"Potentially project insurance is a whole-life insurance, whereby the insurer is involved in a project from the very start," says Egan. "We are looking for ways to support the integrated team approach so there is more than just a jumble of [insurance] companies involved in the construction process."
Under the plan insurers would become members of an Egan-style integrated team, taking part in preliminary planning, having a say in safety and quality issues and managing risk. Many in the industry agree that it is time to rethink insurance. Egan-inspired insurance ideas have been in the air for some time but now, with professional indemnity premiums soaring after last year's collapse of Independent Insurance, and with other insurers still reeling from the effects of 11 September, the pressure for change has ratcheted up dramatically.
But Egan's main concern is to give construction clients a better deal. With each team member buying a separate policy, there is a huge amount of overlap and inefficiency, which the client eventually has to pay for. The Design Build Foundation has calculated that the level of duplication amounts to £1bn – or 1.5% of construction's annual turnover.
Under the new system an insurer would provide cradle-to-grave protection for the client, and any other members of the team that wanted to be named as beneficiaries.
What's wrong
Apart from the rise in premiums, influential clients, including developer Stanhope and NHS Estates, as well as professional bodies such as the Association of Consulting Engineers, are starting to say that the present system encourages adversarial relationships between consultants and contractors. They say the rise of partnering, which includes sharing risk and responsibility, makes the old-style insurance irrelevant.
Under the present system, a project's design and construction phases are insured separately. Contractors take out a policy called contractors all-risk insurance (CAR), which covers loss or damage attributable to unforeseen accidents that might befall a structure under construction. Designers, specialist contractors and other consultants are covered by their own indemnity policies. Stephen Bamforth, managing director of insurance broker Griffiths & Armour Professional Risks, agrees that this system perpetuates adversarial relationships. "In order to claim on a consultant's professional indemnity cover, the client must prove that the designer is at fault," he says. "Therefore, the system is triggered by blame; the client has to consider whether the architect, structural engineer and so on has caused problem. If the consultant raises an objection, the case goes to court, which can take up to five years to resolve. In the mean time, the client is left with a defective building."
Another problem is that neither CAR nor professional indemnity covers defective workmanship. "Only the contractor can be blamed for defective workmanship, after all, this is the company that actually builds. Therefore, there is a tension between contractor and designer," says Bamforth.
Under this system, the contractor must work exactly to the architect's designs – or risk exposure to claims if a problem crops up. This, Bamforth says, is an inefficient management of risk, which can discourage innovation and the re-engineering of project designs to cut costs. Under project insurance, design and works insurance would be brought together.
The alternative
Under the alternative, building works and materials would be included in a single insurance package that would also provide 35-year post-completion cover. Even more radically, it would install the insurer as a project partner.
Members of the traditional team would probably have mixed feelings about making room for a new and powerful member, but it would be essential to making the system economical.
Traditionally, project-type insurance such as that for latent defects has been expensive. But, according to Egan, insurers would feel "happier" about providing project insurance if they took an active role managing risk and sharing in the project's rewards. Whether feeling happier would lead to lower insurance premiums is, however, still an untested hypothesis.
The Movement for Innovation, one of the state-sponsored bodies set up to implement the Egan report, has put together a model of the ideal project insurance policy as part of its "Trust and Money" model. This considers the client, contractor, consultant and insurer as part of one virtual company. The guiding principle is that the client would not need to identify which company had made a mistake in order to make a claim.
Martin Davis, the movement's committee member and vice-chairman of M&E contractor Emcor Drake & Scull, explains: "We are saying design and construction cannot be separated. Liability for damage, human error – they all need to be covered in a single policy. Who actually takes out the policies is immaterial – the point is that everyone would be named on it." The project's losses or rewards would be divided according to a formula agreed by the team at the start of the project, which should mean the different companies' interests are aligned.
Not everyone is convinced.
Will it work?
One objection is on the grounds of fairness. "If somebody has failed to do their job, then other companies shouldn't have to pay," says Mark Whitby, president of the Institution of Civil Engineers. "The reality is that the team might be gone by the time the problem shows itself." Whitby also believes that involving insurers in project design could lead to architects and engineers being undermined.
Another objection is about practicality. How are insurers to be convinced to issue untested project insurance policies? M4I says it is "in talks" with major insurers such as Zurich, but the insurance market has hardened considerably since 11 September. So can they really be expected to start experimenting with radically new policies?
Bamforth is convinced that if clients buy into the concept, the market will provide. "The ultimate test of partnering is: we will not sue. To achieve this level of confidence, construction risk must be re-evaluated. And more and more clients understand this," he says.
Construction clients are eager to see project insurances made available by insurers as more and more believe that they are ultimately paying the cost of inefficient insurance policies. NHS Estates is considering which of its projects could be used to pilot the movement's model with the intention of finding an efficient project-based insurance policy for its new Procure 21 contracts. "We are interested because we want improved value for money," says senior procurement manager Cliff Jones. "We are looking for a long-term strategy and the Movement for Innovation's ideas are very interesting – especially the idea of getting the insurer to form part of the team," .
Developer Stanhope has already shopped around for project-based policies – although it has so far been unable to find an affordable option, or one that insures for the lifetime of a building. Simon Jenna, project executive at Stanhope, says a "one stop" policy is sensible.
"It seems ludicrous that some aspects of a project have in effect doubled insurance – a single policy is potentially more economic. But it will require a lot of developers to drive it forward, and brokers will have to shop around to find insurers prepared to take on such a policy," he says.
M4I appreciates that its insurance model is demanding huge cultural shifts in both the insurance and construction sectors, but this isn't putting it off. "I liken it to how it must have been to get somebody to fly an aeroplane for the first time," says Davis. "It took just one person to show it could work."
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