Newsletter Issue 59 - December 2009

• Why AGS4?
• Successful Tender
• First Aid in the Workplace
• Geophysics and the Search for Homer's Ithaca
• Not So Super Market
• The Big Question

Why AGS4?

The AGS data format is being upgraded to version 4, this note explains the thinking behind the changes, gives the reasons for the changes and develops the potential advantages which this offers for the future.

A beta version of AGS4 will be available for public comment before the end of the year and comments will be welcome before final publication

The AGS data transfer format consists of 3 parts, the data dictionary, the data structure and the transfer format itself which allows the computers to read and write the files.   Each of these has been updated.

The data dictionary contains the list of data items which can be transferred.  This has been extended to include all the items required by the new Euro Codes and associated British Standards, the information necessary for accreditation of test results by external bodies and the typical information included in a Quality Assurance scheme.

The organisation of the laboratory test results have been restructured to provide separate groups for each test, using paired tables where appropriate.  A separate table has been introduced for the results of geotechnical chemical testing for the aggressivity of the ground to concrete in accordance with BRE Special Digest 1.

Rock testing has been divided into aggregate and geotechnical tests.

By working in close association with the geoenvironmentalists a  new group, ERES, has been added for the test results for environmental samples.  

Within the data dictionary an additional key field has been added to the sample table to be known as SAMP_SID, (sample identifier) which will enable the use of a single identifier for samples to be used where this is appropriate. This is particularly relevant for geoenvironmental studies, particularly when taking monitoring samples, and also facilitates the use of new technology in the form of ‘bar coded’ samples.

The rules for the writing of the transfer file  have been simplified with the removal of the 256 character restriction which has deleted the need for the <CONT> line, a throw back to the days of 8bit computers.   This has permitted the addition of line headers which simplify the format even further. The  CSV format has been retained rather than move to XML as this is being investigated by others and taking much longer than expected. After four years of study there seems to be no commercial advantages to changing to XML at this time for the UK geotechnical industry.

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Successful Tender

Question- Can a successful tenderer for a publicly procured project negotiate the terms of the contract post acceptance, but prior to contract award, in order to amend an obligation to indemnify the public body against all losses due to any breach of the appointment or failure to fulfil the obligations due under it, to an obligation to indemnify to the extent of any monies recoverable under the consultant's Professional Indemnity (PI) insurance.  

The public authority is arguing that (a) this would potentially be unfair to other tenderers and/or third parties and (b) such a limitation would be contrary to public policy in a public works consultancy agreement.  The consultant believed that by providing evidence of their insurance at tender stage, that was sufficient to limit their liability to the amount of the level of insurance (LOI).

Answer-

1. A public procurement body may fall foul of the public procurement regulatory regime if the contract which is ultimately awarded does not accord with the particulars of the contract which was described in the contract notice published in OJEU. Not every change will be significant. The test which is usually applied is whether the proposed changes are so significant that the altered contract, if re-advertised, would attract responses from tenderers other than those initially admitted or would have allowed for the acceptance of a tender other than the one initially accepted. This may be the case where one or more important features of the contract have been changed (e.g. as to value, scope, timing or financing arrangements).  I had not seen the contract notice, so I was unable to advise definitively but I provided some initial views on this particular case.
2. A public procurement body may fall foul of the public procurement regulatory regime if the public procurement authority awarded the contract on award criteria which are different from those which it has stated will apply to tenders.  I discussed that in the context of this case.
3. The public body was correct in stating that the consultant’s confirmation of the level of its insurance cover (and in particular the limit of indemnity on its PI cover) does not amount to offering to provide the services subject to the consultant's liability being limited to the amount of its PI cover. The tender criteria sought details of the PI insurance in respect of the criteria relating to the commercial viability/strengths of the interested tenderers.  Unless a consultant expressly states that its tender is subject to the insurance recoverable being the limit of any liability which the consultant may have for breach of the contract , then the mere provision of the insurance details in the tender is unlikely to have that effect.
4. The proposed limitation of liability provisions are not contrary to public policy.  It is well established that parties are permitted to agree to limit their liability.  For example, clause 82.1 of the NEC3 Professional Services Contract provides for a cap on the consultant’s liability. The consultant’s total liability to the employer for all matters arising under or in connection with the contract, other than excluded matters, is limited to the amount stated in the Contract Data & applies in contract, tort or delict and otherwise to the extent allowed under the law of contract.  This contract is part of the NEC3 suite of contracts which have received OGC approval and which are approved as satisfying the “Achieving Excellence in Construction” principles.

