Our system of project insurance wastes about 拢1bn a year, and invariably leads to the courts. Why can鈥檛 we have project-based insurance, as they do on the Continent?

The traditional approach to managing risk in construction projects is to pass it down to others through contracts (the 鈥渂ack to back鈥� culture). These others are then expected to insure that risk as best they can (usually by way of a liability insurance policy), or simply ignore it and hope for the best.

This process results in massive overlap and duplication of insurance and is thus wholly inefficient, wasteful and costly. It undermines arrangements aimed at building integrated and efficient project teams and supply chains. What project teams need, in order to achieve the necessary co-ordination and collaboration, are integrated insurance policies.

Single-project insurance is a policy that covers the delivery team (client, consultants, contractors and their supply chains) for financial loss incurred on the project. Such loss would include the cost of remedying defects or delays to the completion of the project. Rights of subrogation are waived (that is, the insurers will not stand in the shoes of an insured party in order to recover the loss from the party alleged to have caused it).

Most project risks are currently covered by three policies of insurance: professional indemnity insurance, contractors鈥� all-risk insurance and product liability insurance. These policies are taken out by each member of the delivery team, but there are duplications of cover (as a result of the many tiers of subcontracting) and gaps (due to the complex interfaces between liabilities under varying conditions of cover). The industry is probably wasting 拢1bn per year on premiums for all these policies.

The insurer will only meet its liabilities under current policies where liability is established, usually as a result of litigation, arbitration or adjudication. Leading insurance broker Griffiths & Armour estimates that for every 拢1 paid out to the insured party, 拢5 is paid in legal fees. This is not surprising since it is often impossible to allocate responsibility exclusively to one or two members of the team.

Unsurprisingly, there is support within the insurance industry 鈥� from brokers such as Griffiths & Armour and Tysers, and from insurers such as Norwich Union 鈥� for the idea of project insurance. And in principle this support is mirrored within the construction industry, its clients and the government.

There has already been some experimentation. A single project PI policy was adopted on BAA鈥檚 Heathrow Express project and on the Ministry of Defence鈥檚 North Andover site development. The effect in terms of successful collaboration in each case was exceptional. BAA has gone on to adopt single project insurance on the Heathrow Terminal 5 development.

Leading insurance broker Griffiths & Armour estimates that for every 拢1 paid out to the insured party, 拢5 is paid in legal fees ...

Project insurance for integrated teams is commonplace in Belgium and Luxembourg, where it operates in conjunction with 鈥渢echnical control鈥� 鈥� whereby the team is monitored by an independent organisation voluntarily appointed by the client. This technical control puts safety at a premium (from design through to commissioning), opens the door to decennial insurance of the completed facility, and is the vehicle through which insurers see their risk as being managed down to acceptable limits.

There are other benefits to project insurance:

  • It overcomes the concerns of all those engaged in construction over the legal principle of 鈥渏oint and several liability鈥�, which can mean that one party is made solely liable for the negligence of itself and others.
  • It substantially reduces the industry鈥檚 transaction costs by removing the requirement for consultants and contractors to issue warranties to building owners, purchasers, tenants and funders.
  • The insurance remains intact even if a member of the team becomes insolvent.
  • It should significantly enhance the quality of the finished product since the insurers require an independent audit of the delivery teams鈥� quality and risk management systems.
  • Firms selected to form integrated teams are required to demonstrate technical competence, possibly through membership of reputable schemes of qualification.

Otherwise, the premium costs have to reflect an enhanced risk.

This has to be the way forward for project teams. Improvements in the industry鈥檚 performance through integration of its processes are unlikely to last unless there are integrated insurance arrangements.

Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group. Thanks to Martin Davis of Synopsis and Stephen Bamforth of Griffiths & Armour for their help in writing this column