What Happens When Things Go Wrong? – CCPPP Conference 2016 Panel

Panelists:

David Bowcott, Global Director – Growth, Innovation & Insight, Global Construction and Infrastructure Group, Aon Risk Solutions

Paul Hughes, Senior Director – Cost Consulting & Project Management, Altus Group Limited

Brian Kelsall – Partner, Fasken Martineau

Edmund Mahabir – Executive Vice President of Public Private Partnership Infrastructure and Construction, Carillion Plc

When asking a P3 developer to discuss what happens when things go wrong the response we often receive is – “Nothing ever goes wrong!”  The truth, of course, is that some projects do have issues which cause damage or delay.  INTECH’s panel at C2P3 attempted to delve into the types of events, which can delay projects and what the current statistics show in terms of where the majority of the events are coming from.

Aon Risk Solutions provided detailed statistics with respect to the types of events that they have received notifications on.  As Aon has placed 85% of the P3 projects in Canada they have unique insight into the types of events that are being reported.

They provided statistics from 2011 and 2016 to show the types of incidents that were causing problems on projects across Canada.

Property Damage – Where the Time and Energy is Spent!

In INTECH’s infrastructure practice, we spend a tremendous amount of time discussing what would happen if there is a fire, flood, earthquake, etc. at a project site.  When looking at the statistics Aon presented it is obviously that property damage makes up a small portion of the actual events.  These events are typically insurable either under the all risks builder’s risk or all risks property policy and they are very easily settled.

The insurer pays the cost to replace or repair the damaged property including the ensuing loss of income that arises from the physical damage.

A great example raised on the panel discussion was the fire at Peel Memorial Hospital.  This type of claim was settled swiftly by the all risks builder’s risk insurer and the project was able to get back on track.

Pollution Incidents – A Real Concern

Not all jurisdictions require pollution insurance as part of the Authority’s requirements in the Project Agreement. Furthermore some jurisdictions have more comprehensive language surrounding undisclosed environmental hazards than others.  The panel dealt with the Ontario precedent with respect to environmental issues.

We looked at a Carillion Canada project called the Centre for Addiction and Mental Health located in Toronto, Canada. Carillion Canada revealed that during the initial drilling stages of the project they hit a pocket of methane gas which caused a “puff and a bang”, which caused the Ministry of Labour to shut down the site while the cause was investigated.

The pocket of methane did not cause an order to remediate from the Ministry of the Environment, nor did it cause bodily injury or third party property damage.  For these reasons, the pollution legal liability policy, which had been placed, did not respond as no loss had occurred.  The project also had a contractor’s pollution liability policy in place, which covers the event that the contractor causes the pollution or exacerbates an existing pollution condition. Neither of these situations were active in this pollution incident and therefore there was no insurance policy response.

The event was actually dealt with under the Project Agreement as the methane gas was not properly inferable, readily apparent or readily discoverable from the site information provided to Project Co. Carillion confirmed they were made whole under the Project Agreement due to the fact that the methane gas could not be detected by Project Co.  Therefore, while the insurance policy did not pay out the CAMH example shows that the Project Agreement responded correctly to an undisclosed environmental hazard.

The statistics provided by Aon did provide glaring evidence that pollution incidents cause problems on projects.  Not all jurisdictions require for developers to carry pollution legal liability or contractor’s pollution liability, but in INTECH’s opinion these are essential insurance to carry in order to appropriately protect the Project.

Professional and Workmanship Claims on the Rise

What is perhaps most striking with respect to the statistics provided by Aon is that professional liability including design error and workmanship incidents, which include faulty workmanship, subcontractor failure and subcontractor non-performance made up 70% of the incidents reported in 2016 compared to 60% of incidents in 2011.  In INTECH’s opinion this points a few major areas that require specific attention:

• Professional Liability Insurance. Ensuring a proper professional liability program is in place for each project is essential.  The numbers of incidents show the importance of purchasing sufficient, project specific limits, to deal with design issues on a project;

• Contractual risk transfer is key!  It is important to have contracts structured in a way that do not limit a design professional’s liability to their fees.  With respect to workmanship issues, it is important to tailor contractual language to keep either the sureties or the subcontractor default insurance on the hook for as long as possible to deal with any latent defect issues.

• Don’t go into a project without proper QA/QC.  Proper due diligence on the design partners as well the contractor and subcontractors is vital to the success of a project.  It is worth spending the time up front to complete this due diligence in order to save a headache later on in the project.

• Communication. When looking at the nitty gritty of many professional or workmanship issues there has often been a communication breakdown between the parties.  When choosing a partner it is imperative that the general contractor and the design team and / or the subtrades keep open good lines of communication.  Communication can often prevent a design error from materializing or can ensure that a latent defect is fixed quickly and smoothly post Substantial Completion.

An investment in upfront due diligence can save developers a lot of headaches on professional liability issues and workmanship incidents throughout the project.

In Conclusion

No one project is isolated from incidents but P3 projects are still highly successful.  Of the statistics shown only 30 incidents of approximately 230 projects were reported in 2016.  This means that only 13% of P3 projects have incidents, which could lead to delay making the P3 delivery model an excellent option for providing on-time and on-budget delivery of infrastructure assets.  While there have only been 30 incidents the importance of proper due diligence and continued vigilance on the areas causing problems is highly recommended.  Complacency could lead to those numbers jumping dramatically – proper due diligence and a comprehensive insurance program to deal with issues when things go wrong is the best path forward to ensuring success of any project.

Follow us online for full live coverage of the event.

For more information on infrastructure projects or claims handling procedures reach out to our expert team at INTECH:

SARAH ROBERTS
President B.A. Hons, CRM, MBA
Global Practice Leader – PPP and Project Finance
Tel: +1-416-348-1365
Email: sroberts@intechrisk.com