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First Aid in the Workplace - Changes to Regulations

The Health and Safety Executive (HSE), carried out an evaluation of first aid in the workplace and found that 'although first aid awareness and penetration in workplaces was good, compliance was found to be more "in spirit" rather than the letter of the regulations and this exposed some important deficiencies in the format and content of guidance and in the proportionality of the current regulatory requirements for lower risk employees'.
The changes have been developed in consultation with employers and training providers and it is hoped that the new format will make it easier for employers to comply with the regulations.

The initial four day First Aid at Work (FAW) course will be shortened to three days and there will be a new qualification of Emergency First Aider in the Workplace (EFAW) that will require a one day training course. The FAW requalification remains unchanged at two days.
The HSE will also strongly recommend that FAW and EFAW students attend an annual three hour refresher course to prevent ‘skills fade’.
Both the FAW and EFAW courses will be approved by the HSE and must be taught by HSE approved first aid training providers.
FAW certificates will remain valid until their expiry date even if this is after October 1 2009.

For more information, visit www.hse.gov.uk/firstaid/index.htm

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Geophysics and the Search for Homer's Ithaca

An extract from the paper presented at SAGEEP 2009
Greg Hodges, Fugro Airborne Surveys, Mississauga, CA
David Kilcoyne, Fugro-Aperio, Wallingford, U.K.
Rod Eddies, Fugro-Aperio, Wallingford, U.K.
John R. Underhill, University of Edinburgh, Scotland, UK"

Identifying the location of the island of Ithaca, legendary home of Odysseus, has been a problem for historians for centuries.  The modern island of Ithaki, in the Ionian Sea, does not match the description in Homer’s epic poem.  It is the hypothesis of Robert Bittlestone, working with geologist John Underhill and classicist James Diggle, that the westernmost part of Cephalonia, the Paliki peninsula, was ancient Ithaca.  Their book, Odysseus Unbound: The Search for Homer's Ithaca, gives a detailed description of the evidence supporting the hypothesis, and the story of its development.  There is one major sticking point:  Paliki is joined to the larger part of the island of Cephalonia, by an isthmus as much as 180m above sea-level.    Figure 1 shows a Landsat 7 image of the islands today, and the Thinia valley fills the isthmus between Paliki and the rest of Cephalonia.  The new hypothesis requires a channel through the isthmus, perhaps in the location shown in Figure 2.   

Ground, airborne and marine geophysical surveys are being used to study the potential for a channel under an area now largely covered by colluvium from the adjacent mountains.  Fugro's airborne EM and magnetic data provide a regional overview of ground conductivity (Figure 3).  Ground EM, resistivity, gravity and refraction seismic surveys obtained by Fugro Aperio are being used to study the proposed channel zone in detail to determine the depth of fill and contours of the buried bedrock surface.  Marine seismic has been employed offshore by Fugro Oceansismica to analyze the drainage patterns at the low water levels of 3000 years ago.  High resolution airborne LIDAR mapping from Fugro's Fli-Map provides detailed surficial information. All of these data sets are brought together to build a comprehensive geological model of the proposed channel area and to provide the ultimate test of the classical enigma.

(The full paper was presented at the EAGE Near Surface meeting in Dublin – 26th to28th September 2009, for further information contact Steve Poulter, Fugro Engineering Services Ltd 0870 4021423).

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Markets for Professional Indemnity insurance - the not so ‘super market’

The aim of this paper is to summarise the workings of the UK Professional Indemnity insurance market and the hard/soft cycle that has such an influential effect on premium levels. We will also attempt to predict what the future might hold as the market moves inexorably out of its soft phase and into harder times.

Insurance Markets
Most specialist insurance classes - including Professional Indemnity (PI) - are placed either with Lloyd's syndicates or with insurance companies operating outside the Lloyd's environment.

