Insurance Coverage Considerations with OCIPs
This article is part of a series discussing Owner-Controlled Insurance Programs (OCIPs).
Workers’ Compensation & Employers Liability
Workers’ comp and employers liability insurance are statutory, and the limits of liability coverage are regulated by each state’s Department of Insurance. Workers’ comp coverage is a major component of most OCIPs. This is due to the large premiums that are required, the level of claims handling, and the degree of control needed over the safety, loss control, and risk management aspects of the project. The majority of an OCIP’s administrative burden is associated with workers’ comp because, in most states, individual workers’ comp policies must be issued to all participating contractors and subcontractors. On large projects, this can be substantial.
Commercial General Liability
The Insurance Services Office (ISO) CGL Coverage Form, CG 0001, 1986 or later, is the form predominantly used on most projects; it provides bodily injury and property damage liability coverage. Regardless of the specific form used, general liability coverage for an OCIP should include (but not be limited to) several key provisions to safeguard the owner’s interest: contractual liability; broad-form property damage; OCP liability (usually written on a separate project-specific policy); explosion, collapse, and underground coverages; personal injury liability; and employees-as-insureds. In addition, there are a number of endorsements that can be used with the CGL form to broaden coverage or reduce coverage.
It is highly recommended that contractors remove any wrap-up exclusion endorsement from their own individual CGL policy. Contractors should also attach a DIC endorsement to their CGL policy. This is required so that their CGL policy will apply as excess insurance coverage over the OCIP-provided CGL policy. (Note: The limits of these master policies may be less than the contractor would normally provide for its own non-OCIP projects.) This also provides the contractor with coverage at least as broad as that provided under its own policy. Other considerations relative to the contractor’s CGL policy include:
Liability limits. Under an OCIP, aggregate and peroccurrence limits apply to all contractors and subcontractors for the term of the project. Aggregate limits are usually two to three times the per-occurrence limit for any given year on the project. OCIP per-occurrence limits allow the full limit of the policy for each named insured. The coverage provided under the OCIP is extended separately to each entity, which can result in pyramiding limits. Limits can usually start at $25 million and may be $100 million or more, depending on the project’s exposures and owner’s requirements.
Guaranteed-cost vs. loss-sensitive programs. Most OCIPs are written using large deductibles, large retentions, or retrospective rating plans. Under these programs, the total OCIP cost depends on the actual losses incurred. One disadvantage to this is the continuation of premium adjustments years after the project is actually completed. OCIPs can also be written at fixed rates for the project term, but these plans are more expensive due to the risk associated with the uncertainty of large losses.
Completed-operations coverage. Completed-operations coverage should extend for at least three years after final project completion or acceptance. This does not mean the completion of the contractor’s or subcontractors’ specific portion of the project, but the completion of the total project as delineated in the contract.
Contractors may negotiate “tail coverage” (which can be endorsed on their own CGL policy) with their own insurance carrier to extend permanent completed-operations coverage beyond the expiration of the OCIP-provided project insurance. Contractors are advised to negotiate this coverage before work begins so as not to lose their ability to obtain this coverage once the work actually starts.
An excess/umbrella liability policy may be purchased in the excess and surplus insurance markets or as an umbrella policy form. This type of policy provides a buffer layer over the underlying CGL policy.
Note: Many umbrella policies contain a contractor’s limitation endorsement which may include a blanket exclusion for wrap-up projects. For the reasons previously noted, these policies need to be modified.
The builder’s risk insurance policy should cover project exposures associated with earthquakes and floods, damage to existing/adjoining property, boilers and machinery, project delays, the transit and storage of materials off-site, and explosion and collapse. Contractors are required to retain some portion of each property loss. The deductible should be at least $2,500 in order to provide an incentive for contractors to mitigate losses.
Owners may purchase a professional liability insurance policy to provide coverage for all of the design professionals (e.g., architects, engineers, etc.) on the OCIP project. Ideally, the design professionals would subtract the cost of their own individual professional liability (or practice) insurance from their fees on the OCIP. This may not always be possible, however, because the insurer providing the practice policy may not provide a premium reduction to the owner. Regardless of obtaining a premium cost savings, an owner may want to obtain a professional liability policy on the OCIP project to provide coverage for design professionals who may not have this coverage or whose coverage does not satisfy the owner’s requirements. Also, an owner can purchase broader and more uniform coverage for the OCIP than each design professional could purchase individually in a stand-alone policy.
An OCIP can include pollution liability coverage. Policies can be written on an occurrence or claimsmade form, can include completed operations coverage, and can be written for the total duration of the project.
Most policies provide coverage for environmental hazards arising from three sources: known pollutants existing on the jobsite which are accidentally released during construction (pollutants collected by a remediation contractor); unknown pollutants existing on the jobsite that are uncovered by excavation operations (buried fuel oil tanks or barrels of toxic waste); and pollutants brought to the jobsite by a contractor or subcontractor (fuel, hydraulic fluids, paint, etc.). Owners should seriously consider obtaining coverage for these types of exposures and should require environmental consultants to obtain environmental liability coverage.
Surety Bonds & OCIPs
Surety bonds (typically payment and performance bonds) are procured by the contractor at the request of the owner as a requirement of the contract. The surety guarantees the contractor’s performance to the project owner and does whatever is necessary to get the project completed, should the contractor default.
So, surety bonds should not be included as part of an OCIP. Contractor-surety relationships are based on mutual trust, confidentiality, and the contractor’s performance and financial solvency. However, the contractor is solely responsible for its own income statement and balance sheet. The owner should not attempt to gain any additional control over the contractor’s bonding arrangement, over and above requiring such bonding.
Something New Has Been Added
Subcontractor default insurance provides an alternative to surety bonds. This type of coverage directly indemnifies owners for the costs resulting from contractor or subcontractor performance default.
Coverage applies to reimbursement of both direct and indirect costs incurred to complete unfulfilled contractor obligations, including costs related to job acceleration, extended overhead expenses, and liquidated damages. This approach allows an owner to retain control of the project if there is a default without jeopardizing any of the contractor-surety relationship issues, as mentioned above. There may also be a potential cost savings compared to the traditional surety-bond approach.
These types of policies usually include a deductible, a copayment percentage, and an aggregate limit. The insurer underwrites the coverage by evaluating the owner’s method of prequalifying, managing, and controlling the performance of the contractors and subcontractors (i.e., by reviewing the owner’s project management and contract administration procedures). Pricing is determined by project size, geographical location, and the number of contracts.
Now you have a better understanding of an OCIP’s features, benefits, and drawbacks. Next time, we’ll review the assessment and implementation processes: how to determine if this program is right for the project and how to go about putting an OCIP in place.
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.