OWNERS AND CONTRACTORS PROTECTIVE (OCP) LIABILITY

GENERAL CONTRACTOR & JUST WON A CONTRACTING BID? THAN GET THE PERFECT INSURANCE PROGRAM FOR THE PROJECT

WHAT IS OWNERS AND CONTRACTORS PROTECTIVE (OCP) LIABILITY

GENERAL CONTRACTOR & JUST WON A CONTRACTING BID? THEN GET THE PERFECT INSURANCE PROGRAM FOR THE PROJECT

WHAT IS OWNERS AND CONTRACTORS PROTECTIVE (OCP) LIABILITY

When contractors are awarded construction bids, they’re required to maintain an insurance program outlined by the project owner. These include standard coverages like contractors general liability, workers’ compensation and auto, which usually require additional insured status for the owners. An owner controlled insurance program is a single insurance plan designed to cover nearly all liability arising from a construction project. OCIPs combine the coverage benefits of several key insurance policies normally used for construction projects—including general liability, workers’ compensation, excess/umbrella liability, builders risk, and more—into a single policy.

WHY YOU NEED OWNERS AND CONTRACTORS PROTECTIVE (OCP) LIABILITY COVERAGE

The main advantage of an OCP policy is that the coverage applies solely to a project owner. That person or company alone receives primary coverage with a separate, dedicated set of limits. OCP coverage is also primary, so if there are multiple policies that could potentially respond to a claim, the OCP is applied on a primary basis.

UNDERSTANDING OWNER CONTROLLED INSURANCE PROGRAMS

Owner controlled insurance programs are complex insurance products that can offer great opportunities for cost savings, superior risk management, and streamlined insurance claims processing for property owners and/or construction project managers. However, getting started with an owner controlled insurance program is more involved than setting up standard construction insurance policies. The goal of this guide is to explain everything you need to know in order to implement and manage an owner controlled insurance program.

If you are a property owner or developer starting a residential or commercial building project, you have a wide array of insurance coverage options to choose from. One of the most effective options that you should consider is a wrap insurance policy. A wrap is an insurance product that covers the owner, general contractor, and most subcontractors under one product – so each party doesn’t have to get their own individual policies. Wraps typically provide for General Liability coverage and may include Workers’ Compensation and other coverages as well.

Wrap Insurance Programs can be either Owner Controlled (OCIP) or Contractor Controlled (CCIP). An OCIP is purchased by the owner or developer and they are first Named Insured on the policy. With a CCIP, the contractor purchases the policy and they are the first Named Insured on the policy. Below we’ll lay out other key differences and benefits of the two types of wraps.

UNDERSTANDING OWNER CONTROLLED INSURANCE PROGRAMS

WHAT IS AN OWNER CONTROLLED INSURANCE PROGRAM (OCIP)

An owner controlled insurance program is a single insurance plan designed to cover nearly all liability arising from a construction project. OCIPs combine the coverage benefits of several key insurance policies normally used for construction projects—including general liability, workers’ compensation, excess/umbrella liability, builders risk, and more—into a single policy.

HOW OCIPS WORK

OCIPs are a relatively new type of insurance product that were first introduced to provide cost savings an administrative efficiencies for large commercial construction projects with budgets exceeding $50-100 million. However, in recent years, these insurance programs have become more popular and widely used for smaller projects as well.

Unlike the traditional construction insurance model, where each contractor or subcontractor purchases their own individual insurance policies to cover their liability, under owner controlled insurance programs, the property owner or developer, general contractor, and subcontractors all become named insureds under a single policy (the OCIP), which covers the entire project (or group of projects).

The big disadvantage of the traditional construction insurance model from the standpoint of the property owner is that each contractor purchases their own insurance and bakes their individual policy costs into their bids, which results in the property owner indirectly paying for the cost and overhead of dozens of policies. Additionally, in the event of a loss, legal and administrative costs under the traditional model regularly exceed indemnity costs by as much as 5-to-1. By streamlining everything into a single policy, property owners can reduce costs and more efficiently cover losses if they occur.

OCIPs are usually set up for individual projects; however, it is possible to create “rolling” OCIPs, in which the same insurance program is used for a number of similar projects or for a series of projects. Rolling OCIPs are common among large property owners, such as real estate investment trusts or state universities, that usually have a number of construction projects underway at any given time.

THE MUTUAL BENEFITS OF OCIPS AND CCIPS

MANY BENEFITS OF A WRAP POLICY ARE THE SAME, REGARDLESS IF THE POLICY IS AN OCIP OR CCIP. THESE BENEFITS INCLUDE:

#1 Uniformity of Coverage

Under a wrap there is clarity of coverage because all participants fall under the same policy; compared to the traditional approach, where the owner, general contractor and subcontractors all have different policies from different carriers, with different coverages, different exclusions, different deductibles and different limits. Without this overarching policy, there may be gaps if one subcontractor has different coverage or limits. With an OCIP or CCIP, you’ll have the comfort of knowing that everyone on the project is covered. Receiving a contractor’s Certificate of Insurance (COI) doesn’t offer the same peace of mind, because you don’t know the policy details or even if what is showing on the certificate is accurate!

