Robb Tinney, Safety Advisor (email)
Safety Management Group
As construction costs escalate, building owners and developers are in a constant search for ways to trim project budgets. While the price of materials, fuel, and other components reflect the basic economics of marketplace supply and demand, there are some factors that can be controlled.
Insurance is one of those costs, and because the price of most types of insurance has skyrocketed in recent years, strategies for controlling those costs draw increasing attention from owners.
Many owners are taking a fresh look at one strategy that’s actually been around for nearly a half a century. Owner Controlled Insurance Programs (OCIPs) often provide a sensible alternative to traditional construction insurance approaches. In addition to helping owners minimize the insurance cost component, a well-structured OCIP can also result in dramatic improvements to the quality of the project and the safety of the site, enhancing the owner’s public reputation.
The basic concept of an OCIP is relatively simply. Unlike traditional approaches, in which the owner of a project expects all contractors and subcontractors to maintain their own insurance coverage and build its cost into their bids, an OCIP allows the owner to provide all of the coverage for the project. Typically, that includes acquiring, funding, managing, and administering workers’ compensation, general liability, and umbrella coverage.
Why would an owner want to take complete responsibility for the entire project’s insurance program? The primary reason is cost. A well-designed and carefully managed OCIP has the potential to lower an owner’s total project costs by 1 to 2 percent. That may not seem like a lot, but when viewed in the context of a $100 million project, it represents significant savings. An OCIP may also allow the owner to obtain broader insurance coverage with higher liability limits.
An owner may address the insurance issue at the bid stage in two different ways. One is to ask bidders to include a line item for insurance costs related to their participation in the project, and then deduct that amount from the contract. The other is to ensure that bidders know that an OCIP will be in place, and that they should not factor insurance costs into their bids.
While cost may be the primary reason that most owners initiate OCIPs, saving money on insurance is not the only benefit they derive from the strategy. One of the most important is the ability to control the project’s safety. Because OCIPs focus on insurance, they usually include a comprehensive safety program with continuous field presence. That brings professional safety advisors to work directly with the owner’s and contractor’s teams to integrate safety from the initial hazard assessment planning stages through project completion.
A typical element of those safety efforts is a contractor prequalification program. Such a program enforces standards that contractors and subcontractors are required to meet before they will even be considered. For example, requirements might include all contractor personnel attending safety orientations before setting foot on the site, random drug screenings, and being able to document that past safety practices were effective (one way is to require that a contractor’s EMR – experience modification rate – be no higher than 1.0).
A contractor prequalification program is an excellent screening tool that gives the owner the opportunity to choose the contractors who are the most qualified, and who have a proven history of controlling safety with their employees. Owners know that safety tends to go hand-in-hand with quality and productivity. Healthy employees work more effectively and have less downtime. With some OCIPs, owners even provide financial incentives for contractors who meet or surpass safety goals.
Another benefit is that OCIPs reduce the number of insurance companies involved in the project. That reduces the likelihood of multiple insurers battling over legal actions or contract issues when a mishap occurs on the site. Coverage disputes and subrogation issues disappear, and claims handling becomes much simpler.
When all these benefits are combined, it’s easy to see the biggest benefit of an OCIP: it allows the owner to assume and maintain control over many aspects of the project. The OCIP gives the owner leverage to ensure that contractors and subcontractors meet the standards and costs established for the project.
That’s not to say that OCIPs are completely without drawbacks. For the owner, the biggest risk is that the insurance market might “harden” and premiums jump higher than expected, erasing part or all of the expected savings. For contractors, bidding under OCIP rules may be challenging, because they may not be accustomed to removing the insurance cost component. Some contractors may have broader coverage with higher limits than the coverage included in the OCIP, so they may have to obtain excess or “difference-in-conditions (DIC)” liability coverage. The contractor’s own insurer may reduce payroll-based premium credits, and workers compensation dividends from the OCIP are awarded to the owner, rather than the contractor.
Ultimately, the decision to proceed with an OCIP depends on the owner’s willingness to take on the additional responsibilities associated with administering a program. If the owner lacks in-house expertise, they can outsource the management of the OCIP to a safety consulting firm that has experience with the approach. That way, they can take advantage of the benefits of the approach while keeping their own time and efforts focused on their core business.