The UK general insurance market as a whole wrote in excess of £40 billion in premium during 2008 covering a wide range of risks, both domestically and internationally. However, the PI market is very much niche in its nature - but just how niche? UK liability premiums for 2007 totalled £3.8 billion, but this included a number of classes of insurance wide of PI, such as Public and Employers’ liability. We estimate that, of the £3.8 billion total, less than £1 billion relates solely to PI insurance. Of this, the largest element is the PI market for solicitors which accounts for around a third of this.

The construction PI sector is thought to represent a smaller proportion of the total premium although exact figures are not available. However, what is clear is that construction PI represents a very small proportion, less than 0.5%, of the UK’s overall premium spend.

Consequently, as specialist PI brokers, the sector of the insurance market with which we work is, necessarily, very narrow.

The Claims Background

Our statistics show that the number of claims and potential claims are increasing year on year - and this trend is also borne out by figures from the Technology and Construction Court. 2008 saw nearly 400 new cases reaching the court, on top of year on year increases previously.  Nearly half of the Court’s work now relates to construction and professional negligence claims. We should also remember that the vast majority of claims involving professionals are settled out of court – court cases are really just the tip of the iceberg.

Of equal concern to the increasing claims numbers are their increasing complexity, profile and cost.  The longest trial at the TCC last year ran for 109 days and claims have been made for damages of £100m plus against consultants.

Against the back-drop of increasing claim numbers, severity and cost, writing PI business is once again becoming a triumph of hope over expectation.

Premiums Received and Claims Paid
For long-tail classes of insurance such as PI, it is often the case that premiums received are not, of themselves, sufficient to pay claims. Investment income becomes a critical part of the equation particularly when, even now, construction PI claims take an average of five years to reach settlement.

Data from the ABI illustrates just how infrequently insurers make a technical or 'pure' underwriting profit on their accounts – only in 4 out of the last 10 years have they been in the black.  It is also notable that very often it is the liability insurance market that suffers so significantly from poor levels of profitability

The PI Cycle
The insurance cycle - which affects all sectors to varying degrees at differing times - is the name given to the periodic rise and fall of relative premium levels. As with all markets, the insurance cycle is driven as much by the effects of supply and demand as by the underlying cost of risk.

Catastrophic insurance claims are relatively rare events, but given their size they can make accurate pricing models difficult - too frequent to ignore, too infrequent to model. As large claims are also likely to be complex and involve the vagaries of the legal system, their outcomes are often difficult to interpret.

As a consequence, the forces of supply and demand are often the dominant factors in setting premium levels. Insurers may be prepared to set premium levels below the price of risk in the soft phase against an expectation of generating sufficient income in the hard market to have created an overall profit across the cycle.

However, where individual insurers price risk too low and for too long the consequences can be catastrophic - as we will see later.

In summary, the PI cycle is best seen as something like this:-

If we start in “hard market conditions” with high premiums and the real prospect of good rates of return on the capital invested”, capital enters the insurance market.  New entrants to the market look to build up books of business and do so by competing on price. In order to sustain growth (or for more established players to limit lost business) insurers are pressurised to further reduce premiums and/or provide a wider basis of cover.

However, none of this, of course, necessarily reflects any improvement in the underlying risk profile. It is market forces that are driving down premium levels and not necessarily a reduced exposure to claims. Claims still tend to be at the same levels as when premiums were high. As a consequence, claims exceed premiums and insurers start to lose money. Poor economic conditions and reduced investment returns can exacerbate the position.

At this stage we see the mirror image of the cycle. The PI market is now perceived as a poor home for capital and it withdraws relatively quickly to find better investments elsewhere. Reduced capacity (normally provided at this stage by long-term, experienced PI insurers) results in higher prices and reduced policy terms - and so the cycle begins again.

And the Consequences...
Insurers who fail to adequately manage pricing over the insurance cycle - by charging too little for too long - can face catastrophic consequences, as the following two examples indicate.

[a] Case Study - The Independent Collapse
The Independent Insurance Company was founded in 1986 and traded successfully for several years and quickly became the darling of the City. However, all was not well and a failure to adequately reserve for claims led to the Independent's collapse in 2001 triggering £350m of compensation claims by some half a million policyholders. A subsequent investigation by the Financial Services Authority concluded that the company's asset base was insufficient to support its business plans.

