Understanding Owner Controlled Insurance Programs
Owner controlled insurance programs are complex insurance products that can offer great opportunities for cost savings, superior risk management, and streamlined insurance claims processing for property owners and/or construction project managers. However, getting started with an owner controlled insurance program is more involved than setting up standard construction insurance policies. The goal of this guide is to explain everything you need to know in order to implement and manage an owner controlled insurance program.
What Is an Owner Controlled Insurance Program (OCIP)?
OCIPs are a type of controlled or consolidated insurance program (CIP), interchangeably referred to as a wrap-up insurance plan. CIPs are called wrap-up insurance programs because they allow coverage for multiple parties and from multiple policies to be wrapped up, or bundled, into a single insurance plan.
CIPs, or wrap-ups, can be purchased by the property owner, the contractor(s), or both. Consolidated insurance programs that are purchased by the contractor are known as contractor controlled insurance programs (CCIP).
It is also possible for multiple parties involved with the project (for instance, the owner and the lead contractor) to jointly sponsor the insurance program. In this case, the program is referred to as a partner controlled insurance program (PCIP).
This guide will focus on owner controlled insurance programs because they are the most common; however, most of the information in this guide is relevant to all types of consolidated insurance programs.
How OCIPs Work
OCIPs are a relatively new type of insurance product that were first introduced to provide cost savings an administrative efficiencies for large commercial construction projects with budgets exceeding $50-100 million. However, in recent years, these insurance programs have become more popular and widely used for smaller projects as well.
Unlike the traditional construction insurance model, where each contractor or subcontractor purchases their own individual insurance policies to cover their liability, under owner controlled insurance programs, the property owner or developer, general contractor, and subcontractors all become named insureds under a single policy (the OCIP), which covers the entire project (or group of projects).
The big disadvantage of the traditional construction insurance model from the standpoint of the property owner is that each contractor purchases their own insurance and bakes their individual policy costs into their bids, which results in the property owner indirectly paying for the cost and overhead of dozens of policies. Additionally, in the event of a loss, legal and administrative costs under the traditional model regularly exceed indemnity costs by as much as 5-to-1. By streamlining everything into a single policy, property owners can reduce costs and more efficiently cover losses if they occur.
OCIPs are usually set up for individual projects; however, it is possible to create “rolling” OCIPs, in which the same insurance program is used for a number of similar projects or for a series of projects. Rolling OCIPs are common among large property owners, such as real estate investment trusts or state universities, that usually have a number of construction projects underway at any given time.
To understand exactly what type of events and property are and are not covered by an owner controlled insurance program, it is easiest to review them in the context of traditional construction project insurance coverage. In reality, an OCIP is just the combination of traditional construction insurance policies into one program. However, what’s included in the insurance program is ultimately up to the owner, who designs the program with the help of an agent, program administrator, or experienced insurance consultant. Policies like workers compensation, builders risk, and general liability are mainstays of most construction projects’ insurance coverage, and thus, those policies are included in most OCIPs.
What Do Owner Controlled Insurance Programs Cover?
1. Commercial General Liability (CGL)
Commercial general liability (CGL) is a common form of insurance that may vary slightly between insurers. However, it will commonly include important provisions that protect the owner’s interest in the construction project, which is one of the most crucial elements of the OCIP’s coverage.
Most CGL policies, including those that are part of an owner controlled insurance program, will usually contain coverage against (1) contractual liability, (2) personal injury liability, and (3) property damage. More provisions that limit risk to the owner may be included, but these are the most common and critical coverage benefits that CGL policies provide.
Contractors who enroll in the OCIP will likely already have some form of general liability insurance. If they do, they will have to discuss options with their existing CGL insurer. Ideally, the contractor can limit their policy’s coverage to not overlap or conflict with the owner controlled insurance program. Sometimes, the limited flexibility of certain insurance companies might force the contractor to carry overlapping policies or cancel their existing policy all together.
