Gain a better understanding of Owner Controlled Insurance Programs.
Editor's Note: This is the first of a two-part series on controlled insurance programs. The second article will focus on Contractor Controlled Insurance Programs (CCIPs)
Most contractors operating in the United States have participated in an Owner Controlled Insurance Program (OCIP). Due to a variety of approaches adopted by OCIP sponsors, contractors have different opinions about them. Successful OCIPs provide a true collaboration among all project participants to manage risks and reduce total construction costs. But OCIPs do not come without risks, making it important for contractors to fully understand the details of their OCIP arrangement.
Understanding Benefits and Risks
In an OCIP, the project owner provides general liability, excess liability and/or workers’ compensation insurance coverage to the general and trade contractors working on the project site. An OCIP requires contractors to remove customary insurance charges from their contract price, including funding for claims if their insurance policies include a deductible.
A well-constructed OCIP provides many benefits:
- Broad coverage and uniform limits for contractors of every tier
- Claim adjustments by a single insurer
- Coverage stability for completed operations through the applicable statute of repose
- Immediate policy response to a covered general liability claim without the need to first assign fault among covered contractors if the cause is not immediately clear
- The support of rigorous loss control programs, which often include safety incentive programs to provide recognition and sometimes monetary rewards to contractors and their employees for a strong safety performance
Contractors should also be aware of the risks associated with OCIPs. Some OCIP sponsors seek to maximize reductions in contract price while providing minimal insurance coverage under the program, leaving contractors underfunded and underinsured. Several states have responded to this issue by enacting protections for OCIP participants and defining parameters, such as minimum project size, coverage standards and rights of participating contractors.
Making the Most of Your OCIP Program
To make the most of an OCIP, contractors need a solid understanding of their insurance policies and their subcontractors’ insurance policies, the coverage provided under the OCIP and the various practices commonly employed by OCIP sponsors and administrators.
Consider the following to better understand an OCIP:
- Implementing an OCIP does not alter project participants’ tort liability. The negligent party will be responsible for a claim that exceeds the policy limit.
- If an owner’s program covers multiple projects, claims from other projects could substantially erode the available limits. Contractors must determine whether the general and completed operations aggregate limits apply independently to each project.
- OCIPs often exclude coverage for certain locations, trades and activities. Contractors will be required to provide coverage for claims arising out of these exclusions.
- Some OCIPs exclude coverage for products liability. This can create a gap in coverage when compared against most contractors’ general liability policies, which typically provide a legal defense and coverage against claims of bodily injury or property damage resulting from defective materials, even if the manufacturer is ultimately responsible.
- Many OCIPs extend completed operations coverage through the applicable statute of repose. Others provide coverage for only two or three years after project completion.
Applying Construction Insurance
A contractor’s insurer(s) will generally exclude coverage for claims originating from a project covered by an OCIP. Some insurers structure exclusions to provide coverage where the OCIP leaves off, but others exclude coverage even if the OCIP is cancelled or expires.
To ensure adequate coverage, contractors should negotiate their own liability coverage to apply to claims that exceed the OCIP limit or when the OCIP is more restrictive than their own insurance program [referred to as a difference-in-conditions (DIC) provision]. Even if the provisions require a contractor to absorb a premium cost that an OCIP sponsor will not pay, this coverage (if available) will protect your company’s capital from an uninsured claim.
Indentifying Administrative Requirements
Contractual requirements govern contractor enrollment and administrative requirements, such as the following:
- Identification and removal of contractor insurance costs
- Compliance with site-specific safety requirements
- Monthly payroll reporting
- Claims reporting, drug testing and cooperation with return-to-work requirements
- Final calculations and adjustments of contract price (including subcontractors) based on final contract value and/or payroll
Identifying the required tasks will ensure your contract price provides adequate funding.
Dealing with Loss Costs
When a contractor is deemed “at fault” for third-party bodily injury or property damage, some project owners will charge loss costs to contractors, ranging from a nominal sum to a significant portion of the policy deductible. A contractor must choose between funding for the charges within the contract price or absorbing the cost if held responsible for a claim.
Removing Construction Insurance Costs from Bids
Every OCIP includes a method to remove contractors’ customary insurance charges from the contract price. Contractors are often responsible for removing these insurance costs from their subcontractors’ price. The process may follow one of several approaches:
- Contractors bid net of insurance costs with an additive alternate bid to establish the price of contractor-provided insurance.
- Contractors bid with insurance costs with a deductive alternate bid to establish the price without insurance (the terms “bid deduction” or “bid deduct” are often applied generically to contractor insurance costs regardless of the bid method).
- Contractors bid with insurance costs, and those costs are later removed through a change order.
Regardless of the approach, the process seeks to ensure that traditional contractor insurance costs are removed from the contract price to track the OCIP’s financial performance and establish the cost to be charged if the OCIP is terminated during the course of construction.
Estimating Construction Insurance and Labor Costs
Most OCIP administrators will provide a form to contractors to detail their insurance costs. Administrators often require supporting documentation, such as policy rate information, rationale of funding for deductible losses and even several years of loss history to validate those costs. Contractors who include insurance costs as a line item in all of their estimates generally report greater success validating their calculations with OCIP administrators because they can document the costs that would have been charged to the project in the absence of an OCIP.
Some program administrators will adjust a contractor’s reported insurance costs by applying pre-established rates or formulating their own calculation of a loss charge based on a contractor’s claim history. This can result in the project owner reducing the contract price by an amount that exceeds the funding for insurance, which erodes the funding available to pay for materials and labor.
If insurance cost calculations will be imposed upon contractors, the most practical strategy is to incorporate those calculations into your own bid. If the method is not made clear in pre-bid documents, contractors can verify the process by contacting the OCIP administrator.
Many OCIP sponsors will adjust the final contract price of each participating contractor based on an audited project payroll and a reconciliation of estimated versus actual insurance costs. Because a contractor pays insurance premiums based on actual payroll or revenues, the sponsors believe they are entitled to collect an additional premium, just as an insurer would, by reducing the final payment to contractors whose payroll exceeds their initial estimates.
If applied uniformly, contractors who initially overestimate labor costs will receive an increase to their final payment. In this scenario, a contractor experiencing a labor overrun is advised to accrue for the insurance costs associated with that overrun. To avoid rewarding contractors who have made money and penalizing those who have lost money on a project, OCIP sponsors more frequently accept net bids with no final contract price adjustment.
This article is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost or terms of insurance coverage.