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Most businesses and consumers assume that subcontractors that are hired on behalf of a business are covered under that business’s general liability and workers compensation policies. This is most often not the case.

Most general liability policies contain a subcontractor exclusion. The subcontractor exclusion clause excludes coverage that is caused by a subcontractor. In such cases the business that is hiring the subcontractor must protect itself from damages that can be caused by the subcontractor that was hired to do the work. The best way for a business to protect itself from damages caused by a subcontractor is to make sure that the subcontractor has adequet coverage. There are two steps that must be taken. First, the company must request to become an additional insured on the subcontractors general liability policy. The second step is to request a copy of the subcontractors policy to make sure that the terms, conditions and exclusions of the subcontractors policy are acceptable to the business that is subbing the work out. After all, what good is it to be an additional insured on a policy that carries every exclusion under the sun? The terms, conditions and exclusions of a policy are not disclosed on the additional insured certificate and the business that subbed the work out will not know this information untill there is an uncoved claim. By this time, its too late.

Don’t let this happen to you. Check your policy to make sure you and your customers are properly protected against damage or injury.

Need assistance with contractors insurance or business insurance ? Call us at 818-348-6106

Wrap-Up policies AKA Owner Controlled Insurance Programs (OCIPs) are becoming a standard feature in the construction insurance industry. Insurance brokers have heavily marketed OCIPs to owners, promising cost savings.

The programs, initially, are simple and attractive. The project owner buys insurance for all the participants in a construction project. The owner then requires the participants to reduce their price by eliminating all of their insurance costs in exchange for owner-provided coverage. The owner expects to save money by discount-purchasing of insurance and by avoiding contractor markups on contractors insurance costs. A single insurance carrier on the risk for claims can result in more efficient and less expensive claim resolution.  One carrier for all the projects needs is also easier to deal with from an administrative point of view as opposed to multiple policies. This promise is what sells Wrap-Up policy.

In reality this policy is way more complicated than it appears initially. General contractors and subcontractors need to be cautious when participating in an OCIP project. They must ensure that the coverage offered by the OCIP is sufficient to replace their existing insurance coverage. They also must be careful that the “bid deduct” process by which the cost of insurance is deducted from their price is properly and timely performed.

Each OCIP is designed for a specific owner’s needs for a specific project. The following overview of OCIPs is based on general practices. The OCIP documents must be carefully reviewed and considered for each project.

What Is A Wrap- Up Policy AKA Owner Controlled Insurance Program?

In an OCIP, the owner purchases insurance for other participants in a construction project. OCIPs also are sometimes called “wrap-ups.” An OCIP will cover the owner, contractor and subcontractors. An OCIP also may include design professionals. The coverage can include general liability insurance (CGL), builder’s risk, worker’s compensation insurance, design errors and omissions as well as excess, umbrella and other special coverages.

The coverage provided by an OCIP is summarized in a document known as the “OCIP Manual.” The OCIP Manual also should describe the bid-deduct process, claims management and safety requirements. This important document should be made a part of any bid solicitation and of ultimate contract documents. The “OCIP Administrator” administers the OCIP program. The OCIP Administrator acts as an agent of the owner and usually is supplied by the broker that set up the OCIP Program.

Those who benefit from the OCIP must give the owner credit for this insurance coverage. This is the bid deduct process. There are two basic methods for the bid deduct process. In one, the owner can ask that all interested contractors and subcontractors provide a price for the work which excludes insurance. Each proposal must be reviewed by the OCIP Administrator to determine whether the price accurately reflects the elimination of contractor insurance costs. This can be a time-consuming process. In the second approach, all interested contractors and subcontractors are asked to submit proposals that include insurance costs. When the contract is awarded, the OCIP Administrator will calculate a deductive change order for the successful contractor’s and subcontractors’ insurance costs. This second method, which appears to be more popular, requires that only successful proposals be reviewed for a deduction of insurance costs.

Public and private owners first began to use OICPs on large-scale projects ($100 million or more). The use of OCIPs on smaller projects ($50 million or more) is increasing as owner, broker and insurer expertise with OCIPs grows. On smaller projects, the additional administrative cost generally makes it less worthwhile to use OCIPs.

But, there is an exception. Owners and developers have begun to use OCIPs for construction of condominium and other multi-residential projects, even those costing less than $50 million. Defect claims by homeowner associations have plagued such projects for decades and have made it extremely difficult to insure such construction. Many contractors and subcontractors are unable to insure these projects at almost any price. The answer is the OCIP. It may be the only way such a project can be constructed in today’s insurance market.

Why Would a Project Owner Choose an OCIP?

Traditionally, an owner accepts the economic risk of a project but seeks to avoid the construction risk. An owner typically would retain a design team or a design-build contractor to be responsible for design and a general contractor or design-build contractor to be responsible for constructing the project for a fixed price or a guaranteed maximum price. An owner-developer also would use surety bonds, insurance and contractual indemnity provisions to further insulate itself from construction risk.

