01 April 2025
Why UK developers should consider owner-controlled insurance programmes amid rising contractor failures
In the fast-paced and often volatile construction industry, UK developers face an array of risks when it comes to the financial stability of contractors. One of the most pressing concerns is the risk of contractor failure. When a contractor becomes insolvent, it can lead to project delays, cost overruns, and sometimes even project abandonment. An effective way to mitigate these risks is through the use of an Owner Controlled Insurance Programme (OCIP).
An OCIP is a bespoke set of construction insurances, designed to suit all interested parties but in particular the Employer.
The insured parties can include:
· Employer
· Main Contractor(s)
· Sub-Contractors of any tier
· Funders
An OCIP generally consists of Construction All Risks, Terrorism Third Party Liability and Non-Negligent Liability insurances but can also be extended to include Delay in Start-Up insurance.
In the unfortunate event of a contractor failing, having an OCIP greatly reduces construction insurance-related disruptions. The OCIP will remain in place and continue to cover the project until practical completion. There should be no concerns regarding continuity of coverage, and where a new contractor is appointed, they will simply be added as an insured.
In the unfortunate event of a contractor failing, having an OCIP greatly reduces construction insurance-related disruptions.
How an OCIP can specifically address contractor failures and provide substantial benefits to developers in the UK market?
Enhanced Control Over Coverage and Claims
By implementing an OCIP, developers gain more control over the insurance coverage and claims process. Instead of relying on contractors to secure adequate insurance coverage, which may vary in quality and limits, the owner-controlled programme ensures that all parties involved in the project are covered by the same policy. This is particularly beneficial in the event of contractor insolvency, as the developer can oversee and manage claims directly, streamlining the process and avoiding potential delays caused by contractors’ insolvency issues.
Reduced Claims Exposure
Where Contractors are arranging construction insurances, they are responsible for their own coverage, and their financial health can affect their ability to pay claims. If a contractor fails and is unable to meet their obligations, the project owner may face significant difficulties in recovering costs associated with damaged property or injuries that occur during construction. An OCIP ensures that claims are managed under a single, unified policy, reducing the risk that an insolvent contractor will be unable to meet their liabilities. This offers developers greater peace of mind, knowing that the insurance coverage is not contingent on the financial health of individual contractors. Additionally, claim proceeds are less likely to be entangled in legal disputes.
Seamless Continuity in Project Delivery
A key advantage of an OCIP is that it maintains project continuity, even in the event of contractor insolvency. Since the insurance programme covers the entire project, the developer is not left scrambling to arrange alternative coverages or find new contractors to take over the work. The OCIP is designed to ensure that work can continue uninterrupted, even if one or more contractors experience financial distress. This minimises disruptions and helps maintain the original project timeline, ultimately protecting the developer’s investment.
Mitigating Legal and Financial Risks
If a contractor becomes insolvent, the project owner could face potential legal and financial challenges, especially if the contractor has left behind unfinished work or unresolved liabilities. The OCIP can help mitigate these risks by ensuring that the project owner has adequate insurance coverage to deal with any potential legal claims, repair costs, or other financial repercussions that may arise from contractor insolvency.
What other construction-related policies should be considered?
Latent Defects Insurance (LDI) is another policy that can offer protection to developers, in relation to contractor failure. It acts as a first-party policy, and beneficiaries of the policy can take comfort that it remains unaffected by contractor insolvency.
LDI Latent Defects insurance can benefit the building developers, owners, funders, tenants and any other users or occupiers of the building, and the policy is freely assignable to any future owners, funders and tenants.
This coverage ensures that newly built properties remain protected for 10 to 12 years after practical completion, covering the cost of repairing or reinstating structural defects caused by design flaws, poor workmanship, or defective materials.
Impact of contractor insolvency on the developer
Project-related consequences:
· Delays to the construction programme, practical completion, and commercial operations
· Loss of Revenue
· Increase Build Cost
· Legal and contractual amendments leading to additional expenses
Insurance-related consequences:
· If the Contractor had procured the construction insurances, then they will no longer be in place at the point of failure
· The developer must urgently arrange alternative coverage - ideally through an OCIP.
· Mid-term OCIP placements may come with restrictive terms, higher excesses, and inflated premiums.
Conclusion
In today’s construction landscape, where contractor insolvency is an ever-present risk, an Owner Controlled Insurance Programme offers developers a powerful tool to protect their projects. By providing greater control over insurance coverage, reducing reliance on contractors’ financial stability, and ensuring continuity in the event of insolvency. An OCIP not only mitigates the risks of contractor failure but also provides a cost-effective and streamlined approach to risk management. For UK developers navigating an increasingly unpredictable market, an OCIP can offer the peace of mind necessary to ensure that construction projects are completed successfully, regardless of the financial fate of individual contractors.
Incorporating an OCIP into your construction projects is a forward-thinking move that can help protect your bottom line and deliver long-term benefits in the face of financial uncertainty
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