Blog: Why we need to educate the property sector about project insurance

Carrie Arnold

Bridge Insurance Brokers' Carrie Arnold discusses how brokers can help developers reduce setbacks if their contractor collapses.

The construction industry has been rocked recently, with the news that administrators have been called in to well-known contractors Pochin’s.

A key player in construction, their demise is symbolic of an industry that is in dire straits. Competition is fierce and costs are escalating: a factor that is not aided by Brexit impacting on import prices.

As well as the knock-on effect of Pochin’s collapse to workmen and residents, situations such as this can prove a real headache for developers and building owners, many of whom will have appointed the lowest bidder to try to keep costs down.

Collapse
Some developers have in-house construction teams, meaning they are able to cover the work and reduce setbacks if their contractor backs out or goes bust.

However, it’s not just about the build itself. The collapse of a contractor mid-build will open up a quagmire of blame and costly debates if the wrong contractual option is selected.

Pochin’s customers could now be left scrabbling round trying to find alternative insurance cover mid-project - or worse, having to cover claims costs at the same time as looking for a new contractor. Otherwise, as we have seen with Carillion, vast projects could simply be mothballed.

Brokers
As insurance brokers, we have a collective responsibility to educate developers on the alternatives that are open to them. We know that there are better insurance options, it just takes a little time at the beginning.

The current norm is that insurance brokers behave reactively to lawyers, who will have advised developers on their building contract - and hence the insurance obligations within it.

It’s the traditional path, but that doesn’t mean it is the right one. Developers - and solicitors and financiers - need to be shown that there is a better way.

With new builds in particular, the responsibility of identifying all potential risks and sourcing the right insurance product normally goes to the main contractor at the outset of the project.

A JCT, which sees the contractor insuring the build, is fraught with problems. This type of contract benefits the contractor, who retains all the control.

On a contractor’s insurance programme a developer’s loss of profits and additional interest charges are not covered in the event of an insured claim. And in the event of a claim, the monies will go to the contractor, NOT the developer.

Control
A newer, much better approach that we should all be advising on is an OCIP (Owner Controlled Insurance Programme).

With an OCIP, the developer / site owner is in control and is covered more comprehensively for liability and loss.

An OCIP covers a range of risks, from a delay in start-up to acts of terrorism, and means all knowledge about the policy - the excess, costs, cover and duration - lies with the developer, as opposed to the contractor.

There is flexibility - and the beauty is that it is simply a case of changing the insurance option within the JCT.

OCIPs can be tailored to the project, and developers’ needs and premiums are agreed at the outset of the project - they basically deliver complete transparency, which is needed if large contractors fold.

Sites are still insured without the subrogation issues that can arise under the traditional insurance proposition.

Exposure
Developers - who operate in a world of urgency and profit margins - need to realise that a little time spent looking at all options at the start of a contract, could protect them from a world of pain and profit loss later on.

Pochin’s is not the only contractor struggling; the whole industry is a little fraught and the traditional insurance route is quite simply no longer suitable. We need to ensure developers are less exposed.

By setting aside that time and allowing brokers to look around for the best OCIP, developers will remain insured if their contractors collapse, meaning the property owners’ interests remain protected, and they can focus on recouping their costs - and ultimately, getting the build finished.

Carrie Arnold is an account executive at Bridge Insurance Brokers

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