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Principal-Controlled Insurance Programs (PCIP)

A guide for construction project owners

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Owners and developers often overlook the importance of taking a strategic approach to project insurance. We are often asked why companies would depart from the tried and tested approach of letting the contractor insure the project works – after all, the contractor carries the risk in the first instance, doesn’t it?

This assumption is not correct, and while a contractor controlled insurance program (CCIP) is often the path of least resistance, there is an alternative that can provide greater protection, control, and assurance. The advantages of a principal-controlled insurance program (PCIP) are numerous and can deliver real value to owners.

Table of Contents

What is a Principal-Controlled Insurance Program? 

Most standard contractual drafting globally makes the contractor(s) carrying out the project construction works responsible for insuring the construction and third-party liability risks:

  • Contract Works (CW) is designed to insure material damage to the project contract works
  • Third-party liability (TPL) insurance is designed to cover legal liability to third parties arising from the project, primarily arising from injury or damage.

A PCIP is an alternative procurement approach that can provide an owner with greater protection, control, and security. In its simplest form, a PCIP is an arrangement whereby you take control and purchase the CW and TPL insurances in the form of a bespoke, all-party cover for the project. 

There are significant commercial benefits to you (or the project principal) in arranging these insurances yourself, which require minimal amendments to the standard construction contract form.

These amendments should not change any of the contractual elements regarding risk allocation. They would only concern the single party who procures the CW and TPL insurance on behalf of all project parties as part of a PCIP.

It is important to note that the amendments should be made to the tendered construction contracts as early as possible if you are to obtain the full commercial benefits of such an approach – ideally prior to tendering the construction contracts. Marsh Specialty is experienced at working with all major standard contracts and bespoke forms and assisting with the required contractual amendments.

Taking a PCIP approach enables the owner to:

  • Arrange delay in start-up (DSU) insurance to provide an indemnity for lost revenue arising from a delay caused by insurable damage. DSU insurance is only available to the party arranging the CW insurance.
  • Obtain finance for the project on a non-recourse basis; it is unlikely that lenders’ insurance requirements (including DSU) can otherwise be met.

If DSU or non-recourse finance are required for any project, these factors would usually necessitate a PCIP approach, even before consideration of the commercial benefits outlined below.

Why project owners should consider a PCIP

The advantages of using a PCIP for construction project owners can be summarised under cost, cover, control, and claims.

Cost

A PCIP allows you as the owner to be in control of the insurance costs, rather than the contractor arranging the cover and charging you for it. The owner will always pay the insurance costs, whether directly on a PCIP basis or indirectly through the contract price. If you pay indirectly through the contract price, there is rarely transparency of the CW and TPL insurance cost being charged to you.

Where contractors arrange the insurance, they may add an element of profit or administration cost to the insurance line item. Where multiple contractors are involved, there are likely to be overlaps in insurance coverage in some places and hence wasted premium costs transferred to you.

Based on previous comparisons where we have had transparency on costs, significant premium savings may be achieved by taking a PCIP approach.

A PCIP provides full transparency of cost to the owner and puts you in charge of procurement. Where you have numerous contracts or projects, the cost savings are multiplied.

Cover

Using a PCIP means you choose the insurance cover to be designed for your project. 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.

Regardless of the insurance procurement approach, some contractual risks will fall to you as the owner, and you are dependent on the project cover arranged to insure your liabilities. The contractors are primarily concerned with their retained risks. Without contractual provision for your risks, and a robust audit and approval process, you could end up with a significant and unnecessary uninsured loss.

In terms of the design of the project insurance cover, critically it should protect the interests of the whole project rather than each individual contract.

Where you have multiple contractors, they will only insure their own works. Solutions will need to be found to insure any partially completed construction works when they are handed over to you or another contractor. A PCIP is designed to meet your development requirements (not that of the contractor alone) and insure the project to the standard required, from start to finish.

Control

As the term implies, a PCIP approach means you, as the project principal/owner, are in control of both the cover and the panel of insurers providing the project insurance. The identity, reputation, and financial standing of these insurers should be important to you on any insurance placement.

As an owner, you are also named as the principal on the insurance policy, with control of the policy. Should any issues arise and a contractor needs to be replaced due to non-performance, insolvency, or any other form of contract frustration, there should be no concerns regarding the continuation of insurance cover.

Claims

Having a single insurance program to help cover 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 are in control of the claims monies and, in the event of a major incident, this could be key in settling any contractual disputes. From a third-party liability perspective, you may be concerned that any losses are settled quickly to reduce any negative project PR. This can be factored into the program design and will not be reliant on a contractor who may be reticent to affect their policy claims history.

