A draft version of the Code of Practice (CoP) developed by the joint BTS/ABI working group, for insuring future tunnelling projects, has been available to download from the BTS web siteà since early June 2002. On 4 July 2002 members of the BTS came together to discuss the proposals.
Duncan Southcott of Alliance Cornhill and current chairman of the construction-engineering panel of the ABI and of the group of insurers working with the BTS to develop the CoP, opened the meeting by explaining the rationale behind the Code. The insurance industry, he explained, is concerned by the cost of failures affecting the construction industry in general and tunnelling in particular. The major concern is the number and size of claims that insurers have faced over the last decade from both UK and international projects insured in London.
Engineering insurers are struggling to contribute positively to the profit and loss accounts of their companies. Recent market statistics indicate that the engineering loss ratio is over 110%, with underwriters normally targetting 60% to cover overheads, costs and a normal profit. It is difficult to assess accurately the loss ratio in the tunnelling sector, as tunnels are often part of major infrastructure projects.
However, a conservative estimate, based on a comparison of tunnelling premiums to claims, is well in excess of 500%. The poor performance of this sector has resulted in a number of key players, such as AXA in the UK and Royal Sun Alliance overseas, leaving the market entirely. The list of tunnel claims in the UK has been well documented, the losses arising from various causes, and this bad claims record is not just limited to the UK.
Insurers have contributed to their own problems by not insisting on consistent levels of risk management and offering too wide a cover. The insurance industry had to decide how to respond to this scenario. One option, already adopted by some insurers, is to stop insuring tunnel projects. Another option would be to increase premiums, excesses and restrict cover. All these scenarios are likely, but to succeed, the size and frequency of losses must be reduced. Otherwise higher premiums could make tunnel costs prohibitive and reduce the number of projects.
The ABI decided to work with the tunnelling industry to develop risk management in the UK, and then seek to apply this overseas. The insurers’ key objective is to agree appropriate risk assessment and management procedures for the tunnelling sector to reduce the probability of a loss happening and the size of any resulting claim.
This will give underwriters a better understanding of the risks and an increased certainty of predicting the financial exposure. It will help reduce exposures to residual risk, although the insurance industry recognises that claims will still occur. The joint Code will provide an audit trail for insurers and hopefully enable underwriters to persuade their management that this sector can be profitable.
The above issues led the ABI to approach Peter South (preceding BTS chairman) who invited the ABI to address the BTS committee on the 18th October 2001. Recognising its importance, South encouraged the process leading to presentation of the draft CoP.

Discussion
Peter South (director of specialist business for Amec) opened the discussion: “To reduce risk we need to know what the ground consists of, not what to measure the ground against. Ground Reference Conditions (GRC) are a measurement/payment device, not reality, and are often used by contractors to formulate claims by establishing that the ground is completely different to the GRC. This should not be in the Code, which should focus on ensuring the characteristics of the ground are fully identified by good site investigation based on a proper contractors risk assessment. Contractors are concerned that insurers could post-audit a major incident and strike out cover for a particular operation after the event. The audit process must be continuous throughout the project and bought into by both sides to ensure that, should an event occur, both sides can confirm that the process was audited as the work proceeded.”
Terry Mellors said GRC set a level playing field for all tenderers. However, the drafting committee will review these comments. Duncan Southcott addressed the issue of compliance: the insurers want to work with contractors and clients to identify the risks before an incident; work together to find a solution; and if there is a claim/collapse, which is not due to a breach of a policy condition, then they will honour their obligations.
John Anderson (independent safety consultant), welcomed the involvement of the insurance industry in developing the CoP. However, he thought the current version was incomplete and unclear. “The current draft is both inaccurate in terms of reconciling the objectives in relation to the Health and Safety legislation through the European directives and is incompatible with what the legislation requires,” he said.
Anderson pointed out that research into tunnelling disasters has revealed that they are not single cause events but arise from mismanagement and incompetence. He considered there is a lot of material available that should be incorporated in the code. “Management Regulations that provide all the strategy required for the management of risk, contain two sections that are mandatory under European law,” he said. “The observational method for ground engineering, CIRIA report, a method that should be acknowledged and referred to in the code; the ITA guidelines on tunnel risk assessment, an excellent document and provides details on the methods to be used to achieve the codes objectives.”
Mellors thanked Anderson and said: “We have had several constructive comments on the code ranging from the code being too prescriptive, to not being in sufficient detail. The document is currently 44 pages and has been criticised for being too long… A bibliography will be added, referencing other documents, as to include them all would make the Code unusable.”
Darrel Corner (consultant for Jardine Lloyd Thompson), observed that it was interesting to see insurers wanting to place so much faith in the audit process at a time when this role is under question in the financial field. He also asked what sort of guarantee was being given to the buyers of insurance that they would get cover. “Have all the ABI companies represented agreed to provide cover to contractors and owners if they are in compliance with the code?” he asked.
Southcott said the ABI represents insurers that provide cover for a wide range of industries. There is no obligation on any particular insurer to provide cover. The ABI sees the Code as a positive step in ensuring insurance is available. “Given the loss statistics presented, if we were not working together, very few companies would be prepared to provide insurance cover for tunnelling” he said.
Bill Grose (head of tunnelling for Arup), offered 100% support to the Code but was concerned that the document would not meet the objectives if it became too comprehensive. Would the code have prevented the recent collapses discussed? In its current form it fails this test. The industry is being driven to take risks and he questioned where the levels of acceptable risk were going to be defined in the Code. “The key objective should be to promote increased dialogue between insurers contractors and engineers about where the risks are, and an increased focus by the project team in managing those risks. These messages should remain in the final document and we must avoid obscuring them by incorporating too much information.”
