ENHANCEMENT CONTRACTS - AVAILABILITY OF INSURANCE TO NETWORK RAIL

Transcription

1 ENHANCEMENT CONTRACTS - AVAILABILITY OF INSURANCE TO NETWORK RAIL Background As part of the consultation process relating to the revision of the template agreements a few stakeholders have suggested that Network Rail take out insurance policies to cover risks that consultants and contractors would normally be expected to have. They state that where Network Rail already has such policies in place for other areas of their business, they should be made available to enhancement projects. These stakeholders believe that this would enable Network Rail to increase its liability caps to much higher levels, i.e. the level of the insurance cover. This stakeholder suggestion also relates to asset protection agreements where the cost of Network Rail s services, and therefore its liability cap, may be dwarfed by the overall cost of the project. Given that insurance as an option was not dealt with in Network Rail s 31 October 2008 response, Investment Framework liabilities in Network Rail s template contracts, this additional note is intended to clarify and inform such debate by providing: a reaction to DLA Piper's proposals (on behalf of Olympic Delivery Authority, Hutchison Ports UK and Merseytravel) on insurance in the template agreements, set out in DLA Piper s 31 October 2008 response, Investment Framework liabilities in Network Rail s template investment contracts; particularly the idea that Network Rail is required to hold relevant Professional Indemnity insurance; and a statement of what relevant insurance Network Rail already holds, what additional insurance Network Rail would typically take out for 3 rd Party projects and how this insurance applies for different services under the templates. Template approach A key element in influencing the approach taken on a general basis is the Network Rail service and works offer to customers developed through the Investment Framework and embodied in the template agreements. Network Rail believes that the majority of customers are seeking a low cost, value for money solution to developing and implementing projects on the railway. The approach has therefore been developed for Network Rail to undertake a wide range of services / works and assume a commensurately broad range of liabilities, funded through the risk fund mechanism, to help facilitate these enhancement projects. These liabilities, including delay, as identified in Network Rail s 31 October 2008 response, Investment Framework liabilities in Network Rail s template contracts, are much broader than those capable of being covered through insurance arrangements. The ability of a customer to have easy access to and be paid through the risk funds also has to be taken into account (see Quality of cover section on PI claim history below). Within this framework it is understood that some projects will have wider commercial drivers out with the railway, and these will not be subsidised from the risk funds, but that alternate approaches, such as project specific insurance may be appropriate. Professional Indemnity insurance Consultants and some management contractors are generally expected to have Professional Indemnity ( PI ) insurance which provides their customers (who will own the asset on completion) with comfort that, in the event that they incur losses as a result of the fault of the policyholder, they can recoup their losses. Depending on the nature of the company and the business they are involved in, the cover provided is generally between 5 million and 10 million. Such losses may arise either during the project, manifesting themselves as additional project costs, or, following completion, from discovery of latent design defects and required rework. Given that Network Rail in designing and implementing a project subsequently takes into use, operates, owns and maintains such assets, latent defects are for Network Rail s account, and not a liability matter for the customer. Thus Network Rail believes that PI for post completion is not appropriate. Indeed it could be argued in any case that Network Rail is incentivised to make sure the design meets the project infrastructure capability requirements.

2 The case put forward by some stakeholders is that if Network Rail had such a PI policy, Network Rail s liability cap could be increased to the level of the cover. Network Rail does in fact already have a narrowly drawn and limited PI insurance relating to certain other areas of our business but it does not apply to our enhancements business. Should Network Rail be required to broaden its PI cover to include its enhancements business, there are a number of issues that need to be taken into account. Other sources of recourse In the large majority of cases (in excess of 90%), Network Rail will procure consultants and/or contractors to deliver the services or works required by the customer. In this case, Network Rail will benefit from any PI cover that those firms have. Should the customer incur any losses as a result of the fault of Network Rail s consultant/contractor, Network Rail is obliged to claim compensation from them and pass any amounts received to the customer for their losses. If appropriate, the consultant/contractor would be able to cover the cost of the claim through its PI insurance. This is a very important point that we believe may not be understood or may have been overlooked by some stakeholders. Network Rail s roles Network Rail has and assumes a number of different roles in a project on the Network of which design management and management contracting are just two (the others include Network Operator, property owner, etc see Figure 1 below). This distinguishes Network Rail from most professional consultants and contractors who perform narrower roles as their principal or sole business. They can therefore be confident that, so long as they are trading, they will need to maintain their PI policy and can renew and allocate costs accordingly across their customer base. Any spikes in premium costs would have a limited impact on individual customers given the breadth of their customer base and volume of business. Given the disparity between the business of such companies and Network Rail s role in its enhancements business, Network Rail s customers would not benefit in the same way. Figure 1 Roles assumed by Network Rail on enhancement projects

