If you have not experienced some bottom line pain in dealings with the insurance industry, you haven’t renewed your insurance coverage. Many insurance companies have reduced the number of lines of coverage they will now write causing many contractors to search for other insurance carriers for coverage. In the past you received rate reductions if your insurance carrier covered multiple lines of insurance. Today, to find the best rate, many contractors have split their insurance coverage to many different insurance companies. Now comes a renewed interest in Owner Controlled or Contracted or Consolidated Insurance Programs (OCIPs), particularly in the public sector to further complicate the insurance picture.
OCIP BASICS. An Owner Controlled Insurance Program (OCIP), often referred to as a “wrap-up,” is a single insurance program purchased by the owner to cover its project participants for their activities relating to the construction project. Project participants can include contractors, consultants, and their respective subcontractors. The OCIP provides project specific insurance coverage, and includes the following:
and generally includes:
There are many gaps in coverage that must be recognized by the fire
sprinkler contractor. Business auto
liability is typically not included in the OCIP due to the substantial off-site
exposures. The OCIP does not cover: vendors and suppliers, delivery persons,
off-site fabrication or manufacturing, work performed on other projects that are
not part of the OCIP related project. Clearly
understand that the owner drives the OCIP concept and the OCIP coverage is
intended to protect the owner’s interests, not necessarily the interests of
the subcontractor. Obtaining
coverage for these gaps in coverage to protect your company can be very costly
and these costs are often unknown until after you have presented a contract bid
price.
HOW DO WE PAY FOR OCIPs? Generally, the owner will ask all
covered contractors to reduce their contract bids by the amount they would have
paid for the insurance coverage provided by the OCIP program. The Sponsor
utilizes these "Bid Reductions" to purchase insurance coverage with
the expectation of Lower Costs and Improved Protection for both the Owner and
Contractors. If your company has a
significantly bad safety record, then the OCIP costs may be less than what would
be expected from your company insurance carrier.
However, should your company have a moderately good to great safety
record, the OCIP rate is typically much higher than the rate provided you by
your company carrier. Remember that
there will be gaps in coverage and to figure the cost of protecting your company
exposure created by these coverage gaps in your bid price.
But in this payment scenario, the OCIP program always has less money in
“Bid Reductions” than is needed to provide the wanted coverage – typically
adding 30+% to these reductions to buy the coverage thereby leading to different
payment procedures.
Some
OCIP project managers simply ask the owner to include insurance costs based upon
their typical insurance rates in the contract bid price. The OCIP manager will then deduct from your bid price the
amount of the OCIP coverage prorated for your company. Avoid these contracts. If
all successful bidders had excellent safety records then the deduction may be
somewhat reasonable. However, the
rate offered by the OCIP carrier is determined after the safety
record of ALL contractors is reviewed. Thus,
should a contractor or few contractors enter the project with bad safety records
the amount deducted from your contract bid price is often many times that
expected when you prepared the bid. Again,
in addition you must also include the cost to cover gaps in insurance coverage.
PROS/CONS
of OCIPs. The
main source of income for the owner is the successful safety project insurance
rebate. Contractor’s who have successful safety records receive
this rebate from their insurance carrier. The
owner’s gamble is that the safety record for the project will be great and the
rebate comes back to the owner, not the contractor.
To meet this goal, the owner adds employees whose role is to provide
strict safety oversight on the project including fines for safety policy
violations, another source of revenue for the owner.
A con is that extra employees mean extra costs.
The extra costs associated with increased rates and employee costs
suggests that there must be a minimum size of project before an OCIP has a
reasonable chance of being profitable and writings on the subject suggest this
minimum sized project cost is $100 million hard construction costs.
But many OCIP programs are written on projects with hard construction
costs much less than $100 million. Some
school districts have rolling OCIP programs (ROCIP) where their multiple
construction projects are OCIP projects and the aggregate hard construction
costs is much less than the $100 million threshold.