#2 Continuity of Coverage

Even after a project is complete, there is a potential for liability. A wrap oftentimes provides coverage for all participants through the statute of limitations for completed operations/construction defect exposures. In California, you can have exposure for a decade after completion for construction defects. Under a traditional insurance structure, if a sub or general contractor doesn’t renew their annual policy or if they go out of business and an incident occurs, liability could fall solely to you as the owner or developer. With an OCIP or a CCIP, you can have a policy in place through the statute of limitations for one price that doesn’t have to renew each year.

#3 Cost Savings

Purchasing individual policies tends to be more costly than buying one aggregated policy. By purchasing a wrap that covers many of the parties involved in a development project, you get the benefit of economies of scale that individual policies just can’t offer. As a result, you can realize significant cost savings.

#4 Higher Limits for the Same Cost

By purchasing a wrap, you will get higher limits on an OCIP or CCIP than individual subcontractors would have provided or could obtain. Where a modest sized general contractor or subcontractor will only be able to obtain $2 to

$5 million in policy limits, as an owner you can buy $25 million, $100 million or more in policy limits using a wrap. So when an individual subcontractor causes a large problem, you will have adequate coverage to defend and remedy.

#5 Cooperative Defense

By having a wrap that covers all parties, there will be less finger pointing if there is a suit, a construction defect, or other incident that triggers a general liability claim. With separate policies, the insurance companies for each sub will blame each other’s insureds, jockey for position, try to sue each other for reimbursement (subrogation) and avoid liability. Legal expenses can be astronomical, not including the time that is wasted in discovery, depositions and overall distractions. With a wrap, you’re all in the same boat – so insurance companies won’t try to prioritize another policy and shift blame. When you work together to defend against a claim, the outcome will be better for all.

BENEFITS OF AN OCIP OVER A CCIP

Some benefits of a wrap policy will differ between an OCIP and a CCIP. Here are some of the major benefits of an OCIP Policy:

#1 Customized Coverage to Suit the Owner and their Partners

As an owner or developer, with an OCIP, because you purchase the policy, you have the ability to customize certain aspects of the policy with your broker to best fit the project and your risk profile. Usually the general contractor will have an ongoing, “Rolling Wrap” program in place, and will press the owner to use their program. After all, it is already in place and they will take care of everything for you. Be aware though, that this program could have many pitfalls for you as the owner.

Assume that the coverages in the CCIP policy are crafted to best suit the general contractor, not you as the owner. If the wrap provides for a certain limit per project and you would have selected a higher (or lower) limit, you may be finessed into agreeing to something that wasn’t exactly what you had wanted. Does the policy fully cover certain risk characteristics or are there substantially reduced sub-limits? Are there shared limits among projects? Is the carrier financially strong and do they pay claims? When a copy of the policy is provided, are there redacted sections? How do you know certain endorsements weren’t pulled from the copy provided to you? There are many potential hazards that you and your broker need to be cognizant of when using your general contractor’s CCIP.

#2 Control of Claims

In case of a claim, the first named insured is the one most in control of the claims process. With an OCIP, you are the conduit and will be 100% informed, with the least filtering of information. With a CCIP, the general contractor will have that control, not you, and this can become disadvantageous if you believe the process is not being managed properly.

#3 Avoid Markup & Capture the Cost Savings

As an owner or developer, when you buy the wrap, the costs are discernible and understandable. You know the premium, administration, third party peer review, risk assessment and total costs. With a CCIP, it may be harder to obtain the true costs. The purchaser of the wrap will reap the benefit of savings from the economies of scale. If you purchase the wrap, the contractors deduct the cost of those insurances from their contracts.

#4 Responsibility, Control and Survivability

If the general contractor goes out of business or becomes insolvent, or you get into a dispute with the general contractor, coverage can become a leverage point. Although the policy covers many parties, the policy owner controls important aspects of the policy and therefore some additional control over the project. If you needed to replace the general contractor, it may be much easier to do so if you control the wrap.

#5 Multiple Project Capabilities

As an owner or developer of two or more construction projects within a three-year period, an OCIP Program can be put in place to cover multiple projects, each with their separate per project limits. This allows for great economies of scale, and coverage enhancements. Having a pre-negotiated OCIP allows the owner to price the Insurance costs with certainty during the project planning and budgeting stage.

