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Will integrated project insurance do away with PI and construction all risks insurance?

This depends on your perspective. Before you click through to the next blog with a resounding “no” at the back of your mind, it should be said that this question was enough to attract a substantial crowd of industry professionals to the recent address given by Paul Reed QC to the King’s College Construction Law Association.

This is based on the government’s new integrated project insurance (IPI) model, to be used as the basis for the new collaborative alliancing forms of contract by helping to remove the blame culture inherent in an adversarial construction market. 

The current position

A key area of concern in the world of professional indemnity insurance (PI), which Cabinet Office guidance on the IPI model highlights, is that of costs: costs incurred in investigating, identifying, allocating blame for, and defending, errors in construction or design. The broker responsible for piloting and delivering the IPI model (Griffiths & Armour) has calculated £5 spent on costs for every £1 of indemnity actually paid by insurers. Such imbalance underlines the adversarial nature of the industry, where a strong incentive is often to apportion blame to the parties at fault, rather than to get the project built.

This has led to industry professionals increasingly reliant on inadequate insurance, knowingly entering into projects under-insured; the withdrawal of certain major players from the UK insurance market as claims multiply ahead of premium income; and over-reliance on value-engineering from mounting pressure to come up with ever-cheaper methods of construction.

Is IPI the solution?

In outline, the IPI model entails the creation of an alliance structure where project risks are pooled into a virtual company, the alliance, of which each partner in the supply chain is an effective shareholder. Readers of this blog will be familiar with such structures from previous posts; in simple terms, individuals from the supply chain are seconded to the Alliance company to form a management team, whose role is to collaborate in the successful delivery of the project.

Project risks will not be accepted for insurance under IPI until the client’s strategic brief and success criteria are agreed and the alliance contract is ready to be awarded, and the target costs approved by independent risk assurers.

Once the IPI is in place, the parties to the alliance should have the comfort of knowing it will cover any risks subject to minimal market-standard exclusions. The insurers have the comfort that those project risks are identified by the integrated project team (IPT) at the outset, and the work of that team audited by a technical and financial independent risk assurer (TIRA /FIRA).

What does it look like?

At present, there is no single integrated wording for the IPI model insurance, so it is intended that the insurance will cover five areas in familiar form, namely:

Crucially, IPI does away with PI cover in favour of insuring cost over-runs subject to a deductible applied to the financial loss element of cover. All parts of the project team share the excess in a fixed proportion, just as they share the gain should the project come in on time and under-budget.

The advantage of the system is that alliance members know their loss is limited to the pre-agreed share of the pain-share mechanism. Any overspend claim above the excess is expected to be paid promptly once verified.

How much does it cost?

The cost of the product is fixed at 2.5% of project cost – similar to costs found by the Office of Government Commerce for traditional CAR /public liability/PI cover. There’s a good argument that IPI could be better value, because the 2.5% includes the cost of the independent technical / financial risk assurance (which itself should mitigate risks), and the provision of 12 years’ latent defects cover.

Is the market ready for it?

The concern expressed was that cover offered by IPI sounded too good to be true. Several projects earmarked for IPI have lost their funding. Other than the pilot project for a new wing on MOD barracks in Devon, there were no other IPI projects on foot at the time of the Cabinet Office paper delivered in July 2014.

Questions at the end of the session indicated the industry remains divided in its view of the likely success of the new model, albeit with a tendency towards scepticism. A key element driving perceived mistrust of the new model is the culture-shift needed for a traditionally adversarial supply chain to work in collaboration to find solutions, without designating blame.

The understandable scepticism should not, however, stop the attempt to develop IPI. Effective IPI is crucial if alliancing forms of contract are to be used effectively. This suggests that efforts should be made to develop such insurance and to overcome what are currently regarded as cultural industry barriers.

Pinsent Masons LLP Ben Laurence

One thought on “Will integrated project insurance do away with PI and construction all risks insurance?

  1. Hello Ben, I am advising a client who wants to use the IPI model. Do you think it is acceptable to funders? Was this discussed at the King’s College address?

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