17.9.1 The Contract must address the situation where a risk required to be insured against (i.e. a risk covered by a Required Insurance or statutory insurance) and which was previously insurable becomes uninsurable. In this context uninsurability includes both unavailability of insurance for a particular risk, or premiums being charged at a level which is not commercially viable. The approach adopted concentrates upon the availability of insurance cover for a particular risk rather than the availability of cover upon particular terms (with particular levels of deductibles) or conditions. Whilst uninsurability protection may be available if insurance for a particular risk to be covered by a Required Insurance is not available, there should be no uninsurability protection provided by the Authority to the Contractor for a term or condition (including deductibles at a specific level) becoming unavailable. In particular, uninsurability protection should not be offered in the event that non-vitiation protection is no longer available (see Section 17.2.2 (Authority's Requirements)). The provisions for non availability of a Required Insurance term or condition are set out in Section 17.10 (Terms and Conditions that become Unavailable).
17.9.2 Whilst there is no uninsurability protection per se for changes in deductibles Contractors may, given the inverse correlation between premiums and deductibles, nonetheless benefit indirectly under the insurance premium risk sharing arrangement (see Section 17.8 (Insurance Premium Risk Sharing Schedule)). If underwriters are inclined to increase deductibles to levels above the contractually agreed maxima (specified in the Required Insurance Schedule), then the premium payable will need to increase in order that underwriters provide insurance with deductibles at levels which do not exceed the agreed maxima. Under such circumstances (and if no off-setting reductions in the cost of other insurance cover and terms are available) the increased cost may become an Exceptional Cost (as determined under the Insurance Premium Risk Sharing Schedule (Schedule [A]) in Section 17.8) and so be subject to sharing with the Authority.
17.9.3 The consequences of uninsurability (ranging from Contractor Default to the Authority accepting liability for occurrence of the event) will depend on the type of risk involved and whether either party was responsible for the uninsurability.
The required definition of "Uninsurable" for these purposes is as follows:
means, in relation to a risk, either that:
(a) insurance is not available to the Contractor in respect of the Project in the worldwide insurance market with reputable insurers of good standing in respect of that risk; or
(b) the insurance premium payable for insuring that risk is at such a level that the risk58 is not generally being insured against in the worldwide insurance59 market60 with reputable insurers of good standing by contractors in the United Kingdom.61
17.9.4 A "risk" for these purposes is generally an insured peril which could be the proximate cause for a loss. The proximate cause is the initial act which sets off a natural and continuous sequence of events that produces physical loss or damage under a Material Damage policy, loss of revenue under a Delay in Start Up and Business Interruption policy, or injury and/or physical loss or damage to third parties and/or third party property under a Third Party Liability policy. For example, lightning causes a fire in school premises and this results in material damage to the school. In this example, the lightning is the proximate cause. Fire is not the proximate cause in the circumstances of this example (but could be a proximate cause for other claims).
17.9.5 The Contractor should not be required to insure risks which become Uninsurable.
The following Clause should be included as suitable drafting to reflect this principle.
17.9.5 Nothing in this Clause shall oblige the Contractor to take out insurance in respect of a risk which is Uninsurable save where the predominant cause of the risk being Uninsurable is any act(s) or omission(s) of the Contractor or a Contractor Related Party.
17.9.6 If, however, a risk which is to be insured against under the Required Insurances or statutory insurances, becomes Uninsurable, the Contractor will be in breach of Contract where it has caused the relevant risk to be Uninsurable, which will give rise to a termination right for Contractor Default (see Section 21.2.2 (Events Leading to Termination)).
17.9.7 Unavailability of insurance should not be at the sole risk of the Authority. If a particular risk usually covered by the insurances referred to in Clauses 17.2(a) and 17.2(b) (Insurance)62 63 becomes uninsurable to the extent that the Contractor and other contractors operating in similar sectors shut down their operations as the means of managing the particular risk, then neither party should be entitled to terminate the Contract. If (in respect of the risk concerned) insurance becomes unavailable for reasons outside the control of the Contractor, then the parties should consider alternative approaches to the risk to consider if they can agree a means by which it can be managed or shared. If, however, no agreement is reached and the risk reverts to the Authority then (subject to Section 0 below) the amount of the premium previously paid is deducted from the Unitary Charge. If the risk then occurs, the Authority can choose either to pay an amount equal to the insurance proceeds that would have been payable had the Required Insurances or statutory insurances been available (in which case termination will not occur) or terminate the Contract and pay compensation equivalent to the amount payable on a Force Majeure termination to the Contractor (see Section 23.3 (Termination on Force Majeure)).
