December 2002

Ran: San Diego Business Journal - Monday, December 2, 2002

Communication Is Key When Dealing With OCIPs

'Wrap-Up' Insurance Offers Coverage for Multiple Contractors
By Douglas E. Barnhart
Special to the Business Journal

An owner-controlled insurance program, or OCIP, is an insurance option that allows coverage for multiple contractors to be wrapped up into one program.

OCIP's are normally used on large construction projects involving numerous contractors.

They provide owners cost-savings and offer some advantages for the contractors working on the project. Construction managers should investigate OCIPs to ensure that their companies are protected when they choose to participate in a wrap-up program.

OCIPs have been around for almost 40 years and in theory, they seem to have it all: broader insurance coverage; lower construction costs; improved quality of risk management; reduction in work obtaining certificates of insurance from each contractor on the job; and a widened playing field, as contractors need not obtain insurance to bid.

What must be recognized, however, is that there are several precautions contractors and owners together must take when dealing with OCIPs, particularly on public works project. While these programs were developed to be helpful, a poorly structured OCIP can provide unfavorable consequences.

There are several disadvantages to an OCIP, including the additional administrative burden on both contractor and owner if the OCIP administrator is unexperienced and the potential for inherent risks in loss-sensitive programs, resulting in premium increases and/or coverage reductions if the insurance market changes.

Add to that the additional accounting efforts on the day of the bid in the bid room for subcontracting insurance costs from bids and change orders and the additional monitoring required by the OCIP administrator to ensure that claims from contractors' employees injured on other projects are not charged to the OCIP.

Finally, the OCIP makes it the owner's responsibility for implementation of safety and loss issues, something better left to the contractor's safety professionals.

Disadvantages For Contractors
In a close bidding situation a contractor with an excellent safety record may lose out when competing against a less-safety conscious contractor. This occurs if the worker's compensation experience modifier in not taken into consideration as part of the bid process. OCIP coverage may not be as broad as, or may have lower policy limits than, the coverage provided by the contractor's own insurance policies. In this case the contractor must negotiate with its own insurer to obtain excess limits liability coverage.

An OCIP usually includes completed operations coverage for losses in a specified period of time (usually two to five years after project completion). However, the contractor's exposure continues for 10 years. The intent of the OCIP is to respond to claims alleging bodily injury or property damage that occurs at the project site.

Unfortunately, this created a coverage gap for a contractor who manufactures or fabricates a product off-site and installs it as well. Since the contractor's primary general liability policy excludes coverage, the contractor will have no recourse if there is an accident.

Along similar lines, OCIPs typically exclude suppliers, material vendors, haulers, and truckers and some high-hazard operations such as blasting and demolition. Since OCIP costs must be segregated from other project costs, additional bookkeeping is required to maintain duplicate payroll records.

Due to the increase in payroll volume, the contractor's own insurance company may reduce its premium credits and dividends for worker's compensation may go to the owner, not the contractor. There is no inventive for the contractor to keep a safe site.

Auto liability coverage is usually excluded from an OCIP, making it difficult to separate general liability and auto liability claims if the coverage is with different insurers. Some OCIP administrators do no report worker's comp loss data to rating bureaus in a timely manner, consequently affecting the contractor's experience calculation.

Negotiating
While OCIPs do have its merits and were created to simplify insurance coverage on a project and save the owner money, make sure your OCIP does the following when negotiating:

  • Contractors should be given some incentive to keeping a safe site, and receive a safety bonus as mutually agreed to by the owner and the contractor. This is a particularly fatal flaw on a public works project where bonuses are generally not allowed.
  • Take into account subcontractors' workers compensation experience modifier in the bidding process - you do not want unsafe contractors on your jobs, at any price.
  • Contractors should endorse their own general liability policy to include any exposures beyond the OCIP two-to-five "tail" period and obtain the longest tail as possible.
  • Ensure that the OCIP offers completed coverage for off-site and on-site assembly of products to be incorporated into the project, when an OCIP-participating contractors is performing both assembly and manufacture.
  • Be skeptical of any OCIP brokers who fail to fully explain the details of their program. All details of the OCIP should be developed well before the owner solicits any bids or proposals to perform the work.
  • Contractors and owners should receive a clear written statement of which firms and operations fall under the OCIP and the program sponsor should also provide written assurance that the insurance requirements for excluded firms and operations is reasonable.
  • Make sure the OCIP provides broad coverage of all losses "emanating from" the project site, including workers traveling on behalf of the project. The contractor should also receive a written assurance that it will be able to exclude the cost of continuing automobile liability coverage from any insurance credits.
  • On public projects, make sure the OCIP complies with applicable bidding laws.

There are numerous other issues that should be discussed. Plentiful and proactive communication can help dispel any pitfalls that may occur during a construction project.

For more information, please contact your local Associated General Contractors Chapter for their guide to owner-controlled insurance programs, which can be downloaded at (www.agc.org).

Barnhart is the CEO of Douglas E. Barnhart, Inc. He is also a member of the Associated General Contractors of America National Executive Committee.

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