The Joint Code of Practice for Risk Management of Tunnel Works in the UK (September 2003) signals the beginning of underground construction risk management by the giants of the world’s insurance industry – the global reinsurance companies.
Reinsurance companies are ultimately responsible for paying for loss and damages under insurance claims on major underground construction projects around the world. In recent years they have suffered massive losses for underground construction failures, such as the Heathrow Express collapse.
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As a result, availability of insurance on major projects has been difficult (and expensive) to obtain. The re-insurers have made no secret of their position – frankly many don’t want the business, at any price. It is often forgotten that reinsurers are businesses, under no obligation to provide insurance.
Because disasters in underground construction often require more money to rectify than the entire project cost, it is in the interest of these reinsurers that world best practice be used to identify and manage known risks on the projects they choose to insure.
The joint work between the British Tunnelling Society (BTS) and the reinsurers to produce the Code will provide some comfort to the reinsurers – perhaps effecting cost and availability of cover. However it will also impose demands, which may increase project costs. The Code was compiled by representatives from many of the world’s reinsurers including Allianz, Swiss Re, Zurich, SCOR, ER Frankona, Munich Reinsurance Company, Royal and Sun Alliance and Gerlling in collaboration with the BTS.
Put bluntly, the reinsurers now demand that for tunnel projects in the UK, in excess of one million pounds, contractors all risk insurance (insurance for the physical loss or damage to the contract works) will not be available unless the Code is followed. The Code effectively mandates compliance.
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By GlobalDataIndeed, it is anticipated that under new contracts of insurance the provisions of the Code will not only be enforceable by the insurance company, but if they are not so enforced the contract may be suspended or indeed cancelled.
In substance this mandates the use of the Code in the UK. No funding organisation would tolerate investment in an underground project that does not have both contractors or risk insurance and third party liability insurance (insurance purchased to cover the financial consequences of damage to third party property or bodily injury to other third parties arising from the contract).
By the reinsurance companies making compliance with the Code mandatory, they have in substance done what Regulators have been unable to achieve. They have set down a methodology for the assessment and management of risks in underground construction.
What methodology has the Code adopted?
Interestingly the broad methodology adopted within the Code is one of the traditional ALARP or “as low as reasonably practicable” approach. Such an approach is regularly used in common law countries and reflects the common law worlds approach to liability identification, evaluation and allocation of risks.
Its adoption illustrates the importance placed by the reinsurance industry on being able to document not only that a risk management process has occurred, but that the process underlies project decision making.
In this way, reinsurers are embracing the evidentiary requirements of the common law legal world by entrenching documentation provisions within the Code.
The broad process of risk assessment and management is consistent with that found in other industries. Broadly the five-stage process of identifying hazards is:
Importantly the term risk is defined as, “the consequence or severity of a hazard multiplied by the likelihood or occurrence of a hazard”; “hazard” is defined to include:
The type of risk assessment proposed is essentially a combination of both qualitative and quantitative risk assessment, which is a formalised process identifying hazards and evaluating their consequences and the probabilities of occurrences, together with strategies appropriate for preventative and contingent actions.
On the role of insurance
It is specifically noted in the Code that, “insurance should not be considered as a contingent single mitigation measure in risk assessments for tunnel works.” This statement highlights the underlying theme of the Code. In many circumstances insurance is used as a mitigation measure in major infrastructure works.
Risk register
A risk register is also required pursuant to the Code. A risk register is a document that clearly identifies ownership of risks and describes clearly and concisely how the risks are to be controlled, mitigated and managed. It is contemplated that the risk register will be a “live” document that is also auditable, thereby demonstrating compliance with the Code.
Client expertise mandated
The client must have the technical and contractual management competencies in relation to the project during planning, design and procurement and construction stages and project development studies.
Not only are client competencies mandated but it is specified how they will be demonstrated and evaluated. In the absence of demonstrable expertise, the client must appoint a client’s representative who meets the deficits in the client’s technical and contractual management competencies. Indeed the key personnel in the client’s representative must be individually named and their availability confirmed.
Project development stage
There are some important general provisions in the project development stage provisions of the Code. For example during this stage it is a requirement that the scope of work required, “shall not be constrained by programme considerations …”
It is a mandatory requirement that the client must have sufficient time and budgets to: “Investigate and subsequently demonstrate the technical viability of a project prior to proceeding to the construction procurement stage” and “prepare designs appropriate to the form of contract to be adopted”
In other words if the time lines are too tight or there are insufficient funds during the project development stage, insurance may be withdrawn and the project effectively stopped.
Site and ground Investigations
Provisions with respect to ground investigations reflect the fundamental importance of an understanding of the site and ground conditions in tunnelling projects. The ground reference conditions or geotechnical base line conditions prepared must form part of the contract and must provide the basis for comparison of ground conditions encountered, in relation to those assumed and allowed for at the tender stage by the contractor.
This requirement provides clear leadership in how to resolve the age-old conflict between ground conditions encountered and those assumed during tendering. It is a pleasant change from the sometimes encountered practice where contractors are required to assume the risk of underground conditions (often unfairly on the basis of limited underground information) and the client taking advantage of the contractors risk.
Evaluation of project options
There are specific provisions with respect to the process and evaluation of project options, which include identification and evaluation of associated option related hazards and consequent risks.
There is a requirement that these options be analyzed from a risk assessment point of view and there be a formalised risk assessment for each identified project option. For each of these options it is suggested (but not mandated) that overall estimates of cost and time for each project option, with costs assigned to appropriate activities, be known.
Transfer of information between designers
There is a specific requirement that the client is responsible for ensuring that all information developed and collated during one design stage is made available to the designer of the next design stage, including the risk assessment and risk register.
Design process
The fundamental objective of the design process is stated to be achieving a “robust design”. A “robust design” is defined as being one where the risk of failure or damage to the tunnel works or the third party from all reasonable and foreseeable causes is extremely remote during the construction design life of the tunnel works. This requirement is hardly surprising given this is the criteria by which the reinsurers become liable.
In other words the Code sets the fundamental objective of the design process as being to minimize the likelihood of an insurer having to payout.
This is quite a different fundamental design objective than that normally demanded by a client whom is often more driven by political time lines and/or budgetary constrains than the robustness of the design.
Any doubt about the significance of the primary objective is removed by the provision in the Code, which mandates that low frequency events that could affect the works or a third party are also to be considered. In other words, items that have been analysed from a cost benefit analysis in the risk analysis that would normally be rejected are nonetheless to be specifically included as they are a mandatory requirement in the design process.
Management of change
The importance of change management is reflected in a separate section within the Code, which deals with management of change. Not surprisingly any changes to the design or method of working, which result in a greater assessed risk to the project or a third party, must be advised to the contract insurers immediately.
Even value engineering (the method by which costs are reduced and/or time for design and construction process) has to be submitted for approval to the client including a statement setting out the full technical benefits and consequence of the proposal together with an analysis of its project risk impacts.
All changes to the construction process or design from that envisaged at the commencement of the contract are mandated to be included on the risk register and the risk analysis revised accordingly.
Conclusions
The Code provides a glimpse of what may become the future position of reinsurers with respect to construction and third party risk insurance in major underground projects throughout the world. By linking the availability of such insurance to the provisions of the Code, reinsurers have effectively dictated a minimum standard through a predefined methodology for the management of risk in underground construction.
The Code will make project insurance more available and focus attention on systematic risk analysis to support decision making – and these are both desirable outcomes of the Code.
Only time will tell whether the Code reduces the actual risk of underground construction.
