Protecting P3s

Hospitals, schools, hydro plants, wastewater treatment facilities, roads, tunnels and bridges — they are critical structures in our lives, providing our healthcare, educating our children, lighting houses, fuelling cars and providing routes to work or wherever else we want to go. State-of-the-art infrastructure is essential for a nation’s overall prosperity.

However, cash-strapped governments, from local municipalities to provincial agencies, are finding it more difficult to provide the capital necessary to maintain and build new infrastructure. These new infrastructure projects are necessary to maintain a healthy, competitive economy and drive economic growth. Consequently, governments around the world are employing unique partnerships with private businesses, called P3s, to get the projects built and to create revenue-producing opportunities as well. To keep P3 projects moving forward, strong partnerships with insurers are equally important to construct the right insurance protection. 

P3 Projects

Public-private partnerships, or P3s for short, have been quite successful in Australia for years and are a very well-established trend in Europe. P3s have generated some interest in the United States as well.

Here in Canada, P3 projects have created considerable momentum in the construction industry. Renew Canada, an infrastructure-focused magazine that lists the Top 100 infrastructure projects in Canada, reports that the 2012 tally of these infrastructure projects is valued at around $114.2 billion.

This list includes 29 new projects that added an additional $30 billion in infrastructure investment in Canada this year alone.

Supporters of the P3 approach cite benefits that include expedited completion, project cost savings and improved quality and performance. P3s also have detractors, who argue that the projects ultimately cost the taxpayers more than traditional public funding would.

However, the Canadian government sees so much more potential in replacing aging infrastructure or developing new resources through P3 partnerships that it created the P3 Canada Fund to help improve the delivery of public

infrastructure and increase the effectiveness of P3s. It is the first infrastructure funding program anywhere in Canada that directly targets P3 projects.

Building a Partnership

How does a P3 work? A public entity partners with lenders and contractors willing to invest in a project — be it a toll road, hospital or a hydro-electric plant — and work together to develop, design, construct, operate and maintain the new infrastructure. Together, they form a concessionaire, a special-purpose entity specifically incorporated for the project. The concessionaire handles the various business aspects of the project, including contracts with a contractor and buying the insurance required for these projects. Once the project is completed, the concessionaire then operates or maintains the facility or structure for a given period of time. After that time, the project would revert back to public entity ownership. If all goes as planned, the private entity gets a nice profit and the public entity fulfills its responsibility to provide infrastructure for the public’s benefit.

Proponents of P3s believe that because all involved parties are financially invested in the project, an incentive exists to keep the project on schedule, as well as to reduce risks that may stand in the way of completion or inflate project costs. Since contractors involved also stand to reap profits from the finished project, the workmanship and design is believed to be more effective and efficient. Hence, managing the risks of a P3 requires a much more integrated and coordinated effort between all parties because everyone has “some skin in the game.” 

Constructing Coverage

Governments require P3s to buy project-specific insurance. While this is not unusually different from traditional construction risk issues, a P3’s insurance considerations are more complex because multiple entities are involved.

Depending on the project, the parties determine their coverage requirements and design a specific insurance strategy that most likely would include:

• Course of Construction (CoC) or Builder’s Risk, which provides property protection through the course of construction for project delays, wind, flood and earthquake. Policies can be packaged to the initial phase of operational risk as well. Policy terms on these programs can run up to 10 years. 

• Professional Liability (PL) for Contractors to provide third-party professional liability. For P3 projects, the product can be designed to include excess indemnity, protective coverage, mitigation coverage, wrap-up coverage and any potential gaps in professional liability coverage for individual contractors working on the project. For some projects, contractor’s pollution liability coverage can be packaged with PL coverage instead of having to purchase a standalone environmental policy. 

• Environmental or pollution insurance to address pollution conditions that arise from operations performed by or on behalf of the P3 project or its job site.

To help control unexpected costs that might result in project overruns or decrease the project’s potential profits, this coverage also provides emergency remediation expenses to clean up a pollution incident at a jobsite.

Some environmental insurers can package professional liability coverage together with pollution protection. In either case — be it professional with some pollution coverage, or pollution with some PL coverage — concern about adequate limits is prompting P3s to purchase standalone policies. One major pollution incident, for example, could eat away at shared limits of a project’s professional liability protection.

Additionally, based on the large size of many P3 projects, there is increasing interest in having dedicated coverage limits. This allows P3 participants to build towers of coverage using various layers of excess in different lines to address their risks more thoroughly. Standalone coverage carries the added advantage of being delivered by dedicated underwriters who specialize in that business line; also, it comes with dedicated risk control and claims handling.

Other possible coverage pieces that can help build a project insurance program include construction wrap-ups, surety bonds and subcontractor default insurance, a fairly new coverage in the market that provides coverage for economic loss of a general contractor or construction manager caused by a subcontractor’s performance default (including direct and indirect costs). Sureties typically protect the public sector from contractor performance issues, but some sureties are also providing bond protection to the financial community.

Especially for P3 participants that are always looking for ways to prevent possible delays and protect profit margins, construction-specific risk control or safety training offered by some construction insurers are value-added benefits of their insurance programs. These services might include helping to pre-qualify subcontractors, jobsite safety training and contract reviews. In Canada, only a few carriers are capable of addressing all of the construction coverage requirements of P3s. Although working with multiple insurers can add to the complexity of a project, especially if a claim arises, most carriers are accustomed to working with their industry colleagues to help P3s develop a comprehensive combination of coverage. However, special attention needs to be paid to potential coverage gaps and how each line of coverage interacts with each other. P3s projects are typically not finished quickly, and so the length of policy terms and insurer tenure is another factor widely considered in buying P3 coverage. P3 partnerships can last for some 30 years.