Controlled Insurance Programs (OCIPs) are becoming a standard
feature in the construction industry. Insurance brokers
have heavily marketed OCIPs to owners, promising cost savings.
programs, upon initial inspection, are simple and attractive.
The owner buys insurance for all the participants in a construction
project. The owner then requires the participants to reduce
their price by eliminating all of their insurance costs
in exchange for owner-provided coverage. The owner expects
to save money by discount-purchasing of insurance and by
avoiding contractor markups on insurance costs. A single insurance carrier on the risk for claims can result in more efficient and less expensive claim resolution. This promise is what sells OCIPs.
actual practice is more complicated. Contractors and subcontractors
need to be cautious when participating in an OCIP project.
They must ensure that the coverage offered by the OCIP is
sufficient to replace their existing insurance coverage.
They also must be careful that the "bid deduct"
process by which the cost of insurance is deducted from
their price is properly and timely performed.
OCIP is designed for a specific owner's needs for a specific
project. The following overview of OCIPs is based on general
practices. The OCIP documents must be carefully reviewed
and considered for each project.
What Is An Owner Controlled Insurance Program?
an OCIP, the owner purchases insurance for other participants
in a construction project. OCIPs also are sometimes called
"wrap-ups." An OCIP will cover the owner, contractor
and subcontractors. An OCIP also may include design professionals.
The coverage can include general liability (CGL), builder's
risk, worker's compensation, design errors and omissions
as well as excess, umbrella and other special coverages.
coverage provided by an OCIP is summarized in a document
known as the "OCIP Manual." The OCIP Manual also
should describe the bid-deduct process, claims management
and safety requirements. This important document should
be made a part of any bid solicitation and of ultimate contract
documents. The "OCIP Administrator" administers
the OCIP program. The OCIP Administrator acts as an agent
of the owner and usually is supplied by the broker that
set up the OCIP Program.
who benefit from the OCIP must give the owner credit for
this insurance coverage. This is the bid deduct process.
There are two basic methods for the bid deduct process.
In one, the owner can ask that all interested contractors
and subcontractors provide a price for the work which excludes
insurance. Each proposal must be reviewed by the OCIP Administrator
to determine whether the price accurately reflects the elimination
of contractor insurance costs. This can be a time-consuming
process. In the second approach, all interested contractors
and subcontractors are asked to submit proposals that include
insurance costs. When the contract is awarded, the OCIP
Administrator will calculate a deductive change order for
the successful contractor's and subcontractors' insurance
costs. This second method, which appears to be more popular,
requires that only successful proposals be reviewed for
a deduction of insurance costs.
and private owners first began to use OICPs on large-scale
projects ($100 million or more). The use of OCIPs on smaller
projects ($50 million or more) is increasing as owner, broker
and insurer expertise with OCIPs grows. On smaller projects,
the additional administrative cost generally makes it less
worthwhile to use OCIPs.
there is an exception. Owners and developers have begun
to use OCIPs for construction of condominium and other multi-residential
projects, even those costing less than $50 million. Defect
claims by homeowner associations have plagued such projects
for decades and have made it extremely difficult to insure
such construction. Many contractors and subcontractors are
unable to insure these projects at almost any price. The
answer is the OCIP. It may be the only way such a project
can be constructed in today's insurance market.
Why Would an Owner Choose an OCIP?
an owner accepts the economic risk of a project but seeks
to avoid the construction risk. An owner typically would
retain a design team or a design-build contractor to be
responsible for design and a general contractor or design-build
contractor to be responsible for constructing the project
for a fixed price or a guaranteed maximum price. An owner-developer
also would use surety bonds, insurance and contractual indemnity
provisions to further insulate itself from construction
OCIP changes this approach. The owner becomes responsible
for insuring the project and for administering loss prevention
programs and becomes exposed to the risk of increased premiums
for unexpected losses. In exchange for this new risk, the
owner hopes to obtain cost savings.
The Benefits of an OCIP
savings are the primary advantage of an OCIP. The owner-developer
always indirectly bears the cost of insurance on a construction
project. The design consultants, contractor, subcontractors
and other parties involved in the project, in pricing their
work, pass through the cost of insurance plus a markup.
Insurers and brokers assert that an owner can save from
0.5 to 2 percent of total construction costs by using an
OCIP. The savings come from: (1) the elimination
of contractor mark-up on insurance costs; and (2) the
ability to obtain insurance at a lower cost than contractors,
subcontractors and others can obtain it.
