Advantages and Disadvantages of OCIPs
By David L. Grenier
C-Risk, Inc.
February, 2001
This article is part of a series discussing Owner-Controlled Insurance Programs (OCIPs).
The Advantages and Disadvantages for Owners and Contractors
OCIPs hold advantages and disadvantages for both the owner and the contractors performing the work.
Advantages to owners include:
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The ability to obtain broader insurance coverage with higher dedicated limits for contractors, which ultimately provides better protection for an owner.
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Potentially lower construction costs resulting from volume discounts on insurance purchases and reduced losses from more effective, comprehensive, safety and loss-control programs.
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Improved quality of risk management services (e.g., claim handling, loss control).
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Substantial reduction in the amount of time required for obtaining certificates of insurance from contractors.
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Insurance requirements no longer an obstacle for contractors bidding work.
However, an OCIP is not the perfect risk management tool by any means. Here are several owner disadvantages:
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The additional administrative burden can require a substantial level of effort if not managed competently by the owner’s OCIP administrator.
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If the insurance market hardens, there is a potential financial risk inherent in loss-sensitive programs, resulting in premium cost increases and/or coverage reductions.
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An additional accounting effort may be required for extracting insurance costs from contractor and subcontractor bids and change orders.
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An additional monitoring effort is required by the OCIP administrator to ensure that claims from a contractor’s employees injured on other projects are not charged to the OCIP.
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Owner responsibility is increased for the implementation of safety and loss-control programs.
The Time Factor
In many cases, the additional administrative burden associated with the OCIP may be outsourced to an insurance agent or broker, risk management consultant, or a third-party administrator. However, there is still an administrative impact on an owner’s operations because a number of departmental resources (e.g., legal, human resources, accounting, finance, purchasing, facilities and construction, safety and risk management) are affected throughout OCIP implementation and administration. With the exception of risk management, the time burden placed on these other departmental resources is minimal, usually requiring only a few hours during the design and implementation phases. Post-implementation, an owner’s daytoday involvement should only be periodic, and will probably be limited to premium payment, claims reviews, and administrator coordination.
Other Owner Considerations
Owners should be cognizant of the financial risk inherent with a loss-sensitive OCIP, and understand how this differs from guaranteed-cost insurance.
With a traditional insurance program, the owner transfers all risk of loss to the contractor and subcontractors, and pays a fixed premium to the insurer for guaranteed-cost insurance. When an owner changes from a fixed-price, guaranteed-cost program to a loss-sensitive OCIP, an owner is trading off some financial certainty for the potential to lower the cost of risk. The total cost of risk is limited by the application of peroccurrence and aggregate retentions, and by implementing an aggressive safety and loss-control program to mitigate losses. However, owners cannot completely protect themselves from risk unless they purchase a guaranteed-cost insurance program, which usually comes with higher fixed costs, particularly in a hardening insurance market.
Pros for Contractors
Just as there are advantages for owners, an OCIP offers a number of pluses to participating contractors, including:
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The ability to obtain broader coverage with higher liability limits.
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More effective safety, loss control, and risk management programs.
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Coordinated claims handling/adjusting procedures and claims management services.
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Elimination of coverage disputes and subrogation between contractor and insurers.
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OCIP claims not counted as part of the contractor’s own aggregate limit.
But, OCIPs present a downside for contractors, just as they do for owners. Here are several disadvantages for contractors:
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Since bids must be provided with and without insurance, a more complicated bidding process is required in order to delineate bid credits.
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In a close bidding situation, a contractor with a good safety record may lose out when competing against a less safety-conscious contractor. (This could occur if the workers’ comp experience modifier is not taken into consideration as part of the bid process.)
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Documentation and reporting requirements impose an additional administrative burden.
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Since OCIP costs must be segregated from other project costs, additional bookkeeping is required to maintain duplicate payroll records.
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OCIP coverage may not be as broad as, or may have lower limits than, the coverage provided by the contractor’s own insurance policies. In this case, the contractor will have to negotiate with its own insurer to obtain excess limits or differencein- conditions (DIC) liability coverage.
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An OCIP usually includes completed operations coverage for losses in a specified period of time (e.g., a two to five year “tail” after project completion). However, a contractor’s exposure continues for a longer period of time. Therefore, whenever possible, a contractor should endorse its own general liability policy to include any exposures beyond the OCIP period.
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Due to the decrease in payroll volume, the contractor’s own insurance company may reduce its premium credits; also, dividends for workers’ comp may go to the owner, not the contractor.
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Auto liability coverage is usually excluded from an OCIP. This can make it more difficult to separate general liability and auto liability claims if these coverages are with different insurers.
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Some OCIP administrators do not report workers’ comp loss data to rating bureaus in a timely manner, thereby affecting the contractor’s experience calculation.
Other Contractor Considerations
As previously mentioned, contractors have additional administrative burdens associated with an OCIP, as do the subcontractors enrolled in the program. First, the contractor must expand its bid package to define the OCIP for subcontractors and identify the subcontractors’ insurance deductions. The project pre-bid and pre-mobilization meetings must be expanded to educate all subcontractors about the implementation and administration of the OCIP. The contractor must also work with the owner’s insurance representative, and/or designated OCIP administrator, to validate insurance deductions and enroll all subcontractors who will be working on the project.
The Time Factor
Contractors should expect the incorporation of the OCIP documentation to add more time to the preparation of each bid package. (This would include the OCIP manual and associated pre-bid and bid clarification meetings with subcontractors bidding work on the project.) However, under a traditional insurance program, the contractor would probably have expended an equal amount of time tracking its subcontractors’ certificates of insurance. Under an OCIP, this burdensome task is not required.
In addition, the contractor’s and subcontractors’ insurances must be modified to dovetail with the OCIP coverages. Subcontractors must complete wrap-up enrollment forms and monthly payroll reports, and must report claims to an OCIP administrator and insurer in lieu of their own insurers. Additional time should be budgeted for participating in OCIP orientation meetings, completing enrollment forms, and preparing periodic payroll reports.
Next: Potential Savings from an OCIP
About the Author: David L. Grenieris President of C-Risk, Inc., a national risk management consulting firm providing risk management strategies and solutions to construction-industry clients. He specializes in construction, contract management, and wrap-up insurance programs.
Copyright © 2001-2006 David Grenier.All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you believe you may lawfully use a quotation, excerpt or paraphrase of this article under the Fair Use exception to copyright law, except as otherwise authorized by the author of the article, you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.