An OCIP changes this approach. The owner becomes responsible for insuring the project and for administering loss prevention programs and becomes exposed to the risk of increased premiums for unexpected losses. In exchange for this new risk, the owner hopes to obtain cost savings.

The Pro’s of purchasing an OCIP

Cost savings are the primary advantage of an OCIP. The owner-developer always indirectly bears the cost of insurance on a construction project. The design consultants, contractor, subcontractors and other parties involved in the project, in pricing their work, pass through the cost of insurance plus a markup. Insurers and brokers assert that an owner can save from 0.5 to 2 percent of total construction costs by using an OCIP. The savings come from: (1) the elimination of contractor mark-up on insurance costs; and (2) the ability to obtain insurance at a lower cost than contractors, subcontractors and others can obtain it.

An OCIP also can provide increased coverage limits. The typical contractor or subcontractor has liability coverage in the $1 million to $2 million range. OCIP liability limits may be $5 million for primary coverage, with additional excess coverage. OCIP coverage may be broader than that available to contractors. In some cases, such as condominium projects, contractors may not be able to obtain coverage at all. OCIP coverage also is uniform. While contractors and subcontractors usually provide certificates of insurance evidencing coverage limits, the specific endorsements and limitations of their particular policies may not be disclosed. It also is possible that a contractor’s or subcontractor’s policy limits have been depleted by payments on claims on other projects.

A key part of OCIPs is a uniform risk management program. The OCIP Administrator has overall responsibility for safety and loss control on the project. The OCIP Administrator also will handle claims. This centralized management, in theory, can result in cost savings from improved safety, increased loss control and more efficient claims handling.

The Disadvantages of an OCIP

The promise of cost savings may be illusory. Administration of an OCIP will impose new, additional costs on the owner. The owner, through its OCIP Administrator, becomes responsible for safety and claims management on the project. The OCIP Administrator will need to administer the bid-deduct process. The actual experience of owners suggests that the promised cost savings of an OCIP may not always be fully realized.

The insurance premium/loss risk is shifted from the contractor and subcontractors to the owner. The owner may be exposed to the risk of premium increases if labor costs and loss experiences exceed estimates. But, it also is possible that an owner will benefit from premium rebates if claims are less than anticipated.

Under an OCIP, it may be more difficult to manage the performance of contractors and subcontractors that have insurance-related claims. For example, a subcontractor with an insurance claim for damaged work may wait for the owner’s OCIP Administrator to settle the claim before repairing the work. It may be more difficult for the owner to enforce contractual obligations to repair the work and proceed before disputes are resolved when the subcontractor asserts that the owner’s OCIP Administrator is delaying adjustment of the claim.

An OCIP also may discourage bidders. Contractors and subcontractors may be hesitant to bid on the project because they are unfamiliar with OCIPs. Potential bidders may have concerns about unfair calculations of credits for insurance costs during the bid deduct process, about uncompensated overhead resulting from new administrative responsibilities for the OCIP and about loss of mark-up on insurance costs.

What Coverage’s Does an OCIP Provide?

Who is covered?

OCIP coverage will include the owner and the general contractor. Coverage also will include subcontractors but may limit coverage to subcontractors with contract values over a certain amount, such as $25,000. In that case, subcontractors with contracts for less than $25,000 should be required to provide certificates of insurance. Coverage also may be limited to those providing direct labor to the construction site. Therefore, material suppliers typically are not covered. “Furnish and Install” subcontractors that furnish materials but that subcontract out installation also may not be covered.

What is covered?

OCIP coverage will be tailored specifically to the project. In general, coverage will include worker’s compensation/employer’s liability, general liability (CGL) and builder’s risk property insurance. Coverage generally is limited to operations at the project site during construction. The OCIP typically will not provide coverage for off-site operations, including work and transportation, and for post-completion on-site work, such as warranty work. Accordingly, contractors and subcontractors must be required to provide proof of insurance by their own carriers for non-covered activities.

OCIP programs also offer excess or umbrella coverage. Less commonly, an OCIP will provide for design errors and omissions coverage. Such coverage is included when the design professionals are included in OCIP coverage. Such coverage, however, also will be necessary for contractors to the extent that any portion of their scope is design-build.

OCIP coverage generally does not include surety bonds. An OCIP may include subcontractor default insurance, however.

Contract Issues

The existence of an OCIP does not eliminate the need to provide for contractual indemnity by the contractor. An owner should include a broad indemnity clause in the construction contract as a second basis of protection from loss.

If the construction contract provides for alternative dispute resolution, such as arbitration, the owner-developer should seek to bind the broker/OCIP Administrator and insurance company with the same provision. This will ensure that all necessary parties will be involved in any insurance-related dispute. If the broker and/or insurer refuse to agree to ADR, the owner should consider deleting the ADR provision from the construction contract.

