Course of Construction Insurance vs. Operational Insurance – Risk Management Considerations
By: Brent Blasetti
What and When?
When evaluating risks associated with the construction of a new facility, or the modification of an existing facility, it is important to have a good understanding of the distinction between construction insurance and operational insurance and when the policies commence and cease.
Why would I want a construction specific insurance placement?
Construction insurance placements offer many advantages over traditional operational insurance policies. Construction policies cater to the many different parties involved in the project, the unique exposures presented during construction and the need for coverage that is more broad than a traditional property or liability policy provides. Advantages include:
- Segregation of construction risk from existing operational exposures. Construction risks are commonly excluded from operational policies.
- Policies include all facets of the project such as materials, transit, property off site, and can include all contractors, sub-contractors and suppliers associated with the project.
- Simplifies claim recovery for insured losses. Normally there is only one policy to look to and a single lead insurer to negotiate with for recovery.
- Adds certainty and consistency to coverage, deductibles and quality of insurers.
- Will include high risk activities such as start-up and testing and commissioning. There is an ability to tailor cover for items such as defective parts, prototype cover, marine transit, delay in start-up/business interruption and unusual contractual exposures.
- Insulates operational insurance from higher risk construction activities.
- Oftentimes includes a warranty period which extends beyond cessation of the construction policy and during the first 12 to 24 months of operations.
Policies can be divided into two categories: protection of the physical assets included in the construction of the project and third party liability for property damage and bodily injury arising from people and property involved in the project.
Protection of physical assets, commonly referred to as Course of Construction insurance (COC) is normally effected the moment physical assets are procured. It is terminated when the project is handed over to operations for commencement of the project’s intended final use. It is not uncommon for projects to be handed over to operations while punch list items remain. It is critical to ensure that any outstanding work be reported to the Course of Construction insurer as losses associated with completion of the punch list or outstanding construction work will be excluded by the Operational insurance.
Third Party Liability
Third Party Liability exposures for construction projects are generally addressed through a policy called a Wrap-Up Liability policy. The Wrap Up policy is normally put in place when first site works are commencing and contracts are being awarded. The policy will cease, much like the COC policy, when the project is handed over to operations and will include a completed operations period of at least 12 months to extend coverage for work completed or for contractors returning to the site after completion for rework.
The Wrap Up policy will include all contractors, sub- contractors, owners and employees under a single policy so the issue of fault or contributory negligence from multiple parties does not complicate a claim defense and settlement.
Construction insurance can be as unique as each project and tailored to the specific needs of a project. Construction projects are considerably more hazardous than an established operational facilities due to the nature of the work involved, use of heavy equipment and heavy lifts, the significantly higher number of workers on site and likelihood of many different activities taking place at the same time.
As a consequence Underwriters will require considerably more information than they do when underwriting operational insurance policies. For example, to procure COC coverage underwriters will want a project schedule, project plans, manufacturers of major components, lists of contractors and suppliers among many other details that reveal the cost and complexity of the project.
For Wrap Up cover underwriters will want the project schedule, a list of contractors, payrolls, copies of contracts between parties among other details relating to who will be on the site, the type of work that will be formed (heavy lifts, installation, welding etc.) as well as when and how long they will be there.
Construction insurance developed from the need to address increased risk and complexities of a construction project along with the unique nature of having multiple parties involved in the same place at the same time.
When considering your own construction risks it is important to understand how construction specific insurance will better address your needs, when it should be put in place and what type of cover best suits the work being performed.