17.9.8 In the event that a risk is uninsurable and the Contract continues, the Contractor shall be obliged to approach the insurance market at regular intervals to determine whether the risk has become insurable again.
17.9.9 The Contractor should not be obliged to continue to provide services under the Contract where third-party liability cover has ceased to become insurable and the Authority and the Contractor are unable to agree how to manage that risk. If third-party liability insurance becomes unavailable for reasons that are outside of the control of the Contractor and the parties are unable to agree the means by which the risk should be managed by the Contractor, the Authority should be able to elect to either self-insure the risk or terminate the Contract and pay compensation to the Contractor equivalent to the amount payable on a Force Majeure termination (see Section 23.3 (Termination of Force Majeure)). If it is agreed that the Contract should continue then the amount of the premium previously paid should be deducted from the Unitary Charge.
17.9.10 It is unacceptable for the Contractor to seek to benefit from indemnity provisions in the Contract in order to subvert the apportioned risk transfer position on uninsurability of risk and unavailability of deductibles in this Section 17.9 (Risks that become Uninsurable).
The following is required drafting:
17.9.10 Uninsurable Risks
(a) If a risk usually covered by [contractors' "all risks" insurance, property damage insurance, third party liability insurance, delay in start up and business interruption insurance (but not loss of profits)64 or statutory insurances]65 n each case required under this Contract becomes Uninsurable then:
(i) the Contractor shall notify the Authority within [5] days of the risk becoming Uninsurable;66 and
(ii) if both parties agree, or it is determined in accordance with Clause 28 (Dispute Resolution) that the risk is Uninsurable and that:
(A) the risk being Uninsurable is not caused by the actions or omissions of the Contractor or any Contractor Related Party sub-contractor of the Contractor; and
(B) the Contractor has demonstrated to the Authority that the Contractor and a prudent board of directors of a company operating the same or substantially similar PFI and/or PF2 businesses in the United Kingdom to that operated by the Contractor would in similar circumstances (in the absence of the type of relief envisaged by this Clause) be acting reasonably and in the best interests of the company if they resolved to cease to operate such businesses as a result of that risk becoming Uninsurable, taking into account inter alia (and without limitation) the likelihood of the Uninsurable risk occurring (if it has not already occurred), the financial consequences for such company if such Uninsurable risk did occur (or has occurred) and other mitigants against such consequences which may be available to such company the parties shall meet to discuss the means by which the risk should be managed or shared (including considering the issue of self- insurance by either party).67
(b) If the requirements of paragraph (a) are satisfied, but the parties cannot agree as to how to manage or share the risk, then:
(i) in respect of third party liability insurance only the Authority shall (at the Authority's option) either pay to the Contractor an amount equal to the amount calculated in accordance with Clause 23.3.2 (Compensation on Termination for Force Majeure) and the Contract will terminate, or elect to allow the Contract to continue and paragraph (ii) below shall thereafter apply in respect of such risk; and
(ii) in respect of contractor's "all risks" insurance, property damage insurance, third party liability insurance (if the Authority elects to allow the Contract to continue in accordance with Clause 17.9(b)(i) (Uninsurable Risks)), delay in start up and business interruption insurance (but not loss of profits) or statutory insurances] the Contract shall continue and on the occurrence of the risk (but only for as long as such risk remains Uninsurable) the Authority shall (at the Authority's option) either pay to the Contractor an amount equal to insurance proceeds that would have been payable had the relevant insurance continued to be available and the Contract will continue, or an amount equal to the amount calculated in accordance with Clause 23.3.2 (Compensation on Termination for Force Majeure) plus (in relation to third party liability insurance only) the amount of insurance proceeds that would have been payable whereupon the Contract will terminate; and
(iii) where pursuant to sub-clauses (b)(i) and/or (ii) this Contract continues then the Unitary Charge shall be reduced in each year for which the relevant insurance is not maintained by an amount equal to the premium paid (or which would have been paid) by the Contractor in respect of the relevant risk in the year prior to it becoming Uninsurable (Indexed from the date that the risk becomes Uninsurable). Where the risk is Uninsurable for part of a year only the reduction in the Unitary Charge shall be pro-rated to the number of months for which the risk is Uninsurable; and
(iv) where pursuant to sub-clauses (b)(i) and/or (ii) this Contract continues the Contractor shall approach the insurance market at least every four months to establish whether the risk remains Uninsurable. As soon as the Contractor is aware that the risk is no longer Uninsurable, the Contractor shall take out and maintain or procure the taking out and maintenance of insurance (to be incepted as soon as is reasonably practicable) for such risk in accordance with this Contract and provide the Authority with reasonable evidence of the existence of such insurance.68
(c) If, pursuant to Clause 17.9(b)(ii) (Uninsurable Risks), the Authority elects to make payment to the Contractor (such that the Contract will terminate)(the "Relevant Payment"), the Contractor shall have the option (exercisable in writing within (20) Business Days of the date of such election by the Authority (the "Option Period")) to pay to the Authority on or before the end of the Option Period, an amount equal to the insurance proceeds that would have been payable had the relevant risk not become Uninsurable, in which case the Contract will continue (and the Relevant Payment will not be made by the Authority), and the Contractor's payment shall be applied for the same purpose and in the same manner as insurance proceeds would have been applied had the relevant risk not become Uninsurable.
