Contractors Insurance Program vs. an OCIP
As stated in Part 3: Who & What is Included & Excluded in an OCIP? there are certain insurance coverages that are typically included, and excluded, from an OCIP. Now we will review how the OCIP insurance compares to insurance provided by contractors in a traditional program.
To gain a better understanding of an OCIP, let’s first examine how a project owner would traditionally mitigate risk on a construction project. A project owner and a contractor typically execute a construction contract which includes an indemnification clause. The exculpatory language in this clause expressly states that the contractor shall hold the project owner harmless for any loss arising out of the execution of the contract.
These types of indemnification clauses protect a project owner from any vicarious liability and mitigate a project owner’s contributory negligence exposure. This is a prudent contractual risk-transfer method, which should be employed by project owners in most construction contract agreements between a project owner and a contractor.
In addition to this contractual provision, the project owner would require that the contractor purchase and maintain adequate insurance coverage with specified minimum limits of liability. At a minimum, a project owner should normally require contractors to purchase workers’ compensation, employer’s liability, and commercial general liability (CGL) insurance coverage. These insurance coverages form the core of most contractors insurance programs.
Project owners will usually require the contractor to name the project owner as an additional insured on the contractor’s own liability policies. This ensures that the contractor will defend the project owner for any third-party-over action claims.
(a third-party-over action is defined as a type of action in which an injured employee, after collecting workers’ compensation benefits from the employer, sues a third party for contributing to the employee’s injury. Then, because of some type of contractual relationship between the third party and the employer, the liability is passed back to the employer by prior agreement. Depending on the nature and allegations of the action, coverage may be afforded under the contractual liability section of the employer’s commercial liability policy or the employers’ liability section of the employers’ workers’ compensation policy. Reference from: The International Risk Management Institute (IRMI) – Insurance Glossary – IRMI, Inc., Dallas, TX)
Under a traditional insurance program (i.e. contractors insurance program), one alternative to a project owner being named as an additional insured is for a project owner to require that the contractor purchase an owners’ and contractors’ protective (OCP) liability policy. This project-specific insurance coverage is a stand-alone policy purchased and maintained by the contractor for the benefit of the project owner. It provides coverage for vicarious liability the project owner may incur as a result of the contractor’s construction work. An OCP will also cover any liability that may arise from a project owner’s own acts related to the project owner’s supervisory oversight of a contractor’s construction operations on the project. The cost for this optional OCP policy is usually reimbursed by a project owner when a project owner specifically requires this type of supplemental insurance coverage on a project.
Just for clarification, remember, an owner-controlled insurance program (OCIP) is a “program” under which a project owner provides various insurance coverages to contractors and subcontractors who are enrolled in an OCIP and working on a project owner’s construction project. An OCIP can be a portfolio of several insurance policies that are purchased by a project owner (the OCIP sponsor) and wrapped around the construction project’s risks. An OCIP is very different from an owners’ and contractors’ protective (OCP) liability policy, which is an individual “policy”. An OCP is a stand-alone insurance policy that provides a project owner with vicarious liability coverage on a specific project. Sorry about the OCP and OCIP acronyms, but I didn’t name these insurance and risk financing mechanisms!
In comparison to a traditional insurance program (i.e. contractors insurance program), under an OCIP, certain insurance coverages (e.g. workers’ compensation and commercial general liability) are provided by the project owner to the contractor and subcontractors. The indemnification provision still exists. However, the standard contractor insurance requirements are removed. We will review the project owner-furnished insurance coverages that are in an OCIP in more detail in a subsequent post. We will also review a variety of optional insurance coverages that can be wrapped into an OCIP on some construction projects, if required by the project owner.
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 5, we will review OCIP advantages and disadvantages for project owners.
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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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