2. Workers Compensation
Workers compensation insurance is another primary component of an owner controlled insurance program. The purpose of workers compensation insurance is to provide compensation to contractors and employees who become injured on the construction job-site. The compensation is intended to reimburse the “worker” for medical bills and time that they were unable to work due to the injury. Workers compensation insurance is required in most states.
Including workers compensation insurance within the OCIP is one of the biggest drivers of cost savings for the whole program. Workers compensation insurance typically involves high premiums and a large number of claims. The premiums that the contractors pay may also be positively or negatively affected by their track record of safety.
When workers compensation insurance is added to the OCIP, the insurer will evaluate the project sponsor’s vetting process for contractors as well as the loss prevention measures that are taken for the project. These factors inform the insurer about the level of risk involved with insuring your contractors and project. If the perceived risk is low, premiums will be lower. So owners and project sponsors who responsibly evaluate contractors before hiring them, and who take effective safety measures to prevent damages and injury, will earn lower premiums than those who put less emphasis on safety.
3. Builders Risk
Builders risk insurance is critical in large construction projects, so it makes sense that builders risk is another common element of owner controlled insurance programs. Builders risk policies cover damage to the structures on the job-site in the case of damage from weather, vandalism, or theft. Rather than have each contractor purchase builders risk insurance, it is logical to have this included in the insurance program to protect the property.
4. Excess Liability
Excess liability coverage, also called umbrella coverage, adds extended coverage to an existing commercial general liability policy. Because coverage limits should be high and coverage gaps few, excess liability policies are almost always included in owner controlled insurance programs.
Professional contractors may also carry excess liability insurance already. In similar fashion to their CGL policies, contractors may need to modify or eliminate their existing policies.
5. Professional Liability
It is possible for owner controlled insurance policies to include professional liability insurance for professionals such as engineers, architects, and other design professionals. This coverage protects against costs related to design issues caused by covered professional designers. Most design professionals carry this coverage already. Depending on the number of design professionals tied to a given project, adding this coverage to the OCIP may or may not be profitable.
That said, even when engineers, architects, and other professionals are enrolled in the OCIP, the coverage it provides is usually not a sufficient substitute for their own professional liability coverage, which will adequately protect them against economic damages that a loss may cause. As such, many contracted projects will leave it up to these professionals to carry their own coverage.
6. Subcontractor Default Insurance
Subcontractor default insurance is a relatively new form of coverage that provides similar coverage to surety bonds. It protects the project sponsor against failure on the part of the contractor or subcontractor to complete the project. These policies cover unprojected expenses on the part of the contractor or expenses incurred from unfulfilled obligations by the contractor.
This could save owners money when compared to surety bonds, which must be purchased by the contractor by design. Because the costs are ultimately passed on to the project sponsor, and each contractor may not put much emphasis on finding a good price, adding this coverage to the OCIP could save significant money compared to using traditional surety bonds for this protection. The cost of this type of policy will be determined by the project sponsor’s processes for vetting and managing contractor performance, rather than by each contractor’s specific track record for execution and safety.
7. Completed Operations Coverage
It is generally wise to add completed operations protection to the controlled insurance program. This type of coverage extends protection to all persons enrolled in the insurance program beyond the completion date and ideally through the statute of limitations.
8. Other Optional Coverage
Many other policies can be added to the OCIP; however, which policies can be added will likely depend on the project sponsor’s choice of insurer. Some of the more common options that could be available to include in the program are:
- Pollution and Environmental Liability
- Flood / Earthquake Protection
- Industry Specific Liability Policies (Airport, Railroad, etc.)
Additionally, most coverage extensions that are available through the component policies that comprise the OCIP can be added to the OCIP as well. For instance, if builders risk insurance is included on the OCIP, then extending the coverage to include debris and pollutant removal should be possible with most insurance providers. Our guide to builders risk insurance provides a comprehensive list of builders risk coverage options.
An owner controlled insurance program needs to be designed and set up before construction begins. In fact, details should be worked out by the time bids are being received because contractors and subcontractors will need information about the OCIP in order to submit accurate bids. Coverage provided by the plan and enrollment by program participants should begin before groundbreak.
