OCIP Pros & Cons for Contractors
As stated in Part 5: Advantages & Disadvantages for Project Owners, we reviewed some of the pros and cons of OCIPs for project owners. Now we will focus our discussion on some of the identified pros and cons of an OCIP for contractors.
OCIP Advantages for Contractors
Just as there are advantages for project owners, an OCIP can be beneficial and have advantages for contractors participating in this risk financing program, including:
- The ability to obtain broader coverage with higher liability limits.
- More effective safety, loss control, and risk management programs.
- Coordinated claims handling, adjusting, and claims management services.
- Elimination of coverage disputes and protracted subrogation claims between multiple contractors, subcontractor, and their insurers.
- OCIP claims are not counted as part of a contractor’s own aggregate limit.
Well, like everything else in life, there is good news and there is bad news. OCIPs are not perfect. They can present a downside for contractors, just as they do for project owners. Here are several of the disadvantages that have been identified by some contractors:
OCIP Disadvantages for Contractors
- Since bids must be provided with and without insurance, a more complicated bidding process requires contractors to delineate bid credits. (This disclosure may increase a contractor’s level of effort in the bid process, but it is critical for OCIP reconciliation so project owners can verify there is no double-dipping.)
- In a close bidding situation, as respects the workers’ compensation insurance, a contractor with a good safety record may lose-out when competing against a less safety-conscious contractor if the workers’ compensation experience modifier is not taken into consideration as part of evaluation process.
- Documentation and reporting requirements can impose administrative burden.
- Since OCIP costs must be segregated from other project costs, additional bookkeeping may be required to maintain duplicate payroll records. (Note: on public works projects, this is a mandatory requirement for certified payrolls.)
- OCIP coverage (on some OCIPs) may not be as broad as or have lower limits than the insurance coverage purchased by a contractor on their own annual insurance policies. In this case, a contractor is advised to negotiate with its own insurer to obtain excess limits or difference-in-conditions (DIC) coverage to provide the contractor with a backstop to cover the excess limits differential.
- An OCIP usually includes completed operations coverage for losses in a specified period (e.g. a two to five year “tail” after project completion). However, a contractor’s exposure continues for a longer period of time. Whenever possible, a contractor should have their own commercial general liability (CGL) insurance policy endorsed to include any exposures beyond the project OCIP period.
- Due to the decrease in payroll volume, the contractor’s own insurance company may reduce its premium credits. Also, dividends for workers’ compensation may go to the project owner, not the contractor.
- Auto liability coverage is usually excluded from an OCIP. This can make it more difficult to separate general liability and auto liability claims if these insurance coverages are with different insurers.
- Some OCIP administrators do not report workers’ compensation loss data to rating bureaus in a timely manner. This could potentially affect the contractor’s experience modification rate (EMR) calculation.
The Time Factor
Contractors should expect the incorporation of the OCIP documentation to add more time to the preparation of each bid package. (This would include the OCIP manual and associated pre-bid and bid clarification meetings with subcontractors bidding work on the project.) However, under a traditional insurance program, the contractor would probably have expended about the same amount of time for tracking its subcontractors’ certificates of insurance. Under an OCIP, this burdensome task is not required.
In addition, the contractor’s and subcontractors’ insurance policies must be modified to dovetail with the OCIP coverages. Subcontractors must complete wrap-up enrollment forms and monthly payroll reports. They must report claims to an OCIP administrator and OCIP insurers in lieu of their own insurers. Additional time should be budgeted for participating in any OCIP orientation or status meetings, completing enrollment forms, and preparing periodic payroll reports.
Other Contractor Considerations
As previously mentioned, contractors have additional administrative burdens associated with an OCIP, as do the subcontractors enrolled in the OCIP. First, the contractor must expand its bid package to define the OCIP for its subcontractors and should identify the subcontractors’ insurance deductions.
The project pre-bid and pre-mobilization meetings must be expanded to educate all contractors and subcontractors about the implementation and administration of the OCIP. The contractor must also work with the project owner’s insurance representative, risk management department, or designated OCIP administrator, to validate insurance deductions and enroll all subcontractors in the OCIP who will be working on the 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 7, we will review potential savings from an OCIP for a project owner.
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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