Rather than increasing the administrative burden, a PCIP allows the cover arranged by you to be bespoke and efficient. It does not require checks to be carried out on each contractor’s coverage, often on an annually renewable basis.

Is a PCIP approach right for you? Contact your Marsh advisor for more information.

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What does a PCIP look like?

There are three core classes of insurance that form a PCIP:

Contract Works

This policy is designed to cover physical loss or damage to the contract works. If there is insured damage (e.g., a fire), this policy is designed to indemnify the insured for the cost of reinstatement of the damaged works. The standard insured parties are the owner/developer, lenders, the main contractor, and sub-contractors. Any party with an insurable interest can be added as coinsured if required.

Third Party Liability

This policy is designed to provide indemnity for legal liability following third-party property damage or third-party bodily injury arising from the works. The standard insured parties are the owner or developer, lenders, the main contractor, and subcontractors.

However, if requested, any party with potential liabilities arising from the project could be added as coinsured. The limit to be purchased is a commercial consideration for the project but you should select this with due consideration for the overall project exposures.

Delay in Start-Up

Many clients are concerned about the revenue they will lose if the project fails to complete on time. Delay in start-up insurance (DSU) is designed to indemnify the owner and lenders (if applicable) for financial loss following a delay in project completion, that has arisen from an event covered under the CW policy. This insurance can only be purchased as an extension to the CW policy and generally only where the owner has taken a PCIP approach.

The sum insured can be selected to suit the project needs but will typically be revenue, gross profit (less any variable costs), fixed costs, additional financing or interest charges, and increased working costs (e.g., alternative accommodation).

As noted previously, lenders will typically mandate this coverage, so DSU insurance is essential and usually non-negotiable where non-recourse project finance is employed.

Other insurances

A PCIP approach also allows the owner to take a proactive view on the risks and the availability of mitigation solutions, including insurance. Other insurance products that you might consider will vary depending on the location and the nature of the project. They might include:

  • Environmental impairment liability
  • Marine cargo/transit insurance
  • Professional indemnity insurance (single project or owner’s protective)
  • Political risks

Features and benefits of a PCIP

  • The owner can tailor the policy to cover all appropriate parties, as opposed to several potentially disjointed arrangements
  • Adaptable to changes in the project, such as increased values and extensions of the period
  • Non-cancellable policy for the duration of the project
  • Helps to eliminate unknown exposures arising from inadequate insurance provided by contractors
  • No uninsured contracts or coverage loopholes
  • Can protect owner’s liabilities where contractors’ are limited 
  • Streamlined interface between construction and handed-over works
  • The owner retains control of insurance market security
  • Facilitates purchase of cover for existing structures and delay in completion coverage
  • Facilitates a uniform and disciplined approach to risk management
  • Allows efficient management of phased handovers

  • The owner retains control of insurer selection; important for long-term projects
  • Streamlines project administration; no need to check and re-check contractors’ insurances
  • Known and fixed insurance cost at the outset
  • The owner achieves benefit of bulk purchase of insurance in terms of premium costs, coverage, and reduced administration costs
  • The owner can ensure that lenders’ requirements are satisfied as PCIP is a lender’s preferred approach
  • Certainty that premium is paid and that insurances are current
  • Avoids duplication of insurances and can save premium for the project
  • Eliminates overhead and profit loadings by a contractor
  • Not affected by insolvency of a project partner or removal of a contractor from the project

  • All parties enjoy joint insured status; no subrogation issues
  • Helps to eliminate claims between contracting parties; promotes a “no blame” culture
  • The owner has direct access to insurers for claims matters
  • Helps to eliminate legal and contractual disputes between parties
  • Claims monies are paid direct to the owner

Is a PCIP approach right for you? Contact your Marsh advisor for more information.

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Marsh Specialty has the experience to deliver real benefits

For more than 30 years, colleagues in Marsh Specialty have worked in partnership with clients. Our specialist teams are at the forefront of providing innovative solutions for developments in Australia and globally.

We work with both developers and major project owners on some of the largest and most complex infrastructure and building projects, including public, commercial, and public- private partnership developments. 

  • Our global construction team places US$2.5 billion of construction premium annually
  • On average we review and provide advice on over 2,000 contracts each year

For more information on how we can help with your risk requirements contact your Marsh advisor. 

LCPA 21/162