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58 The effect of this provision should not be to give the Contractor protection against changes in terms of insurance or levels of deductibles, but to only give protection if the cost of insurance (on any terms) is at such a level that the market is not generally insuring against that risk.
59 To the extent relevant, the wider risk transfer market (rather than just the insurance market) should be referred to. Insurance advice should be taken on this. Reference to any geographically narrower market, such as the European market, will not be acceptable.
60 This approach is preferable to one dealing with the extent to which prices of premiums have increased.
61 In projects where the Contractor retains end-user risk, the Authority should consider whether it should give the Contractor any price protection in relation to increases in insurance premiums (i.e. paragraph (b) of the definition of Uninsurable can be deleted) as the Contractor can manage such increases by increasing the price that the end user pays for the Services to reflect any increase in insurance premiums for the Project.
62 See Sections 17.2.1 and 17.2.2 (Authority's Requirement)
63 These are the Required Insurances (e.g. contractors' "all risks" insurance, property damage insurance, delay in start up and business interruption insurance (but not loss of profits, third party liability insurance) and statutory insurances (e.g. employer's liability insurance).
64 See Section 17.2.3 (Authority's Requirements).
65 That is, the insurances referred to in Clause 17.2(a) and Clause 17.2(b) (Insurance). See Sections 17.2.1 and 17.2.2 (Authoritiy's Requirements) for discussion.
66 At the Authority's discretion it may elect to use the following alternative wording: "the Contractor shall notify the Authority of any risk becoming Uninsurable within 5 Business Days of becoming aware of the same and in any event at least 5 Business Days before expiry or cancellation of any existing insurance in respect of that risk".
67 In the event that a risk becomes Uninsurable and the parties are required to meet to discuss how to manage the risk, the Authority should take into consideration the extent to which it may be deemed to be carrying out insurance business in the event that the parties are unable to agree and the provisions of Clause 17.9(b) (Uninsurable Risks) apply. In the event that the Authority believes that it would be conducting insurance business, it should consider whether it has the necessary powers and authorisations to do so.
68 Additional sub-clauses (v) and (vi) may be added at the Authority's discretion as follows :
(v) In respect of any period between the Authority receiving notification in accordance with Clause 17.9(a)(i) that a TPL Risk has become Uninsurable and the Authority's notification to the Contractor in accordance with Clause 17.9(b)(i) in respect of such risk then, provided it is ultimately agreed or determined that the requirements of Clause 17.9(a)(ii) are satisfied in respect of the Uninsurable TPL Risk and subject to Clause 17.9(b)(vi) below, Clause 17.9(b)(ii) shall apply in respect of occurrences of the Uninsurable TPL Risk during such period unless the parties otherwise agree how to manage the risk during this period; and
(vi) Clause 17.9(b)(v) shall only apply provided the Contractor does not unreasonably materially delay (a) agreement and/or determination in accordance with the Dispute Resolution Procedure as to whether the requirements of Clause 17.9(a)(ii) are satisfied in respect of the Uninsurable TPL Risk and/or (b) meeting with the Authority to discuss the means by which the risk should be managed.
TPL Risk should be defined as 'a risk which is required to be insured under the third party liability insurance policy'.