The Owner-Controlled Insurance Program (OCIP)


What is an OCIP

An OCIP is an Owner-Controlled Insurance Program, a type of insurance plan also known as a construction wrap-up insurance program. As a wrap-up plan, the OCIP replaces the traditional model under which the parties to a construction project would each obtain their own separate insurance coverage. Wrap-ups often also incorporate safety programs that may help prevent accidents and injuries that would otherwise result in claims.

A typical OCIP provides general liability insurance coverage and workers' compensation insurance coverage to all enrolled contractors and subcontractors performing operations at a specific project site. The OCIP may also include umbrella coverage for claims in excess of other policy limits. Individual contractors will normally remain responsible to obtain their own insurance for automobile liability, and for their own equipment.

The OCIP may provide cost savings and better insurance coverage to a project owner, while also providing the owner with more control over the insurance policy and claims process. By providing insurance through an OCIP, the project owner avoids lapses in coverage or inadequate insurance coverage that might result for claims made through individual contractors' and subcontractors' insurance. By having claims made through a single insurance carrier, the claims process is simplified and made more efficient.

An OCIP may potentially expand the number of contractors available to bid on a project, by making coverage available to contractors who might find insurance to be unavailable or unaffordable if they were responsible for providing their own coverage.

Historically, OCIPs have been used primarily for large commercial construction projects. In more recent years, they have increasingly been used for residential construction projects. An OCIP may be set up for a single construction project, or it may encompass multiple projects.

OCIPs vs. CCIPs

Another form of wrap up coverage is the Contractor-Controlled Insurance Program (CCIP). The difference between an OCIP and a CCIP is a matter of who sponsors the insurance program. The sponsor is the entity that is responsible to secure insurance coverage for the project, pay for the insurance, and administer the program. An OCIP is sponsored by the project owner, while a CCIP is sponsored by the general contractor.

Some states may limit the use of wrap-up policies. That is most likely to occur for CCIPs where the project is contracted by a public entity.

When it comes to choosing an OCIP or a CCIP, cost is often the deciding factor. If a general contractor is able to a better rate of coverage than the project owner, even after a mark-up, the project owner may opt for having the contractor sponsor a CCIP.

Advantages of an OCIP

Traditionally, when a general contractor was hired for a job, it would carry its own insurance and name the project owner as an additional insured. Each of its subcontractors would carry their own insurance, in turn naming the general contractor as an additional insured.

Lower tier subcontractors would normally provide an indemnification agreement to the contractors. When liability arose, claims would be made against subcontractors and, as their insurance coverage was exhausted, be made through the various layers of insurance coverage above them. A single claim could potentially be made to the insurance companies of every contractor and subcontractor on a project. An OCIP will also normally have higher limits of coverage than would individual policies held by contractors.

When coverage is provided through an OCIP, that inefficiency is largely eliminated:

  • Simplicity - An OCIP will allow for coverage to be provided by a small number of insurers, perhaps even a single insurer. The OCIP ensures that the project owner will have adequate limits for coverage, consistent coverage for all contractors and subcontractors, and a coordinated claims process. As a claim will normally be made through only one insurance company, the project owner gains control over the claims process and the chance of cross-litigation or subrogation claims is significantly reduced.

  • Cost Savings - The OCIP should allow for the project owner to avoid redundant costs from contractors' carrying their own overlapping coverage, as well as avoiding mark-ups by contractors who would otherwise pass their insurance costs on to the owner. The project owner's purchasing power, in obtaining insurance for the entire project, should also allow for the owner to obtain insurance at a significant cost savings over the collective cost of insurance to individual contractors.

  • Predictability of Coverage - The project owner will not have to worry about the availability or adequacy of insurance coverage by individual contractors on the job site, with differences in policy limits and deductibles, or with liability that may arise if a contractor allows its insurance coverage to lapse. All of the parties will be aware of the insurance coverage that is available for the project, as well as the policy limits. An individual contractor's insurance coverage may be eroded by liability on other projects, while an OCIP may provide a dedicated policy limit that is not affected by claims made on other projects.

  • More Contractors - Contractors who might not be able to obtain insurance, or whose insurance costs might otherwise be too high for them to profitably bid on a project, will be able to bid on a project if that insurance is provided through an OCIP.

Disadvantages of an OCIP

Although an OCIP provides significant advantages to a project owner, the choice of an OCIP is not without its downsides. Potential disadvantages include:

  • Insurance Coverage Gaps - Under an OCIP, insurance coverage gaps may arise. For example:

    • An OCIP does not cover suppliers, material dealers or vendors.

    • Where some work is performed off-site, that work might not fall under the OCIP's definition of the project site for purposes of insurance coverage. It is thus important to make sure that a gap is not created for off-site fabrication and delivery.

    • A typical OCIP will also exclude product liability coverage for products manufactured off-site, and may exclude environmental claims.

    • A typical OCIP will not provide any coverage for professional services provided for the project, such as architectural or engineering services.

    • An OCIP may exclude specific contractors due to their trade (for example, demolition or abatement of hazardous materials), or due to their claims history.

  • Exhaustion of Coverage - A serious construction accident can potentially exhaust an primary OCIP's aggregate insurance coverage before the project is completed. An OCIP may not include completed operations coverage, and it may be necessary to purchase additional inurance to cover the period from the completion of the project through the expiration of statutes of limitation and repose.

  • Set-Up and Administration - Although once established, a wrap up will provide significant efficiencies in the processing and handling of insurance claims, the initial set-up can be complex.

  • Reduced Incentives to Contractors - A contractor or subcontractor that is not responsible for obtaining its own insurance may have a reduced incentive to control losses. The OCIP also creates potential for fraud, if a contractor makes a workers compensation claim under the OCIP for an injury that occurred off-site in order to avoid submitting the claim to its own workers compensation carrier.

Some contractors may disfavor OCIPs due to the need to get credit from their own insurance companies for a project that falls under an OCIP, or concerns about whether their loss experience and experience modification rate (EMR) will negatively affect their bids. The project owner may have to educate contractors that might be reluctant to bid about the actual benefits of an OCIP.

Conclusion

Wrap-up policies can provide significant cost savings and increased efficiency for insurance coverage on large construction projects. At the same time, the parties to a construction project must understand the limitations of the OCIP, and the gaps in insurance coverage that may arise, and make sure that they carry adequate insurance to cover liability for claims that do not fall under the OCIP.

Copyright © 2016 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing 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.

This article was last reviewed or amended on Dec 8, 2016.