This is the first part of a three-part series discussing Owner Controlled Insurance Programs (OCIPs). Part I will provide an introduction to OCIPs and discuss some of the potential advantages to owners and contractors over traditional loss funding methods. Part II will explore potential disadvantages of OCIPs, and part III will discuss and consider the current state of the law concerning OCIPs.
Traditional loss funding for large capital improvement projects can be thought of as a hub-and-spoke wheel, with the owner and the general contractor (GC) located at the hub and policies purchased by the subcontractors constituting the spokes. The owner sets minimum insurance requirements and the GC obtains a CGL policy and names the owner as an additional insured, while also providing the owner with a broad indemnity agreement. Subcontractors similarly name the GC as an additional insured on their own CGLs, and likewise provide indemnity agreements. As a result, losses first hit the outlying subcontractors’ policies and do not reach the GC or the owner until the limits of all of these “spokes” have been exhausted.
In an OCIP, the owner procures all insurance on the project, or even multiple projects under a single program. In other words, the owner “wraps up” all of the insurance of the project. Indeed, in addition to CGL coverage, the wrap-up may also contain workers compensation insurance, employer’s liability coverage or builder’s risk insurance, as well as excess or umbrella coverage. At first blush, it may seem that an OCIP, which places all responsibility for procuring insurance on the owner, a needless burden on the owner as compared to the traditional-style program. Under the traditional wheel scheme the owner shifts the responsibility for and cost of insurance to the contractors while also enjoying what can be substantial insulation from losses. In theory, for example, the policy limits comprising the spokes can respond together to a large loss; twenty $1 million “spokes” can fund a $20 million loss and, at least under traditional CGLs, defense costs do not erode limits of liability. So, how can an OCIP benefit the owner? The answer is, in a number of ways.
Perhaps unsurprisingly, potential cost savings is a significant motivator for owners that choose OCIPs over the traditional approach. Under an OCIP, savings may come from volume discounts on premiums and the owner’s ability often to assume large deductibles. But savings may also come by changes in the bidding process. Under the traditional approach, the contractors, who bear the costs of insurance, include those costs in their bids—typically including a markup. By paying the cost of insurance itself, the owner can eliminate the contractor’s insurance markup. Some estimates are that the use of an OCIP will reduce bids by an average of two percent.
Another advantage under an OCIP relates to the scope and limits of coverage. One disadvantage to the traditional approach is that, although the owner gets to set minimum requirements, there is no reliable way to ensure the contractor’s compliance—insurance certificates may not reflect certain limitations on coverage. With an OCIP, the owner can be confident that it has broad, uniform coverage. Moreover, an owner typically can obtain higher limits than a smaller contractor can carry.
Other advantages of OCIPs relate to administrative benefits. Having all of the insurance on a project wrapped-up allows for uniform claims handling and centralized risk management. It also allows for the efficient resolution of disputes among contractors. Under traditional programs, contractor disputes often can result in coverage disputes among co-insurers and subrogation claims. The claims handling and dispute resolution advantages also inure to the benefit of the contractors in terms of efficiency and reliability.
Contractors enjoy another advantage. Under a traditional program, losses paid under the contractor’s policy would necessarily reduce the aggregate limit, which the contractor may need to pay claims on other projects. With an OCIP, the contractor effectively shifts claims away from its own policies and, thus, is able to insulate those aggregate limits so that they are available to cover other losses.
That wraps-up our introductory discussion on OCIPs. Next time, we will consider the disadvantages that may be associated with OCIPs from both the owner’s and contractor’s perspective.
 It is, perhaps, misleading to refer to the non-OCIP approach as “traditional” because it gives the wrong impression that OCIPs are a new concept. In fact, OCIPs have been used for decades. If anything is new about OCIPs, it is that they have become more prominent in recent years and are no longer reserved for only massive projects.