With increasing regularity, construction project owners are creating Owner Controlled Insurance Programs to cover many of their loss exposures during projects. These programs, also known as “wrap ups,” are insurance policies that cover all construction and contractors working on the site. They allow owners to control the insurance program instead of relying on the contractors to purchase adequate insurance. In theory, owners pay less for the coverage “in bulk” than the individual contractors would pay on their own. Also, OCIPs often include an integrated owner-contractor safety program designed to reduce the frequency and severity of losses. Finally, with everyone covered under one program, questions over which contractor may have been responsible for a loss become irrelevant.
Contractors who have contracts for jobs involving OCIPs need to consider several factors. What firms, operations and locations will the OCIP cover? OCIPs often do not cover truckers, vendors, suppliers, and contractors doing high-hazard work like demolition. They may also exclude coverage for contractors below a certain number of employees or payroll. Does coverage extend to locations off the primary job site, such as storage facilities, fabrication sites, and staging areas? Does it cover contractors’ employees when they must travel off the site to obtain supplies, tools or documents?
Another consideration is when the program’s coverage ceases. If it provides completed operations coverage, how long will it last? Some OCIPs may provide coverage for up to three years after the completion date, but state law or contract indemnification clauses may extend a contractor’s potential liability beyond that. The contractor should verify that its own liability policy will supplement the OCIP.
A major issue is the scope of the OCIP’s coverage. It might provide liability coverage only, liability and workers’ compensation, or coverages in addition to those two. It will probably not cover automobile liability, so the contractors will need full coverage for this risk. Does it cover damage to the work and pollution liability? The contractors will need individual builders risk or installation floater policies and pollution liability coverage otherwise.
The adequacy of the insurance limits is another important consideration. The combination of the primary and excess limits should be high enough to fund any catastrophic losses. Do the limits apply separately to each location or to all locations collectively? Does the policy reinstate them annually or do they apply in aggregate to the whole project? How many parties (owner, contractors) are sharing the limits?
Because each contractor will continue to carry individual coverages for other work, it is important to determine how the OCIP will coordinate with them. The contractor should obtain assurance that the OCIP coverage will be primary and that its own policies will be excess. The contractor may also need difference in conditions coverage to fill in gaps left by the OCIP, such as property losses from flood or earthquake. The contractor’s insurance company should reduce its premium in recognition of the OCIP’s primary coverage.
The contractor also needs to consider whether the OCIP makes it responsible for any deductibles or penalties. Will the contractor be responsible for deductibles from all losses or only those for which it is liable? If it’s the latter, how will the owner determine which contractor is responsible? Will the liability question extend to “no fault” coverages like workers’ compensation?
Whenever an OCIP is involved in a project, the contractor should review the requirements very carefully and ask these and many other questions. The contractor should work closely with its insurance agent to ensure that any coverage gaps are filled and that the limits are adequate. OCIPs are an inevitable part of the construction industry today. Contractors who handle them properly can limit the financial risk they present.