OCIP, or Owner Controlled Insurance Programs, are insurance policies (also sometimes known as Wrap Up 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.

An OCIP can be for all insurances you need on a job or for just certain insurances (i.e. liability but not worker's comp...).

According to the U.S. Department of Transportation (USDOT) Federal Highway Administration, Owner Controlled Insurance Programs are an effective way to improve the safety of construction operations and reduce the cost of insurance on large projects.

From the USDOT website:

"The 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.

Generally, the use of an Owner Controlled Insurance Program 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."

The 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.

The 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.

The 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 costs.

Once 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 amount.

And 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.

At 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?

Based 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.

But what of the contractor? Does he/she really save money on insurance costs?

When 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).

This dollar amount is then used by the insurer to determine how much the contractor's premium is.

Once 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.

At 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.

If, 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.

On 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.

Herein 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?

It's 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!

Estimate 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!

At one website where OCIP's are sold, the following reasons are listed as to why an OCIP should be used:

• Owners and prime contractors may not get adequate protection for their exposure because the contractor's policy limit of liability is shared with other projects.
• Without 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.
• Many 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.

While 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, there's still:

• The, uncompensated for, additional administration costs involved with dealing with the paperwork generated by the OCIP.
• The possibility that the insurance coverage provided through the OCIP will not be enough coverage for the contractor.
• Contract deductions that exceed the contractor's actual insurance costs.

OCIP's 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.

In 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 one.

A few "gotcha's" to watch out for in an OCIP:

• Limits of coverage might be inadequate (too low for the size group).
• Deductibles are often ridiculously high, $50,000 or more.
• Exclusions, limitations, and conditions vary greatly from policy to policy.

It's 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.

Many thanks to 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 customer!

If 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.

Mention 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. :)

Southern California Insurance Brokerage Inc.
(800) 900-9372
scib@socalinsurance.com
http://www.thecontractorsgroup.com/scib/