3 Cost PI cover is generally very expensive typically premia are in the region of 10% of fee revenue to provide cover of 5 million, but, as the market is very volatile, premia often vary substantially from one year to the next. Should Network Rail be required to take out PI cover, this cost would need to be funded, presumably by its customers. However, based on experience so far, the large majority of customers would be reluctant to incur additional costs for something that they do not believe that they need (see below for further reasons why the majority of customers would be extremely reluctant to pay for PI cover). Therefore only those customers who require Network Rail to take out the cover should pay for it, and based on the premia indicated above, this is likely to be prohibitive if shared among a small number of customers. It is possible to take out project specific PI cover but again this is expensive and generally impractical although it might have a role for very large projects. PI policies generally include 12 year post completion cover to insure against claims that arise in the future as a result of the policy holder s fault. However, as Network Rail will take into use assets upon completion, customers would not benefit from such cover. An alternative exists in the form of current space insurance which provides cover up to completion of projects only. Non-contestable services Availability of cover and/or prohibitive costs would be a particular problem where Network Rail is providing asset protection services on a non-contestable basis. These services typically comprise provision of information, application of the safety management system, provision of access and granting of consents. The impact of not providing these services predominantly manifests itself through delay to a project. Such delay is covered through a liquidated damages regime, which is out with the insurable loss. Notwithstanding this, experience shows that insurers are very reluctant to provide PI cover related to these services as it is very difficult to identify losses that result directly from a failure by Network Rail to perform (other than delay which is not covered by PI insurance as mentioned above). Quality of cover and cost of recovery Another concern that stakeholders should be aware of is that PI insurance, like all insurance policies, is specific in what it covers. If Network Rail is required to procure PI cover, and increase its liability cap to correspond to the level of cover available in relation to its liabilities, it would need to match the risks that it is able to take in the template agreements with the risks covered by the policy. This might lead to customers taking additional risks that are currently assumed by Network Rail. The insurer could also require additional control steps, adding cost to the project. Secondly, PI policies are notoriously difficult to claim against and many claims are rejected by insurers. Even where a claim is successful, the cost in legal fees can typically amount to approx 50% of the amount recovered. Thirdly, policies will include an excess so that claims will only be payable over a certain amount. Such excesses are typically in excess of 100,000 and can be as high as 250,000. This would render PI cover redundant to the large majority of customers whose (relatively small value) projects are highly unlikely to generate claims higher than the excess. Other insurance DLA Piper also commented that Network Rail has no obligations to procure insurance other than what is required under the Network Licence. This is broadly limited to Public Liability insurance. DLA Piper goes on to say that there is a wide range of insurances available relevant to construction projects. Network Rail agrees with this point and requires its contractors to take out appropriate insurances. Whilst customers have the right to comment on the contents of works contracts, Network Rail would be happy to include in a new schedule to the templates a list of all insurances that apply to a particular project.

4 Limits of liability that Network Rail generally requires from their contractors relating to the various risks can be summarised in Figure 2 below. It should be noted that these limits are increasingly becoming the norm in the wider construction industry:- Figure 2 Contractor limits of liability 1. Design Negligence 2. Workmanship / Quality Remedial cost of physical damage &/or design defect & impact on Railway & other consequence loss Design Consultant 10m N/A 100% Contract Traditional Contractor Design & Build Contractor N/A No Cap 100% Contract 10m No Cap 100% Contract Goods Supplier N/A No Cap 100% Contract 3. Late Delivery 4. Interference with Railway during Performance of the Works N/A 100% Contract 100% Contract N/A Insurances held by Network Rail relevant to enhancement projects A statement of what relevant insurance Network Rail already holds, what additional insurance Network Rail would typically take out for 3 rd Party projects and how this insurance applies for different services and works under the template agreements is set out at Appendix 1. Stakeholders will be aware that Network Rail has already put in place a top-up facility for customers related to Public Liability insurance as part of the Investment Framework in 2004/5. Conclusions Given: low cost approach and broad liability coverage required by the majority of customers; the insurance recoveries available from consultants and contractors; post project completion where Network Rail undertakes design and implementation so Network Rail specific PI cover post completion is not appropriate; the wide range of roles Network Rail plays which are not consistent with PI coverage; the narrow coverage and relative high cost of PI insurance; delay not covered as addressed through liquidated damages arrangements; the potential for claims being disputed; and the proposition to set out levels of insurance held within the template agreements; Network Rail believes that it is highly questionable whether the customer s position would be enhanced by Network Rail obtaining PI cover on a general basis. For bespoke projects project specific insurance cover may offer a better solution when the requirements are understood.

