Why Owners and Contractors Like OCIPs
By David L. Grenier
C-Risk, Inc.
February, 2001
This article is part of a series discussing Owner-Controlled Insurance Programs (OCIPs).
Why Owners Like OCIPs
Compared to conventional insurance programs, there are a number of compelling reasons why owners consider OCIPs appealing as an insurance/risk management approach. Some of these reasons include:
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Coverage Quality. While owners can mandate minimum insurance requirements, it can be very difficult to ensure that these requirements are actually met. Certificates of Insurance, the typical method of verifying coverage, only provide summary information. By comparison, an OCIP guarantees that the owner’s requirements will be met. Also, OCIPs allow owners to secure broader coverage by leveraging premium volume with the insurer.
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Insurance Limits. Many contractors, especially smaller firms, carry only $500,000 to $1,000,000 of CGL coverage. These policies respond to liability arising from work on all of the contractor’s projects; however, a contractor’s aggregate limits may be eroded by claims on other projects. Also, individual contractor coverage may be inadequate, given today’s multi-million dollar settlements and jury awards. Under an OCIP, an owner can provide $100 million or more of dedicated liability coverage, if required.
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Insurer Stability. On a large OCIP, there can be over 100 contractor and subcontractor firms; so, theoretically, there could be as many as 100 different insurers covering these contractors and subcontractors. This poses two concerns: Not all of these insurers may be financially stable and their financial stability at the start of a project does not guarantee financial stability throughout! Under an OCIP, an owner has direct control over the selection of the insurer and can monitor that insurer’s performance and financial solvency. Typically, only one insurer is selected for the primary workers’ comp and CGL lines of coverage.
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Program Innovation. Over the past few years, owners of construction projects have expressed a growing interest in using integrated risk management and risk financing methods to augment the benefits of design-build project delivery. This type of innovative risk-transfer methodology is best utilized on large, multi-discipline, multi-year OCIPs because it requires a strong project management team to administer.
Some of these programs can integrate insurance coverage for professional design, environmental remediation, force majeure perils, and builder’s risk. Capitalizing on the leverage created under an OCIP approach, an owner can buy broader coverage at more reasonable prices, realizing volume discounts from economies of scale. However, these cost savings can be offset by increased administrative costs. Additionally, combining P&C policies (typically written on an occurrence basis) with professional and/or environmental policies (typically written on a claims-made basis) can create difficulties from a claims standpoint.
Why Contractors Should Like OCIPs
When an owner assumes the risk burden under an OCIP, two important benefits are realized: 1) improved loss control and 2) improved claims management. Both minimize the cost of retained losses. OCIPs
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Loss Control. By complementing the existing safety programs of participating contractors, an OCIP can help standardize safety procedures on the whole jobsite. Also, an owner can add additional safety staffing, implement a financial safety-incentive program, expand periodic audits, or some combination of these options, by using the money from contractor and subcontractor bid credits and insurance deductions.
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Claims Management. Over the past few years, workers’ comp reform in several states has greatly improved employer’s control over injured-employee claims management. Cost control techniques (such as directing employees to Preferred Provider Networks, return-to-work and modified-duty programs, and medical bill reviews) can potentially reduce an employer’s workers’ comp costs by as much as 30%.
Owners can offer these program features to all contractors and subcontractors on the OCIP – a real advantage to smaller contractors, since many would not normally benefit from these features through their individual insurance programs.
Another claims-related benefit is the streamlining of GL claims management. Under the conventional approach to project insurance, the owner, contractor, and/or subcontractor involved in a claim are all likely to be represented by different insurers and attorneys. An OCIP helps to mitigate and lower the cost of claims because, typically, only one insurer provides the insurance for all enrolled parties.
Next: The Necessary Groundwork For 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, except as follows: You may link this article to your website, either directly or through an ExpertLaw Library index page, provided your link does not depict this article, its author, or expertlaw.com in a negative manner.