Owner Controlled Insurance Programs - Part 2

David L. Grenier

OCIP - Program Controls

There are a number of compelling reasons why an owner would consider an OCIP an appealing insurance and risk management approach, in comparison to a conventional insurance program. Some include:

Coverage Quality. An owner can mandate minimum insurance requirements, but it is very difficult to ensure that these requirements are met. Certificates of Insurance, the typical method of verifying coverage, provide only summary information. In comparison, an OCIP ensures that an owner's requirements will be met. Owner’s can also secure broader coverage under an OCIP by leveraging the premium volume with an insurer.

Insurance Limits. Many contractors, especially smaller firms, carry only $500,000 to $1,000,000 of general liability insurance. These policies respond to liability arising from a contractor's work on all of its projects. However, their aggregate limits may be eroded by claims on projects other than the owner's. These coverage limits may be inadequate given today's multi-million dollar settlements and jury awards. Under an OCIP, an owner can provide $100 million or more of dedicated liability coverage if required.

Insurer Stability. On an OCIP, there can be over 100 contractor and subcontractor firms on a large project, and theoretically, there could be as many as 100 different insurers covering these contractors and subcontractors. In addition, all of these insurers may not be financially stable, and even if all these insurers were at the start of the project, there is no guarantee that they will remain solvent throughout the project’s total duration. Under an OCIP, an owner has direct control over the selection of an insurer and can monitor insurer’s performance and financial solvency. Typically only one insurer is selected for the primary workers compensation and CGL lines of coverage.

· Program Innovation. There has been an increasing interest by owners over the last few years to use integrated risk management and risk financing methods to augment the benefits of design-build project delivery on construction projects. This type of innovative risk-transfer methodology is best utilized on the larger multi-discipline, multi-year, OCIPs, and requires a strong project management team to administer. Some of these programs can integrate insurance coverage for professional design, environmental remediation, force majeure perils, and builders' risk. Capitalizing on the leverage created under an OCIP approach, an owner can buy broader coverage at reasonable prices, realizing volume discounts from the economies of scale.

However, proceed with caution because these cost savings can be offset by the additional administration costs. In addition, it becomes more difficult from a claim perspective when you try top combine P&C policies that are typically written on an occurrence basis with professional and/or environmental policies that are normally written on a claims-made basis.

OCIP – Loss Control & Claim Management

With an owner assuming significant risk under an OCIP, two important benefits of this approach are improved loss control and claim management, both minimizing the cost of retained losses.

Loss Control. Complementing the contractor’s existing safety program, an OCIP can help to standardize safety procedures on the whole jobsite. Also, an owner can add additional safety staffing, implement a financial safety-incentive program, expand periodic audits, or some combination of these options, using the money from contractor and subcontractor bid credits and insurance deductions.
Claim Management. Workers compensation reform in several states over the past few years has greatly improved employer’s control over injured-employee claim management. Cost control techniques, such as directing employees to Preferred Provider Networks (PPOs), return-to-work and modified-duty programs, and medical bill reviews, can potentially reduce an employer’s workers compensation costs by as much as 30%. Owners can offer these program features to all contractors and subcontractors on the OCIP. This is an advantage to smaller contractors, since most would not normally benefit from these features through their individual insurance programs.

Another claim-related benefit of an OCIP approach is the streamlining of general liability claim management. Under a conventional approach to project insurance, the owner, contractor, or subcontractor, involved in a claim is likely to be represented by different insurers and attorneys. An OCIP helps to mitigate and lower the cost of claims because typically only one insurer provides insurance to all parties enrolled in the OCIP.

OCIP – Implementation & Administration

OCIPs should proceed through the following steps prior to implementation:

· Feasibility study. An important first step to any successful OCIP is the feasibility study, which is used to evaluate the advantages and disadvantages, statutory and regulatory impediments, cost savings, timing and other issues associated with the owner’s OCIP.

· Request for proposal (RFP). Assuming an OCIP is feasible, proposals should be obtained from brokers and/or OCIP administrators. In many cases, the broker is the OCIP administrator. However, it could also be an owner’s representative or risk management consultant. The RFP should describe the scope of the construction project, anticipated OCIP coverage's and requested services, and obtain information from the broker and/or OCIP administrator about:

- Background of the firm.

- OCIP administration services.

- Experience and location of the project team.

- Approach to structuring an insurance program

- Available safety and loss control services.

- Available claim management services.

- Computerized risk management information systems (RMIS).

- Fees for all other required service components.

