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OCIPS and Safety Management
12/28/2006
 Today's contractors are well aware of the staggering increase in insurance costs that have occurred since September 11, 2001'some estimates cite increases as high as 300%.(1) Obviously, the unpredictable costs associated with today's insurance environment pose a negative impact on construction projects and the contractors who participate in them.
Although the concept has been around for over forty years, Owner Controlled Insurance Programs (OCIPs) are becoming more commonplace as an insurance alternative. As more contractors and subcontractors begin participating in OCIP projects for the first time, they are being introduced to some of the benefits and challenge OCIPs present.
An OCIP is a project where the owner provides blanket coverage (usually workers' compensation, general liability, and umbrella coverage) to contractors and subcontractors. In other words, the owner takes total responsibility for the acquiring, funding, managing, and administrating the insurance program.'(2) If operated effectively, OCIPs can potentially reduce an owner's project costs by approximately 1-2%.(3) This may seem insignificant, but 1-2% of $100 million can make or break most projects.
OCIPs reduce the number of insurance companies involved in the project. Subsequently, legal actions between insurers that would typically result from potential jobsite mishaps or contractual disputes on traditional projects won't occur on OCIP projects because all parties are covered under the same policy.
At the heart of the OCIP is a comprehensive safety program. Whether operated by the owner or subcontracted to a safety consulting firm, a successful safety process involving the project's contractors will result in savings in the workers' compensation insurance that will typically fund the safety program while still providing savings to the owner.(4)
Components of the safety program will typically include the prequalification of contractors performing work on OCIP projects on the basis of pre-determined safety requirements and the contractor's past safety record. The Owner may reserve the right to refuse to award contracts to the low bidder if there is a concern about the contractor's safety record. Additionally, Owners may provide financial incentives for contractors who meet or surpass safety standards or goals set for the project.(5)
Most contractors benefit from OCIP projects in several ways, including more safety and loss control programs, the opportunity to obtain broader insurance coverage with higher liability limits, coordinated claims handling and management services, and the elimination of coverage disputes and subrogation between contractors and insurers.(6)
OCIPs do provide some pitfalls of which contractors should be aware. OCIPs are vulnerable to 'hardening' insurance markets. When these conditions exist, any cost benefit afforded by OCIPs could be immediately eliminated by inflating premium costs.(7) Other pitfalls that contractors should consider when becoming involved in OCIP include the following:
' Removing costs associated with insurance costs can be complicated and increase the burden of preparing accurate bid proposals.
' If bids between contractors are close, a contractor with a good safety record may be at a disadvantage to a competitor without an effective safety program, particularly if the OCIP doesn't utilize experience modifiers in its pre-qualification.
' Some contractors may have broader coverage with higher limits than the coverage included in the OCIP. Consequently, these contractors will have to obtain excessive or 'limits or difference-in-conditions (DIC) liability coverage.'
' By removing the payroll associated with the OCIP, the contractor's own insurance company may reduce its premium credits.
' Dividends from the workers compensation that is part of an OCIP will be awarded to the owner, not the contractors.(8)
Despite the drawbacks, OCIPs will continue to be a viable option for owners undertaking large construction initiatives. These projects typically offer safer work environments for contractors while limiting liability associated with other contractors on the site who may be underinsured. OCIPs also enable contractors to benefit from comprehensive safety programs and reduce losses associated with workplace injuries.
For more information about OCIPs, visit the OCIP section of Safety Management Group's website OCIP's Page.
Footnotes
(1) Katzman, Gerald 'Owner-controlled 'wrap insurance' is a viable alternative for contractors,' The Business Review, July 26, 2002.
(2) Grenier, David L., 'Owner Controlled Insurance Programs ' Part 2,' http://www.c-risk.com/Articles/dlg_OCIP_02.htm
(3) Grenier, David L. 'Owner Controlled Insurance Programs ' Part 1,' http://www.c-risk.com/Articles/dlg_OCIP_01.htm
(4) Katzman
(5) Katzman
(6) Grenier, David L. 'Owner Controlled Insurance Programs ' Part 1,' http://www.c-risk.com/Articles/dlg_OCIP_01.htm
(7) Grenier, David L. 'Owner Controlled Insurance Programs ' Part 1,' http://www.c-risk.com/Articles/dlg_OCIP_01.htm
(8) Grenier David L., 'Owner Controlled Insurance Programs ' Part 1,' http://www.c-risk.com/Articles/dlg_OCIP_01.htm
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