Article reprinted from Western Roofing magazine July/August 2007.

 

Owner Controlled Insurance Programs

Promise, Perils of OCIPs Discussed

by Bill Callahan, executive director, ARC of the Bay Area Counties

 

 

It was no surprise that a near-record crowd turned out to hear Allen Brooks of associate member firm Gallagher Construction Services discuss the "pros and cons" of Owner Controlled Insurance Programs (OCIP) at the May ARC of the Bay Area Counties membership meeting. As the name implies, an OCIP (sometimes also referred to as a "Wrap-Up") is an insurance program paid for and controlled by the owner of the property where construction is taking place. Instead of each individual contractor providing his own general liability, workers' compensation, and/or other insurance, the owner secures an OCIP that covers some or all of the contractors working on the project.

 

Advantages for Owners

                  By asserting control over the insurance aspects of the project, the owner expects to experience significant cost savings. In the first instance, by covering all contractors under a single policy, the owner expects to be able to obtain lower, "bulk" insurance rates from carriers. These initial savings are compounded as each participating contractor is forced to credit back to the owner the cost of the insurance that the contractor would normally include (and mark up) in his or her bid. The involvement of a single insurance carrier may result in additional savings through more consistent safety and loss control programs and more efficient claims management and dispute resolution processes.

                  The appeal of Wrap-Up programs is not limited to potential cost reductions. Owners can also leverage the "buying power" of a multi-million dollar project to extract important concessions from insurers. In order to secure all of the premium associated with a large project, an insurer may be willing to provide increased coverage limits. Similarly, broader coverage may be made available to an OCIP than would be offered to any individual contractor. Most condominium construction work is performed under OCIPs precisely because most contractors cannot otherwise secure coverage for this type of work. Without OCIPs, very few condominiums would be built. Finally, the uniformity of coverage that OCIPs provide may also appeal to owners. When many insurance carriers are involved, policy limitations, exclusions, and endorsements can vary widely from contractor to contractor, and may not even be disclosed to the owner. Under an OCIP, no such variability or uncertainty is possible. Consequently, the owner is assured that there will not be any insurance related "surprises" associated with the project.

 

Advantages for Contractors

                  While designed primarily with the interests of owners in mind, some aspects of Owner Controlled Insurance Programs may benefit participating contractors, as well. First and foremost, the opportunity to bid on and perform types of work that their own insurance policies limit or exclude, such as condominium construction, can make participation in an OCIP very tempting. Increased policy limits and broader coverage for such occurrences as subsidence and pollution can also be important advantages. Like-wise, the reduction in subrogation, cross-litigation, and claim disputes that typically characterizes OCIP projects can be of major benefit to contractors.

 

Potential Drawbacks

                  In the abstract, it may seem reasonable for a contractor to trade off the loss of the markup on his or her own insurance costs in return for increased limits, broader coverage, and more efficient resolution of disputes. In actual practice, however, the equation is rarely this simple. Contractors can never lose sight of the fact that the primary beneficiary of an OCIP is inevitably the owner. While property owners and contractors may have some insurance related interests in common, where their interest diverge, the OCIP deck is likely to be heavily stacked to the advantage of the owner and to the detriment of the contractor.

                  One of the lynchpins of the OCIP system is that contractors must credit back to the owner the cost of the insurance that would normally be included in their bids. Obviously, how this credit is calculated can be manipulated to the advantage of the owner. OCIP enrollment forms must be carefully scrutinized to ensure that the formula that is employed allows contractors to show their true costs of insurance. Unless all of the discounts and credits that contractors are afforded by their regular carriers are included in the calculation, OCIP deductions will exceed contractors' actual costs. •••