5 Key Steps to Designing an Effective Project Insurance Program

The importance of insurance and operational risk management solutions as key risk management tool for projects that need financing cannot be underestimated. However, there is no standard or perfect insurance policy that can be applied to all projects.

There are important factors that the one must consider before starting the project in the bid to determine the ‘ideal’ insurance program. The steps often apply to apply to multifarious projects; they are general procedures that can be applied for all insurance project sizes.

They include:

Step #1:  Risk Assessment Practices and Risk Inventory

They are a myriad of risk assessment practices that can be applied in the construction industry presently. Some of them have proved to be more effective. Others have shown a low success rate. For a practice to be successful and effective, it, must meet the following requirements:

  • It should be inclusive of a broad spectrum of the stakeholders of the project. The stakeholders include the design team, project owner, lenders, contractors and subcontractors among others.
  • Developing a risk inventory: The preliminary plan coupled with the risk inventory will help determine and manage the highest priority risks. The risks would be determining whether insuring, controlling or transferring would be necessary for the project.
  • Updating the risk assessment and registering the risk during the important milestones of the project in the bid to address any changes in the project against the built conditions.

Step #2:  Determining Risk Allocation and Ownership

After the risks have been identified and assessed, the next step is planning risk allocation. The risk allocation decision will be based on who is better placed to “own” individual risks. It is important to note that the planned risk ownership intent may vary depending on the commercial considerations. For instance:

  • Does the expected risk owner accept the risk at a reasonable cost?
  • Will the risks be designed out as part of the final plan?
  • External factors such as suppliers of the equipment, lenders, etc.

Nonetheless, developing a reasonable risk ownership plan enables the insurance provider to develop contingency budgets, contracts and insurance documents.

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Step #3: Designing the Insurance Program, Feasibility Analysis and Budget Creation

Before releasing the procurement requirements, it is important to create an insurance program. The program should spell out the minimum coverage requirements that can be easily communicated to bidders. Also, the expertise of a qualified insurance professional should be sought while creating the design. The professional should have a proper understanding of the market environment and most specifically the construction type under discussion. It is the duty of the project team to design an insurance plan that will cover all the identified risks during the risk assessment. Lastly, it should include all policies that are commercially available to the participants of the project.

One helpful tip would be considering alternative insurance such as:

  • Owner-controlled insurance programs
  • Contractor –controlled insurance program
  • Project specific insurance such as environmental or professional liability

However, the emphasis should be on specifying on the needed coverage that will protect the project. Most people tend to focus on the service provider. The service provider will be determined at a later stage through negotiation and procurement.

It is the role of the project team to develop estimate project costs for selected project designs which will enable them to create an insurance cost estimate. The best time to conduct the estimate of the insurance cost would be after the maturation of the design. At this point, it becomes easy to estimate factors such as labor costs, schedule, the cost of construction and other rating factors. The estimation should be inclusive of retained losses as a result of self-insurance or expected deductibles within the insurance program structure. The estimated insurance cost margin forms the baseline from which bids results for the insurance can be compared.

Step #4: Contracts and Procurement

Most of the general conditions included in the procurement papers are not well researched. They are usually developed with an intended approach to identification and allocation of risks and a distinctive insurance design program. As a result, bidders may present a wide array of alternatives, and there may be no time to consider them resulting in incomplete information.

As long as the prior steps have been followed in a concise language of indemnity, it becomes easy to develop the risk allocation tactic framework. The insurance requirements can be crafted carefully to match the desired coverage. As long as the right steps are taken to price and design the policy, instructing bidders on the proposed alternatives compared against the budget estimates for the insurance becomes easy. It should offer a win-win situation for both parties.

Step #5: The Final Structure and Program Negotiation

Assuming the bids alternatives are solicited, it is important to pay close attention to the proposals. When reviewing the proposal for the insurance alternatives, always consider the cost as the priority item.

The CCIP and OCIP are practical alternatives for larger projects that have an average risk management practice. Owners for single projects may not find OCIP superior considering factors such as coverage, cost and a host of other factors.

Owners with multiple projects will be favored by OCIP as compared CCIP for the first time if a contractor implements their projects.

It is for this reason that a flexible procurement process is encouraged as it gives rooms for innovative proposals that offer the best results. Lastly, the input of an experienced insurance professional in developing and evaluating insurance programs is paramount.

No matter what your insurance needs may be, work with the professional and dedicated team at Allied Insurance Brokers to help you mitigate risk on the worksite. With over 34 years in business, you can bet that our team has deep knowledge of the industries we work in, helping you come up with an efficient & solutions-driven approach to mitigating risk and strengthen your business. Discover for yourself how our risk engineering services can help you embrace risk head-on and contact Allied Insurance today.

*Allied does not deem this blog entry as a complete and thorough listing or overview of the above topic, and does not recommend it be primarily relied on. It only highlights some common issues and resolutions. For a thorough overview, please contact Allied’s Risk Engineering Division.