or Owner Controlled Insurance Programs,
are insurance policies taken out by the Owner of the property
where construction is taking place. Instead of each individual
contractor securing his own liability and/or worker's comp and/or
other insurance for the project, the Owner secures an OCIP that
covers all construction and contractors on the project.
OCIP can be for all insurances you need on a job or for just
certain insurances (i.e. liability but not worker's comp...).
to the U.S. Department of Transportation (USDOT) Federal Highway
Administration, OCIP's are an effective way to improve the safety
of construction operations and reduce the cost of insurance on
the USDOT website:
basic operational features of an OCIP are: (1) the owner purchases
insurance coverage (all or some specific elements) to cover
all contractors and subcontractors on a project; (2) there
is an integrated owner-contractor managed safety program on
the project; and (3) claims are processed centrally.
the use of an OCIP can save money on large projects through
lower bulk insurance rates, improved safety management processes,
and reduced disputes between contractors over who was responsible
for a particular loss."
premise is that the insurance will cost less to purchase it in "bulk" (covering
all contractors under the same policy) than it costs when each
contractor purchases insurance on his own.
Owner pays for the insurance policy and the contractors are covered
under that policy for that particular project, instead of each
contractor being covered by insurance he's purchased himself.
Owner then looks to each contractor to credit back to him the
cost of the insurance that the contractor would normally include
in the bid as overhead costs. The Owner requires the contractor(s)
to break his bid down and show how much of the bid is insurance
a dollar amount (insurance cost) has been determined, the Owner
deducts that amount from the contractor's bid and writes the
contract for that lower amount. If the contractor wants the job
he will be required to accept the contract at the lower dollar
remember there's almost always several contractors in line
behind you willing to take the job should you pass on it,
which unfortunately greatly reduces your ability to negotiate
more preferable terms.
first glance an OCIP may appear to be attractive to all involved,
after all who doesn't want to save money on their insurance costs?
on the fact that the "bulk" insurance policy is less
expensive than each contractor's individual policies added together,
it's true that the Owner can enjoy a significant savings on the
cost of his project.
what of the contractor? Does he/she really save
money on insurance costs?
a contractor obtains his own liability insurance, one of the
things he's required to provide is a dollar amount estimate of
how much work he'll do (aka gross income he'll earn from his
construction business) for the term covered by the policy (which
is usually one year).
dollar amount is then used by the insurer to determine how much
the contractor's premium is.
the premium is determined, the contractor has to pay a percentage
as a down payment and then agree to make monthly payments over
the course of the policy term, with the final monthly payment
due before the policy expires.
the end of that insured term the contractor is audited by the
insurer (or a representative of the insurer) to make sure the
contractor didn't do more work/have more income than what he
paid insurance for.
during the audit, it's discovered that the contractor under estimated
his work/income and he actually had more income than he paid
premiums for, then he has to make up the difference by paying
the insurer a "balloon payment", kind of like when
you under estimate your quarterly taxes. And yes, just like taxes,
there can also be penalties.
the other hand, if the contractor over estimates how much work
he'll do/income he'll have, 9 out of 10 times he will NOT get
a refund on the unearned premium. That means if you estimate
that you'll do $1,000,000 for the year but for whatever reason
you end up doing only $750,000 you won't get a refund for the
premiums you paid on the $250,000 that you didn't earn.
is where the problem lies for contractors. How do you know how
much work you'll do this year that will be covered by OCIP's
rather than by your own insurance?
tough enough to estimate accurately how much work you'll do in
a year but now you have to factor in to that equation how much
of that work you'll do that won't be covered by your insurance!
wrong and it's going to cost you, either with penalties for under
estimating your work/income or by no refund of excess premiums
that were paid due to over estimating work/income!
one website where OCIP's are sold, the following reasons are
listed as to why an OCIP should be used:
and prime contractors may not get adequate protection for their
exposure because the contractor's policy limit of liability
is shared with other projects.
project specific limits, the majority of all contractors and
consultants evidence a blanket annual aggregate limit that
covers all work performed in the course of a year.
large projects will have multiple contractors due to logistics,
size and project phases. These scenarios lead to probable coverage
differences in the various policies such contractors provide.
Some contractors may be uninsured for certain exposures.
the above reasons may be good reasons for OCIP's, there's still
the issue of the contractor losing out in the end. The lost dollars
to unearned insurance premiums (or underpayment penalties) aside,
uncompensated for, additional administration costs involved
with dealing with the paperwork generated by the OCIP.
possibility that the insurance coverage provided through the
OCIP will not be enough coverage for the contractor.
deductions that exceed the contractor's actual insurance costs.
can be useful on projects that are hard for contractors to get
insurance for, such as condominium projects, but that still doesn't
eliminate the risks outlined above.
addition, policies are said to vary greatly from one to the next,
which means you can't necessarily rely on past experience. Just
because the job you're on right now has an OCIP that's acceptable
to you doesn't mean the next job you're on will have an acceptable
few "gotcha's" to watch out for in an OCIP:
of coverage might be inadequate (too low for the size group).
are often ridiculously high, $50,000 or more.
limitations, and conditions vary greatly from policy to policy.
very important to have an insurance agent/broker or attorney
read over any OCIP before you agree to the terms. Some agents
may charge you to do this but it is well worth it as he/she
knows the lingo and knows what to look for.
Gary Oltmanns and Gabriel Hill of Southern California
Insurance Brokerage for their help on this article.
Gary and Gabriel review OCIP's for their customers and have offered
to do the same for you our readers, even if you're not their
you find that a job you're going to do has an OCIP on it, contact
Gary or Gabriel asap to get their input on it.
us, TheContractorsGroup.com, and they'll review those documents
for you free of charge, even if they aren't your insurers. They're
good guys, we know because we've used them for our liability
insurance and they've been great to work with. :)
California Insurance Brokerage Inc.
read more about these insurance programs visit Google (or your
favorite search engine) and search for "Owner Controlled
you by chance know of any training or seminars on this topic
please do forward that information to me and I'll include it
here for others to be aware of. :)
Diane Dennis Enterprises - TheContractorsGroup.com
Dennis is the Webmistress of www.TheContractorsGroup.com,
a website designed to help contractors through the myriad of
pitfalls that can jump into their path. She's a graduate
School Of Hard Knocks" and she's always willing to share
her experiences, even when no one wants to listen... ;) Please
note that this article is not to be taken as legal advice. For
questions of a legal nature please
contact an attorney. This article can be reprinted provided
it is done so in its entirety including this bio. If you do use
this article, please let Diane know by sending an email to her