It used to be common for insurances during construction to be controlled by the contractor based on the FIDIC contract. However, as a project grows in size and project finance becomes mainstream, we often see that the project owner controls the insurances. We will introduce the merits of an “Owner Controlled Insurance Program” here, in accordance with such recent trend.
Contractors generally insure their own risks in construction contracts. This means contractors may not insure owner’s risks such as natural hazards, for which contractors are sometimes not contractually responsible. An “Owner Controlled Insurance Program” can achieve appropriate terms & conditions and choose preferable insurers for the project.
If a number of contractors are separately appointed for the project and the owner leaves the insurance arrangement to them, there might be non-insured risks, partially-duplicated coverage, and inconsistent terms & condition for each insurance. An “Owner Controlled Insurance Program” can avoid such problems and simply arrange all contractors’ insurances in one complete package.
Sometimes the insurance premium is included in the contract amount and the owner cannot get the actual figure. An “Owner Controlled Insurance Program” can ensure transparency in insurance costs and enable the owner to gain a clear understanding of the insurance program.
Lenders, the providers of project finance, prefer the insurances to be managed by the owner with whom they always discuss the insurance terms & conditions.
In most cases, the owner is asked by lenders to arrange Delay in Start-Up Insurance (DSU) so that repayment of a debt will be duly secured. DSU covers the owner’s loss of income, and, in principal, the owner has to purchase it. However, the DSU stand-alone arrangement is practically difficult. Therefore, it is most common for the owner, as a policyholder, to arrange DSU in combination with Marine and/or CAR.
Construction insurances should be smoothly connected to operation insurances . Especially when there are a number of plants in a project and each commercial operation date is different, the owner is strongly recommended to control both construction and operation insurances in a simple manner. This enables the owner to make both insurances work effectively and avoid unexpected claim problems resulting from any inconsistency.