Interview process. Firms that submit the best proposals should be interviewed (or, as they say in the business, invited to the beauty contest). The firm that can offer the best OCIP structure, services, innovative approaches, and fees will ultimately be selected.

Insurance placement. The selected firm will work with the owner, and the contractor if selected at this time, to compile underwriting information and negotiate insurance terms.
Document Preparation. These include the OCIP administration manual, drafting of the bid document clauses, enrollment forms and similar OCIP administration materials.

Services and fees can vary widely between firms. Evaluate fees carefully and negotiate changes where appropriate. Request brokers or OCIP administrators to submit sample service contracts. Most firms should provide them with the RFP. Negotiate changes to meet your requirements.

OCIP administration is the critical component to a successful implementation.

Once an owner commits to an OCIP approach, there are several things that will influence its ultimate success, which include:

· Owner-Contractor Partnership. At the onset of a construction project, it is essential that the contractor, i.e., GC, understands and accepts responsibility for his or her role in the OCIP program management. The GC typically has authority over, and responsibility for, the two most important elements of an OCIP's financial success; negotiating insurance credits with subcontractors, as part of the procurement process, and project site safety.

· Program Design. To maximize support on the OCIP from the owner and GC, it is important that OCIP procedures be designed in alignment with the owner's and GC’s existing practices. The broker, OCIP administrator, or risk management consultant providing design and implementation consulting on the OCIP should consider mapping the owner’s and GC’s procurement, accounting, safety, and risk management processes and procedures in order to minimize any changes imposed by OCIP implementation.

· Information Management. Every contractor’s and subcontractor’s understanding and compliance with OCIP procedures is essential for the OCIP program's success. Bid instructions and expectations must be clearly delineated and communicated to all contractors in order to maximize the insurance deduct process. Timely and accurate claim reporting is necessary to ensure that all injured employees receive immediate medical treatment and assigned to a back-to-work program.Timely and accurate payroll reporting is necessary to measure program financial performance and ensure compliance with insurance statutory, regulatory and audit requirements.

· Documentation and Procedures. Understanding the requirements and expectations of an OCIP is accomplished through a number of tools:

- Easy to read and understand bid deduct form,

- Easy to read and understand OCIP procedures manual,

- Comprehensive safety and loss control manual

- Clear and concise claim reporting forms and procedures, and

- Pre-bid and pre-mobilization meetings and associated documentation packages.

· Safety Program. To minimize OCIP losses, it is essential that the GC create and continually reinforce a proactive safety culture. Most GCs would do this regardless of being involved with an OCIP or not. A good safety program has many of the following characteristics:

- Formalized safety program and written safety manual,

- Contractor and subcontractor safety prequalification procedures,

- Safety training, monitoring and periodic toolbox talks,

- Independent, scheduled and unscheduled safety audits,

- Full-time safety representative and onsite safety staffing,

- Safety orientation and indoctrination procedure, prior to mobilization, and

- Drug and alcohol testing program.

Program Monitoring. An OCIP monitoring program will provide timely measurement and recording of trends and events that will indicate program financial results, administrative procedures effectiveness, and individual contractor safety performance. These types of reports should be produced monthly, be easy to read and interpret, and be written in terms that are consistent with the owner and GCs procedures and expectations.

Key implementation and administration tasks include:

Prepare an OCIP manual providing contractors and subcontractors information about implementation procedures, insurance coverages and limits, safety programs, claims reporting, record keeping and other OCIP requirements.

· Prepare insurance clauses for bid documents and contract administration.

Provide contractor and subcontractor OCIP orientation notices and meetings.

· Obtain contractors and subcontractors evidence of insurance purchased that is not provided by the OCIP, e.g., commercial auto liability and general liability DIC coverage for accidents that may occur away from the project site.

· Enroll all contractors and subcontractors in the OCIP.

Prepare claims administration procedures for insurers, or claims administrators

· Review contractor and subcontractor bid deducts for all OCIP-provided coverages.

· Review initial bids and change orders to ensure proper insurance deductions.

· Collect payroll and other required reports from contractors and subcontractors.

· Prepare cost reports that show cost of the OCIP and contractor and subcontractor insurance bid deductions. This will allow the owner to monitor OCIP savings.

· Provide periodic cost reports to the owner, or other owner-designated recipients.

· Ensure that statutory workers compensation reports are filed with rating bureaus.

· Ensure that contractor and OCIP insurers accurately complete payroll audits.

· Following a contractor's or subcontractor’s completion of work, review performance, quality, and calculate final insurance deductions for each contract prior to final payment.

