And in recent months with multiple construction companies in the UK going into administration, the sector continues to show signs of distress. This was enforced by the announcement of a further 24 construction related companies going into administration in March alone1.
Contractor insolvencies have consequences for all parties involved in a project, and with 16% of insolvencies in the UK and Northern Ireland occurring in this sector in 20212, it’s important to ensure your investment in any incomplete development(s) is protected.
We explore the insurance considerations required in the event the contractors used for your sites or projects go into liquidation. Some of your immediate considerations should include:
Ensuring the development is insured and protected against any material damage that may occur, whilst the site is uninsured and vacant.
Contractor Controlled Insurance vs Owner/Employer Controlled Insurance Programmes
There are typically two types of insurance programme available for construction developments.
- Contractor Controlled Insurance Programme (CCIP), where the Construction All Risks (CAR) insurance responsibility falls to the contractor, covering the development throughout the construction phase plus a 12-24 month defects liability period, at which point it is handed over to the housing association for cover to continue under their property policy. Housing associations also have the option to insure the development on a contingent basis, which covers the site in the event the contractor goes into administration.
- Owner Controlled Insurance Programme (OCIP), is a bespoke set of construction insurances, designed to suit the needs of all parties to a project and is arranged by the housing association rather than relying on a contractor’s rigid annual insurance programme being adequate or the contractor placing project specific insurances. The OCIP approach may be of particular interest to housing associations that have wider interests (e.g. investors, lenders, councils, freeholders, etc) to protect. The housing association insures the development, removing the need for the contractor to insure.
The key factors why an Employer would typically choose to procure and arrange the construction insurances are:
- Ability to protect anticipated revenue / Delay in Start-Up (DSU). Should there be a specified perils damage event e.g. fire or escape of water leading to a delay to the project, the contractor would usually be granted an extension of time, therefore no liquidated damages can be levied. This risk is insurable under an OCIP via Delay in Start Up (DSU) insurance, it is not available where the contractor provides the CAR insurance as they do not have an insurable interest in the Employer’s anticipated revenue. Furthermore, Lenders typically prefer the Employer to arrange DSU and control the insurances.
- Control; Should the main contractor become insolvent, issues are greatly reduced where Employers have their own project insurance programme in place; plus any claims proceeds would not get caught up in any insolvency proceedings. Furthermore, if due to insolvency or a disagreement the Contractor needs to be replaced, under an Employer arranged programme this would likely be achieved for no additional premium. If the Contractor was responsible for arranging the programme, a new premium of at least double the cost due to re-procuring would be charged to the Employer and the terms and conditions amended or even restricted. There would also be an element of ambiguity around coverage for any pre-existing defects in the works done to date, as any new Contractor may not agree to assume responsibility.
- Cost; Ultimately the Employer pays for the insurances under the construction contract and yet more than likely will not fully understand the insurance costs if the Contractor procures the programme. This can allow Contractors the opportunity to introduce additional costs to the bid for their time spent arranging and managing the insurances thereby increasing cost to the overall project. By controlling procurement, Employers understand the actual insurance cost and should request that tendering Contractors discount their bid to reflect insurances procured and provided by the Employer. Premium can be paid in instalments in line with budget requirements.
- Tailored policy wording towards the housing association which ultimately reduces their risk.
- Insurer Selection; The Owner / Developer can control which insurer’s they want to use, taking into consideration existing relationships that can be leveraged.
- Claims; Reduced likelihood of disputes between the project parties (and their individual insurers) as all parties are covered under the OCIP, leading to faster claim payments.
- Transition to Property Phase; Where an OCIP solution is chosen the Employer can control both the Construction and Operational phase placements ensuring that there is no gap and the covers dove tail.
Without a contractor responsible for your development, you will also have a legal liability for the vacant site and will need to consider your public liability risk. You should inform your insurance provider of the situation and ensure that the liability risk is adequately covered whilst you organise a new contractor.
How can we support you?
In a high-risk industry such as construction, securing adequate cover for your business and its activities can be vital. With specialist housing and construction teams, we can advise you and help to build a bespoke policy to meet your unique requirements.
Get in touch to discuss your businesses risks today.