5 Appendix 1 Network Rail Insurance - responsibilities and coverage This Appendix 1 identifies the insurance held by Network Rail. It discusses these in relation to services and works for enhancement projects, noting that where Network Rail procures services or works its consultants and contractors carry a range of insurance policies. Insurance coverage held by Network Rail As will be the case for most businesses, Network Rail maintains an insurance programme relating to its principal insurable exposures arising out of the organisation s activities through various policies. These policies form an insurable risk financing programme that includes self-insured retentions (eg excesses, exclusions and substantial involvement from Network Rail s captive insurance company) and external insurance provided by insurance companies, including: - Public Liability (meeting the ORR s requirements whereby cover should be to a minimum of 155m and subject to certain terms and conditions) - Construction Works cover for selected major projects (may be referred to as Construction All Risks) - Property Damage and Business Interruption - Employers Liability - Financial Lines - including Directors & Officers Liability, Pension Trustees Liability and Crime insurance - Motor 3 rd Party Liability Network Rail put in place a 6 year external insurance programme for Control Period 4 in April 2008 covering activities declared to its insurers. Network Rail s captive insurance company, which has an independent chairman, acts in the same manner as a normal external insurance company and is used to manage specific self-insured retentions below a 15m threshold level. Public Liability policy As part of the overall insurance programme the Public Liability policy has a Professional Indemnity liability add-on. However, as Network Rail is not a traditional professional services company, coverage is provided only for specific areas declared to insurers. Network Rail s insurance programme coverage in respect of enhancement projects The insurance programme is framed to cater for a wide range of activities that Network Rail engages in, including enhancement projects. Should an insured event occur arising out of such project, that falls within the scope of coverage (e.g. Network Rail has sustained loss or is demonstrated to be liable), then the relevant policy would respond. There are some important caveats to note however: - While an insurer may respond to a claim under our programme, it will then have the benefit of subrogation rights against any third party that may be liable. - As mentioned above, Professional Indemnity cover is only insured by Network Rail for specific areas, where such liabilities have been identified. In view of the present contractual position regarding funding of risks / liabilities for enhancement projects, Network Rail does not insure Professional Liability resulting from services provided for projects under the ORR s Framework for Investments conditions. Coverage is however

6 provided to the extent that such breach of professional duty etc results in injury or property damage. - Our coverage is based on our declaration of material facts to insurers, including description of the contractual framework through which Network Rail deals with third parties. Should such contractual liabilities or responsibilities change, this would be a material change under which insurers would be entitled to review the terms, conditions and premium charged to us. Network Rail does not otherwise specifically take additional insurance for 3 rd Party projects. The coverage Network Rail holds does not apply differently under the range of template agreements used, but the insurance exposures placed on Network Rail under these template agreements will of course vary, and so our own insurance coverage may often not be particularly relevant to the services or works in question. Insurance risks will be primarily carried by Network Rail appointed contractors and consultants undertaking works and services. Network Rail has arranged a facility allowing customers to access our Excess Public Liability insurance programme in respect of the customer s third party liability exposures. This is discussed further in the next section. 3 rd Party projects insurance responsibilities There are several types of template agreements used. It is not the purpose of this document to review each in detail, but an overview of the current allocation of insurance responsibilities under the main types is set out below: A) Asset Protection Agreements insurance responsibilities rest with the customer in respect of their services and works. The customer should take out, or procure that their consultant and/or contractor takes out:- - Contract Works insurance - Professional Indemnity insurance - Public Liability Insurance. The level of Public Liability Insurance required is generally 155m, in line with the ORR minimum requirement for railway related works. Network Rail has put in place an insurance arrangement to address concerns from customers in meeting the 155m level, whereby the customer can access coverage above 25m up to 155m at competitive premium levels for their project. This is an optional facility; the customer can maintain its own cover to 155m if it so chooses. Basic Asset Protection Agreements in their template form do not prescribe insurance to be held by customers in detail, but refer to the need for appropriate Public Liability and Professional Indemnity cover to be held by the customer. B) Implementation Agreements as these agreements deal with Network Rail s implementation of services and works, the insurance responsibilities arising are dealt with by Network Rail in the procurement process with its consultants and contractors. The Network Rail suite of procurement contracts will allocate responsibility for taking out appropriate insurances. While the specific requirements will vary depending on the form of contract appropriate to the works, the contracts will normally place responsibility on the contractor to insure: - Contract Works - Contractors Plant - Public Liability (excess Public Liability cover is provided by Network Rail to its contractors up to 155m) - Professional Indemnity (where appropriate)

7 - Employers Liability and other insurance the contractor may be obliged to hold by law As with many employer / contractor relationships it is often more appropriate for the contractor to insure these risks rather than the employer (as is recognised in the APA which allows the customer to procure insurance through their contractors). For selected major projects, Network Rail may insure Public Liability and Contract Works for the project on behalf of its contractors. The Implementation Agreement further requires that Network Rail maintains its own Public Liability insurance as required under the Network Licence, which is catered for under our insurance programme detailed earlier. While perhaps not appropriate to prescribe each class of insurance in the Implementation Agreement, Network Rail has stated that it would be happy to include in a new schedule to the template a list of all the insurances that apply to a particular project. C) Development Services Agreements Network Rail procures that each proposed Consultant with a design responsibility effects and maintains appropriate professional indemnity and public liability insurance. D) Basic Services Agreements do not currently refer to any specific insurance requirements, but do record that recoveries made from consultants insurance would not count towards the Network Rail liability cap. It is noted that the template agreements are subject to a current review process and the current drafts under consultation contain insurance requirements and references that are generally consistent with the above summary.