WHAT ARE THE BENEFITS OF OWNER CONTROLLED INSURANCE PROGRAMS

Several aspects of the owner controlled insurance program make it a beneficial method of insuring construction projects. For owners, some of the potential benefits include:

Lowered costs through purchase of insurance in bulk. Contractors usually purchase insurance, but the costs are always ultimately passed on to the owner.
Higher dedicated limits for contractors. Contractors on the policy will all benefit from the high limits of the entire insurance program. OCIPs tend to carry very high limits since they cover costs for potential damages of the entire project. Any damages caused by one contractor are unlikely to even approach the limit of the OCIP.
Lowered risk of accident on the job site and reduced losses from an increased focus on loss prevention.
Rapid enrollment. Contractors can become insured more quickly by enrolling, rather than setting up their own policies for the project.
Simplified claims handling and payout on damages because determining who’s at fault is not necessarily relevant. With OCIPs, there’s reduced litigation and more efficient claims handling since everyone is on the same policy.
OCIPs offer a major benefit to the project sponsor, which is complete and precise coverage. Owners gain visibility into exactly where gaps in coverage exist because the programs are customizable and designed by the owner, with the help of an agent or insurance consultant.
Custom coverage time frame. OCIPs are designed to cover the project for its entire duration, not a specific time limit. In fact, policies are often designed to provide coverage well beyond the build, through the statute of limitations, ensuring coverage for the entire possible period when liability is present.
Access to more contractors. These policies give contractors who, on their own, may not be able to obtain insurance for the type of project you’re working on. Whether it is their prior experience or inability to achieve a high enough coverage limit, some contractors cannot get the right coverage for every job. OCIPs eliminate these issues.

ADVANTAGES FOR CONTRACTORS

While many contractors are averse to projects that use OCIPs (for reasons we’ll cover below), they can actually offer advantages:

Better coverage. Sometimes, OCIPs will offer higher coverage limits and broader coverage to contractors than those individual contractors would be able to obtain on their own. The result is that contractors can bid on more (and/or larger) OCIP jobs that would otherwise be difficult for the contractor to secure independent insurance for.
The improved loss prevention and safety procedures that OCIP jobs demand keeps contractors safe while on the job-site and also less likely to experience a loss.
OCIPs, when managed well, will also offer a streamlined and clearly explained claims procedure.
Subrogation, which is when insurance companies seek to recoup losses from damages by taking legal action on behalf of the insured, and disputes regarding fault are not an issue for OCIP covered projects because all parties are covered under the same program and only one party (the project sponsor) paid for insurance on the project. Claims made on an owner controlled insurance plan will not be counted against the contractor. If the contractor experiences a covered loss on the OCIP-covered project, it will not affect their own insurance policies.
Subcontractors. With OCIPs, there’s no need for contractors to monitor the insurance certificates of its subcontractors.

OCIP VS CCIP

WHAT IS THE DIFFERENCE BETWEEN AN OWNER CONTROLLED INSURANCE PROGRAM AND A CONTROLLED INSURANCE PROGRAM?

In construction, OCIPs (Owner Controlled Insurance Programs) are paid for by the project sponsor or property owner, whereas CCIPs (Contractor Controlled Insurance Programs) are paid for by the lead contractor on the construction project.

Since CCIPs operate mostly in the same way as OCIPs, why choose a CCIP over an OCIP? One big reason is cost. Sometimes, contractors with long track records of safety and strong relationships with their insurance providers can actually achieve better rates or higher limits than the project sponsor. In this case, it can make sense for the owner to simply reimburse the contractor for the cost of insurance because the terms are much more favorable.

Some contractors may regularly perform similar projects that need very similar coverage. It is possible for contractors in this situation to set up a rolling CCIP with their insurance provider, rather than creating similar policies for new projects over and over. Contractors with rolling CCIPs are also likely to save on the cost of insurance, which can benefit owners when the cost is passed on to them.

Contractors may also prefer CCIPs because it incentivizes owners to stick with them. If the contractor is no longer on the project, neither is their insurance policy. And contractors who carry CCIPs, or are willing to adopt a new one, are not very common.

Apart from the advantages of CCIPs mentioned above, there are some downsides as well. In some cases, parties that contract directly with the owner, instead of the contractor may not be able to enroll in the insurance program. However, this can usually be resolved if the owner can be added to the policy as a named insured.

Sometimes coverage limits on the CCIP apply to multiple projects being worked on by the contractor. This means that the limits can be lower for a given project if another project on the CCIP experiences a covered loss. To deal with this issue, project owners can require that the CCIP has limits that apply only to their project or even require a project-specific policy.

Owners should take an active interest in policy details, like coverage limits, claims management procedure, safety and loss prevention programs, and much more. The contractor should supply owners with informative material about the insurance program, or expect to discuss and design the CCIP alongside the project sponsor.

CCIPs are not very common compared to their owner controlled counterparts. However, the benefits offered by CCIPs has led to an increase in their popularity in recent years.