[b] Case Study - HIH Collapse
The collapse of HIH during 2001 saw the demise of Australia's second largest insurer. The fundamental problem for HIH was that over a wide range of classes of insurance it failed to charge premiums which could adequately cater for future claims. HIH's liquidators estimate that it collapsed with debts of £2.1 billion. Company executives have been sentenced to prison terms and thousands of insureds worldwide were affected.

Where are we now - and the future?
The PI market is coming off the back of a prolonged soft market period, which saw many insurers put volume ahead of profit.

And what of the future? It is certain that at some stage the market will enter harder conditions. There is uncertainty as to when the market might harden and by how much. Invariably the deeper and more prolonged the soft market the more pronounced the adjustment will be when it comes.

If the solicitors market is anything to go by, then we could be in for a rough time ahead.  With every solicitors practice in the country sharing a common renewal date, the scramble to the 31st October (is it??) is always fraught.  This year has been particularly so.  Rating increases of between 50 – 100% have not been uncommon, with all practices suffering to some degree.  Even those practices as the “less risky” end of the spectrum have seen their rate increase substantially.  Where insurers have perceived particular risk factors, even more so, with certain firms being effectively blackballed because of certain practice traits.

Events in insurance, as in life, are powerful and unpredictable. What future events might conspire, individually or collectively, to prompt a return to harder market conditions? The following is a list, by no means exhaustive, of the likely culprits:-

The Credit Crunch
The credit crunch had had (and will continue to have) three adverse effects on the insurance market. First, the cost of capital has increased as its availability becomes scarce. Second, a reduction in the asset base of major insurers as investment losses erode balance sheets - further reducing the capital available to underwrite risks. Third, an increase in credit crunch liability claims as those who have suffered losses (home owners, shareholders etc.) seek to recover from professional advisors, company directors etc.

Investment Income
A combination of increased stock market volatility and reduced interest rates is severely curtailing insurer's ability to generate investment income.

Environmental Factors
After two relatively benign years of (insured) natural catastrophes, 2008 saw the second worst year on record for catastrophe claims with in excess of $50bn (£35bn) paid out.

Economic Factors
A downturn in the economy hits the insurance industry in two ways: (1) recessions invariably lead to an increase in claims; (2) the contraction in economic activity leads to a reduction in premium income leaving insurers with a reducing pool of money to pay claims.

Our Approach
Our approach will continue by:

a) placing cover with first class markets who are long term players in the construction PI market;
b) looking to charge premiums which reflect the long term cost of risk without prejudicing the position of our clients in the soft market; and
c) offering the guarantee that, absent fraud, all valid claims made will be paid.

And our commitment to proactive risk management will also continue unabated.

And Finally
There is no doubt that some sectors of the liability insurance market have seen severe corrections.  How long consultants in the engineering professions can continue to escape such corrections and how severe they will be when they come is always difficult to predict.  There is no doubt that we have hit the bottom of the current soft market and that next year will see rates on the way up.  As ever, forewarned is, or should be, forearmed.

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The Big Question

Q&A:  Liabilities of The Qualified Person Arising from Definition of Waste:

Development Industry Code of Practice

Introduction
The Definition of Waste: Development Industry Code of Practice was published by CL:aire in 2008 (www.Claire.co.uk).  It was prepared by the development and remediation industry in consultation with the Environment Agency.  The Code of Practice (CoP) was designed to allow the development industry to demonstrate that wastes (derived from/ during remediation etc) have been “fully recovered” and therefore are no longer “waste”.  This self regulation relies upon the professional integrity of all of the parties involved, but particularly upon the “Qualified Person” – a term which the CoP introduces.  The CoP requires the Qualified Person to sign off a Declaration that all of the appropriate lines of evidence are in place to demonstrate compliance with / adherence to the Code.
Concerns have been raised by some in the industry that the Qualified Person could face potential liabilities in signing off the Declaration which are not compensated by the level of fee – for example, in the event of subsequent activities by third parties.

