Global demand for green energy is driving the development of subsea cable projects. While subsea cables can represent a cheaper way to transport energy than overground or overhead cables, they remain billion-dollar investments, so getting the right insurance and risk management approach is critical to securing finance.
Subsea cable project owners, such as national grids and joint venture partnerships, must decide early on in their planning process whether a contractor-controlled insurance programs (CCIP) or an owner-controlled insurance programs (OCIP) is most appropriate to their project. In this Q&A we compare the two options, examining:
What are the key differences between CCIPs and OCIPs?
What are the advantages of OCIPs for subsea cable projects?
Why might a subsea cable project owner chose a CCIP?
What are the key insurance market considerations around CCIPs and OCIPs?
Q: What are the key differences between CCIPs and OCIPs?
A: With a CCIP, your subsea cable project is essentially owned by the contractor until it's delivered. The contractor has obligations to ensure the project is delivered to specified requirements by a set deadline. Until then, the contractor covers liabilities related to your individual project or multiple projects.
Because CCIPs render contractors responsible for anything that could imperil delivery of your project, they can potentially represent a lower admin and resource burden for project owners.
As the name suggests, an owner-controlled insurance programme (OCIP) is co-ordinated by the project owners/employers involved in a subsea cable project. As the principle (owner), you're responsible for buying insurance cover on behalf of all contracted partners, typically structuring your OCIP to meet the key asset, legal liability and financial risks associated with your subsea cable project, covering insurance of the works, as well as third party, product and employer liability coverage.
While the OCIP route involves greater responsibility, these obligations offer greater transparency over how risks and potential points of failure are being managed, and with this, greater control over costs and the wider risk management approach.
Q: What are the advantages of OCIPs for subsea cable projects?
A: Subsea cable project owners might opt for OCIP arrangements where:
- There are substantial financial exposures arising if a project is completed late, or where projects are particularly complex or specialist
- The exposures involved aren't adequately addressed by contractual damage provisions meaning lenders or funders are only satisfied with an owner-controlled insurance approach
- Project owners want to take a more proactive stance and gain greater control, certainty than they can under CCIPs which may help to avoid disputes between parties and their insurers
- The project owner wants bespoke forms of wordings unique to the placement – including lenders' specific insurance requirements – to support greater certainty and the ability to drawdown lender funds
- Project owners want to extend the programme to address specific financial exposures arising from delayed project completion, such as loss of income, loss of interest and additional costs (delay in start up insurance cover).
- Owners want greater transparency to help eliminate insurance gaps or duplication of coverage
- Owners prefer coordinated claims reporting and handling facilities to retain greater control over repairing and reinstating damaged property
- Owners want the flexibility of arranging an OCIP either via one-off insurance placements or as annually renewable coverages, or to cover exposures relating to pre-existing foundations or facades
- Owners want to cover pollution and contamination liabilities/costs, construction plant and equipment, temporary buildings and contents, latent or inherent defects in completed works, as well as indemnities and contingent liabilities, such as defective title, defective lease, and restrictive covenant.
Q: Why might a subsea cable project owner chose a CCIP?
A: CCIPs offer embedded insurance costs in the contractor tender price. These costs may be cheaper because they are based on annual turnover and not the specific project.
In addition, under CCIPs, project owners can leverage contractors' insurer relationships and potential economies of scale.
In the present insurance market conditions, lower value cable projects can be difficult to obtain insurance for, particularly at an economical premium. Project principles are able to benefit from the economy of scale that a contractor may have through their pipeline of projects with insurers and therefore benefit from a more competitive premium.
Q: What are the key insurance market considerations around CCIPs and OCIPs?
A: When evaluating CCIPs versus OCIPs, you need to understand what's driving insurance costs and how you can be assured that every exposure is covered. What information is going into the market about your risk?
For example, we're seeing losses from defects as increasingly hard to insure, so the question is: how is the project principle managing design and manufacturing standards upon the contractor and how is the contracted marine warranty surveyor enforcing adherence and therefore managing these risks and what are they sharing with insurers to prevent prohibitively expensive premiums or rendering the risks uninsurable?
More generally, subsea cable projects owners should seek to understand the capacity available for which risks and whether there is more or less depending on whether you choose a CCIP or OCIP approach. Wider competition for risk under one arrangement over another could work to lower costs.
While the owner-controlled insurance program can help you get a clearer understanding of those risks most responsible for driving costs in markets where there is limited capacity. However, with CCIPs, insurers' risk engineers will already be familiar with contractors' philosophy toward risk management and loss prevention. This may enable market in being more willing to accept unusual risks due to the portfolio relationship. It's also worth bearing mind how under a CCIP, the contractor bears the excess/deductible of their choice and as they own the risk of loss, they may be seen as more likely to be invested in good risk management.
Ultimately, every project is different and you may need specialist support in evaluating whether owner or contractor-controlled insurance program is optimal for yours.
For smarter ways to manage risk arising from subsea cable projects, get in touch with our specialists with deep sector knowledge.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
