Controlled Insurance Programs, are
insurance policies (also sometimes known as Wrap
Up Policies) taken
out by the Owner of the property where construction is
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
OCIP can be for all insurances you need on a job or for
just certain insurances (i.e. liability but not worker's
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.
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
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."
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
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.
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.
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
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
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, there's still:
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
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 one.
few "gotcha's" to watch out for in an OCIP:
of coverage might be inadequate (too low for the size
are often ridiculously high, $50,000 or more.
limitations, and conditions vary greatly from 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.
Please note that, as mentioned above, Owner Controlled Insurance Programs/Policies are also known as Wrap-Ups or Wrap Ups.
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!
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
California Insurance Brokerage Inc.
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