It’s a wrap Featured

8:00pm EDT May 26, 2008

It’s no secret that the cost of construction is on the rise. Increases in the cost of materials, equipment, energy and labor all have an impact on project costs. Naturally, the bigger the construction project the bigger the price tag. Project owners are looking for ways to reduce costs without cutting corners. For the right project, insuring it under an owner-controlled insurance program (OCIP), or wrap-up program, can be a viable way to save.

“In an OCIP the project owner provides the insurance for the project. Buying one large insurance program in this way can be significantly less expensive than having each contractor provide its own insurance,” says Ryan Rosta, producer with The Graham Company. But, he warns, in order to see any savings, the OCIP has to be run with the utmost diligence, with an emphasis on loss control and aggressive claims management. “The administration is critical to ensure a successful OCIP.”

Smart Business learned more from Rosta about the benefits that can be provided by an OCIP and the elements that need to be in place in order to reap those benefits.

What is an OCIP?

It’s a method of insuring a specific construction project, where the owner purchases the liability insurance coverage for the project. The insurance provides coverage for the owner, the construction manager or general contractor and all contractors and sub-contractors enrolled in the project.

What insurance coverages are included?

The liability coverages typically provided in an OCIP are workers’ compensation, general liability and excess liability. These coverages are supplemented by builder’s risk coverage, which provides coverage for the building or property under construction. Depending on the complexity of the project, it may be wise to consider additional lines of coverage like professional liability and pollution liability.

What are some of the advantages to this type of program?

An OCIP can provide better ‘protection’ for both the owner and the participants working on the project. Because you’re designing the insurance program for a specific project, you can usually purchase coverage with higher limits of liability than may be available to the individual contractors and subcontractors involved.

By purchasing the insurance for the entire project, the project owner can leverage the economies of scale achieved by a bulk purchase. You also have the flexibility to purchase the insurance for several years, if not the duration of the project. So if the market fluctuates, you have pricing stability for however long the project happens to be.

More importantly, you are providing improved safety and loss control through the use of one project safety program. A strong safety program means fewer injuries and less lost time from a project. Claims management personnel should also be working hand in hand with safety and loss control to aggressively manage and minimize the impact of any claims that do occur.

Another advantage to an OCIP is the ability to include smaller, local, minority or disadvantaged contractors. Many times these companies do not have the internal personnel to meet the necessary bid specifications. The OCIP will provide the safety services and resources to these companies that would not have had them otherwise. This means more work for more companies.

Who might consider an OCIP?

In order for an OCIP to make sense, in our experience, the project has to be a minimum of $100 million in construction costs. If a project is less than $100 million you tend to lose the economies of scale because there’s less that you can negotiate and less that you can impact in terms of the cost of the insurance. The potential for savings increases as the construction value of the project increases.

What are the risks of this approach, and how can they be managed?

The whole idea behind an OCIP is to save the project owner money. A well-run OCIP can provide the project owner with a savings of 1.5 to 3 percent of the hard construction costs. But if you don’t have the right partner — being the broker in this case — that can administer the project, the costs can get out of hand.

This insurance is typically written on a loss-sensitive basis so the fixed costs are just one component of the entire program. This means that if you don’t have good safety and loss control your losses and claims expenses can quickly get out of control. Lack of administration and poor safety and loss control services are the reasons OCIPs fail. When this occurs, an OCIP can end up costing millions of dollars more than planned.

Success starts with putting one unified safety management program in place that everyone who’s enrolled in the project — meaning the contractors and subcontractors — adheres to. It should include standards that exceed the OSHA minimums and include things like pre-employment and post-accident drug testing. All of this is laid out up front so that there are no surprises for contractors when they’re on site doing the work. Then you have to have a qualified loss control professional on site on a regular basis, especially when you’re doing more complicated parts of the project, to really enforce it.

RYAN ROSTA is a producer with The Graham Company. Reach him at (215) 701-5249 or rrosta@grahamco.com.

Producer The Graham Company