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Procurement Challenges

“Perspectives on Insurance”

Simon GrayState Manager NSW/ACT

Planned Cover

Overview

• Insurance Overview– background and key issues

• Case Study– hypothetical politically significant road project

• Current trends– certificates/Collateral Warranties– builders going insolvent and consequences for

consultants– “ATM” clauses in contracts

Insurance Overview

• Planned Cover has been placing professional indemnity insurance in construction industry for over 40 years

• On the Consult Australia PI Pathway panel for approximately 8 years.

• We make our own submissions on government policy (e.g. harmonising proportionate liability, WHS law changes)

• Also support industry bodies in negotiations with government.

Insurance Overview

• What is/was a PI policy?• Covers negligent advice• Historically “act & errors” cover ie for negligent

design• Extended to “civil liability” cover in 2000’s to

include breach of the then TPA (misleading statements/advice) and also “breach of contract”

• Always a contractually liability exclusion to exclude claims unless the liability would have attached in any event ie “negligence”

Insurance Overview

• Essentially policies allowed claims framed as breach of contract claims but only covered liability that would otherwise have been incurred

• About 2010 policies started to broaden again to include cover for:– contracting out of proportionate liability

legislation– certain indemnities to the extent that the civil

liability “results from”, “arises from”, “is due to” the relevant services

Insurance Overview

• We provide a contract review service:– for consultancy agreements– review of the insurance risks in agreements– over 1500 agreements reviewed each year– Our legally qualified Risk Managers advising

consultants across the country

Contract Reviews

• From 2013 until 2015, based on over 3,000 contracts reviewed by Planned Cover:– 20% of contracts required the consultant to

contract out of proportionate liability legislation– contracting out was most prevalent in WA

(32%) and NSW (30%), and least prevalent in Queensland (8%)

• Legislation expressly allows for contracting out in NSW, WA and Tasmania

ACT NSW NT QLD SA TAS VIC WA Total Australia0

5

10

15

20

25

30

35

14

30

0

8

20

0

19

32

20

Percentage of Contracts Waiving Proportionate Liability (by state)

State

% co

ntra

cts w

aivi

ng P

ropo

rtion

ate

Liabi

lity

Insurance Issues

1. Waiving your proportionate liability rights2. Indemnity clauses3. Unlimited liability4. Fitness for purpose5. Warranties6. Expert standard of care7. Payment of liquidated damages8. Novation clauses which result in duplication of

liability9. Certificates10.Collateral warranties

Case Study – A&NZ Link

• Hypothetical road project• Fast tracked due to political imperatives• Government outsources to a D&C contractor• Contracts are complicated and numerous

iterations which are not always consistent are generated at high speed and contractual timelines difficult to meet

• What could go wrong?!

Case Study – A&NZ Link

• D&C contractor is required to take out $150M project policy which also covers some Consultants

• Insurers conduct their own Risk Management assessment of the project and decline to offer insurance capital due to:– concerns about the project itself– concerns around the contract including lack of clarity

about the contract before the Project is announced– onerous contractual obligations imposed by the

principal on D&C contractor– “fast tracking” of the project which will lead to poor

project co-ordination and also likelihood that all consultants will be involved in a claim

– concerns about political risk with an upcoming election

Case Study – A&NZ Link

• Insurers decline to offer insurance quotes for the requested $150M or will only cover $50M.

• Contract has liability for delay claims (irrespective of fault/negligence) limited to $10M – insurers decline to cover that contractual obligation and consultants uninsured for $10M during or at the end of the project when the “ATM” clause is called upon

• Mismatch between contract and insurance – insurance covers risk and does not provide cover for guarantees

Case Study – A&NZ Link

• Due to the problems with project the only insurers who want to insure the project are off-shore insurers and not the key insurers with local experience which makes a difference when the claims come in over the next 10 years

• Consequential policy interpretation issues when off-shore insurers outside their usual jurisdiction write the project on “local” policy wordings

• Local branches of off-shore insurers decline to cover the project but overseas branch steps in to write the project

What is a PI policy today?

• New potential cover:– “Fitness for purpose” guarantees

• Problem is attitudinal– clients view PI policies as “project protection”

vehicles ie if the project does not go well then “just claim on your PI”

– ATM clauses that essentially pass on any project delays to the consultant and consultant wants the insurer to pick these amounts up but the consultant is uninsured for those amounts

• Long way from traditional negligence

Don’t forget next year

• Professional indemnity insurance is “claims made”.

• The policy that covers a claim against you is the policy you had when the claim was made. Not the policy when you did the work. Claims can be made years in future.

• So “extra” cover has to be obtained this year and all future years.

Insurance trends

• Builders going insolvent is causing more claims to be brought against consultants

• Cyber insurance– watch-out for “waiting periods”– make sure you have first party and third party

protection• Contracts

– keep up the good fight on contracts as a profession

– beware Certificates and Collateral Warranties– strive for a balanced contract that does not

compromise the PI policy

Disclaimer

This presentation and the advice contain herein is intended only as general advice in respect of insurance and risk management.

It is not tailored to your individual needs or those of your business nor is it intended to be relied upon as comprehensive legal or insurance advice.

For such assistance you should approach your legal and insurance advisors.