OCIP Insurance – Base Coverages & Optional Coverages
In Part 7: Potential Savings from an OCIP, we reviewed some of the cost savings that could potentially be realized with the use of an OCIP. An OCIP, if structured properly, is an effective and efficient risk financing approach for construction project insurance. In this section, we will review some of the base insurance coverages that are the foundation of many OCIPs. We will also review some ancillary coverages that could be incorporated into an OCIP to address certain project-specific risks and exposures.
INSURANCE COVERAGES (This is a partial list of coverages used with an OCIP.)
- Workers’ Compensation & Employer’s Liability
- Commercial General Liability (CGL)
- Excess / Umbrella Liability
- Professional Liability (PL)
- Owners’ Protective Professional Indemnity (OPPI)
- Environmental and Pollution Liability (PLL / CPL)
- Surety Bonds
- Subcontractor Default Insurance (SDI)
Workers’ Compensation & Employer’s Liability
Each state throughout the United States statutorily requires workers’ compensation and employer’s liability insurance. Each state’s Department of Insurance regulates minimum limits of liability coverage. Workers’ compensation insurance is a typical component of most OCIPs. (Except in some states that are monopolistic, e.g. Washington State. In Washington State, the workers’ compensation insurance is administered through the Washington State Department of Labor and Industries [L&I] for the state’s workers’ compensation system, and it is managed and regulated by a State Fund.)
Workers’ compensation insurance is included in most OCIP projects due to the large premiums that are required, the level of claims handling, and the degree of control needed over the safety, loss control, and risk management aspects of these projects. Most of an OCIP’s administrative burden is associated with workers’ compensation because, in most states, individual workers’ compensation policies must be issued to all participating contractors and subcontractors. On large projects, this can be substantial.
Commercial General Liability
The Insurance Services Office (ISO) Commercial General Liability (CGL) Coverage Form, CG 0001 is the policy form that is predominantly used on most projects to provide primary general liability coverage. The CGL provides bodily injury and property damage liability in Coverage A, personal and advertising injury liability coverage in Coverage B, and coverage for medical payments is in Coverage C of the CGL policy form.
CGL insurance is a third-party coverage. This means, a CGL provides liability coverage for contractors and the project owner for any claims that arise out of the contractor’s operations on a construction project from the general public, i.e. third-parties. The majority of CGL claims are primarily for bodily injury (BI) and/or property damage (PD) to third-parties (e.g. BI: slip & falls within the construction zone, PD: subsidence or differential settlement resulting in foundation and/or interior drywall cracking.)
Regardless of the CGL policy form used, general liability coverage for an OCIP should include (but not be limited to) several key provisions to safeguard a project owner’s interest. These include; contractual liability, broad-form property damage, OCP liability (usually written on a separate project-specific policy, as we discussed in an earlier post), explosion, collapse, and underground coverages (typically included in most recent editions of the CGL policy form), personal injury liability; and employees-as-insureds.
In addition, there are numerous endorsements that can be used with the CGL policy to broaden coverage, reduce coverage, or just for coverage clarification purposes. This list is too extensive to cover here A couple of endorsements you should have endorsed to the CGL are; an additional insured (AI) endorsement, waiver of subrogation endorsement.
Also, when contractors participate in an OCIP, it is recommended that the contractors remove any wrap-up exclusions or add a wrap-up exclusion endorsement on their own individual CGL policy. Contractors can protect themselves by having their insurance broker or agent add a difference-in-conditions (DIC) endorsement to the contractor’s own CGL policy. DIC coverage is required so that their own CGL policy will apply as excess insurance over the OCIP-provided CGL coverage furnished by a project owner on an OCIP project. (Note: the main reason for doing this is because the coverage limits of some of these master policies may be less than the contractor would normally provide for its own non-OCIP projects.) Adding a DIC insurance policy, or a DIC endorsement to a contractor’s own CGL policy, provides a contractor with coverage at least as broad as provided under its own CGL insurance policy.
