In the construction industry, questions and confusion regarding the use of owner-controlled insurance programs (OCIPs) and contractor-controlled insurance programs (CCIPS) have been increasing over the past few years. OCIP and CCIP plans are also commonly referred to as “wrap-up” or “wrapped” insurance plans.

How Do These Programs Work?

The concept of these programs involves the project owner (OCIP) or prime contractor (CCIP) purchasing a master policy. This policy would cover insurance issues that pertain specifically to a construction project—usually a very large one.

While the concept is not new, the use of these programs is becoming more prolific due to a few reasons:

• Use of the OCIP concept has grown into a broader scope of construction projects. Initially most were applicable to very large commercial and civil projects. Today, OCIPs/CCIPs are used in larger residential multi-family projects, as well.
• OCIPs/CCIPs are also being used for smaller projects than they have historically been in the past which has increased their popularity.
• More competition exists for this business among insurers. Previously, only a few key players existed in this market, but the number of providers has grown immensely.

Reasons for Using an OCIP/CCIP

The primary reason a company would use an OCIP/CCIP is to give the owner of the project greater control of the insurance concerns relating to a specific construction project, such as:

• ongoing administration of a project’s insurance is easier to manage with a single policy versus a collection of individual policies held by numerous subcontractors;
• streamlining management of claim handling and safety efforts for the duration of the project;
• adding consistency to insurance coverages. All subcontractors will share the same limit on the OCIP master policy in lieu of each of their individually procured policies;
• giving the owner direct involvement in policy terms, conditions, coverages and limits of insurance; and
• providing greater ability to negotiate coverages, limits and rates such “buying in bulk.”

What are the Downfalls of OCIPs for Subcontractors?

A subcontractor’s own insurance policy will usually exclude coverage for losses arising out of a job covered by an OCIP/CCIP policy. In addition, they will not charge a premium for insurance on a project where an OCIP/CCIP exists if a subcontractor can show records to prove existence of the policy at the time of audit.

While there are many benefits, there are also some potential downfalls that subcontractors can run into. Here are possible problem areas:

• Deductibles can be much higher on an OCIP/CCIP policy than what a subcontractor has purchased on their own. For example, a subcontractor is in the process of installing a large piece of corrugated sheet metal on a rooftop when a strong gust of wind causes it to fall six stories onto a car below. The $35,000 claim is submitted under the OCIP/CCIP policy that is insuring the subcontractor for the project. However, its discovered that the OCIP policy has a larger $50,000 deductible, causing the subcontractor to have to pay the claim out of pocket.
• Limits of insurance selected by the OCIP/CCIP purchaser could be inadequate for the project. For example, a large multi-family project insured under an OCIP/CCIP might have an insurance limit of $20,000,000 to cover any claims resulting from the entire project but be limited to a period of five years.
• Coverage provided by the OCIP/CCIP purchaser may not be as broad as a subcontractor’s own policies. For example, the OCIP/CCIP might have a five-year limitation for project-related liability claims, yet a subcontractor’s own insurance might have no time limit.
• Costs and rates may not be what they seem. Sometimes a subcontractor’s insurer and the underwriters for the OCIP’s/CCIP’s insurer do not agree on the proper classification of the work being performed. While most trades are permitted to have multiple classifications for the work being performed, it is not always cut-and-dried. Mechanical contractors, ironworkers, commercial interiors, concrete contractors and many others have a variety of classifications that can be applicable to their work, and underwriters often disagree on which classifications make sense.
• While the OCIP/CCIP purchaser does gain more control of the claims and safety efforts on a certain project, a subcontractor can subsequently lose some of their own. A large workers' compensation claim can surface on a subcontractor’s NCCI Experience Modification only for it to be determined that the claim occurred on a job covered by an OCIP/CCIP. If this happens, the claim would also be handled by the OCIP/CCIP administrators and the specific insurer covering the project.
• On the other hand, while the owner can gain some administrative simplicity with a single OCIP policy, the subcontractor can encounter increased burden and confusion when it comes to reporting requirements. This especially rings true when there are multiple jobs under various OCIPs/CCIPs since very few of the reporting formats and requirements are the same.
• An OCIP/CCIP can diminish the buying power for a subcontractor’s own policy. If a large portion of the subcontractor’s insurance premiums are being paid to the insurer(s) writing the OCIP/CCIP policies, it can affect underwriting and relationships with the subcontractor’s existing providers. For example, a subcontractor can have so much work insured under OCIP/CCIP plans (all of it, sometimes) that their own policy doesn’t generate enough premium to keep their long-time insurer interested.
• Wrap-up exclusions can exist on a subcontractor’s insurance policy. This means that anytime a contractor is working on an OCIP/CCIP project, their current insurance carrier will exclude coverage for that project.

Ultimately, there is no magic solution to solve all issues, concerns, costs and claims that can surface from insuring a large project. Whether a property owner and/or developer is relying on a general contractors insurance, a large prime contractor is relying on subcontractor agreements, or a trade contractor is relying on the insurance purchased by the owner or contractor under an OCIP/CCIP, the best recommendation is to avoid any situations, personally and professionally, where a business is relying on somebody else’s insurance.