Lexpert
Introduction to PPP Construction Insurance and Performance
Security Requirements
06 December 2012
Presented by
David Bowcott
Senior Vice President and National Director
Maurice Audet
Senior Vice President
Aon Risk Solutions™
Construction Services Group
Infrastructure Services
Infrastructure
Ontario
Agenda
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A Bit About Aon
Basics of P3 Insurance and Performance Security
Uninsurable Risks in Insurance and Performance Security
When Disaster Strikes – how insurance and performance security
requirements respond to various participants’ needs
• IOCIP – impact on IO AFP market and the insurance market
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.
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Ontario
A Bit About Aon
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.
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Infrastructure
Ontario
Aon’s Credentials
• Our market share in Canada
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Broker and advisor to 12 of the top 15 contractors in Canada
Broker and advisor to over 50% of the Top 100 Projects
Broker and advisor to over 80% of all Canadian Public Private Partnerships
Over 2,500 construction clients
• Aon swims in the largest pool of construction risk management
transactions in Canada
The following presentation reflects our perspective
given our pool
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The Goal
Cost
Effective Risk
Communication
Insurance
Brokerage and
Advisory Costs
(100’s of Thousands)
Insurance and
Performance
Security
(Millions)
Cost of
Construction
Cost of
Operations
Cost of
Capital
(10’s of Millions) (10’s of Millions) (100’s of Millions)
Unnecessary Risk
Contingency
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Ontario
Insurance and Performance Security in the World of P3s
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Ontario
Basics of PPP Insurance and Performance Security Key Features
• Keys are alignment with on time, on budget, and as per specification
objectives
Changes as a result of this alignment:
1. Scope of coverage
– The broader the better
– The lower the deductibles the better
2. Liquidity/Responsiveness
– The faster the better
3. Better integration of covers
– Eliminate the finger pointing between policies
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Infrastructure
Ontario
Basics of PPP Insurance and Performance Security – A
Project Centric Approach
Procurement
Agency
Developers
The Public
Sponsors
Project-Centric
Approach
Debt
Participants
Equity
Participants
Contractors
Designers
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The Goal - No Gaps Between Buckets
All Risks
Risk
Controls
Risk
Controls
Builders
Risk
Risk
Controls
Contractor
Policies
WrapUp
Professional
Pollution
Liquidated
Damages
Insurance
Sub Default
Insurance
Letter of
Credit
Force
Majeure
Insurance
Surety
Uninsured Risks
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Expanded Solutions (PPP/Quality Driven)
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The Basics of P3 Insurance
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Basics of PPP Insurance and Performance Security –
Products
Common Insurance Covers – A “suite” of core coverages:
• COC
• Wrap-Up
• Professional
• PI
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Basics of PPP Insurance – Alignment with Project Risks
• Beyond the limits and deductibles (though they are important too)
• Identify specific risks and their impact on project delivery objectives
• Determine insurability based on insurance market appetite for risks and
cost for risk transfer
• Then design solutions that strike the acceptable balance within the
stakeholder group
• This process potentially varies within the main “camps” of a project and
within the stakeholders within these camps:
– Sponsor
– Project Co
› Lenders
› DB Contractors and Designers
› Project Co / Equity
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Basics of PPP Insurance – Key Features
• Lenders:
– Financial security ratings of insurers
– Control over insurance mechanics
› Control must remain with the party to whom they are lending
– Control of claims proceeds
› Loss payable
› Insurance Trust Agreements
– Non-cancellation
› Except for non-payment of premium, suspension of project or termination of the Project
Agreement
– Non-vitiation
– Exclusivity of insurance
› Not shared with risks in which they hold no financial interest
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Basics of PPP Insurance – Key Features
• Sponsors
– Balance between price and coverage, though more is often better so they
can transfer more risk
– Alignment with supervening events as it reduces compensation
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Basics of PPP Insurance – Key Features
• Project Co/Equity
– Compliance with specifications – tick the box
– Price – low bid still wins in the PPP world
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The Basics of P3 Performance Security
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Performance Security Defined
Any security used to guarantee the performance
of entities contracted to complete project work
Broader definitions see all security (including insurance) as performance
