An Owner Controlled Insurance Program (“OCIP”) (also known as a “wrap-up” policy) is an insurance product that provides coverage on a project-wide, rather than entity based, scale. Instead of relying on a collection of mismatched policies provided by numerous parties, OCIP provides uniform coverage for multiple parties involved on a construction or other industrial type project.

Property owners with significant resources and infrastructure have strong reasons to use an OCIP. First, the owner has more control over the program, and does not have to rely on another party’s insurance. Consequently, the claims handling process is easier and more predictable. Second, the owner knows exactly what coverage it is getting and it can tailor coverage to its exact needs. Third, the OCIP will typically have higher catastrophic loss limits than those available through an enrollee’ standard liability program. Fourth, OCIP protects the owner’s standard insurance program because losses do not impact its traditional insurance. Finally, a properly run OCIP can actually save the owner money in terms of premiums.

General liability and workers compensation are the standard coverages provided through OCIP. Some pollution and professional liability risks may also be covered. But an OCIP is not intended to cover damage to the project itself. That property exposure is more appropriately addressed through a Builder’s Risk policy. Consistent with the larger insured market that would obtain an OCIP, deductibles are typically high. Which party – the owner or the contractor – should absorb that deductible must be addressed in the contract, consistent with any anti-indemnity act that may apply.

One drawback with using an OCIP is that administration can be intensive, and therefore expensive. That is why (just as with captive insurance companies) the use of the OCIP is, as a practical matter, often restricted to companies with significant infrastructure and resources. Companies considering the use of an OCIP should discuss the cost of administration with a sophisticated insurance broker. Some brokers or OCIP sponsors will have resources available to help owners shoulder the internal administrative burden. If an owner is interested in an OCIP but cannot commit the resources, it may consider coordinating a Contractor Controlled Insured Program or “CCIP” through the project’s general contractor. A CCIP will offer similar benefits, but at the expense of the owner relinquishing program control.

Part of the administration of an OCIP is enrolling contractors into the program. For the owner, the intent will be for claims to follow the contractor’s loss history, not the owner’s. That way, it is the contractor’s experience modification rate or “EMR” that is impacted in the event of an injury. The administration of the OCIP and the registration of the contractor must be addressed early on and made a part of the bidding process. That process must include identification of subcontractors so that they can be enrolled if appropriate.

The reasoning here is twofold. First, each contractor will need to be enrolled into the OCIP for coverage to be extended. Failure to adhere to this condition can be extremely penalizing as not having properly enrolled parties leads to uncovered losses. Note that standard policies will commonly exclude coverage where an OCIP is available, regardless of enrollment. So, if a party is not enrolled, it may not be covered by either the OCIP or its own traditional insurance program. Second, the owner’s premium savings comes in large part from the reallocation of premiums from the enrolled contractor’s own insurance program. If a contractor (or its subcontractor) is not enrolled, the premium cannot be allocated to the OCIP.

An OCIP can have particular value inasmuch as the enrolled party’s insurance program may be insulated from losses, and under some state’s construction anti-indemnity acts, OCIPs are excluded from the scope of the act, rendering the OCIP’s protection valid. This can greatly improve claim efficiency, and in turn, maintain project scheduling, as less priority is given to determine culpability. However, the protection to enrolled parties is not limitless. The scope of the OCIP is typically restricted to incidents occurring at the covered project site; each enrollee must maintain its standard insurance for off-site exposures.

An OCIP can impose administrative policies on each enrolled party. These policies may include the following “return to work” requirements, safety policies, reporting obligations, and training. Penalties may be imposed for the failure to follow safety programs or drug testing. As explained above, one risk of the OCIP is that the application of the program could potentially void the contractor’s standard insurance. The contractor should consult with its broker and at least attempt to ensure that (i) its standard program is not voided by the presence of an OCIP, but that the standard program sits in excess to the OCIP or (ii) the exclusion only applies if the contractor is actually enrolled in the OCIP.

When procuring an OCIP, the owner must ensure that the OCIP applies for the appropriate length of time. An OCIP that expires upon completion of the project or the applicable enrollee’s work on the project will not adequately capture all potential claims. Call-back or warranty work can still lead to liability or workers’ compensation claims. Additionally, an injured party may not bring a claim for several years. Therefore, OCIP’s coverage should extend beyond the completion of the project, through the applicable statute of repose.

In conclusion, an OCIP is a valuable risk management product that merits strong consideration on large scale projects for sophisticated owners with appropriate resources to commit. In such cases, the owner will benefit from improved coverage, claims-handling, and cost.

About the Authors...

Written on behalf of the Insurance Law Committee.