The majority of owner controlled insurance programs span several years (usually 2 – 5 years for large projects). Coverage can often last years after the project completes, that is, if completed operations coverage is added to program. This coverage extends coverage beyond project completion, usually for a number of years through the statute of limitations, ensuring that parties involved in the project won’t be liable for flaws long after the project has finished. This additional period of coverage is sometimes called the “tail” or “extended reporting period” (ERP).
Except in the case of rolling OCIPs, the insurance program will apply specifically to one job-site or multiple specific sites associated with the project. Typically, the “job-site” refers to the construction site, any on-site temporary structures or shops, and storage locations for the project. It is important to note that any other locations, even along the route between a covered job-site and a covered storage location, are not covered under the insurance program. This is one possible gap in coverage that can be filled with commercial auto insurance, which we discuss later.
What Coverage is Excluded from OCIPs?
As discussed above, an owner controlled insurance program is comprised of many different insurance policies. So it stands to reason that the OCIP will contain the same exclusions as the policies that make it up.
Generally, owners can work with their insurance company to fill necessary coverage gaps; however, certain coverage (listed below) is simply not offered through an OCIP.
1. Commercial Auto Insurance
Commercial auto insurance policies are not included in OCIPs. The main reason for this is that verifying that damages actually occured while on the job is very difficult. Because false claims are more difficult to identify, this coverage is not available for the insurance program and must be purchased by each contractor who needs it. For more information, see our complete guide on finding the best commercial auto insurance policy.
2. Surety Bonds
Contractor surety bonds are not included with any OCIP because, by design, surety bonds are purchased by the contractor through a third party who “guarantees” the contractor will complete the project as contracted. This third party typically verifies the contractors financial solvency and track-record to establish their “trustworthiness.” Because of the evaluation and verification required for each contractor (and subcontractor) who requires a surety bond, this protection is purchased outside of the OCIP by each contractor individually.
Even though surety bonds may not be included in the OCIP, similar protection can be included in the insurance program by adding subcontractor default insurance, discussed above.
3. Off-site Contractors
Contractors who do the majority of their work off of the job-site are usually not eligible for coverage under an owner controlled insurance program. For example, if someone builds a feature or component of the property away from the job site and ships it to the location, they would not be covered under this policy. This is because they are not subject to the same safety and loss prevention measures that on-site contractors adhere to, and thus, are potentially at a higher risk for loss. When the risk for loss is out of the sponsor’s hands, it makes sense to exclude them from coverage.
4. Contractors with Limited Involvement
Contractors with very little relative impact on the project may also be excluded. This is similar to off-site contractors. Perhaps the contractors rarely appear on-site or have a very small potential risk profile associated with the work they complete. These types of contractors may be good candidates to keep off of the OCIP to avoid increasing costs of the program unnecessarily.
5. Indirect Costs for Designers and Contractors
Indirect additional costs that a contractor takes on as the result of a covered incident are usually not going to be covered by the OCIP. However, contractors, designers, engineers, architects, and the like will usually have their own professional liability coverage that they can use to cover such potential damages.
The OCIP will still cover the designers in the case of bodily injury or property damage, but legal liability is left to the contractor’s own professional liability coverage.
6. Third-Party Vendors, Manufacturers, and Transporters
Typically, anyone hired for one-off and exclusively off-site purposes are not going to be included on the OCIP. This includes materials vendors and suppliers, parts manufacturers, hazardous materials transporters, and trucking services. Insurance for third-party vendors can still be purchased, but it won’t be a part of the OCIP.
Advantages & Disadvantages of OCIPs
Owner controlled insurance programs provide several advantages and disadvantages to the owners and contractors who make use of, or are covered by, them. Here we review the different pros and cons that owners and contractors find in using an OCIP.
What are the Benefits of Owner Controlled Insurance Programs?
