lexpert introduction to ppp construction insurance and performance security requirements 06 december...

LexpertIntroduction to PPP Construction Insurance and Performance

Security Requirements06 December 2012

Presented byDavid Bowcott

Senior Vice President and National DirectorMaurice Audet

Senior Vice President

Aon Risk Solutions™Construction Services Group

Infrastructure Services

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.2

Infrastructure Ontario

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Agenda• 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



A Bit About Aon

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Aon’s Credentials• Our market share in Canada

– 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



The Goal

5

Co

st

Insurance Brokerage and Advisory Costs

Effective Risk Communication

Insurance and Performance

Security

Cost of Construction Cost of

Capital

(100’s of Thousands) (Millions) (10’s of Millions) (100’s of Millions)

Unnecessary Risk Contingency

Cost of Operations

(10’s of Millions)



Insurance and Performance Security in the World of P3s

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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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Basics of PPP Insurance and Performance Security – A Project Centric Approach

Sponsors

Debt Participants

Equity Participants

Designers

Contractors

The Public

Developers

Procurement Agency

Project-Centric Approach



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The Goal - No Gaps Between Buckets

Uninsured Risks

All Risks

BuildersRisk

Letter ofCredit

Pollution

Wrap-Up

Sub Default Insurance

Professional

ForceMajeure

Insurance

LiquidatedDamagesInsurance

Surety

ContractorPolicies

RiskControls

RiskControls

RiskControls

Expanded Solutions (PPP/Quality Driven)



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



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

ContractorBalance Sheet

Constraints

Acceptance ofSecurity by

Debt (and Equity)



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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



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 operationsCase Study No. 2: Project Delay• Scenario 1 – Damage to project during construction• Scenario 2 – Supply chain disruption• Scenario 3 – Contractor or subcontractor failure



When Disaster Strikes – Selected Examples

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When Disaster Strikes – How Insurance and Performance Security Responds

Case Study No. 1: Hurricane Hazel ReduxBackground:• 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 SubcontractorBackground:• 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)



IOCIP Explained

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What is IOCIP?• Infrastructure Ontario Construction Insurance Program (IOCIP)• “Suite” of project-specific construction insurances:

– 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

Aon Risk Solutions™Construction Services GroupInfrastructure Services

20 Bay Street, Toronto, OntarioTel:

Thank you

lexpert introduction to ppp construction insurance and performance security requirements 06 december...

Documents

aon reed stenhouse

aon basics of p3 insurance

insurance market

construction clients

ppp construction insurance

infrastructure ontario

cost insurance brokerage

canada broker