NOTE: It is highly recommended that you review the capabilities of the risk management information systems (RMIS) used by administrators to track contractor and subcontractor bid deductions and fixed OCIP costs. Some of these systems do not track losses and variable costs. If an OCIP premium is loss sensitive, the total OCIP costs may require a manual calculation. Carefully consider this for OCIP reports, and selecting a broker and/or OCIP administrator.

OCIP - AUDITS

OCIPs are usually implemented by owners to achieve improved safety, reduced losses and specific financial results. OCIP administration requires that the owner’s OCIP administrator complete all specified tasks for the successful implementation and administration of an OCIP. Periodic OCIP audits provide a check to ensure that the quality of OCIP administration and the potential OCIP savings are being achieved.

Audits should be done on an annual basis, preferably at the same time each year prior to the anniversary date of the OCIP, and also at the completion of the project. Items to be reviewed during an OCIP audit should include:

Practices and procedures used for binding insurance coverage, issuing certificates of insurance, and issuing insurance policies to contractors and subcontractors.
Practices and procedures used for OCIP contractor and subcontractor enrollment.
Practices and procedures used to collect contractor and subcontractor exposure data, such as experience modification rates (EMR), and other information required to calculate bid and change order deductions for OCIP-provided insurance coverages.
Practices and procedures for verification that all required OCIP forms and documentation have been obtained from contractors and subcontractors, is completely and accurately filled-out, and is properly filed and maintained by the OCIP administrator.
Practices and procedure for WC and GL claims reporting, quality of claims handling, and administration services provided to contractors and subcontractors enrolled in the OCIP.
Practices and procedures for compliance with all state and federal laws, policies related with safety and loss control, accident prevention, and drug & alcohol abuse testing.
Practices and procedures to ensure quality of status reports, delineating all OCIP costs incurred and credits obtained from contractor/subcontractor bids and change orders.
Practices and procedures used for verification of bills and OCIP premium adjustments.

Audits will require interviews with representatives of the owner, GC, contractors and subcontractors, broker, OCIP administrator, and the insurer(s).

OCIP - FAQs

An owner contemplating the implementation of an OCIP may receive a number of questions from their own internal management and the GC, who would be responsible for a significant portion of the OCIP administration, and contractors and subcontractors. In addition, there may be a series of questions from regulatory agencies, such as OSHA, union officials, and from national and local trade associations representing contractors and subcontractors that would be enrolled in the OCIP. Some frequently asked questions (FAQ’s) include:

What’s the difference between an OCIP and a Wrap-Up?

The terms OCIP and wrap-up are frequently used interchangeably because the underlying premise is relatively the same. Both have the same insurance coverages, usually WC, GL, and an Umbrella, however, there is a slight difference. The wrap-up concept had originally emerged as a form of consolidated insurance program that placed the responsibility for providing insurance coverage on the prime contractor, or GC, for all its subcontractors. In this context, the wrap-up would be considered a contractor controlled insurance program (CCIP). In comparison, an OCIP provides similar coverage as a CCIP, but the owner is the sponsor and provides insurance for all parties. In other words, the owner takes total responsibility for the insurance procurement, including direct payment of premiums, and the management and administration of the entire program.

How does an OCIP benefit an owner?

An owner benefits from an OCIP in many ways which include; cost savings, more efficient project management and administration, more effective safety and loss control programs, more opportunities for MBE/WBE/DBE/SBE contractors and subcontractors, having direct control of insurance coverage exclusions, obtaining higher insurance limits and mitigating claim disputes. The primary advantage of an OCIP is increased control, hence the name, Owner “Controlled” Insurance Program. Other factors include obtaining a lower cost of risk, resulting from cost reductions and protection from catastrophic loss by obtaining higher limits of liability insurance coverage.

How much additional time will an OCIP require from an owner’s management staff?

The estimated time expenditure will be more significant in the initial stages of design and implementation of an OCIP. However, once an OCIP is up and running, the time required for administration will be minimal, consisting mostly of responding to coordination questions and reviewing periodic OCIP status reports with the broker, OCIP administrator, and insurer.

If an owner commits to an OCIP, can it revert back to a conventional insurance program?

There are several reasons why an owner may want to dissolve an OCIP, but the main reason is usually driven by economic factors as a result of changes in insurance market conditions. Given the economic volatility, as respects hard and soft insurance markets, if an OCIP is implemented in a hard market and the market softens, the OCIP will cost less than projected.

However, if an OCIP is implemented in a soft insurance market, which usually will provide broader coverage, lower rates and higher limits. If the market hardens, costs will increase, coverage may be reduced and limits lowered. This economic cycle can make it extremely difficult for an owner to provide the necessary insurance coverage, which is a contractually stipulated requirement on all construction projects.