The response from the Loss Prevention Group’s legal advisor (Zita Mansi) to two of the most commonly raised concerns is set out below. 

The Qualified Person’s Declaration

The CoP sets out an auditable system to demonstrate that the CoP has been adhered to on a site by site basis.  This system includes a Declaration by a Qualified Person (“QP”).  The Environment Agency (“EA”) will audit a certain number of Declarations at random, to check that the CoP is not being abused.

The QP’s Declaration (which is set out in full at Appendix 6 of the CoP) includes confirmation:

1. That he/she has reviewed the relevant documents set out in the checklist (these include the Materials Management Plan (“MMP”), the Risk Assessment and the Remediation Strategy/Design Statement);
2. The MMP contains all the information required by Appendix 4 of the CoP; 
3. The Risk Assessment concludes that the objectives of preventing harm to human health and pollution of the environment will be met if materials are used in the proposed manner; and
4. the relevant regulatory bodies have not objected to the proposed development on the basis that the use of any material is likely to cause harm.

The Declaration is addressed to the person commissioning the works (likely to be the person employing the QP) but must be sent to the EA.

Q&A

Questions have been raised by an AGS member regarding the potential liabilities of the QP to his/her client and/or to the EA in the following scenarios:

1. The QP provides a Declaration and subsequently the MMP is not followed by those carrying out the works.
   Paragraph 3.17 provides that the responsibility of the QP is limited to review of the documentation detailed in the Declaration.  Responsibility for carrying out the development in an appropriate manner, and the duties pursuant to waste legislation, remain with the person commissioning the excavation works and those executing the works.
   
   After providing his/her Declaration, the QP has no further involvement in the project and has no inspection, monitoring or auditing duties.  Hence he/she has no control over whether or not the MMP is adhered to and cannot be held responsible for any adverse consequences of the works deviating from it. 
   
   Paragraph 3.12 of the CoP allows deviations from the original MMP provided they are recorded and subsequently detailed in the Verification Report.  The QP has no involvement in or responsibility for the Verification Report.
   
   
2. The QP provides a Declaration and subsequently the EA audits the project and decides that the MMP and Risk Assessment are inadequate or inappropriate because, for example, the materials were not suitable for re-use, were used or planned to be used in excessive quantities, or were likely to cause harm.
   Paragraphs 3.17 and 3.18 of the CoP suggest that the QP’s role is limited to “review” of the documentation detailed in the Declaration.  Paragraph 3.18 of the CoP states that the QP is not required to re-work or check the Risk Assessment or Remediation Strategy/Design Statement.  The precise nature of the QP’s obligations when “reviewing” the documentation is not entirely clear.  The wording of the Declaration (as set out above) is key.  The QP confirms that the MMP contains all the information required by Appendix 4 of the CoP but this is not the same as confirming that the information is correct.  In addition, the Declaration includes a statement that the QP has advised the person commissioning the works that if materials are not used in accordance with the MMP or Risk Assessment or if it is discovered that materials were not suitable for use, were used in excessive quantity or in such a manner as to harm human health or pollute the environment, the EA may conclude that those materials were discarded and were waste.  This appears to place responsibility for these matters upon the person commissioning the works, which is consistent with the wording of the CoP.  
   
   In any event, the question of whether a particular material is waste is ultimately a decision for the Courts and the fact that the EA do not agree with the conclusions of the Risk Assessment and MMP does not necessarily mean that those documents have been negligently prepared or that the QP was negligent for providing the Declaration.  (Paragraph 3.17 of the CoP provides that a QP who “recklessly” or “falsely” completes a Declaration may be subject to prosecution under waste legislation, but this requires more than mere negligence on the part of the QP.)
   
   If, for any reason, the QP is held to have been negligent, he may be liable to his client for any losses that result from the client’s reliance on the Declaration.  The extent of the QP’s liability to the client will ultimately be governed by the terms of his/her appointment.  The QP should therefore ensure that none of the terms of the appointment place him/her under any higher obligation than to use reasonable skill and care in carrying out his/her duties under the CoP (he/she should not, for example, warrant that the Declaration will satisfy the EA) and it should be made clear in the appointment that he/she is not responsible for the information provided to him/her or liable for defects in it. 

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