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Rahul Sharma

A new approach to construction insurance

Rahul Sharma from Marsh's Construction Practice discusses the pros and cons of an owner controlled insurance programme (OCIP)

Posted by Dave Higgitt | April 02, 2015 | People, policy, politics, money

You specialise in construction project insurance on behalf of employers. What projects have you been involved in recently?
Most recently we’ve been involved in student accommodation projects on behalf of major universities and private developer clients. Prospective students expect a high standard of living, which is linked in part to the increase in tuition fees. This has led to a huge capital expenditure across the sector to improve existing facilities. Marsh was recently asked to assist with a £30 million construction project in London, which involved creating over 300 bedrooms. Our role is to look at our client’s needs, project timescales and the risks they face. Then we design a comprehensive project insurance programme, which aims to de-risk the client throughout the lifecycle of the development. 

What is an owner controlled insurance programme (OCIP)?
An OCIP is a project-specific construction policy that is procured by the owner in the joint names of the main contractor and themselves. It provides protection during the lifecycle of a development. The OCIP arrangement lends itself to any construction-related project. 

Is this really a viable alternative for an educational institution? What are the benefits?
The number of schools, colleges and universities arranging construction project insurance has increased significantly in recent years. Historically, the standard default position was for the main contractor to arrange the contract works insurance and any associated liabilities. However, this approach can leave an employer vulnerable in the event of contractor liquidation or a delay in completion. The benefits of an OCIP include: a non-cancellable policy for the duration of works; claims monies are paid directly to the employer and the owner can insure for consequential financial loss. 

Sounds interesting, but surely it’s more expensive than letting the main contractor insure the works?
This is a common misperception. The main contractor will usually pass on insurance costs, including overhead and profit within their tender bids. Therefore the employer will eventually pay for it somewhere along the line. Asking the contractor to include an insurance line within their preliminaries (during the tender phase) allows employers to see easily how economic the contractor offering is in comparison to an OCIP. 

Has the sector embraced this? How many owner controlled construction projects has Marsh placed recently?
Many clients have now adopted this method for their contract/refurbishment projects. Our team has placed over 180 education-related OCIPS in the past three years, ranging from a small school gymnasium extension to multi-million pound science laboratories and student accommodation schemes. 

Can you give me an example of how a claim would be paid using this arrangement, rather than the traditional method?
Let’s use new student accommodation as an example. If there was a major fire and/or escape of water during the construction phase, which resulted in a delay in completion (meaning the scheme does not become operational for another year), the employer could suffer a huge financial loss. This includes the loss of potential rent and the cost of finding alternative accommodation. In this scenario, the contractor is likely to avoid a liquidated damage claim and if they were responsible for insuring the works, it would not include the employer’s financial loss (in the event of this delay) as the contractor has no insurable interest in the employer’s continued revenues.
Within the OCIP arrangement you can include consequential financial loss in the event of a delay. This means the insurer covers the loss of rent and/or the cost of finding alternative accommodation.
Another example would be contractor liquidation. The OCIP would still be in place, covering the partially completed site, even if the contractor defaulted and was no longer occupying the site.

If I wanted to use an OCIP for my next project what should I do and how quickly can you provide premium indications?
We advise that you ask the contractor to break out their insurance costs within the tender price. We can then benchmark this cost against an OCIP arrangement, so you can find out the cost of procuring insurance yourself. If the OCIP option is cheaper, you can ask the contractor to remove the insurance cost from the bid and procure an OCIP directly. This makes the cost of insuring the project either neutral, or even cost saving. In many cases you will also have a better level of insurance, as your organisation can tailor the insurance policy to your coverage needs and you will know which insurers have been selected to underwrite the risk. Following completion of a short proposal form, which captures the basic project facts, we can provide a premium indication within two working days.

E: rahul.sharma@marsh.com W: uk.marsh.com

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