Major construction projects are planned across the higher education sector but, as Matt James, client director – head of education at Aon, explains, the insurance arrangements must be a primary consideration.
Construction is ramping up across the higher education sector, with industry analysts Glenigan identifying it as a key area for growth and predicting a 13% rise in university building project starts in 20241. But, as it’s still a tough economic climate, it’s important to give early consideration to the insurance arrangements before you order your hard hat.
There are options when insuring a building project – cover can either be arranged through a contractor controlled insurance programme (CCIP), or the employer of the works can arrange cover via an owner controlled insurance programme (OCIP).
Whichever route you take, the client of the works will be paying for the insurance, either directly or through the contract price. Therefore, it makes sense to understand the advantages and disadvantages of the options available to reach agreement on who is insuring the works before the contract is put out to tender.
While it may appear to involve more work as you are responsible for arranging cover, there are several reasons why an OCIP may be the more appropriate option.
More control
Under an OCIP, the client arranges appropriate insurance cover in the joint names of themselves, financiers, contractors and all sub-contractors working on the project. This gives them much more control over the cover that is taken out.
Potential duplication and overlap of insurance cover can be avoided, both of which add cost to a project, and the client can also ensure that cover terms, excesses and insurer credentials meet their security criteria.
It also removes the risk of a contractor taking out insufficient cover, providing incorrect information when arranging insurance under a CCIP or invalidating their cover while it’s in force. This is outside of a client’s control but could potentially leave them without protection.
Using an OCIP also avoids any potential hiccups if a contractor goes out of business as any cover they had arranged may cease. This is a significant risk in the construction sector as businesses struggle with higher material prices, supply chain issues and labour shortages. Figures from The Insolvency Service show that 4,371 construction businesses went bust in 2023 – more than in any other sector2.
Consider the implications if a substantial contract of works was arranged in stages where each contractor arranges cover for their portion – if one contractor goes out of business and cover ceases, there could be significant gaps in coverage throughout the duration of the works, even if other contractors are unaffected.
Greater certainty
Even without a contractor going under, taking responsibility for the insurance through an OCIP gives a client certainty over cover.
A lengthy due diligence exercise would be necessary to ensure this certainty under a CCIP. Checks on cover would need to be carried out at the outset of the project and, where annual policies are involved, repeated at yearly intervals.
It would also be prudent to speak to contractors’ insurers to ensure they kept the client notified of any attempt to cancel cover mid-term.
With an OCIP there’s also more certainty if a loss occurs as all claims would fall to the client’s insurance programme. Under a CCIP, it can be difficult to establish responsibility for a loss, especially where the contract is let in separate phases with different main contractors.
Broader cover
An OCIP also offers an opportunity to arrange broader cover. Clients have the option to include cover for certain exposures and risks that only apply to them, for instance additional cost of construction; delay in start up / advance loss of profit; judicial review; and environmental liability.
This can be advantageous. As an example, take a university with a construction project for a new halls of residence for 200 students. The project is scheduled to complete in time for the new academic year but two weeks before it’s finished, a fire guts the building, setting back completion date by over six months.
Under a CCIP, the cost of reinstating the works would be covered but if the university had arranged an OCIP, they could have included cover, as an example, for advance loss of profits and costs associated with the delay in completion. This would have enabled the university to potentially claim for the rental income they would have received if the halls had been finished on time.
Insurance first
Insurance requirements for any construction project need to be considered at the earliest possible stage. This will allow all potential options to be evaluated before the project is put out to tender.
This also enables a client to outline the insurance arrangements within the tender document. This will ensure that contractors are aware of any responsibilities they may have to arrange cover and enable them to factor the costs of this into their bid. It also ensures that, where the client opts for an OCIP, the cost of insurance cover isn’t included in the bid.
Ultimately, being clear in the contract for the works and ensuing everyone is aware of the responsibilities around insurance, will enable legal and procurement teams to draft appropriate terms and better protect the contracting authority from risks associated with larger construction projects.
More information
Aon can support your insurance arrangements on any construction project. Its specialist division, Aon Construction, has a dedicated team who can provide expert input and advice on OCIP design, technical, contractual and placement issues.
To find out more about construction insurance and to discuss your requirements ahead of any construction project, speak to your Aon consultant or contact Matt James at [email protected].
1Green shoots in key construction sectors lift optimism for 2024 | Glenigan
2Commentary - Company Insolvency Statistics October to December 2023 - GOV.UK (www.gov.uk)
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