security
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Key to Contractor Performance Security –
Striking the Balance
Acceptance of
Security by
Debt (and Equity)
Contractor
Balance Sheet
Constraints
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Basics of PPP Construction Performance Security –
The Options
Common P3 Performance Security
• Parental company guarantees (PCGs)
• Letters of credit
– Traditional and EDC Performance Security Guarantees
• Cash reserves
• Surety bonds - Traditional performance bond and payment bond
• Subcontractor default insurance (Subguard®)
Future Potential Solutions
• Liquid surety – Performance bond with loss advance
• Cap Assure – DB contractor cover with sub default insurance
NOTE: There are several others (be aware)
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Basics of PPP Performance Security
Some Helpful Hints
• Know all the performance security options
• Read all agreements to ensure alignment of performance security
requirements
• Read the actual performance security documents
– Watch for conditionality that doesn’t conform with agreements
• Watch carrier ratings
• Use performance security consultants/brokers
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The Uninsurable
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Traditionally Perceived Uninsurable Risks…
• Defect
– Design, labour and materials
• Force majeure
– Strikes, lockout, embargo
• Weather events
– Weather events causing pure delay without causing property damage
• Economic
– Commodity price, currency and labour cost fluctuation
• Delay or cost overrun
– Schedule slippage
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…but the lines are getting blurry
• Fifty Shades of Grey…
• Lines between uninsurable and insurable are less clear because of
coverage innovation
Case Study No. 1: Construction Defect (Faulty workmanship)
• Scenario 1 - During construction defect discovered
• Scenario 2 - Defect causes damage to project
• Scenario 3 - Defect during completed operations
Case Study No. 2: Project Delay
• Scenario 1 – Damage to project during construction
• Scenario 2 – Supply chain disruption
• Scenario 3 – Contractor or subcontractor failure
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When Disaster Strikes – Selected Examples
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When Disaster Strikes – How Insurance and
Performance Security Responds
Case Study No. 1: Hurricane Hazel Redux
Background:
• 1954: Hurricane Hazel spills over to GTA, Don River floods
• 2007: ORC begins construction of Flood Plain Landform (FPL), taking
area from West Don Lands to Bay Street from the 300 yr. floodplain
• 2011: Construction begins of Pan Am Athletes’ Village – an AFP project
and part of major overall waterfront redevelopment in the area
• 2011 and 2012: New York City sustains direct hits from 2 hurricanes
• What if Toronto is next?
Discussion and Analysis:
• If coverage properly crafted:
– Flood coverage
– Windstorm coverage
– Pollution liability coverage
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When Disaster Strikes – How Insurance and
Performance Security Responds
Case Study No. 2: Insolvency of Major Subcontractor
Background:
• Currently over 20 Social Infrastructure APFs under construction
• Valuations into the billions of dollars
• On social infrastructure M&E could represent 30% to 40% of contract
• In the large space there are limited options for M&E
• What if one of them becomes insolvent?
Discussion and Analysis:
• Focus on performance security
– surety, sub default insurance, LCs, PCGs, etc:
• Things to look for:
– Look closely at the wording of the instruments (conditionality is an issue)
– Liquidity and responsiveness is vital (secure the people, status of payments)
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IOCIP Explained
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What is IOCIP?
• Infrastructure Ontario Construction Insurance Program (IOCIP)
• “Suite” of project-specific construction insurances:
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Builders’ Risk
“Wrap-Up” CGL
Pollution
Professional
• Concept developed and in place since 2008
• Transactional construction insurance services on IO AFP infrastructure
projects through a “sponsored program” concept
• IO mandates Project Co purchase their main construction insurances
through IOCIP but retains control of administration and claims
management
• Over 27 projects and $10.5 billion in construction values have passed
through
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IOCIP Benefits
• Lower insurance costs – benchmarked at delivering rates better than
30% lower than best-in-market transactions – generating over $35
million in savings since 2008
• More comprehensive coverage – over 90 coverage innovations
automatically included – many have rewritten the book on construction
insurance in Canada
• Flexibility – all asset classes, all proponents are eligible
• Consistency – since inception, no premium increases or reductions in
coverage; program is locked in by contract with insurers
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Thank you
Aon Risk Solutions™
Construction Services Group
Infrastructure Services
20 Bay Street, Toronto, Ontario
Tel: