is satisfied that the Contractor is using its reasonable endeavours to reinstate. Accordingly, the Authority's response to the proposed Reinstatement Plan should be reviewed by the Authority as a matter of priority and the Authority should respond to the Contractor within a reasonable period of time.
17.5.4 The Authority has a clear interest in the application of any insurance proceeds received by the Contractor under the physical damage policies that are to be applied in reinstatement of the Project. Although the Authority agrees a Reinstatement Plan with the Contractor, the Authority should also be concerned to ensure that any insurance proceeds are utilised in accordance with the agreed Reinstatement Plan. Additionally, the Authority must ensure that upon termination of the Contract (either through natural expiry or early termination) the Authority receives the benefit of any insurance proceeds so that it can continue with the reinstatement of the Project.22 This is achieved by having the insurance proceeds in excess of a minimum level paid into a joint insurance account which is in the names of the Authority and the Contractor.23 Proceeds below the minimum level are paid directly to the claimant (with the exception of third party liability claims payments which are typically paid directly to the aggrieved party). A minimum level is set in order to avoid unnecessary administrative costs arising.
Required drafting is as follows:
17.5 Reinstatement
(a) [Subject to Clause 17.6 (Economic Test)], all insurance proceeds received under any policy referred to in [paragraph 1 of Parts I and 2 of Annex 1 (the "Physical Damage Policies")]24 shall be applied to repair, reinstate and replace each part or parts of the Assets in respect of which the proceeds were received.
(b) All insurance proceeds paid under any Physical Damage Policy in respect of a single event (or a series of related events) in an amount in excess of £ [minimum level] (indexed) shall be paid into the Joint Insurance Account.25
(c) [Subject to Clause 17.6 (Economic Test)], where a claim is made or proceeds of insurance are received or are receivable under any Physical Damage Policy in respect of a single event (or a series of related events) (the ("Relevant Incident") in an amount in excess of £[ ] (Indexed):
(i) the Contractor shall deliver as soon as practicable and in any event within [28] days after the making of the claim a plan prepared by the Contractor for the carrying out of the works necessary (the "Reinstatement Works") to repair, reinstate or replace (the "Reinstatement Plan") the Assets which are the subject of the relevant claim or claims in accordance with sub-clause (d) below. The Reinstatement Plan shall set out:
(A) if not the Construction Sub-Contractor, the identity of the person proposed to effect the Reinstatement Works, which shall be subject to the prior written approval of the Authority; and
(B) the proposed terms and timetable upon which the Reinstatement Works are to be effected (including the date that the Project will become fully operational), the final terms of which shall be subject to the prior written approval of the Authority, which approval shall not be unreasonably delayed;
(ii) provided that the Authority is satisfied that the Reinstatement Plan will enable the Contractor to comply with sub-clause (d) below within a reasonable timescale:
(A) the Reinstatement Plan will be adopted;
(B) the Contractor shall enter into contractual arrangements to effect the Reinstatement Works with the person identified in the Reinstatement Plan approved by the Authority;
(C) prior to the earlier to occur of the Termination Date or the Expiry Date, any amounts standing to the credit of the Joint Insurance Account (the "Relevant Proceeds") (together with any interest accrued) may be withdrawn by the Contractor from the Joint Insurance Account as required to enable it to make payments in accordance with the terms of the contractual arrangements referred to in sub-clause (ii)(B) above, and to meet any other reasonable costs and expenses of the Contractor for the sole purposes of funding the Reinstatement Works and the parties shall operate the signatory requirements of the Joint Insurance Account in order to give effect to such payments. Following the earlier to occur of the Termination Date and the Expiry Date, the Authority may withdraw amounts standing to the credit of the Joint Insurance Account for the purposes of funding any Reinstatement Works;
(D) the Authority agrees and undertakes that, subject to compliance by the Contractor with its obligations under this Clause, and provided that the Contractor procures that the Reinstatement Works are carried out and completed in accordance with the contractual arrangements referred to in sub-clause (ii) (B), it shall not exercise any right which it might otherwise have to terminate this Contract by virtue of the event which gave rise to the claim for the Relevant Proceeds;26
(E) the Authority undertakes to use reasonable endeavours to assist the Contractor
in the carrying out of the Reinstatement Plan;
(F) after the Reinstatement Plan has been implemented to the reasonable satisfaction of the Authority and in accordance with sub-clause (d) below the Authority shall permit withdrawal by the Contractor of any Relevant Proceeds then held in the Joint Insurance Account that have not been paid under sub- clause (ii) (C) above, in respect of the Relevant Incident, together with any interest accrued; and
(G) subject to the provisions of Clause 14.3. (Indemnities) the Contractor shall be solely responsible for the payment of any deficiency.
(d) Where insurance proceeds are to be used, in accordance with this Contract, to repair, reinstate or replace any Asset, the Contractor shall carry out the work in accordance with the [Construction Specification] so that on completion of the work, the provisions of the Contract are complied with.
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21 If the Authority decides to reinstate with a lower level of Service requirement following an insured event, the Unitary Charge should remain the same unless compensation is paid to the Contractor or the parties jointly agree otherwise. The Authority should also be aware of the fact that a decision not to reinstate fully may impact upon the amount of insurance proceeds recoverable.
22 This is particularly important if the Contract is terminated for Contractor Default and the Authority elects (and is able) to retender the Contract.
23 To note that insurers generally settle as the costs of reinstatement are incurred and so large balances seldom build up in the joint insurance account.
24 This will not include, for example, third party liability, employers' liability, business interruption or advance loss of profits insurance.
25 See Schedule 1 (Interpretation) for definition.
26 This would apply if the definition of Relief Events (see Section 15.3.2 (Scope of Relief Events)) did not cover the insured event giving rise to the issue of reinstatement. If so, the Contract may confirm that the concepts of Compensation Events and Relief Events (see Section 15 (Supervening Events)) will apply during the period of carrying out the Reinstatement Works so that, for example, any Authority breach will be treated as a Compensation Event (see Section 15.2.1.2) during this period.