Advantages for Project Sponsors / Owners
Several aspects of the owner controlled insurance program make it a beneficial method of insuring construction projects. For owners, some of the potential benefits include:
- Lowered costs through purchase of insurance in bulk. Contractors usually purchase insurance, but the costs are always ultimately passed on to the owner.
- Higher dedicated limits for contractors. Contractors on the policy will all benefit from the high limits of the entire insurance program. OCIPs tend to carry very high limits since they cover costs for potential damages of the entire project. Any damages caused by one contractor are unlikely to even approach the limit of the OCIP.
- Lowered risk of accident on the job site and reduced losses from an increased amd centralized focus on loss prevention.
- Rapid enrollment. Contractors can become insured more quickly by enrolling, rather than setting up their own policies for the project.
- Simplified claims handling and payout on damages because determining who’s at fault is not necessarily relevant. With OCIPs, there’s reduced litigation and more efficient claims handling since everyone is on the same policy.
- OCIPs offer a major benefit to the project sponsor, which is complete and precise coverage. Owners gain visibility into exactly where gaps in coverage exist because the programs are customizable and designed by the owner, with the help of an agent or insurance consultant.
- Custom coverage time frame. OCIPs are designed to cover the project for its entire duration, not a specific time limit. In fact, policies are often designed to provide coverage well beyond the build, through the statute of limitations, ensuring coverage for the entire possible period when liability is present.
- Access to more contractors. These policies give contractors who, on their own, may not be able to obtain insurance for the type of project you’re working on. Whether it is their prior experience or inability to achieve a high enough coverage limit, some contractors cannot get the right coverage for every job. OCIPs eliminate these issues.
Advantages for Contractors
While many contractors are averse to projects that use OCIPs (for reasons we’ll cover below), they can actually offer advantages:
- Better coverage. Sometimes, OCIPs will offer higher coverage limits and broader coverage to contractors than those individual contractors would be able to obtain on their own. The result is that contractors can bid on more (and/or larger) OCIP jobs that would otherwise be difficult for the contractor to secure independent insurance for.
- The improved loss prevention and safety procedures that OCIP jobs demand keeps contractors safe while on the job-site and also less likely to experience a loss.
- OCIPs, when managed well, will also offer a streamlined and clearly explained claims procedure.
- Subrogation, which is when insurance companies seek to recoup losses from damages by taking legal action on behalf of the insured, and disputes regarding fault are not an issue for OCIP covered projects because all parties are covered under the same program and only one party (the project sponsor) paid for insurance on the project. Claims made on an owner controlled insurance plan will not be counted against the contractor. If the contractor experiences a covered loss on the OCIP-project, it will not affect their own insurance policies.
- Subcontractors. With OCIPs, there’s no need for contractors to monitor the insurance certificates of its subcontractors.
Disadvantages of Owner Controlled Insurance Programs
Disadvantages for Owners
For project owners, OCIPs create a handful of new challenges that they must manage, including:
- Added administrative costs and effort for the owner in both establishing and maintaining the program. Owners will devote HR, accounting, and legal resources to set up the OCIP. Additionally, once the program is set up, insurers will typically require enhanced loss prevention and safety controls on the project. This obligation will fall on the project owner, the policyholder.
- It can be difficult to isolate insurance costs from contractor bids. Without extracting such costs, the savings offered by OCIPs become less impactful.
- False claims. Contractors may claim injuries that did not occur on the job-site to benefit from the OCIP. As a result, owners may need to create a more robust audit process for claims to ensure that they are valid.
- Contractors have less incentive to control losses, since it is not their own policies affected by claims.
- OCIP coverage limits may not be high enough if the project experiences damages from multiple independent sources.
- Rising insurance costs. If program costs are tied to insurance market fluctuations, there is risk that costs could rise and cut into or eliminate the cost savings that these programs create.
