Owner-controlled insurance in construction: a strategic risk tool

What is an OCIP?

Owner-Controlled Insurance Programmes (‘OCIPs’) are complex insurance products that are often procured by a project owner (which is generally those otherwise referred to within construction sector as the ‘employer’ or ‘principal’), rather than individual contractors (or subcontractors). OCIPs offer substantial benefits and opportunities for cost savings, enhanced risk management, and streamlined claims handling – making them an attractive insurance option for large or smaller construction projects.

Essentially, an OCIP is an insurance plan designed to cover (almost) all liabilities arising from a construction project; these typically include and consolidate multiple standard insurance coverage into a single, project-wide policy that covers any:

-          general liability;

-          workers’ compensation;

-          excess liability;

-          builders risk and more.

OCIPs are typically established for individual construction projects; although, it’s possible to create ‘rolling’ OCIPS, that cover several similar projects or in some cases a series of projects. ‘Rolling’ OCIPs are commonly used by large property owners, like universities or real estate investment trusts, that often oversee various construction projects which are underway simultaneously.

OCIP policies should be established prior to the commencement of a construction project, with their lifetime coverage spanning over several years; covering the project’s duration and succeeding years (in the event that any post-completion liabilities arise thereafter).

OCIPs Vs Traditional Insurance Models

Unlike traditional construction insurance models - whereby each contractor (or subcontractor) purchases their own individual insurance policies to cover their liability - OCIPS procure that the parties involved on a construction project consolidate their coverage as named insureds under one single policy. The disadvantage of the traditional model is that contractors will often encompass their individual policy costs into their bids, which results in the project owner indirectly covering such costs and overheads for a variety of individual policies. Additionally, in the event of a loss, further legal and administrative costs under the traditional model regularly exceed indemnity costs. By streamlining everything into a single policy, project owners can reduce costs, administration and more efficiently cover losses if they occur.

What does an OCIP cover?

As discussed, OCIPS are often made from a combination of traditional and standard construction coverage policies. The above-named coverages are mainstays of most construction projects’ insurance coverage, and thus, those policies are included in the vast majority of OCIPs. To summarise, standard construction insurance policies you may see, include:

1.      General commercial liability (‘GCL’): Most GCL policies, including those that are part of an OCIP, will usually contain (but are not limited to) coverage against contractual liability, personal injury liability, and property damage.

2.      Workers’ compensation: Provides compensation to contractors and employees who become injured on the construction jobsite. The compensation is intended to reimburse any “worker” for private medical bills and loss of income incurred due to the injury for any period of absence from work.

3.      Builders risk insurance: This covers damage to the structures on the jobsite in the case of damage from weather, vandalism, or theft.

4.      Subcontractor default insurance: This protects the project sponsor against failure on the part of the contractor or subcontractor to complete the project, which in turn lead to unforeseen expenses on the part of the contractor or expenses incurred from unfulfilled obligations by the contractor.

5.      Professional Liability: This coverage protects against costs related to professional issues, like design issues – however, the OCIPs coverage will rarely be a sufficient substitution for their own professional liability coverage.

What are common OCIP exclusions?

Despite OCIPs covering a broad variety of different insurance policies, generally owners can work with insurers to fill any necessary gaps in coverage (i.e. environmental liability, flood liability and industry specific liabilities (airports or railways)). However, it must be noted that certain coverage is simply not offered through most OCIPs. Common exclusions are:

1.      Commercial auto insurance: This is typically excluded due to the challenges faced in verifying any ‘job-related’ claims and damages. Contractors must therefore purchase their own policy if needed.

2.      Coverage for ‘off-site’ contractors: those who do the bulk of their work away from the job site are usually not eligible for coverage under OCIP (i.e. 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’re not subject to the same safety and loss prevention measures that on-site contractors adhere to, and therefore, are potentially at a higher risk for loss. This may also apply to those who rarely appear on-site or have a very small risk profile associated with work undertaken or to be completed. Typically, anyone hired for one-off purposes are not going to be included on the OCIP; this includes materials vendors and suppliers’ parts manufacturers, hazardous materials transporters, and trucking services.

