It’s no secret that the cost of construction is
on the rise. Increases in the cost of materials, equipment, energy and labor all have an impact on project costs. Naturally, the bigger the construction project the bigger the
price tag. Project owners are looking for
ways to reduce costs without cutting corners. For the right project, insuring it under
an owner-controlled insurance program
(OCIP), or wrap-up program, can be a viable
way to save.
“In an OCIP the project owner provides the
insurance for the project. Buying one large
insurance program in this way can be significantly less expensive than having each contractor provide its own insurance,” says Ryan
Rosta, producer with The Graham Company.
But, he warns, in order to see any savings, the
OCIP has to be run with the utmost diligence,
with an emphasis on loss control and aggressive claims management. “The administration is critical to ensure a successful OCIP.”
Smart Business learned more from Rosta
about the benefits that can be provided by an
OCIP and the elements that need to be in
place in order to reap those benefits.
What is an OCIP?
It’s a method of insuring a specific construction project, where the owner purchases the liability insurance coverage for the
project. The insurance provides coverage for
the owner, the construction manager or general contractor and all contractors and sub-contractors enrolled in the project.
What insurance coverages are included?
The liability coverages typically provided in
an OCIP are workers’ compensation, general
liability and excess liability. These coverages
are supplemented by builder’s risk coverage,
which provides coverage for the building or
property under construction. Depending on
the complexity of the project, it may be wise
to consider additional lines of coverage like
professional liability and pollution liability.
What are some of the advantages to this type
of program?
An OCIP can provide better ‘protection’
for both the owner and the participants working on the project. Because you’re
designing the insurance program for a specific project, you can usually purchase coverage with higher limits of liability than may
be available to the individual contractors
and subcontractors involved.
By purchasing the insurance for the entire
project, the project owner can leverage the
economies of scale achieved by a bulk purchase. You also have the flexibility to purchase the insurance for several years, if not
the duration of the project. So if the market
fluctuates, you have pricing stability for
however long the project happens to be.
More importantly, you are providing
improved safety and loss control through the
use of one project safety program. A strong
safety program means fewer injuries and
less lost time from a project. Claims management personnel should also be working
hand in hand with safety and loss control to
aggressively manage and minimize the
impact of any claims that do occur.
Another advantage to an OCIP is the ability
to include smaller, local, minority or disadvantaged contractors. Many times these
companies do not have the internal personnel to meet the necessary bid specifications.
The OCIP will provide the safety services and
resources to these companies that would not have had them otherwise. This means more
work for more companies.
Who might consider an OCIP?
In order for an OCIP to make sense, in our
experience, the project has to be a minimum of $100 million in construction costs.
If a project is less than $100 million you tend
to lose the economies of scale because
there’s less that you can negotiate and less
that you can impact in terms of the cost of
the insurance. The potential for savings
increases as the construction value of the
project increases.
What are the risks of this approach, and how
can they be managed?
The whole idea behind an OCIP is to save
the project owner money. A well-run OCIP
can provide the project owner with a savings
of 1.5 to 3 percent of the hard construction
costs. But if you don’t have the right partner
— being the broker in this case — that can
administer the project, the costs can get out
of hand.
This insurance is typically written on a
loss-sensitive basis so the fixed costs are just
one component of the entire program. This
means that if you don’t have good safety and
loss control your losses and claims expenses
can quickly get out of control. Lack of
administration and poor safety and loss control services are the reasons OCIPs fail.
When this occurs, an OCIP can end up costing millions of dollars more than planned.
Success starts with putting one unified
safety management program in place that
everyone who’s enrolled in the project —
meaning the contractors and subcontractors
— adheres to. It should include standards
that exceed the OSHA minimums and
include things like pre-employment and
post-accident drug testing. All of this is laid
out up front so that there are no surprises for
contractors when they’re on site doing the
work. Then you have to have a qualified loss
control professional on site on a regular
basis, especially when you’re doing more
complicated parts of the project, to really
enforce it.
RYAN ROSTA is a producer with The Graham Company. Reach him at (215) 701-5249 or [email protected].
The Graham Company