Southcott stated this summarised exactly what the ABI wanted to achieve. Insurers want to see that the risks are being managed better.
On continuity of design Guy Lance (WS Atkins), considered it politically correct to allow packaging and bidding for different design phases as allowed under the Code. This eliminates one of the most important aspects of the design engineering process that is the continuous cycle of data interpretation, evaluation against the design hypothesis, monitoring, re-evaluation and confirmation. Monitoring the performance of the structures and the ground to validate the design is vital for the risk management.
The Code assumes that the contractors’ all risk policy is taken out at the construction stage, yet the insurer can withdraw cover for breaches by others, such as the geotechnical specialists responsible for the site investigation prior to the appointment of the contractor. This is not equitable.
The key item in the code, according to Lance, is on p35 which appears to provide insurers with a condition precedent for either the withdrawal of insurance cover or a shopping list for insurers facing substantial claims. He suggested that insurers could better protect their interests in our industry by employing an independent panel of engineers to oversee work.
Southcott responded that the compliance condition generally comes into force when the first spade is put into the ground. Insurers would audit, monitor and assess information provided by the client at the tendering stage and if the Code had not been complied with they could refuse to offer insurance. Insurers can make this decision for any technical or commercial reason – as is the current situation.
Mellors said there could inevitably be a break with a Design and Construct contract where the contractor appoints his own designer. The important thing was to ensure the transfer of information.
Ambrose McGuire (Donaldson Associates), asked what legal advice was taken by the committee on the interpretation of the Code with respect to construction contract law, health and safety law and the legal status of the document itself? He requested some guideline in the code on what was actuarial risk and what were the day-to-day construction risks that contractors and designers undertake as part of their business.
Southcott said the aim was not to legalise the Code, but they are taking up the offer from a lawyer to review it. “Insurers are looking at all the risks that could affect a contracts works policy and third party liability arising out of a construction contract assessed and managed properly. It is difficult to distinguish between an actuarial risk and a business risk and the code is deliberately not prescriptive on the headings that should be catered for. At the back of the code headings have been provided to guide on the sort of risks that should be considered. The insurance surveyors will discuss with the contractor and the client the sorts of risk which could affect the policy. The code is to make sure the process is undertaken so insurers are happy that their policy covers residual risks,” he said
Michael de Freytus (Imperial College London), said the meeting was an important step forward, but he felt the underwriters may become terribly disillusioned. “Reference conditions are excellent but they are not sufficient; underwriters need to know how the volume of ground is going to behave,” he said. This makes it difficult to assess the risk and while he hopes the document will be slim it needs some substantial supporting information. Insurers may consider a risk assessment to be an absolute description of something, but is also very subjective. Without guidance on how to undertake the risk assessment, a series of risk assessments of the ground may appear to be equivalent while involving different levels of risk.
Helen Nattrass (Sir Robert McAlpine), was sure that competent people exist in the tunnelling industry from her experience of working for the contractor or as a client representative at the tunnel face with the miners and engineers who manage risk on a daily basis. In this role she has interfaced with insurers on many projects, and she considered that to be audited by insurers was not such a big issue as made out by some speakers. Undertaking risk assessment and management is current practice. Helen’s experience of being audited by insurers had been positive and she had welcomed their input and had found it helped focus on the real objectives. A range of people, could provide a good assessment of the ground risks. She referred to the ICE geotechnical risk guide, which codifies good practice.
Mellors said that an ITA document on risk goes into great detail on assessment methods, which the CoP wanted to avoid for fear of becoming unusable.
Bob Ibell (London Bridge Associates), felt the risk management approach recommended in the Code could only be used with a limited number of contract forms. The Code implied early contractor involvement, and for this to be of benefit the contract must allow an open discussion. The Code is almost introducing another person into the contractual arrangements and with certain forms of contract this could allow an unscrupulous contractor to exploit the process by flagging up an element of work as too risky and seeking to stop the works by using the insurers. This circumstance could only be avoided with contract forms that promote risk sharing. The document may miss the target, and not focus on the risks that the insurers are interested in. The code goes into areas, particularly on the construction side, which are not relevant or could be dealt with in a simpler way: “we could end up with parallel documentation.”
Southcott said insurers could not dictate which conditions of contract should be used or where the risk should be placed. The key issue is that under a contract works insurance policy, both contractor and client are covered. The insurers want to see the risks being identified and managed by the client and the contractor during construction. They want to audit this process by reviewing the risk register. Insurers would encourage the partnering approach but could not be prescriptive on how the contract shares the risk.
Donald Lamont (Health and Safety Executive and chairman of BSI committee BS6164), welcomed the participation of stakeholders in risk management and had been trying for ten years to get the insurance industry to take some responsibility for risk management in tunnelling. “Risk is a product of frequency and consequence and we need to be careful as we are not looking at run of the mill risks but low frequency, high consequence events… once you have the big event then risk assessment and management gets forgotten and hazard elimination is more important. So we need to focus on the high consequence events.” Fire risk should also be covered, because a major fire on a TBM will result in large claims as should gas in the ground
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BTS Chairman, Anthony Umney, thanked everyone for their contributions. It was in the interests of everyone to enhance the Code to reduce risks and improve the record of the industry so that tunnelling can continue to be an insurable activity.

Rapporteur: Eddie Woods