And that’s a Wrap! The Advantages of OCIPs or CCIPs over Traditional Construction Insurance
By Alliant
When public entities undertake a large-scale construction project they are presented with an opportunity to implement a Wrap-Up to help manage many of the risks they face both during and after construction. Wrap-Ups offer beneficial risk management tools and opportunities for project savings that are otherwise unavailable using traditional insurance where all parties involved in the project are providing their own insurance. Wrap-Ups come in two primary forms: an Owner Controlled Insurance Program (OCIP) or a Contractor Controlled Insurance Program (CCIP). Both OCIPs and CCIPs offer similar risk management benefits to public entities and offer project savings to the entity as compared to traditional insurance. However, there are important factors that should be considered when determining whether an OCIP or CCIP is right for your project. This article will address the similarities, differences, and where applicable, the pros and cons between each to help serve as a tool in your decision making process:
- Coverage & Insured Status
- Project Limits & Use of Multiple Projects
- Termination of General Contractor
- Project Costs, Collateral Requirements, and Savings
Coverage & Insured Status
Coverage between OCIPs and CCIPs can be considered similar to each other. The insurance markets for each are underwritten by the same group of carriers and offer comparable terms and conditions. Under an OCIP, the coverage is selected by the public agency in conjunction with their insurance broker, whereas under a CCIP, the coverage is selected by the contractor in conjunction with the contractor’s insurance broker.
OCIP Pros: Allows the coverage to be specifically tailored to the public entity and can extend coverage to eligible contractors directly contracted with the public entity and are outside the general contractor’s contract chain. Under an OCIP the public entity is the first named insured on the policy, putting them in the driver seat for the claims process and allows it to hold a policy in its name for the project. Given that the project is always the public entity’s true risk, these are significant benefits of an OCIP as compared to a CCIP which is always the public entities true risk.
OCIP Cons: Requires a small upfront workload to provide the insurance markets with project documentation to assist with the marketing process.
Additional project or board approvals may also be necessary to be able to implement and purchase the OCIP once coverage is selected, depending on the timing of the OCIP being selected.
CCIP Pros: The coverage selection and process is undertaken exclusively by the contractor and their broker. Insurance is included within the project budget and would not require any additional approvals.
CCIP Cons: Coverage is not tailored to the public entity and is written with the contractor first in mind. The public entity is an additional insured and typically still requires claims to run through the standard contractual process as opposed to being able to submit the claim directly to the OCIP insurer without involving the contractor.
A CCIP will not cover other contractors that are contracted directly with the public entity outside of the general contractor’s contract chain.
Project Limits & Use of Multiple Projects
Both OCIPs and CCIPs offer high levels of limits to cover the project at hand. The primary differences between the two are how the limits can be allocated. Under an OCIP, the public entity can always dedicate the limits to a specific project, or can even set-up shared limits to cover multiple projects being built by separate general contractors. Under a CCIP, the policy in force may be covering multiple projects the contractor is building in various locations and cannot extend to other projects for the public entity unless they are the prime builder. Implementing a CCIP may require the public entity to specify that the policy must be project specific if it does not want to share limits with other projects the builder is undertaking.
Other than neutral scenarios where the project limits are intended to be used exclusively for one project, OCIP limits offer a significant advantage to the public entity as compared to CCIP limits. Additionally, OCIPs offer the public entity with the flexibility to cover multiple projects with separate general contractors. This is a major benefit to entities such as school districts, wastewater treatment plants undertaking plant wide upgrades, or large agencies with capital improvements across multiple locations.
Termination of General Contractor
If the need arises to terminate the general contractor during the course of the project, an OCIP allows for a simple “plug and play” to replace the GC without the insurance component interrupting the project further than the termination itself will cause. However, if a CCIP is in place, replacing coverage mid-project is expensive, time-consuming, and can result in a combination of coverage gaps and litigation between the original CCIP carrier and the one to replace it. Replacing a CCIP can become so expensive or difficult that it eliminates the ability to replace the general contractor all together.
Project Costs, Collateral Requirements, and Savings
Either form of a wrap-up has the ability to lower project costs compared to traditional insurance when properly structured. The primary difference between the two being that a CCIP is generally built into the overall contract value and marked-up by the contractor’s fee whereas an OCIP is generally priced to include a flat fee from the public entity’s insurance broker. The fee structures of either can generally be viewed as neutral to each other, though through the use of an OCIP, the contractor’s insurance load is reduced and therefore reduces their overall fee cost to the public entity.
Aside from general liability only programs, wrap-ups are typically written with a high deductible structure, which also features a deductible loss aggregate that provides a set cap on the deductible load to the wrap-up’s budget. The loss aggregate is required to be backed up by collateral in usually one of two ways – either through a letter of credit or a cash fund on hand with the carrier.
OCIP Pros: The OCIP insurance carrier does not generally require the full loss aggregate to be collateralized, which frees up liquid capital to be utilized elsewhere on the project. As a rough example, if the loss aggregate is set at $1,000,000, the carrier will generally only require 60-70% ($600,000 - $700,000) of that amount to be collateralized. In addition, any unspent deductible dollars are ultimately returned, resulting in additional savings for the public entity.
OCIP Cons: The OCIP insurance carrier requires collateral to be maintained throughout the duration of the project and up to the full statute of limitations for construction defect claims following completion of the project. The duration and amount of collateral required after the project completes is based upon the overall loss performance of the project.
CCIP Pros: A CCIP does not require the public entity to post collateral with an insurance carrier.
CCIP Cons: While the collateral is not required to go to an insurance carrier, the contractor will price their CCIP to include the funding of their loss aggregate and pass it along to the public agency. Any unspent dollars from the loss aggregate will be kept by the contractor and realized as additional profit to the contractor. These funds will not be returned to the public entity unless a contractual shared savings agreement is made. Even in a shared savings approach, the public entity will not see the full return of its unspent deductible dollars as it would under an OCIP.
Summary
If a public entity is involved in a large scale project that qualifies for a wrap-up, it is most always in its best interest to implement one due to the risk management and cost savings benefits it will receive in comparison to the traditional insurance approach. The primary decision points come down to control, flexibility, and ultimate realized savings. There is often a misconception that implementing a CCIP will absolve the public entity from the risk as they are not controlling the insurance. However as stated earlier, the project is always the public entity’s risk and it is a matter of transferring certain aspects of that risk to a policy controlled by a contractor, or to a policy it controls for its own project.
Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
