What’s an OCIP?
A strict definition defines an owner-controlled insurance program (OCIP) as a wrap-up under which a project owner provides various insurance coverages to contractors and subcontractors. OCIPs make up the largest percentage of wrap-up programs being used in the U.S. (I will not cover which States in the U.S. allow and/or disallow wrap-up insurance programs. Each State’s department of insurance regulates this. It varies from State to State, and is subject to change.) Another type of wrap-up, which I will reference without going into detail is a contractor-controlled insurance program (CCIP). This is a wrap-up that a general contractor controls the program versus a project owner. The entity that controls the program is the “sponsor”, on either an OCIP or on a CCIP.
OCIPs and CCIPs are basically the same. The main difference is sponsorship (a project owner for an OCIP, and a general contractor for a CCIP). The key consideration is who has the ultimate control for the program, i.e. Who is responsible for what? The issue of control can pose potential problems for either type of program, especially if a wrap-up program is not properly structured with partnering and collaboration in mind. Having proper scope definition, a clear delineation of responsibilities, and definitive program structure, with communication and cooperation, are critical for wrap-up success.
Is an OCIP the most viable approach?
The key success factor in building a better wrap-up consist of taking a holistic approach for ensuring a controlled insurance program process. This takes into consideration all the phases of a wrap-up, including; conceptual design, insurance program structure, formation, implementation, administration, management, close-out, and final audit.
The first step in the process, other than doing an initial gut-check on the reasonableness of using an OCIP in the first place, is to prepare a comprehensive OCIP feasibility study. This should be based on the specific idiosyncrasies of the project under consideration.
An OCIP feasibility study is designed to provide more than a cursory risk assessment for a Go/No-Go decision for using a wrap-up insurance program. A well-formulated OCIP feasibility study should provide an overview of the primary issues related to the viability and practicality of using an OCIP as a risk financing program strategy on a project.
The OCIP feasibility study’s purpose is to identify any “make or break” issues which could prevent a project owner from being successful in the implementation of an OCIP on a project. In other words, an OCIP feasibility study validates if this risk management approach for the project under consideration is viable and makes economic sense.
Keep in mind, a project owner needs to be objective when evaluating an OCIP feasibility study. Some project owners may want to overlook or minimize deficiencies in their project management team. This can be a fatal flaw in the process because no matter how good a project plan may be, or how complete a OCIP feasibility study is, it will never compensate for ineffective project management on an OCIP for a construction project. Success on an OCIP is directly dependent on the enforcement of the OCIP requirements by project management, in collaboration with risk management and the OCIP broker.
An objective and realistic evaluation of a project owner’s prior track-record with the enforcement of construction contracts, and more importantly contractor compliance, will determine if an OCIP can be effectively managed by a project owner. This requires a thorough evaluation of all the stakeholders in the OCIP, i.e. all the departments directly responsible for enforcement of the contract terms and conditions of the OCIP. Specific contract provisions stipulating the OCIP requirements need to be an integral part of all construction contracts. This is a critical success factor, and probably the single most important criteria for any project owner who is considering using a project OCIP.
Enforcing contractor compliance with construction contract provisions starts with crafting stringent contract language for both indemnification provisions and for the OCIP insurance requirements. It also includes being very clear on the other required contractor-provided insurance coverages outside of the owner-furnished coverages.
Another critical success factor is OCIP administration. Who will manage the OCIP? There also needs to be a contractual risk-transfer element for all, or a portion of, the OCIP insurance policy deductibles. The deductible responsibility should be transferred to the enrolled contractors so the contractors have some “skin in the game”. Integration of the construction contract provisions with the OCIP insurance requirements is key. The OCIP insurance policy(s), safety and claims manuals, and OCIP administration procedures, need to be explicit. The comprehensiveness of the OCIP documents is a required best practice. Making sure they are adhered to will ensure a successful OCIP.
Remember, an OCIP feasibility study only starts the OCIP process. Planning is a critical component of a successful OCIP. However, planning alone won’t guarantee success. The plan must be strategic, realistic, and based on reasonable expectations for the OCIP.
Why OCIPs now?
Why OCIPs now? That’s a good question! Answer: It’s all about timing! These are unique and interesting times. There is now a HUGH focus on rebuilding America’s deteriorating infrastructure. This will stimulate increased growth in transportation, manufacturing, and construction sectors. Knowing what a key role infrastructure plays in the USA’s economic competitiveness and strengthening economic growth in both urban and rural areas are factors that should provide a boom in the building industry.
Combining this fact with an abundance of private capital from investors and a growing interest in the creation of public-private partnerships (P3s), will present new project opportunities. In addition to interests in P3s, there will be renewed interest in the use of OCIPs to wrap-up the insurance on these types of innovative risk financing projects.
OCIPs have been around for more than 50 years. However, like everything else lately, and it’s not just a retro thing, OCIPs are making a comeback. And, so the saying goes, “what goes around comes around”. In the past decade, OCIPs have been utilized on numerous commercial construction projects. There has also been a proliferation OCIPS used on large public works and transportation projects. These types of megaprojects are great candidates for using an OCIP because they tend to attract a lot of public attention, have substantial impacts on communities, the environment, have large budgets, and many of these megaprojects can cost more than $1 billion to build.
The use of OCIPs continues to grow because of several key factors:
- An increase in the number of large capital improvement projects undertaken to repair the nation’s deteriorating infrastructure.
- A booming economy, fueled by the growth and expansion of the high-tech industry and associated businesses.
- The implementation of less stringent insurance regulations, requirements, and standards that have been modified within State legislation.
- A highly competitive construction insurance market for both insurance and reinsurance.
Hope you enjoyed this post. I will look forward to your comments. I will share more Insights in future posts.
In OCIP 2.0 – Part 3, we will cover who & what is included & excluded in an OCIP.
Thank you for visiting and reading C-Risk Insights.
Until next time…
David Grenier is the Managing Director and Principal Consultant at C-RISK, LLC.
C-Risk is a risk management consulting company that provides strategies and insights on wrap-up insurance programs to help project owners in the public and private sector who are involved with large capital construction projects.
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