The advantages of Principal Arranged Insurance
If you propose to develop a property that you own, then you should consider whether you or your builder/project contractor insure for risk that present during the course of construction.
Property owners are faced with exposure to economic loss during the course of construction. It is not uncommon insurances to be arranged by the contractor. In turn the principal contractor may push down to its contractors and consultants the obligations to insurer.
In issue however is that the principal does not control those policies. It may be a beneficiary to cover but it has little say in how the coverage is arranged as it itself is not the policyholder. Otherwise, some policies require there to be legal liability (such as professional indemnity or public liability) before the benefits of cover are advanced: there may be loss, cost and expense that accrues and no determination on legal liability in which case the owner receives no benefit until liability is determined. Otherwise under first party coverage sections where the principal is not conferred the benefit of cover as they are not the policyholder, there may be no cover – for instance for mitigation costs, for existing structures (see our article here) or for advanced loss of profits (see our article here).
Significant economic consequences can flow during a project and it makes sense for owners to select their coverage and be the beneficiary of the cover. It makes more sense when considering that in the contractor arranged insurance model the principal generally pays for the insurance costs, yet it does not set the scope of cover nor is it the first beneficiary of the policy.
Principal Arranged Insurance (“PAI”) is the solution to protect owners. These policies can be arranged to cover the project and all of its participants, or as umbrella policies difference in conditions insurance above participants cover. The intention is to provide certainty around what is covered during the works.
PAI insurance is not a new concept. Many large property owners undertake their project on a PAI basis, and most state governments will also insure their projects in lieu of relying on the contractors policies.
The key advantages of this approach include:
- The property owner (Principal) retains control over the choice of Insurers, and determination of their security. Further, a favourable business and risk relationship with a particular insurer and your business may result in some savings in premiums.
- The Principal is able to negotiate the extent and level of the cover to be arranged including excesses.
- The direct supervision of Insurance costs, budgeting and identification are simplified.
- The possibility of an uninsured loss arising, either due to misunderstanding or absence of insurance cover, is reduced. Where a PAI policy is in place, there is a lesser need to check a multitude of different policies provided by different contractors and subcontractors to ensure that adequate cover is given upon each contract. The “Principal Controlled” method relieves the Insurance Officer or Risk Manager of the onerous responsibility of assessing acceptable policy conditions under the terms of the policies affected by each contractor. Consequently, there are considerable savings in the costs of administration of the insurance cover.
- The Principal retains control and knowledge of when and which insurance is put in place. It is not uncommon that construction commences where the only evidence of insurance presented is a certificate of currency, which does not show the full extent of cover, nor the restrictions of the insurance contract utilised. Sometimes, through oversight, contractors may begin work before they have arranged insurance.
- The Principal can impose excesses upon small contractors that they are capable of bearing without offending their financial viability.
- A single Insurer or panel of Insurers deal with all losses appertaining to the specific risk and subsequent prompt settlement of claims may be achieved.
- Cover can be extended to continue after completion of separate parts of the works.
- Some overall premium saving should be achieved since premium rates will not be loaded by all of the contractors’ and subcontractors’ profit elements, on-site costs and insurance costings. Also, it is worth remembering that many contractors have blanket policy premium rates which take into account all their activities and not the specific project.
- In a difficult economic climate, the risks associated with liquidation following major loss are largely removed. The property owner can ensure that all claims are payable directly to themselves for distribution in accordance with the terms of the insurance contract. Thus, any large claim payment will not be available to the creditors of a contractor in liquidation.