Owner Controlled Insurance Programs: A Primer

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By Jeff Cavignac, CPCU, RPLU, ARM, MLIS

Owner Controlled Insurance Programs (OCIPs) or wrap-ups as they are commonly known, are project-specific, general liability insurance policies designed to cover the job site risks and completed operation exposures of the owner and contractors on a construction project. The program sponsor is the entity that buys the insurance.  It is usually the owner (OCIP) or the general contractor (CCIP).  With the exception of who secures the coverage, the policies are basically the same.  For the purposes of this article, we will use the term OCIP recognizing that our comments would apply to a CCIP as well.  There are other types of coverages which can also be project specific, including: Builders Risk or Course of Construction policies, Workers Compensation, Project Professional Liability policies (PPLI) and Project Pollution policies.  This article will focus on Project Specific General Liability policies.

Historically, OCIPs 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.  OCIPs are also used on nearly every condominium project of any size because these types of projects have been fraught with litigation.  On projects of 50 units or more, the chance of litigation is close to 100%.  Because of this, most, if not all, subcontractors in California have a “Condominium Exclusion” in their operational general liability policy so the only way these projects can be insured is with an OCIP.  Other types of residential projects like tract homes and apartments may also employ OCIPs, however, coverage is generally available on a subcontractor’s operational policy so OCIPs might not be necessary.  Apartment projects that could be converted to condominium projects within the statutory timeline for reporting latent defects (see below) would want to consider using an OCIP that does not include a “Condominium Exclusion.”  Alternatively, you might want to consider “Deed Restricting” the project so it cannot be converted to condominium ownership within the statutory timeline.

There are a number of reasons an owner, developer or general contractor may want to consider an OCIP.  One is that it insures (pun intended) that all contractors on a job have insurance coverage.  It can lower the overall cost of the project to the extent the offsets provided by the subcontractors who now don’t need to use their own insurance exceeds the OCIP premium.  It can also be a profit center for the sponsor of the program.  Finally, the joint defense requirement can save a lot of time and money in the dispute resolution process.

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 repose, which, in California, is 10 years upon substantial completion.  The sponsor of the program is usually the owner or the contractor.  Regardless of who the policy sponsor is, named insureds will include the owner, general contractor and all enrolled subcontractors.  Some 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.

The limit of coverage applies for the policy term, meaning the limit is not reinstated annually. Defense costs are commonly included inside the limit for condominiums but can be provided in addition to the limit on other projects.  There is also a “Joint Defense” requirement.  In the event of a claim, insureds under the policy will be jointly defended by the attorney selected by the insurance company.

It is recommended that the liability limit be equal to 50%-75% of the hard construction costs.  The policy will have a deductible of Self Insured Retention.  Minimum deductibles start as low as $15,000, but, depending on the size of the project, can be higher.  Payment of the deductible is usually apportioned to the contractors that caused the problem.  It is critical that the deductible allocation be addressed in the contract documents.  Minimum premiums for attached residential projects begin at about $50,000. 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 construction costs.

BUILDERS RISK POLICIES – A CRITICAL COMPLEMENT TO AN OCIP

Nearly all OCIPs written on residential projects and some written for commercial 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 an OCIP program is complex. The enrollment process starts with the bid documents. These need to clearly spell out that an OCIP 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 operational 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, who is responsible for the deductible and any other relevant provisions. There are “Wrap Up Administration” companies that specialize in providing appropriate legal wording for bid documents and contracts.  They also provide enrollment services and can, for an additional fee, provide Insurance Recovery Services.  In other words, they will make certain the sponsor of the program is receiving appropriate insurance credits from all enrolled subcontractors.  Contract and Enrollment Administration fees start at $15,000.  Coincidentally, so do the Insurance Recovery Services.  Underwriters of OCIPs will also require that the services of a quality control company be employed.  The QC company will review plans and inspect and document the project during construction.  In the event of litigation, this can be a crucial element to a defense.

SUBCONTRACTORS

If you are a subcontractor participating in an OCIP 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 OCIP 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 an OCIP policy.  Subcontractors will also be required to provide evidence of insurance for other coverages such as off-site general liability, workers compensation and automobile.  The insurance broker that manages your operational policy should review any OCIP you are considering.

FINAL COMMENT

Owner Controlled Insurance Programs are complex.  Whether you are a developer or contractor, if you are going to sponsor or be an insured under an OCIP, it is imperative that you understand the coverage and your obligations under the contract. The benefit of an experienced insurance broker and attorney who understand this type of coverage is a critical component 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.