Frequently Asked Questions About Owner-Controlled Insurance Programs
By David L. Grenier
C-Risk, Inc.
February, 2001
This article is part of a series discussing Owner-Controlled Insurance Programs (OCIPs).
Owners thinking about implementing an OCIP may receive questions from their own internal management. Questions can also come from the GC (who may be responsible for a significant portion of the OCIP administration) and other contractors/ subcontractors. There may also be queries from regulatory agencies, union officials, and local trade associations. Here are some common FAQs:
What’s the difference between an OCIP and a wrap-up?
The terms “OCIP” and “wrap-up” are frequently used interchangeably because the underlying premise is relatively the same. Both have the same primary insurance coverages (usually workers’ comp, GL, and an umbrella policy).
However, there is one major difference. The wrap-up originated as a type of consolidated insurance program that could be viewed as a Contractor-Controlled Insurance Program (CCIP). On a CCIP, responsibility for providing project insurance coverage for all subs resides with the GC. On an OCIP, the owner is the sponsor who provides insurance for all parties. And, the owner takes total responsibility for the insurance procurement, including direct payment of premiums, along with the management and administration of the entire program.
How does an OCIP benefit an owner?
The primary advantage of an OCIP is increased control (hence, the name Owner-Controlled Insurance Program). But, an owner benefits in many other ways:
-
Cost savings
-
More efficient project management and administration
-
More effective safety and loss control programs
-
More opportunities to hire MBE/WBE/ DBE/SBE contractors and subs
-
Direct control of insurance coverage exclusions
-
Ability to obtain higher insurance limits and mitigate claims disputes
Other benefits include a lower cost of risk (resulting from cost reductions) and protection from catastrophic loss by obtaining higher limits of liability insurance coverage.
How much additional time will an OCIP require from an owner’s management staff?
On a typical OCIP, the estimated time expenditure will be more significant in the initial stages of design and implementation. However, once the OCIP is up and running, the time required for administration will be minimal, consisting mostly of responding to coordination questions and reviewing periodic OCIP status reports with the broker, OCIP administrator, and insurer.
If an owner commits to an OCIP, can it revert back to a conventional insurance program? There are several reasons why an owner may want to dissolve an OCIP, but the main one is usually driven by economic factors resulting from changes in insurance market conditions. For example: If an OCIP is implemented in a hard market and the market softens, the OCIP will cost less than projected. However, if an OCIP is implemented in a soft insurance market and then the market hardens, costs will increase, coverage may be reduced, and limits will be lowered.
Therefore, economic-cycle volatility can make it extremely difficult for an owner to provide the necessary insurance coverage, which is a contractually stipulated requirement on all construction projects. In the event that happens, the OCIP may need to be dissolved. This entails the negotiation of contract cost adjustments, including change order increases with enrolled contractors and subcontractors. Unfortunately, the magnitude of the increased construction costs would have a negative financial impact on the project’s profitability.
Do all contractors and subcontractors who perform work on the project have to be enrolled in the OCIP?
Contractors or subs who perform the majority of their work away from the project site may be excluded from an OCIP. The primary reason for this exclusion is that their limited project site exposure results in limited risk and exposure to jobsite injuries, claims and liability.
In addition, contractors and subs should also be excluded if their contract value is less than a certain amount due to considerations of practicality from an administrative standpoint. Depending on the total construction cost of the project, a good rule of thumb is to exclude contractors and subcontractors with contract values less than $25,000-$50,000, but these figures are relative.
Do OCIPs provide an unfair advantage to contractors with poor loss experience when bidding on work against a contractor with a good safety record?
Logically, it would appear that contractors with poor loss experience usually expend a greater percentage of revenue on the cost of insurance than do contractors with good safety performance and low loss experience. Therefore, contractors with poor loss experience should have higher insurance costs, higher total costs and higher construction bids than a contractor with favorable loss experience.
So, by removing insurance costs from construction bids, contractors with favorable loss experience may lose a cost advantage. However, the difference in contractors’ bids created by differences in loss experience is likely to be small when measured as a percentage of construction bids. Also, by making insurance costs a neutral factor, the bid competition is focused on more substantive issues, like performance, quality of workmanship, and safety.
In addition, a contractor develops the lowest bid because of lower labor, material, or other costs and not because of lower insurance costs. This should be an advantage to the owner. To eliminate any advantage to contractors or subs with poor loss experience, some owners will not accept bids when workers’ comp EMRs exceed a set level (for example, 125%).
Are contractors’ and/or subs’ loss-sensitive insurance programs impaired by an OCIP?
Specifically, would it cause them to have less leverage with their own insurance carriers? Loss-sensitive insurance programs, such as dividend plans and retrospective rating plans, have two components: a fixed charge and a variable charge. The variable charge is based on the frequency and severity of losses.
When a contractor’s or sub’s projected payroll (the predominant rating base used for determining premium) is moved from its own insurance program to an OCIP, the fixed charge may increase as a percentage of premium because of this reduction in payroll. If a substantial portion of the premium is moved to the OCIP, the effect on a contractor’s or sub’s own insurance premium may ultimately result.
Next: Wrapping Up the 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.