Other CGL policy considerations for contractors include:
Under an OCIP, aggregate and per occurrence limits apply to all contractors and subcontractors for the term of the project. Aggregate limits are usually two to three times the per-occurrence limit for any given year on the project. OCIP per-occurrence limits allow the full limit of the policy for each named insured. The coverage provided under the OCIP is extended separately to each entity, which can result in pyramiding limits. Limits can usually start at $25 million and may be $100 million or more, depending on a project’s specific exposures and a project owner’s requirements.
Guaranteed-cost vs. loss-sensitive programs
Most OCIPs are written using large deductibles, large retentions, or retrospective rating plans. Under these programs, the total OCIP cost depends on the actual losses incurred. One disadvantage to this is the continuation of premium adjustments years after the project is actually completed. OCIPs can also be written at fixed rates for the project term, but these plans are more expensive due to the risk associated with the uncertainty of large losses. Availability of coverages and program types is dependent on the market.
Completed-operations coverage should extend for at least three years after final project completion or acceptance. This does not mean the completion of the contractor’s or subcontractors’ specific portion of the project work, but the completion of the total construction project as stipulated in the contract. Three years for completed operations may be insufficient for many construction projects. This is a basic timeframe for many statute of limitations, but it is insufficient for many state’s statutes of repose. I am not an attorney, so I recommended that all contractors seek legal counsel on state statutes.
(Note: Many attorneys will opine that while a statute of limitations sets a lawsuit-filing time limit based on when the potential plaintiff suffered harm, a statute of repose sets a deadline based on the mere passage of time or the occurrence of a certain event that doesn’t itself cause harm or give rise to a potential lawsuit.) Properly structured OCIPs should align the completed operations coverage period with the project’s state’s statutes. This provides a direct correlation between the total construction period for the project stipulated in the contract and the coverage period in the insurance policy(s).
Contractors may also negotiate “tail coverage” (which can be endorsed on a contractor’s own CGL policy) with their own insurer to extend permanent completed-operations coverage beyond the expiration of the OCIP-provided project insurance. Contractors are strongly advised to negotiate this tail coverage with their brokers and insurers before the project work starts so as not to lose their ability to obtain this tail coverage once they have mobilized on the project site to start their work.
An excess liability insurance policy may be purchased in the excess & surplus market or an umbrella policy form can be purchased. These policies provide a buffer layer over the underlying CGL insurance coverage policy. They should be written on follow-form basis.
Note: Many umbrella policies contain a contractor’s limitation endorsement which may include a blanket exclusion for wrap-up projects. For the reasons previously noted, these policies need to be modified to remove any/all wrap-up exclusions to have coverage.
A builder’s risk insurance policy covers project exposures associated with earthquakes and floods, damage to existing/adjoining property, boilers and machinery, project delays, the transit and storage of materials off-site, and explosion and collapse. This is a first-party coverage, meaning a builder’s risk policy covers the project work during the course of construction, which is the name that was used years ago to describe this policy, i.e. “course of construction” insurance. Contractors are required to retain some portion of each property loss. The deductible should be at least $2,500 to provide an incentive for contractors to mitigate losses. However, on a large OCIP projects, the contractor’s deductible responsibility should be significantly higher based on total construction cost.
Project owners may purchase a professional liability insurance policy to provide coverage for all the design professionals (e.g., architects, engineers, etc.) on an OCIP project. Ideally, the design professionals would subtract the cost of their own individual professional liability (or practice policy) insurance from their fees on an OCIP. This may not always be possible, however, because the insurer providing the practice policy may not provide a premium reduction to the project owner.
I do not advocate a project owner to include professional liability insurance coverage in an OCIP. After my lessons learned on a flawed OCIP on a transportation infrastructure project that I inherited, which included professional liability in the portfolio of coverage, it demonstrated to me that it is best that some lines of insurance should not be bundled.
If a project owner has decided to use design-build as the project delivery approach, then it may be advantageous to include professional liability. However, professional liability is specifically for the design professional and does not cover a project owner’s interest.
Regardless of a project owner obtaining a premium cost savings, project owners may want to obtain a professional liability policy on an OCIP project to provide coverage for design professionals who may not have this coverage or whose coverage does not satisfy the project owner’s project requirements. Also, a project owner may be able to purchase broader and more uniform coverage for the OCIP than each design professional could purchase individually in a stand-alone policy.
