OCIPs: Project-Specific Liability for Condos

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By Jeff Cavignac, CPCU, RPLU, ARM

Introduction

Owner-Controlled Insurance Programs (OCIPs) or “wrap-ups” as they are commonly known, are project-specific insurance policies designed to cover the job site risks and completed operations exposures of the owner and contractors on a construction project. The program sponsor (the entity that buys the insurance) procures certain coverages on behalf of some or all of the parties working at the job site rather than having each firm supply its own insurance. Wrap-ups can include general liability, workers’ compensation, builders risk and pollution liability.  Some insurance companies may also include a limited form of professional liability for the design team, however, the coverage is not a substitute for a design professional’s practice policy and coverage should be reviewed carefully.

Historically, wrap-ups were designed for projects with construction values of $100 million or more.  The main reason to implement an OCIP on larger projects is to create a profit center for the program sponsor and to allow for better coordination of loss prevention and safety.  Wrap-ups are also used nearly exclusively on condominium projects of any size and are also commonly used on other types of residential projects (tract homes, apartments). This is due to the fact that these types of projects have been fraught with litigation. Most subcontractors are apprehensive about becoming involved in these types of projects, and in most cases their general liability policies specifically exclude this type of work. A wrap-up policy enables a developer or owner to attract these subcontractors, who would otherwise not bid these projects. Additionally, the OCIP provides a centralized controlled defense for the insured parties

How Does an OCIP Work?

An OCIP policy must be placed prior to the start of construction. It usually continues through substantial completion of the project plus a number of years thereafter. This period is known as the ‘extended reporting period’ (ERP) or ‘tail.’ Ideally, the tail extends through the applicable statute of limitations, which, in California, is 10 years.

The sponsor of the program is usually the Owner (Owner Controlled Insurance Program or OCIP) or the Contractor (Contractor Controlled Insurance Program or CCIP).  The “Named Insured” also includes all enrolled contractors.

The limit of coverage applies for the policy term. In other words, the limit is not reinstated annually. There is usually a deductible or self-insured retention (minimum retentions typically start at $25,000 but are often higher). Minimum premiums for attached residential projects begin at about $50,000.  It is recommended that the liability limit be equal to 50% of the hard construction costs at a minimum. The ultimate premium will vary but it is not uncommon for a fully layered (primary and excess coverages) OCIP policy to cost 1-2% of sales costs.  Ideally, the cost of defense is included in addition to the limit, but this is not always the case.

As mentioned above, occasionally underwriters are willing to include the design team under an OCIP. Recognize that this is not a substitute for a design professional’s professional liability policy. An OCIP is a general liability product that only covers damages that result in bodily injury (BI) or tangible property damage (PD). Professional liability, on the other hand, extends to legal liability that includes economic damages as well as BI and PD.

Where Does Builders Risk Factor In?

Nearly all wrap-ups written on residential projects will exclude damage to the project itself while under construction.  This makes it imperative to place a builders risk policy on the project that includes the interests of all the parties working on the job.  Builders Risk, or Course of Construction Insurance as it is also called, provides first party property coverage for damage to the project during construction caused by an insured peril.  Coverage should be written on a special peril form (all-risk) and the perils of earthquake and flood should be considered.

Administering a Wrap Program

Enrolling the various contractors into the program, obtaining premium credits from each contractor and managing a wrap program is complex.  The enrollment process starts with the bid documents. These need to clearly spell out that a wrap policy will be provided on the project and how it will work.  It should explain the coverage, the limits and the deductible obligations.  Participants will also be asked to provide an “insurance credit” as an offset in their bid.  This credit reflects the money the contractor will save on their practice policy since this project is being insured under an OCIP.  The insurance section of the Sub-Contract Agreement must also address the wrap-up program including the enrollment process, how the policy will be administered and any other relevant provisions.

If you are a subcontractor participating in a wrap-up program, you need to understand the coverage being provided, the insurance credit you will be asked to provide and your deductible obligation.  You should also know whether your general liability policy will dovetail with the wrap-up and provide excess coverage in the event the wrap-up limits are exhausted.  Note that most general liability policies available to subcontractors will specifically exclude condominium work and any work done on a project covered by a wrap-up policy.

As previously discussed, managing an OCIP program is complicated, and because of this, it is recommended that the services of a wrap-up administrator be utilized.

Final Comment

Any new condominiums built today will be insured by a wrap-up insurance policy.  If you are going to develop, design or build this type of project, it is imperative that you understand the insurance coverage and your obligations under the contract.  The benefit of an experienced insurance broker and attorney that understand this type of project (residential) and coverage type (project-specific general liability) are critical components in your risk management efforts. 

The OCIP marketplace is changing rapidly. This coverage summary is not an affirmation of coverage, and any proposed program or policy should be read for actual terms and conditions.