Negotiating a solution - The effect of uninsurability provisions are typically that, if a particular risk becomes uninsurable in accordance with the agreed contractual definition (and not as a result of the Private Partner's actions), the Parties will negotiate a mutually satisfactory solution for managing the risk, failing which the Contracting Authority will become the insurer of last resort. Any availability payment will then be reduced accordingly to reflect the premium no longer being paid by the Private Partner. The position as regards third party liability insurance is slightly different because clear responsibility is needed in order for the Private Partner and its employees to continue to operate - the Contracting Authority should have the option to accept the risk itself or to terminate the PPP Contract (on a Force Majeure termination compensation basis).
Relief from breach - The Contracting Authority usually grants relief to the Private Partner from the obligation to insure, but only to the extent the Private Partner's own acts or omission have not caused the insurance to become unavailable. If it has caused the unavailability, the Private Partner will be in breach of the PPP Contract which is likely to give the Contracting Authority a right to terminate for Private Partner default (see Section 4, Termination Payments).
Insurer of last resort - If the Contracting Authority accepts becoming insurer of last resort, it will be liable for the consequences of the occurrence of the uninsurable risk. It is therefore important that the Contracting Authority is able to manage the risk transferred to it (for example by taking out insurance policies itself or being otherwise able to manage the potential cost impact). The Private Partner should also be required to periodically approach the insurance market (e.g. once every three months) to see if the risk can be insured again.
| EMERGING AND DEVELOPED MARKET DIFFERENCES In negotiating an insurer of last resort option, the Private Partner and its Lenders will carefully assess the credit of the Contracting Authority. This type of provision is therefore likely to be seen more in established jurisdictions. In less established jurisdictions there may be more negotiation over whether taking out a particular insurance should be an obligation in the first place, and/or the risk of the event occurring may instead be managed through the Force Majeure provisions. |