Traditionally, the responsibility to arrange the insurance for major construction projects is left to the main contractor. However, it is not uncommon for such insurance arrangements to become fragmented which can increase the risk of gaps or duplication of cover which in turn may increase insurance costs.
While a contractor controlled insurance programme is often the path of least resistance, there is an alternative insurance programme that, as an owner, will not only satisfy your insurance requirements, but that of the contractors and financiers too. This is called an Owner Controlled Insurance Programme (OCIP).
What is an OCIP?
An OCIP is where the owner or employer of a construction project purchases certain insurances. There are three core programmes:
- Construction all risks – insures material damage to the project contract works. If there is insured damage (e.g. a fire), this policy will indemnify the insured for the cost of reinstatement of the damaged works.
- Third-party liability insurance – covers the legal liability of third parties arising from the project, primarily resulting from injury or damage.
- Delay in start-up – this indemnifies the owner and lenders (if applicable) for financial loss following a delay in project completion, arising from an event which is covered under the construction all risks policy.
These can be arranged annually to provide automatic cover for all projects, or for site-specific projects as and when needed.
Why you should consider an OCIP for your construction project
So, why should you consider to depart from the tried and tested approach of letting the contractor insure the project works – after all, the contractor carries the risk in the first instance. Don’t they? Well, no they don’t.
As mentioned at the beginning of this article, when you engage a main contractor to carry out the works, it is the responsibility of this contractor to insure the works during the build and cover any associated liabilities. The main contractor often employs sub-contractors and passes the risk and insurance responsibilities onto them. However, contractors may select a level of cover to reflect their risk appetite and may arrange a reduced level of cover to cut costs and increase profit. This can lead to insurance programmes that don’t provide enough cover and potentially introduce risk to you, the owner – as uninsured losses can threaten a project, especially if the contractor experiences financial difficulty.
Plus, when the contract is pages long, some parties might be unclear on their insurance responsibilities, especially if the contract conditions are written in legal terminology. This situation could create insurance coverage loopholes, which, in the event of a loss, could cause confusion and arguments between the parties. And could cause delays to the project and create financial risk to you. Should this situation arise, with insurance cover arranged by the main contractor, you would not have any control over the quality of the insurance that was arranged, and it can be extremely difficult to make checks on the insurance of every contractor on site.
How you can benefit from an OCIP
Of course every project is unique. But an OCIP can provide greater protection, control, and assurance. By taking responsibility for the required insurances, owners can help reduce many of the vulnerabilities and can also insure against risks not catered for by the contractors’ programmes, such as delay in completion. It can often be a cost-effective solution, especially if something goes wrong.
From a claims perspective, having a single insurance programme to cover all damage or legal liability events promotes a smoother claims handling process, minimising the potential for dispute and offering a clear route to recovery.
Additional insurance covers for your construction project
While an OCIP approach allows owners to take a proactive view on the risks and the availability of mitigation solutions, including insurance. Other insurance products might also need to be considered depending on the location and the nature of the project. This could include:
- Rights of light.
- Latent defects.
- Environmental impairment liability.
- Professional indemnity insurance (single project or owner’s protective).
Ultimately the final insurance programme will be determined by the contract clauses and any funding agreement requirements.
Time to take your construction project insurance in hand?
The construction sector is firmly in a hard market which means there’s reduced capacity and policy cover, as well as increased pressure on rates and excesses. Now could be the time to take your construction project insurance in hand.
You should always discuss the particulars of your project with your insurance broker so they can recommend he best course of action. We highly recommend you speak to your insurance broker at the earliest point in your construction project’s cycle. As with all insurance policies, terms and conditions apply.