Who should place project insurances?
August 1, 2015 by David Bowcott
A long-debated topic in the construction sector is the question of who should place the project-specific insurance policies – the owner of the asset being constructed or the contractor being hired to construct it. The most common term used for owner-placed policies is Owner-Controlled Insurance Program (or OCIP). The term for policies placed by the contractor is Contractor-Controlled Insurance Program (or CCIP). As to which is best, there are many schools of thought and it would seem the answer is not black or white.
The following points represent some of the rationales for making the decision between OCIP and CCIP.
• “I’m the owner and the asset is mine.” Some owners feel that they should be placing the insurances for their projects because, at the end of the day, it is their asset and they are highly incented to ensure the asset is returned to normal if the asset is damaged and/or delayed during construction due to an insurable risk.
• “I’m the contractor and you’ve transferred the risk of building to me.” The contractor feels that since the owner has opted to transfer the risk of construction to the contractor, then as the holder of the risks related to the asset during construction, he should be the party placing the insurance to manage those risks.
• “I am the owner and I understand my business and the assets I use in my business best.” The owner understands how the asset being built needs to perform in order to deliver the results necessary to achieve the company’s business goals. Experience makes the owner more aware of how the insurance should be structured in order to deliver the desired results.
• “I’m the contractor and I have the experience managing construction risk.” The contractor, when at risk through contract, is highly incented to put in place protocols and practices to manage key risks. Through the volume of construction done through the company, they continuously refine these practices to improve risk results. That experience managing construction risk allows them best to tailor insurance covers to risk.
• “I do more volume.” Both the owner and the contractor can use this rationale. It is based on the fact that the greater the volume of premium generated by insurance programs, the better the assurance of best terms. Some owners have tremendous capital expenditure budgets annually that generate significant premiums. Likewise, some contractors build huge volumes of work annually that also translate into significant insurance premiums. Whichever rationale wins out, the fact is that greater volume placed with the same group of carriers will achieve improved terms from those carriers. There is a bigger spread of risk and thus the opportunity to obtain improved coverage or reduced pricing.
• “I have strong relationships with my partner insurance markets.” Once again, this is a phrase used by both the owner and the contractor. This rationale cites relationship with partner insurance markets as a way to achieve best terms on coverage and best results in the event of a claim. Relationships and volume of business with insurance carriers do matter and can lead to optimal results.
Though all of the above are good rationales, in my experience intimate understanding of the risk is the best way to achieve optimal results. If the risks are things like property damage during the construction phase, design errors, subcontractor failure, pollution events during the construction phase or liability events during the construction phase, the chances are that the contractor has the most experience managing these risks given that it is their business.
That said, there are owners that actively share in construction phase risks via their contracts and have equal – and in rare cases greater – understanding of construction-phase risks. For the most part though, the contractor tends to be the one most highly incented to manage the risk (due to risk being transferred to them via contract). Therefore, they have likely built their organization around managing these “very real” risks most effectively.
As an intermediary that helps my clients communicate to insurance markets how the owner and contractor will manage risks, it is vital for me to be armed with best-in-class risk controls. Most often, I obtain those from the contractor.
The ideal strategy should be a Project- Controlled Insurance Program. That means that both the owner and the contractor should collaborate in the insurance procurement. As well, both should share their combined strategies around how they will manage key project risks in order to achieve optimal terms.
In my experience, the insurance industry responds best to united strategies when the owner and contractor are collaborative and transparent. Further, when there is collaboration and transparency in the procurement model and contracts, the risks tend not to manifest and the insurance is not required to respond, as there are no claims.
David Bowcott is senior vice-president and national director of Large/Strategic Accounts at AON Reed Stenhouse Inc. Send comments to email@example.com.
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