What an OCIP Means to the General Contractor and Subcontractors

When an owner implements an OCIP, participation is mandatory for the contractor and subcontractors. While OCIPs often are touted as having benefits, these benefits usually accrue to the owner. An OCIP imposes real risks to and expenses on contractors and subcontractors, and they must be carefully managed.

The contractor must carefully review the OCIP Manual before submitting pricing. OCIPs commonly require the contractor to submit pricing with the cost of insurance included. The contractor then must complete an OCIP Enrollment Form to become eligible for the OCIP. Once the OCIP insurance is issued, the cost of the contractor’s insurance is deducted from the contractor’s pricing.

The Benefits of an OCIP to a General Contractor or Subcontractor

An OCIP may provide greater limits for primary and excess or umbrella coverage than the contractor’s or the subcontractors’ regular policy. This may prove beneficial in resolving defect claims. In addition, because a single carrier insures all of the participants in a project, claims resolution may be easier.

An OCIP also may allow a contractor to engage in work that it may not otherwise be able to obtain. Many contractors and subcontractors cannot take work involving multi-family residential structures. Such projects have been plagued by claims and lawsuits for years, and as a result, such work usually is excluded from insurance coverage. An OCIP provided by the owner-developer may be the only way a condominium project can be constructed with insurance.

The Disadvantages of an OCIP to a General Contractor or Subcontractor

The three major disadvantages of an OCIP are: (1) possible gaps in coverage; (2) OCIP deductions that exceed actual insurance cost savings, and (3) uncompensated administrative costs.

The prudent contractor must do more than review the OCIP Manual for a summary of the coverage provided. The contractor should request copies of the OCIP policies and have the policies reviewed by the contractor’s broker or attorney for the coverage they offer. This is especially true for general liability and builder’s risk policies, which can vary significantly between policies. Critical liability insurance issues include whether the policy provides “broad form” coverage, how long the “completed operations” coverage continues and what exclusions are included.

The contractor must carefully review and complete the OCIP Enrollment Form. The format of OCIP Enrollment Forms varies. The form must be carefully scrutinized to ensure that it allows the contractor to show its true cost of insurance. If all discounts and credits are not reflected, the OCIP deduct will exceed the true cost of the insurance.

If the contractor has any flat-rate premiums, this should be carefully noted. The OCIP deduct should not include any flat-rate premiums because the contractor is unlikely to receive credit from its insurer for the OCIP-provided coverage.

The contractor also should ask the OCIP Administrator for a complete breakdown of the eventual OCIP deduct and should be prepared to challenge an excessive deduction.

The OCIP enrollment process, the submission of monthly insurance-related information such as payrolls, and the OCIP deduct review process can impose a significant administrative cost on the contractor. It is unlikely that the owner will agree to compensate the contractor for these additional costs.

The timing of the OCIP deduct process also may cause problems. The OCIP deduct is usually taken though owner-issued deductive change orders. The initial OCIP deduct may be applied to a single progress payment, which may significantly reduce a month’s cash flow. The OCIP deduct process also affects change orders. The owner generally will request that the contractor provide additive change orders with insurance costs included. When the additive changes orders are numerous or constitute a large dollar volume, the OCIP deduct process for change orders may be slow. The owner will hold final payment until the OCIP Administrator can calculate the total amount of the deduct for change orders.

An OCIP also eliminates the contractor’s markup on insurance costs. While this is a desirable benefit to the owner, it deprives the contractor of any compensation for insurance-related administrative costs.

What Is Covered?

OCIPs usually provide worker’s compensation/employer’s liability, general liability (CGL) and builder’s risk coverage. The coverage has two basic limitations: (1) coverage is restricted to activities at the project site; and (2) coverage, with certain limitations, ends upon completion of the project. Coverage for “completed operations” generally continues after the project ends. This “tail” may be for 3, 5 or 10 years. In an effort to maximize cost savings, the owner may select a less expensive policy, which leaves the contractor at risk after project completion. The contractor should be wary of “modified occurrence” type policies that provide coverage only for claims made during the policy year. Also, it is important to confirm that there is “completed operations” CGL coverage. Further, certain policies may only provide “completed operations” coverage for a limited time period, such as for 3 or 5 years after project completion. If this period is less than 10 years, there may be uninsured exposure to liability for construction defects because such actions may be brought for up to 10 years after completion of the project, particularly for latent defects.

What Is Not Covered?

OCIP coverage should be reviewed to determine whether it is as broad as needed to replace the contractor’s existing policies. The existing policies must be maintained because off-site work incidental to the project is not covered by most OCIP programs. Warranty work and call-backs also generally are not covered after completion of the project.

Conclusion

OCIPs are here to stay. For project owners and developers, OCIPs may bring real benefits in the form of cost savings. These cost savings, to some extent, are counterbalanced by increased administrative costs and exposure to risk. For contractors and subcontractors, OCIPs can be survived. It is important to carefully review the coverage provided by the OCIP and to manage the method by which insurance costs are deducted to ensure that the process accurately reflects the true cost of insurance.