Insurance risk

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Description (What is the Risk)

The risk that insurance for particular risks is or becomes unavailable

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner is responsible for taking insurance for the project at its own expense. The power purchase agreement is silent on the requirement with respect to insurance that the Private Partner is required to undertake. The insurance requirements will normally be stipulated by the lenders providing financing for the project under the Finance Documents.

Mitigation Measures (What can be done to minimize the risk)

The Private Partner should engage an insurance advisor to advise them on the insurance arrangement required for the project.

Comparison with Emerging Market

The Contracting Authority generally takes no risk of uninsurability.

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Description (What is the Risk)

The risk that insurance for particular risks is or becomes unavailable.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner has an obligation to insure at its own expense, as may be required by law and the standards of a reasonable and prudent operator (as defined). The Private Partner has an additional obligation to ensure that its contractors are similarly insured.

The Government agreements are generally silent on the remedy in relation to insurance where insurance for a particular risk is unavailable, but the insurance is still required by law or would general be required in accordance with the standards of a reasonable and prudent operator.

If an uninsured risk event occurs, the Private Partner will typically have to bear this risk.

If the uninsured risk is fundamental to the project (e.g. physical damage cover for major project components) then the Private Partner may need an exit route (e.g. force majeure termination) if it cannot reinstate the project on an economic basis.

Mitigation Measures (What can be done to minimize the risk)

As part of the feasibility study the Private Partner should consider whether insurance might become unavailable for it given the location and other factors relevant to the project and should raise this with the Contracting Authority and the funders to the project.

Replacement of insurances is often addressed as part of the financing negotiations with commercial lenders, where we see the development of schedules of insurance which are indicative of insurance required by law and the standards of a reasonable and prudent operator (as defined).

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may need to consider whether it stands behind unavailability of insurance, in particular where this has been caused by in-country or regional events or circumstances.

Comparison with Developed Market

On emerging market transactions, the Contracting Authority typically does not take the risk of uninsurability arising on the project, although there are good grounds to say that it should do so if the Private Partner has no protection for the consequences of a natural force majeure that becomes uninsurable.

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