Owners’ Protective Professional Indemnity (OPPI)
Another alternative to purchasing project professional liability insurance by project owners is for a project owner to require an owners’ protective professional indemnity (OPPI) policy. This type of policy is focused on project owners (i.e. owner’s protective) of construction projects who execute contracts with design professionals. An OPPI policy provides first-party indemnity to a project owner for damages the project owner incurs as a result of negligence of the part of the design professionals on the project.
An OPPI policy does not extend coverage to the design team. Therefore, the probability of defense cost eroding the limit of liability within a typical professional liability policy, which is always a concern with a project professional liability program, is mitigated or eliminated. An OPPI is purchased in the name of the project owner, and it sits excess of the design professional’s own PL insurance coverage. An OPPI provides a project owner with supplemental coverage and additional capacity than what a professional design firm would typically bring to a project with the use of their own annual practice policy. No design professionals are named to the policy. A benefit of an OPPI is usually cost. OPPI premiums are basically 30 – 40 percent lower than a typical project PL placement.
An OCIP can include pollution liability coverage. There are two main types of coverage. A project owner typically purchases a pollution legal liability (PLL) insurance policy, which provides coverage to a project owner when the project owner has an insurable interest in the property where the construction project is being built. A contractor typically purchases a contractors’ pollution liability (CPL) insurance policy, which provides coverage for the potential discharge of any environmental contaminants that have been brought onto the project site by the contractor. A CPL policy is typically included in many large OCIPs. Pollution policies can be written on an occurrence or claims-made form. The CPL policy should include completed operations coverage, and it should be written for the total duration of the construction project.
Most CPL policies provide coverage for environmental hazards arising from three sources: 1.) known pollutants existing on the jobsite which are accidentally released during construction (e.g. pollutants collected by a remediation contractor); 2.) unknown pollutants existing on the jobsite that are uncovered by excavation operations (E.G. buried fuel oil storage tanks or barrels of toxic waste); and 3.) pollutants brought to the jobsite by a contractor or subcontractor (e.g. fuels, hydraulic fluids, paint, etc.). Project owners should seriously consider obtaining coverage for these types of exposures and should also require environmental consultants to obtain environmental liability coverage.
Surety Bonds with OCIPs?
Surety bonds (i.e. typically payment and performance bonds) are procured by the contractor at the request of the project owner as a requirement of the contract. The surety guarantees the contractor’s performance to the project owner and does whatever is necessary to get the project completed, should the contractor default.
So, should surety bonds not be included as part of an OCIP? The contractor-surety relationship is based on mutual trust, confidentiality, and the contractor’s performance and financial solvency. The contractor is also solely responsible for its own income statement and balance sheet. The project owner should not attempt to gain any additional control over the contractor’s bonding arrangement, over and above requiring such bonding for the project owner’s construction project. Therefore, surety bonds are provided by the contractor(s), but they are not included as part of the OCIP coverages.
Subcontractor Default Insurance (SDI) An alternative to Surety Bonds?
Subcontractor default insurance provides an alternative to surety bonds. This type of coverage directly indemnifies project owners for the costs resulting from contractor or subcontractor performance default.
Coverage applies to reimbursement of both direct and indirect costs incurred to complete unfulfilled contractor obligations, including costs related to job acceleration, extended overhead expenses, and liquidated damages. This approach allows a project owner to retain control of the project if there is a default without jeopardizing any of the contractor-surety relationship issues, as mentioned above. There may also be a potential cost savings compared to using the traditional surety-bond approach.
These types of policies usually include a deductible, a copayment percentage, and an aggregate limit. The insurer underwrites the coverage by evaluating the project owner’s method of prequalifying, managing, and controlling the performance of the contractors and subcontractors (i.e., by reviewing the project owner’s project management and contract administration procedures). Project size, geographical location, and the number of contracts, as well as other underwriting subjectivities, determine pricing.
You should now have a better understanding of an OCIP’s main features, benefits, and some of their drawbacks. In the upcoming sections, we will review the OCIP assessment and implementation processes. Also, how to determine if an OCIP is the right approach to be used and how to go about putting an OCIP in place for 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 9, we will review Why Project Owners and Contractors like OCIPs.
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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