Disadvantages for Contractors
Many contractors and subcontractors avoid projects that use OCIPs as the method of insurance. This list of disadvantages that OCIPs create for contractors and subcontractors helps explain why:
- Worse coverage. While some contractors may receive improved coverage through an OCIP, more experienced contractors may experience the opposite. OCIPs might leave coverage gaps or provide lower limits than they have with their existing policies.
- OCIP projects create a complicated bidding process because the contractor must provide estimates both with and without insurance. The same applies to any of the contractor’s subcontractors.
- OCIP projects can create additional administrative burden for contractors. The time and energy required to track and report the additional information required by the OCIP is significant. Additionally, contractors will need to educate any of their subcontractors on how to do the same.
- In many instances, contractors might have to eat the cost of insurance premiums they already paid for.
- Contractor liability may extend beyond the duration of the OCIP, meaning the contractor could be liable for damages that occur long after project completion. Contractors can mitigate this risk by extending their existing general liability coverage to cover losses that occur after the OCIP has terminated.
- Loss of benefits. Dividends associated with workers compensation, designed to reward safely completed projects, will likely go to the project owner instead of the contractor.
- If program administrators don’t report losses in a timely manner, then the contractor’s reputation can be damaged, resulting in worse terms for him or her on future insurance policies.
As you can see, there are numerous hurdles and considerations for contractors engaging in a project that uses an OCIP. However, projects that use OCIPs are often large projects that create a large earning potential for contractors, which make some of these challenges worth working through.
OCIP vs CCIP
What is the difference between an owner controlled insurance program and a contractor controlled insurance program?
Since CCIPs operate mostly in the same way as OCIPs, why choose a CCIP over an OCIP? One big reason is cost. Sometimes, contractors with long track records of safety and strong relationships with their insurance providers can actually achieve better rates or higher limits than the project sponsor. In this case, it can make sense for the owner to simply reimburse the contractor for the cost of insurance because the terms are much more favorable.
Some contractors may regularly perform similar projects that need very similar coverage. It is possible for contractors in this situation to set up a rolling CCIP with their insurance provider, rather than creating similar policies for new projects over and over. Contractors with rolling CCIPs are also likely to save on the cost of insurance, which can benefit owners when the cost is passed on to them.
Contractors may also prefer CCIPs because it incentivizes owners to stick with them. If the contractor is no longer on the project, neither is their insurance policy. And contractors who carry CCIPs, or are willing to adopt a new one, are not very common.
Apart from the advantages of CCIPs mentioned above, there are some downsides as well. In some cases, parties that contract directly with the owner, instead of the contractor may not be able to enroll in the insurance program. However, this can usually be resolved if the owner can be added to the policy as a named insured.
Sometimes coverage limits on the CCIP apply to multiple projects being worked on by the contractor. This means that the limits can be lower for a given project if another project on the CCIP experiences a covered loss. To deal with this issue, project owners can require that the CCIP has limits that apply only to their project or even require a project-specific policy.
Owners should take an active interest in policy details, like coverage limits, claims management procedure, safety and loss prevention programs, and much more. The contractor should supply owners with informative material about the insurance program, or expect to discuss and design the CCIP alongside the project sponsor.
CCIPs are not very common compared to their owner controlled counterparts. However, the benefits offered by CCIPs has led to an increase in their popularity in recent years.
Finding the Best Owner Controlled Insurance Program
Owner controlled insurance programs are more difficult to research and set up than traditional insurance policies. Finding an insurer who offers OCIPs and who is reliable and experienced is also a difficult task.
Very few large insurers deal owner controlled insurance programs directly, and most programs are offered through brokers. However, we believe that buying through an underwriter is a good idea when possible because it saves money and comes with the financial security of the insuring company.
We’ve researched the owner controlled insurance program market and compared the top insurers based on their customer reputation, financial strength, and coverage options. Below is a list of the top providers of OCIPs:
The Best OCIPs: Summed Up
|The Hartford||Liberty Mutual|
|Best For||Best Overall||Best for Government||Best for Residential|
|Best For:||Best Overall|
|Best For:||Best for Government|
|Best For:||Best for Residential|