Owners and developers of Renewable Energy Projects often default to the conventional method of allowing the contractor to insure the project works. This approach seems logical as contractors are perceived to bear all the risk. However, this assumption is not entirely accurate. While a Contractor Controlled Insurance Programme (CCIP) is often the path of least resistance, there is an alternative that can offer superior protection, control, and assurance. An Owner Controlled Insurance Programme (OCIP) has numerous advantages and can deliver substantial value to owners.
Understanding OCIP and the Benefits for Your Renewable Energy Project
Typically, global standard contract drafting assigns the responsibility of insuring the construction and third-party liability risks to the contractor(s) executing the project construction works. These insurances, Construction All Risks (CAR) and Third-Party Liability (TPL), offer significant commercial benefits for the project and require minimal amendments to the standard construction contract form. These amendments do not alter any contractual elements regarding risk allocation but only determine who procures the CAR and TPL insurance on behalf of all project parties as part of an OCIP. It's crucial to make these amendments to the tendered construction contracts as early as possible to fully reap the commercial benefits of such an approach – ideally before tendering the construction contracts. An OCIP is an alternative procurement approach that offers greater protection, control, and security. In its simplest form, an OCIP is an arrangement where the project takes control and purchases the CAR and TPL insurances in a bespoke, all-party cover for the project.
Benefits of an OCIP
Cost
As the owner, you control the insurance costs, rather than the contractor arranging the cover and charging you for it. You will always pay the insurance costs, either directly on an OCIP basis or indirectly through the contract price. If you pay indirectly through the contract price, the CAR and TPL insurance cost being charged is rarely transparent. An OCIP provides full transparency of cost to the project and puts you in charge of procurement.
Cover
The project chooses the insurance cover to be designed for it. Contractors will select a level of cover to reflect their risk appetite and may arrange a reduced level of cover to cut costs and increase profit. Uninsured losses can threaten a project, especially if the contractor experiences financial difficulty.
Control
You control both the cover and the panel of insurers providing the project insurance. As the owner, you are also named as the principal on the insurance policy, with control of the policy. There should be no concerns regarding continuation of insurance cover, should any issues arise and a contractor needs to be replaced due to non-performance, insolvency, or any other form of contract frustration.
Claims
A single insurance programme covering all damage or legal liability events promotes a smoother claims handling process, minimising the potential for dispute and offering a clear route to recovery. You control the claims monies and, in the event of a major incident, this could be key in settling any contractual disputes.
What Does an OCIP Look Like?
An OCIP comprises three core classes of insurance:
All Risks Construction Insurance
This policy safeguards against physical damage or loss to the construction works. In the event of insured damage, such as a fire, the policy compensates the insured for the cost of restoring the damaged works. The standard insured parties include the owner/developer, lenders, the main contractor, and sub-contractors. Additional parties with an insurable interest can be included if necessary.
Third-Party Liability Coverage
This policy offers compensation for legal liability resulting from third-party property damage or bodily injury related to the construction works. The standard insured parties are the owner/developer, lenders, the main contractor, and subcontractors. If needed, any party with potential liabilities related to the project can be included. The purchase limit is a commercial consideration for the project.
Delay in Project Start-Up Insurance
Many clients worry about potential revenue loss if the project doesn't complete on time. Delay in start-up insurance compensates the owner and lenders (if involved) for financial loss due to a delay in project completion, resulting from an event covered under the "All Risks" Construction Insurance policy. This insurance can only be purchased as an extension to the "All Risks" policy and is typically only available when the owner has adopted an OCIP approach. As previously mentioned, lenders usually require this coverage, making it essential and often non-negotiable when non-recourse project finance is involved.
