You are an entrepreneur on a large project. If something goes wrong, whose insurance should cover it: yours, your subcontractor’s or the owner’s? Large, complex projects often have a complicated puzzle of insurance coverage insurance. If the pieces do not fit together correctly, you can end up with cover gaps and disputes. Settlement insurance provides a simplified solution.
Construction disputes are becoming more expensive
Global Construction Disputes Report 2021 from Arcadis shows a worrying upward trend in the cost of construction disputes. The global average value of disputes rose from $ 30.7 million in 2019 to $ 53.26 million in 2020. In North America, the value of disputes increased from $ 18.8 million in 2019 to $ 37.9 million in 2020. The main cause of disputes was when owners, contractors and subcontractors failed to understand or comply with contractual obligations.
In 2020, the construction industry was hit hard by the pandemic. Since then, the shortage of labor and materials has continued to plague the industry. According to the Q4 2021 Commercial Construction Index from the US Chamber of Commerce, 91% of contractors have difficulty finding skilled labor, while 95% face at least one material shortage.
These problems can lead to increased risks and delays. It is important to have the right insurance coverage, but when contractors, subcontractors and owners are all responsible for securing their own coverages, risky cover gaps and expensive overlaps can arise. Closing insurances are usually seen as an effective way to simplify coverage, control costs and reduce disputes.
What is settlement insurance?
Settlement insurance refers to controlled insurance programs (CIP) that combine coverage for all contractors and subcontractors in a project into one insurance program. OCIP is bought by the owner and CCIP is bought by the contractor.
Although these programs can be expensive, they also provide simplified coverage, so if a claim occurs, it should not be a question of whose insurance is responsible. Having a single program can also reduce or eliminate coverage disputes and layoffs that can drive up costs.
Most graduation programs are used to cover a single large project. However, IRMI states that certain termination policies may serve other purposes. A maintenance wrap can be left on indefinitely to cover ongoing contract work, and a rolling-up can be used to cover multiple insurance projects.
Although policies can vary considerably, Investopedia says that termination programs often include the following coverage:
- General responsibility
- Builders’ risk
- Property damage
- Commercial vehicle
- Umbrella responsibility
- Employee compensation
Tips to make a CIP work
While termination policies can help solve many of the coverage issues faced by large projects, they can have their own disadvantages. First, they are expensive, although this is understandable given the amount of coverage provided.
If you are considering using a termination policy to manage your construction project risks, make sure the policy really fits your project.
- Decide if an termination policy is even needed. CIPs can simplify coverage, reduce the risk of litigation and control costs in the right situation, but they are not always appropriate. CIPs are typically used for large projects worth at least $ 10 million.
- If a CIP is needed, the next step is to determine the appropriate type. For example, will it be an OCIP or a CCIP? How will this affect the bids? And do you need a regular wrap up, a rolling wrap up or a maintenance wrap up?
- Check who and what is covered. A CIP is meant to be all-encompassing through design, but of course there are limits to this. There may be certain requirements that the parties must meet to be covered by the insurance, and some parties may be excluded. In addition, although some CIPs include many different types of coverage, others may be more limited in scope. Confirm that the limits and types of coverage are adequate and determine when other insurance policies may be necessary.
- Review the insurance with other agreements in mind. Think, for example, of any damages clauses in your contracts. If a claim occurs, can the compensation clause mean that you are responsible for losses that are not covered by the settlement insurance?
Whether you use an insurance solution or not, securing the right coverage for your construction project can be a daunting task. BNC Insurance can help you get the coverage you need. Read more.