What heavy construction operators need to know about owner-controlled insurance programs

Although owner-controlled insurance programs (OCIP) have been around for decades they have not been used very often in Saskatchewan, despite their many benefits.

“When structured properly, an OCIP best protects the interests of everyone on the project,” said Greg van Ginkel, a managing partner and the construction leader at EQUA Specialty Risk Partners Corporation (EQUA).

An OCIP is a set of insurance policies that applies to an entire construction project and protects all parties involved. This begins from the date of first design, continues through the construction period, and can be extended even after the project has been completed.

“Using OCIP is an intelligent approach to insuring a project, because it has a number of benefits for contractors and the project owners,” continued van Ginkel. “A few of the most notable benefits include cost efficiency, the reduction of administrative delays, an increase in the consistency of safety requirements on-site, coverage for critical equipment, and the protection for contractors from any future premium resulting from an adverse claims history.”

Contractors who have a strong understanding of risk and risk allocation, including OCIP, are better able to protect themselves and project owners. OCIP can be a real competitive advantage for contractors and can help to protect their relationships and brand. Private industry owners working with insurance professionals who are well versed in construction insurance are very likely to maintain this form of coverage for all parties.

Typically, on larger projects, van Ginkel said that owners want a specific type of insurance that contactors may not carry, such as environmental liability or professional liability. Subcontractors are also impacted because they need to increase their insurance coverage to meet the specifications for a project. This drives up their costs and reduces their competitive advantage, since they might not be able to purchase insurance as efficiently as their competitors.

For smaller contractors, this increased coverage requirement becomes problematic because they do not carry it as part of their operational insurance program. The result can be a significant minimum premium for a contract with a low dollar value.

“For a contractor, OCIP puts them on a more even playing field when bidding for projects, as there is one less subjectivity to worry about. The owner can also buy coverage more efficiently because it is purchased on the value of the project or the value of their portfolio of projects. From a cost perspective, OCIP eliminates that stacking of insurance costs for all subtrades that require certain limits,” said van Ginkel.

How OCIP works

For example, a mid-sized project could involve 50 subtrades, of which 45 carry $2 million of general liability insurance. If the project owner requires each to maintain $10 million liability, all subtrades would likely need to buy additional limits for this project. With a minimum premium of $1,000 per million, the costs would be $8,000 x 45 subtrades for a total of $360,000. With OCIP, the owner may be able to buy coverage for everyone involved in the project for $50,000 or less, while providing consistent coverage for all contractors, subcontractors and suppliers.

“With OCIP, contractors are covered under that program in a primary way and, if stated in their own insurance policies, have additional coverage should the owner’s program not be sufficient,” explained van Ginkel. “Contractors don’t have to pay for this coverage and any losses won’t be connected to their records. It’s important to maintain your own insurance on a contingency basis and, with OCIP in place, you will pay much less for it.”

He also noted that contractors often suffer the consequences of workmanship, material or even design defects by having to redo the work, through project delays, or even cancellations. With OCIP, everyone is protected and even design defects can be covered.

There are numerous benefits for owners including being able to specify insurance requirements without precluding any contractor from bidding; front-end risk allocation in the contract so all parties know the extent of their acceptance of risk; and higher limit availability and consistent coverage for all parties. Owners can also cover risks that may not otherwise be considered, such as a delay in start-up or an extra expense if critical contractor equipment is damaged.

For contractors, there are the benefits of having less risk management administration in determining whether parties have appropriate insurance coverage; there is coverage assurance for years after final completion (recourse falls to OCIP rather than their own practice policies and there is no record on their files); claim handling consistency which can help expedite the claims process; and the claims loss record does not become attached to any single party, which prevents the future syndication of operational insurance from being hindered for any of the parties involved.

OCIP benefits

One of the most notable benefits, according to van Ginkel, is a streamlined administrative process.

“Typically, before contractors are allowed on a project site, they must provide proof of having obtained the insurance required within their contract. As a result of inconsistency, showing certificates to comply with specs can result in a horrendous amount of administrative work and delays. OCIP eases this burden since less contract compliance for insurance is required.”

There is also an impact on safety. With consistent measures in place for all contractors, the overall team is safer due to consistent safety requirements (which are usually dictated by the insurer).

Van Ginkel said there is really no downside to a contractor being covered under an OCIP as the coverage under the OCIP is the first to respond to a claim. However, the contractor’s insurance professional should be well versed in how to protect the contractor for potential gaps.

“As a general statement, more sophisticated and larger contractors will be able to address these potential gaps. Smaller contractors may have difficulty addressing these potential gaps because the insurance companies providing coverage to smaller contractors or subcontractors may not understand the concept of OCIP. It is critically important to work with a broker who understands the difference between first- and thirty-party policies and exclusions,” he concluded.