3.      Indirect additional costs: Any costs that a contractor takes on as the result of a covered incident are usually not going to be covered by the OCIP (however, they may be covered by their professional liability cover).

Is an OCIP right for you?

OCIPs provide several benefits and pitfalls to those parties that make use of them under a construction project, in particular any project owners and contractors.

Advantages

For project owners, OCIPs may be advantageous due to:

-          Cost saving: Through purchasing insurance in bulk, project owners can avoid the costs associated with each party having to arrange their own individual insurances annually and, in addition, the administrative costs in having to review the insurances annually for all parties engaged within the construction contract. Also, pooling risks under one policy often means project owners can negotiate better terms and premiums quickly compared to individual policies for each contractor.

-          Consistency: OCIPs ensure consistent, continuous and comprehensive coverage, reducing gaps in insurance that might arise during the project.

-          Simplified Claims and Recovery: Claims under OCIPs are managed centrally, simplifying the process for affected subcontractors and suppliers. This can reduce delays in financial recovery and help maintain project continuity.

-          Protection Against Insolvency Risks: This is particularly important for claims that might arise during or after a project’s completion, whereby subcontractors and project stakeholders are less exposed to financial risk when a contractor defaults.

Furthermore, contractors may also benefit from OCIPS through:

-          Enhanced coverage: Contractors may benefit from higher limits and broader coverage through an OCIP, in comparison to what they would likely secure independently.

-          No impact on individual policies: Claims made under an OCIP will not affect a contractor’s own insurance policies.

-          Reduced administrative burden: Contractors will no longer need to verify insurance certificates for subcontractors; however, they will need to educate any of them on how to track and report additional information required by the OCIP.

Disadvantages

Alternatively, it may be argued that OCIPs create further challenges for project owners through:

-          Complex Administration: Managing a centralised insurance program requires expertise to ensure compliance (i.e. legal and accounting assistance) and address the needs of all stakeholders.

-          Initial Costs: Setting up an OCIP can involve higher upfront costs for the project owner and there may be challenges in segregating insurance bids within contractors’ bids.

-          Coverage Limits: OCIPs may fall short in terms of coverage if multiple independent incidents occur, exhausting policy limits. It’s also important for project owners to ensure that the OCIP covers all possible risks comprehensively, including specialised coverage for subcontractors.

Additionally, contractors may face:

-          Potential reduced coverage: Dependent upon the experience of a contractor, those with vast experience may find that OCIPs offer lower limits or leave gaps/risk for exposure compared to their existing individual policies.

-          Bidding Process: As touched upon above, contractors must provide separate bids with and without insurance costs, adding a layer of complexity to this process.

-          Extended liability: A contractor’s liability may extend past the duration of the OCIP (under the construction contract or statute), meaning the contractor could be liable for damages that occur long after project completion. Therefore, it may be necessary for contractors to extend their existing policies.

Whilst there are numerous hurdles for both project owners and contractors engaging in projects insured through an OCIP, most OCIP covered projects are large ones, which creates a large earning potential for any contractor undertaking work – so such challenges may be worth considering.

How can we help?

In summary, while OCIPs cannot fully eliminate the risks associated with a major contractor’s failure, they can significantly mitigate financial and operational disruptions by centralising and stabilising insurance coverage. This makes them a powerful tool for managing large construction projects, especially in volatile industry environments.

Here at Forbes, we have specialist commercial solicitors that work within the construction sector on projects like those discussed. It is important that your contracts reflect the reality of what the parties are doing when taking out insurance and we often provide assistance with drafting and incorporating OCIP provisions into your construction contracts to ensure that the responsibilities of all parties are clearly defined. Please get in touch through the form below.