OCIP also can provide increased coverage limits. The typical
contractor or subcontractor has liability coverage in the
$1 million to $2 million range. OCIP liability limits may
be $5 million for primary coverage, with additional excess
coverage. OCIP coverage may be broader than that available
to contractors. In some cases, such as condominium projects,
contractors may not be able to obtain coverage at all. OCIP
coverage also is uniform. While contractors and subcontractors
usually provide certificates of insurance evidencing coverage
limits, the specific endorsements and limitations of their
particular policies may not be disclosed. It also is possible
that a contractor's or subcontractor's policy limits have
been depleted by payments on claims on other projects.
key part of OCIPs is a uniform risk management program.
The OCIP Administrator has overall responsibility for safety
and loss control on the project. The OCIP Administrator
also will handle claims. This centralized management, in
theory, can result in cost savings from improved safety,
increased loss control and more efficient claims handling.
The Disadvantages of an OCIP
The promise of cost savings may be illusory. Administration
of an OCIP will impose new, additional costs on the owner.
The owner, through its OCIP Administrator, becomes responsible
for safety and claims management on the project. The OCIP
Administrator will need to administer the bid-deduct process.
The actual experience of owners suggests that the promised
cost savings of an OCIP may not always be fully realized.
insurance premium/loss risk is shifted from the contractor
and subcontractors to the owner. The owner may be exposed
to the risk of premium increases if labor costs and loss
experiences exceed estimates. But, it also is possible that
an owner will benefit from premium rebates if claims are
less than anticipated.
an OCIP, it may be more difficult to manage the performance
of contractors and subcontractors that have insurance-related
claims. For example, a subcontractor with an insurance claim
for damaged work may wait for the owner's OCIP Administrator
to settle the claim before repairing the work. It may be
more difficult for the owner to enforce contractual obligations
to repair the work and proceed before disputes are resolved
when the subcontractor asserts that the owner's OCIP Administrator
is delaying adjustment of the claim.
OCIP also may discourage bidders. Contractors and subcontractors
may be hesitant to bid on the project because they are unfamiliar
with OCIPs. Potential bidders may have concerns about unfair
calculations of credits for insurance costs during the bid
deduct process, about uncompensated overhead resulting from
new administrative responsibilities for the OCIP and about
loss of mark-up on insurance costs.
What Coverage Does an OCIP Provide?
Who is covered?
OCIP coverage will include the owner and the general contractor.
Coverage also will include subcontractors but may limit
coverage to subcontractors with contract values over a certain
amount, such as $25,000. In that case, subcontractors with
contracts for less than $25,000 should be required to provide
certificates of insurance. Coverage also may be limited
to those providing direct labor to the construction site.
Therefore, material suppliers typically are not covered.
"Furnish and Install" subcontractors that furnish
materials but that subcontract out installation also may
not be covered.
What is covered?
coverage will be tailored specifically to the project. In
general, coverage will include worker's compensation/employer's
liability, general liability (CGL) and builder's risk property
insurance. Coverage generally is limited to operations at
the project site during construction. The OCIP typically
will not provide coverage for off-site operations, including
work and transportation, and for post-completion on-site
work, such as warranty work. Accordingly, contractors and
subcontractors must be required to provide proof of insurance
by their own carriers for non-covered activities.
programs also offer excess or umbrella coverage. Less commonly,
an OCIP will provide for design errors and omissions coverage.
Such coverage is included when the design professionals
are included in OCIP coverage. Such coverage, however, also
will be necessary for contractors to the extent that any
portion of their scope is design-build.
coverage generally does not include surety bonds. An OCIP
may include subcontractor default insurance, however.
existence of an OCIP does not eliminate the need to provide
for contractual indemnity by the contractor. An owner should
include a broad indemnity clause in the construction contract
as a second basis of protection from loss.
the construction contract provides for alternative dispute
resolution, such as arbitration, the owner-developer should
seek to bind the broker/OCIP Administrator and insurance
company with the same provision. This will ensure that all
necessary parties will be involved in any insurance-related
dispute. If the broker and/or insurer refuse to agree to
ADR, the owner should consider deleting the ADR provision
from the construction contract.
What an OCIP Means to the Contractor and Subcontractors
an owner implements an OCIP, participation is mandatory
for the contractor and subcontractors. While OCIPs often
are touted as having benefits, these benefits usually accrue
to the owner. An OCIP imposes real risks to and expenses
on contractors and subcontractors, and they must be carefully
contractor must carefully review the OCIP Manual before
submitting pricing. OCIPs commonly require the contractor
to submit pricing with the cost of insurance included. The
contractor then must complete an OCIP Enrollment Form to
become eligible for the OCIP. Once the OCIP insurance is
issued, the cost of the contractor's insurance is deducted
from the contractor's pricing.
