Owner-controlled insurance programs (OCIP) - what is it and why should you choose it?

The all-risk part of a construction insurance policy can be purchased in two ways: using the traditional approach, where all works performed by a contractor during a year are covered by their annual open cover, or by purchasing a project-specific insurance policy. The latter is valid for the covered project and lasts for the entire construction period and any pre-agreed maintenance period. This specific project policy can be purchased by both the contractor and the project owner, i.e., the purchaser of the construction project, which could be a private company, municipality, organization, etc.

Contractor-Controlled Insurance Programs (CCIP)

A CCIP is commonly used when the contractor commits to performing projects that are outside their ordinary scope of work, either by size or complexity. For example, if a contractor that normally performs ground and dock works is awarded an offshore contract, it would usually be covered with a CCIP rather than the ordinary annual open cover.

If the owner decides to rely on the insurance purchased by the contractor, it can be associated with risks such as:

• Insolvency of the contractor. The insurance covering the project might then be invalid and is at risk of not being insured.
• The contractor has not paid their premium. This is particularly common in economic recessions, which tend to be especially harsh on the construction industry. A certificate of insurance provided by the contractor does not necessarily prove any value to the owner, as it does not confirm that the premium has been paid. In the last couple of years, there have been many examples of claims connected to this problem, where owners believed the project had valid insurance, which turned out to be incorrect.
• The contractor’s insurance is not adequate. Allowing the contractor to arrange the insurance coverage means the owner misses out on the opportunity to design and customize it.

Owner-Controlled Insurance Programs (OCIP)

A project policy purchased by the owner is referred to as an OCIP. It is designed to cover all activities and parties involved in a specific construction project. The policy is valid for the entire construction period, including extended maintenance, ensuring the owner can ensure the project and investment are properly insured.

The arguments for choosing an OCIP are many, including:

• The possibility of including a Delay in Start-up (DSU) cover. This cover is designed to protect the financial interest of the owner resulting from project delays caused by physical damage covered by the all-risk part. DSU is only available through an OCIP.
• Less administration for the owner. They don’t need to collect certificates of insurance from contractors or subcontractors annually or ensure premiums are paid.
• Cost control. A contractor’s bid rarely shows the exact price for insurance, but excluding it allows the owner full control of the insurance costs for the project.
• Smooth claims handling with only one point of contact. In case of a large claim at a late stage with each contractor holding their insurance policies, the claims handling process becomes complex, involving many parties and insurers, leading to project delays.
• Tailor-made insurance cover. The owner can specifically design the cover, including sub-limits, extensions, and deductibles tailored to the project.
• Eliminate the risk of an uninsured project due to contractor insolvency. An OCIP ensures the project is covered, even if contractors become insolvent during the construction period.

What does an OCIP cost?

The price of an OCIP depends on many factors such as location, contractors, building methods, materials, ground conditions, and type of project. Generally, the premium rates applied to the insured value of the project are rarely higher than a couple of permilles. The same goes for a DSU, where most premium rates are up to a handful of permilles, applied to the chosen indemnity sum. When paying hundreds of millions USD for a construction project, proper insurance coverage is one of the best investments an owner can make.

For more information on Zurich’s construction insurance solutions, please contact Erik Francke, underwriter construction.