Covering Complex Construction Risks Under An OCIP
Risk management practices are older than the building of Babylon (Hammurabi Code 1780 B.C.). However, the comprehensive risk management program which protects the Owner’s budget, known as an Owner-Controlled Insurance Program (OCIP), has only been available in the market place for about 20 years. “Wrap-ups”, as they are also called, were originally thought to be available only for projects in excess of $100M. Now, smaller projects of $30M or more are good candidates for OCIP benefits in today’s marketplace mainly due to the economy driving down pricing.
An OCIP’s hallmarks are its cost-effective, broad coverage for every enrolled Contractor, subcontractor, and some vendors (typically those who perform work on the job site); its safety record and reduced lost time due to injury; its reduced litigation between insured Contractors; and its responsible and financially reliable insurers which stand behind the coverage for the years before, during, and after the project is completed. A construction Owner can also mitigate its costs by utilizing the OCIP administration personnel, rather than its own operations staff, to address claims issues long after contract close-out. Insurance protection in most cases can continue after project completion through the repose period (in Florida up to 10 years), allowing the Owner to rely upon coverage to reimburse losses attributed to latent defects resulting from a subcontractor’s defective or deficient work.
The OCIP premium cost itself can be redeemed through the Owner’s taking credits from the Contractor, since the Contractor does not have to pay for or provide its own coverage for job site risks. For example, if the Contractor’s bid price is $100M, a substantial amount of the Owner’s insurance cost included in a traditional bid price can be reduced if not eliminated through the purchase of an OCIP. Often the Owner can even completely cover the excess liability cost as well, if properly structured bid credits are extracted from the Contractor. These insurance bid credits would reflect the cost not just for the Contractor’s actual cost of its basic coverage but would reflect enhanced insurance charges for the superior insurance provided to the Contractor under the OCIP. A loss sensitive OCIP could also result in even more Owner savings while providing possibly much broader coverage. An exact or even estimated savings is difficult as types of construction, deductibles and quality of coverage issues have too many variables. Therefore, the Owner must be prepared to conduct a feasibility study as part of its due diligence for purchase of an OCIP program. The feasibility study is a scenario-based risk assessment conducted to determine the level of Owner savings.
The basic OCIP insurance products include Worker’s Compensation and General Liability with excess limits not ordinarily available for the traditional insurance program, but the Owner may also add builder’s risk; professional liability for (1) designers, Contractors, and the Owner’s own employees who participate in creative collaboration on the project and could contribute to design risks and for (2) consultant and Contractor risks for managing building information modeling (BIM); environmental; and others. Policies are often specially negotiated to cover risks unique to the project.
Do you think that these OCIP benefits are too good to be true? The benefits do not come without Owner effort and participation. For example, the Owner must manage its own operational personnel or rely on a professional administrator to evaluate and extract credits for insurance from the Contractor at contract bid, at change order pricing, and at contract close-out. Additionally, the Owner’s commitment to a successful OCIP requires the early involvement of its construction lawyer and its OCIP insurance broker to anticipate, address, and contractually allocate risks under an OCIP. As early as conceptual design and budgeting, if not even earlier, these consultants need to work in concert to develop the contract, insurance manual for bidding, safety manual for standards to be met or exceeded by the Contractor, and to establish the infrastructure for the OCIP bid credit and claims administration. The Owner must also assess its requirements for OCIP administration infrastructure which can include an on-site claims office, medical facility, drug-testing, and security clearance center to badge employees.
OCIP financial benefits are achievable and are worth looking into. If you require more information about the contractual risks allocation of your project and whether an OCIP might be an option, please feel free to contact us.