The Benefits of an OCIP to a Contractor or Subcontractor
OCIP may provide greater limits for primary and excess or
umbrella coverage than the contractor's or the subcontractors'
regular policy. This may prove beneficial in resolving defect
claims. In addition, because a single carrier insures all
of the participants in a project, claims resolution may
OCIP also may allow a contractor to engage in work that
it may not otherwise be able to obtain. Many contractors
and subcontractors cannot take work involving multi-family
residential structures. Such projects have been plagued
by claims and lawsuits for years, and as a result, such
work usually is excluded from insurance coverage. An OCIP
provided by the owner-developer may be the only way a condominium
project can be constructed with insurance.
The Disadvantages of an OCIP to a Contractor or Subcontractor
three major disadvantages of an OCIP are: (1) possible
gaps in coverage; (2) OCIP deductions that exceed
actual insurance cost savings, and (3) uncompensated
prudent contractor must do more than review the OCIP Manual
for a summary of the coverage provided. The contractor should
request copies of the OCIP policies and have the policies
reviewed by the contractor's broker or attorney for the
coverage they offer. This is especially true for general
liability and builder's risk policies, which can vary significantly
between policies. Critical liability insurance issues include
whether the policy provides "broad form" coverage,
how long the "completed operations" coverage continues
and what exclusions are included.
contractor must carefully review and complete the OCIP Enrollment
Form. The format of OCIP Enrollment Forms varies. The form
must be carefully scrutinized to ensure that it allows the
contractor to show its true cost of insurance. If all discounts
and credits are not reflected, the OCIP deduct will exceed
the true cost of the insurance.
the contractor has any flat-rate premiums, this should be
carefully noted. The OCIP deduct should not include any
flat-rate premiums because the contractor is unlikely to
receive credit from its insurer for the OCIP-provided coverage.
contractor also should ask the OCIP Administrator for a
complete breakdown of the eventual OCIP deduct and should
be prepared to challenge an excessive deduction.
OCIP enrollment process, the submission of monthly insurance-related
information such as payrolls, and the OCIP deduct review
process can impose a significant administrative cost on
the contractor. It is unlikely that the owner will agree
to compensate the contractor for these additional costs.
timing of the OCIP deduct process also may cause problems.
The OCIP deduct is usually taken though owner-issued deductive
change orders. The initial OCIP deduct may be applied to
a single progress payment, which may significantly reduce
a month's cash flow. The OCIP deduct process also affects
change orders. The owner generally will request that the
contractor provide additive change orders with insurance
costs included. When the additive changes orders are numerous
or constitute a large dollar volume, the OCIP deduct process
for change orders may be slow. The owner will hold final
payment until the OCIP Administrator can calculate the total
amount of the deduct for change orders.
OCIP also eliminates the contractor's markup on insurance
costs. While this is a desirable benefit to the owner, it
deprives the contractor of any compensation for insurance-related
What Is Covered?
usually provide worker's compensation/employer's liability,
general liability (CGL) and builder's risk coverage. The
coverage has two basic limitations: (1) coverage
is restricted to activities at the project site; and
(2) coverage, with certain limitations, ends upon completion
of the project. Coverage for "completed operations"
generally continues after the project ends. This "tail"
may be for 3, 5 or 10 years. In an effort to maximize cost savings, the owner may select a less expensive policy, which leaves the contractor at risk after project completion. The contractor should be wary of "modified occurrence" type policies that provide coverage only for claims made during the policy year. Also, it is important to confirm that there is "completed operations" CGL coverage. Further, certain policies may only provide "completed operations" coverage for a limited time period, such as for 3 or 5 years after project completion. If this period is less than 10
years, there may be uninsured exposure to liability for
construction defects because such actions may be brought
for up to 10 years after completion of the project, particularly
for latent defects.
What Is Not Covered?
coverage should be reviewed to determine whether it is as
broad as needed to replace the contractor's existing policies.
The existing policies must be maintained because off-site
work incidental to the project is not covered by most OCIP
programs. Warranty work and call-backs also generally are
not covered after completion of the project.
are here to stay. For owners and developers, OCIPs may bring
real benefits in the form of cost savings. These cost savings,
to some extent, are counterbalanced by increased administrative
costs and exposure to risk. For contractors and subcontractors,
OCIPs can be survived. It is important to carefully review
the coverage provided by the OCIP and to manage the method
by which insurance costs are deducted to ensure that the
process accurately reflects the true cost of insurance.
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