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AVOID
OCIP PROGRAMS |
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Particularly when the construction hard
costs are less than $100 million and the contract allows for automatic
deduction from your contract bid price for insurance coverage and
insurance cost overrides. |
A pro for all is that there is one central point to address claims. Another pro for the individual contractor is OCIP will provide coverage that they may otherwise not be able to obtain. A con is that the contractor who cannot find coverage elsewhere usually has a bad safety record, which will drive up the costs for others.
Another con is that some OCIP agreements have
“policy retro adjustments,” or the further ability of the owner to withhold
money from your bid agreement to cover insurance cost overrides.
And yet another con is that of political intervention when government is
the owner, which often leads to coverage lower than what should be purchased in
an effort to make the OCIP concept viable.
There is also an
issue of control. There are those that utilize OCIPs even if the potential
savings are minimal just to be able to control the insurance functions: coverage
limits, coverage enhancements, and control of the safety and claims process.
Additionally, many public projects seek to implement wrap-ups in order to
support Minority Business and Woman Business participation.
Another concern is
protecting your tail! Most OCIPs
have a short life, coverage ends when or near when the project ends.
The contractor then must seek coverage elsewhere to protect its interest
and often this “tail” coverage is expensive as the insurer asked to provide
the coverage did not participate in the initial project.
We strongly recommend if legislation to control OCIPs is initiated that
tail coverage be an issue; the OCIPs provider must be required to cover the
project for at least 10 years or the law should say the liability ends when the
insurance coverage provided by OCIPs ends.
The latter is not acceptable by the owner thereby shifting the number of
years as the major negotiation point.
Protecting
Contractor Interests in OCIPs.
Owner-controlled
insurance programs are complicated and tricky. To stay informed and protect
their interests, contractors need to be involved at the planning stage of the
program. How will policy limits be
shared if a catastrophe occurs? How
will completed operations coverage be handled?
What about coverage for vehicles, fabrication and our supplier’s
delivery staff? These are just a few of the questions contractors need to ask
the owner—and have answered—during the contracting phase.
Doing so allows the contractor the time needed to negotiate changes in
the program, to include the cost of providing coverage for gaps in coverage on
its own policies, and to ensure changes are made in the contract risk allocation
based on the contractor's ability to provide coverage it deems necessary to
protect its interests. Look at all OCIP contracts with wide eyes and deep
thought or you could quickly lose your profit margin through automatic deduction
clauses in the contract.
And What About
CCIPs?
Contractor Consolidated Insurance Programs (CCIPs)
has the major difference of shifting insurance control from the owner to the
general contractor. Many large
general contracting companies use CCIPs as a simple method of reducing their
insurance costs. However, the
impact and risk on the subcontractor under CCIPs is similar to that of the OCIPs
program. One noticeable difference
is that under CCIPs some of the insurance gaps such as travel from to and from
the jobsite may be covered under a CCIPs program while rarely covered under
OCIPs. The most critical management
action is a thorough review of the CCIPs agreement with a close eye for
indemnification language and liability transfers, particularly in the sharing
amongst all subcontractors any insurance costs overrides.
Your Regional Operations Staff recommends
legislation allowing entry in an OCIP and CCIP program the option of the
contractor and not the mandate of the owner.
A copy of an OCIP
law that has passed a state legislature is available for
download. The political lobby was such that all construction trades
were needed to ensure passage of the legislation and all construction trades
were in agreement on OCIPs but not all were in agreement on CCIPs.
The main focus of this legislation was to limit the proliferation of
OCIPs by setting a limitation that OCIPs only be used on projects over $75
million. Where an OCIP or CCIP is
implemented, the contract should state that liability of the contractor ends
when the coverage ends, again a state law change may be needed to implement this
recommendation. The OCIP contract
must state that changes to the coverage obtained through an OCIP may only be
changed with consent of both parties. And
the contract must state that the owner will be responsible for all deductibles
where an Owner Consolidated Insurance Program (OCIP) is implemented. Contact your Regional Operations staff for assistance.
Buddy Dewar