OCIP Pros & Cons for Project Owners
As stated in Part 4: OCIP vs. Traditional Insurance Program, there are several fundamental differences between an OCIP and a traditional insurance program, (i.e. a contractors’ insurance program). There are also several advantages and disadvantages for a project owner to use an OCIP on a project, which we will cover in this section.
OCIP Advantages for Project Owners
OCIPs have advantages and disadvantages for project owners as well as for contractors performing work on a construction project. Let’s first review some of the advantages that have been identified for project owners, which include:
- The ability to obtain broader insurance coverage with higher dedicated limits for contractors, which will ultimately provide better protection for a project owner.
- Potentially lower construction costs resulting from the economies of scale of obtaining a volume discount on the purchase of the OCIP insurance coverages.
- Benefiting from a higher probability of reduced losses from integrating more effective and comprehensive safety and loss-control programs into the OCIP.
- Improved project quality from a variety of risk management program services (e.g. insurance claim handling, loss control, periodic risk engineer inspections).
- Substantial reduction in the amount of time required for obtaining insurance certificates from contractors enrolled in the OCIP through a formal structured OCIP administration process, procedures, and systems.
- Insurance requirements and limits no longer an obstacle for some contractors, especially DBE, WBE, SBE firms, on bidding work when enrolled in the OCIP.
OCIP Disadvantages for Project Owners
An OCIP can have some challenges for project owners. An OCIP may not be a panacea for all project management, risk management, and administration on a construction project. Here are several OCIP disadvantages that have been noted by some project owners:
- The additional administrative burden can require a substantial level of effort if not managed competently by the project owner’s OCIP staff or administrator.
- If insurance market hardens, there could be a potential financial risk inherent in loss-sensitive programs, resulting in premium increases or coverage reductions.
- An additional accounting effort may be required for extracting insurance costs from contractor’s bids, and subsequent change orders can increase level of effort.
- An additional monitoring effort may be required of an OCIP administrator to ensure that claims submitted from a contractor’s employees injured on other projects are not charged to the project owner’s OCIP. (Oversight is required.)
- A project owner’s responsibility can increase by being more involved with the implementation of a more stringent project safety and loss-control program.
The Time Factor
In many cases, the additional administrative burden associated with an OCIP can be outsourced to the incumbent insurance broker, a risk management consultant, or a third-party administrator. Although, even with these additional resources, there can still be an administrative impact on a project owner’s operations. Some departmental staff (e.g. legal, accounting, finance, contract administration, construction, facilities, safety, and risk management) may be affected in OCIP implementation and administration.
Apart from risk management and safety, who typically have a more personal stake in the day-to-day involvement with an OCIP, the anticipated time burden placed on the other departments is minimal. Typically, it may require only a few hours during initial design and during the project kick-off and OCIP implementation phase.
Post-implementation, a project owner’s involvement should only be intermittent. It will be limited to a project owner’s involvement in reviewing insurance premium payments, and attending claim review meetings. Also, reiterating to department staff that success on the OCIP will only be achieved with everyone’s commitment to the OCIP project.
Other Project Owner Considerations
Project owners should be aware of the financial risk inherent with a loss-sensitive OCIP. They need to fully understand how this insurance program structure differs from using guaranteed-cost insurance with all losses paid by an insurer. Most project owners know this since many have transitioned their operational insurance programs to a deductible program or self-insured retention (SIR) program, which has now become the norm.
With a traditional insurance program, the project owner transfers all risk of loss to the contractor and the contractor’s subcontractors on a project. The project owner also pays a fixed premium to the insurer for guaranteed-cost insurance, or for whatever type of insurance & risk management program they have procured for their own operations.
When the project owner transitions from a fixed-price, guaranteed-cost program to a loss-sensitive OCIP, the project owner is trading off some financial certainty for the potential to lower the cost of risk. The cost of risk is limited by the application of a per occurrence and an aggregate limit retention. Project owners can control additional risk by implementing a stringent safety and loss-control program to reduce losses.
As much as project owners strive to transfer as much risk as they can, they cannot totally protect themselves from all risks. Purchasing a guaranteed-cost insurance program that comes with higher fixed costs, is cost-prohibitive. I’m not even sure if guaranteed-cost insurance for construction operations is still available in the market.
The best a project owner can do is to purchase a high deductible insurance program. Then, through contractual risk-transfer, transfer the responsibility for payment of a portion, or the whole deductible, to the contractor for any claims that may proliferate during the course of construction. The construction contract between a project owner and the contractor needs to be explicit regarding the contractual risk-transfer of the deductible responsibility and the established insurance policy deductible amounts.
In addition, a deductible charge-back procedure should be considered by a project owner. Especially, for the commercial general liability (CGL) insurance to cover any bodily injury (BI) or property damage (PD) claims submitted by third-parties against the project OCIP. This recommendation may be an additional level of effort, but it will be in the best interest of a project owner who requires an effective risk-transfer method for contractors to have some skin in the game to limit losses on a construction project.
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 6, we will review OCIP advantages and disadvantages for contractors.
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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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