In the event that the owner cannot provide the contractually required insurance coverage, the OCIP may need to be dissolved. The dissolution of the OCIP would entail the negotiation of contract cost adjustments, including change order increases with contractors and subcontractors currently enrolled in the OCIP. The magnitude of increased construction cost would have a negative financial impact on the project’s profitability.

· Do all contractors and subcontractors who perform work on the project have to participate and be enrolled in the OCIP?

Contractors or subcontractors that perform the majority of their work away from the project site may be excluded from an OCIP. The reason for this exclusion is primarily that the limited project site exposure in the contractors or subcontractors contract results in limited risk and exposure to jobsite injuries, claims and liability.

In addition, contractors and subcontractors should also be excluded from an OCIP if their contract value is less than a certain amount. It just isn’t practical from an administration standpoint to have these types of contractors and subcontractors enrolled in the OCIP. Depending on the total construction cost of the project, a good rule of thumb is to exclude contractors and subcontractors with contract values less than $25,000 or $50,000, but these figures are relative.

· Do OCIPs provide an unfair competitive advantage to contractors with poor loss experience, bidding on work against a contractor with a good safety record?

Contractors with poor loss experience usually expend a greater percentage of revenue on the cost of insurance than contractors with good safety performance and low loss experience. Therefore, contractors with poor loss experience should have higher insurance costs, higher total costs and higher construction bids than a contractor with favorable loss experience.

By removing insurance costs from construction bids, contractors with favorable loss experience may lose a cost advantage. However, the difference in contractors' bids created by differences in loss experience is likely to be small when measured as a percentage of construction bids. Also, by making insurance costs a neutral factor, the bid competition is focused on more substantive issues, like performance, quality of workmanship and safety.

In addition, if a contractor is to develop the lowest bid, it will be because of lower labor, material or other costs and not because of lower insurance costs. This should be an advantage to the owner. As an additional measure to eliminate any advantage a contractor or subcontractor with poor loss experience may have, some owners will not accept bids with workers compensation EMRs exceeding a set level, e.g., 125%.

Are contractors and/or subcontractors loss-sensitive insurance programs impaired by an OCIP, that it would cause them to have less leverage with their own insurance carriers?

Loss-sensitive insurance programs, such as dividend plans and retrospective rating plans, have two components, a fixed charge and a variable charge. The variable charge is based on frequency and severity of losses. When a contractor’s or subcontractor’s projected payroll (the predominant rating base for the determination of premium), is moved from their own insurance program to an OCIP, the fixed charge may increase as a percentage of premium, as a result of this reduction in payroll. If a substantial portion of the premium is moved to the OCIP, the effect on a contractors or subcontractors own insurance premium may ultimately result in a higher fixed cost, but a lower variable cost.

An OCIP may not be the best choice for a risk management program on all projects, but an OCIP is a comprehensive insurance program that warrants consideration for many single-site projects with total construction values in excess of $100 million and portfolios of smaller projects that aggregate to at least $50 million annually. The trend over the last several years has lowered the minimum threshold in each state for the use of wrap-ups. Consult your state insurance laws.

There are many ways to structure an OCIP program, but like everything else in the construction industry, planning is a key element of any successful program. An OCIP provides an owner with some definite advantages over a traditional insurance program; substantial savings potential, broader insurance coverage, higher policy limits, more efficient claims management, and better safety and loss control procedures. Owners should structure an OCIP carefully with the help of a competent risk management professional.

About the Author

David L. Grenier is President of C-Risk, Inc., a national risk management consulting firm that provides risk management strategies and solutions to construction industry clients. (phone: 503-228-0884, e-mail: david.grenier@c-risk.com, or Web site: www.C-Risk.com). He specializes in construction risk management, contracts, insurance and wrap-up programs.

David has over 25 years experience in the construction industry. He has held senior-level project management positions with some of the nation’s top engineering and construction firms and was an insurance executive with several national insurance companies.

David holds a BS in Construction Management from Syracuse University and a MBA in Finance, Marketing, and Business Strategy from the University of Chicago Graduate School of Business. He is currently a member of CFMA’s Colorado Chapter and serves on CFMA’s Construction Industry Liaison Committee.

The information in this article, and all other articles provided by C-Risk, is intended for general information purposes only and does not constitute, nor is it intended to constitute, legal advice. For legal advice, you should always consult with the appropriate legal counsel in order to determine the laws that are applicable to your specific circumstances.