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In The Public Eye: That's a "Wrap!" Why You Should Consider an OCIP for Your Next Construction Project

By Alliant Specialty

An Owner Controlled Insurance Program (OCIP, otherwise known as a "Wrap-Up") is an efficient, cost-effective way to provide insurance for owners and contractors for a specific or a series of construction projects. Carleen Patterson sits down with Shawn Kraatz, Alliant Public Entity and Mike Davidson, Alliant Construction, to discuss the benefits of an OCIP for Public Entity Projects.

Intro (00:00):
Welcome to the Alliant In the Public Eye Podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here are your host, Carleen Patterson and Justin Swarbrick.

Carleen Patterson (00:19):
Welcome back everyone to another episode of In the Public Eye. Our last few conversations have been focused on the insurance market and what you can do to drive total cost of risk, either through submissions or by getting information together for the insurance market. Today, we still want to be focused on budgets for our public entity clients. And one of the ways we can look at saving money and reducing costs is by putting together an owner-controlled insurance program or OCIP. To talk about this, we have invited Shawn Kraatz and Michael Davidson to our discussion today, before we get started, Mike and Shawn, do you want to introduce yourselves and tell us a little bit about you and your experience?

Shawn Kraatz (01:05):
Thanks, Carleen. My name is Shawn Kratz and I'm in our public entity division. I've been in the insurance business for 24 years. Twenty of that being with Alliant. My main focus is on city and county business, in particular with OCIP working in conjunction with our construction services group.

Michael Davidson (1:27):
Hey, thanks, everybody. This is Mike Davidson. I joined Alliant 14 years ago into our construction services group, and immediately got niched into focusing on owner-controlled insurance programs. Within a year of working with Alliant, I had been shipped from San Diego up to Sacramento. We had a job up there on the Sacramento international airport. I was the onsite administrator for that program for a couple of years, then moved back down to San Diego and started expanding what I was doing within OCIP from program management, ultimately up into handling the marketing placements for our San Diego division within CSG, and then in OCIP that whole entire time.

Carleen Patterson (02:07):
Well, it's good to have you both on the call with us today before we get into OCIP and really talking about it specifically for public entities, maybe we can back up for our listeners and talk a little bit about what they are for those who might be unfamiliar with the term or the strategy behind an OCIP.

Michael Davidson (02:28):
Yeah, so again, OCIP stands for owner-controlled insurance programs also referred to as a wrap-up. At the end of the day, if you know what an insurance policy is, it's just a big insurance policy for a large construction project. They can either be comprised of general liability and excess liability only, or you can add a workers' compensation component to it as well. That coverage is named first for the project owner or in this case, as we're on topic with public entity as the first named insured and then additional named insured for all of the contractors working on a project site, the OCIP concept is coming with benefits compared to a traditional approach to insurance, where you have the contractors, all providing their own insurance, as well as the owner of providing their own insurance separately.

Carleen Patterson (3:17):
So, one of the big-ticket benefits that I always hear about OCIP is that it's a way for a public entity to save money. Can you tell me a little bit about how a public entity can save money through an OCIP?

Shawn Kraatz (03:32):
Yeah, Carleen. So, there's really three benefits that we talk about and actually “cost” is probably the last part of the conversation simply because we believe that the other two are unquantifiable. So, when we talked about the three benefits, what we're looking at is the administration benefits. So, in an order-controlled insurance program, typically the risk manager and that department has to facilitate that OCIP through the duration of the project. And unfortunately, that takes up a lot of time. They’re tracking certificates. There's just a lot of work that goes involved with handling or administrating an OCIP. When you employ an OCIP, typically there's going to be an administration team from the OCIP team that will take all of that work off of the risk managers desk and the staff. So again, when you think about that, you really can't quantify how much savings that brings to the table in just workload itself.
So, the administration is one of the things that we talked about. There's also claims control. We think this is actually the most important simply because when you look at a claim and an OCIP, they're typically going to be fairly large. And if you have a traditional model, which is what we call when the general contractor places the insurance, what ends up happening in a claim situation is the general contractor, their broker, their attorneys are sitting in the front room while the public entity is sitting in the other room, waiting for them to essentially make all the decisions. So, we believe that the control when you employ an OCIP is extremely important and that control allows the public entity to be sitting in the front room, making decisions on their own projects and determining exactly how to get that job back up and running as soon as possible. So, we do believe that the claims control is probably one of the biggest benefits of employing an OCIP.

Carleen Patterson (5:34):
So, let's talk a little bit more about that cost savings. I assume you're talking about premiums or what are you talking about when you say there's a cost savings to the public entity?

Shawn Kraatz (05:44):
So, essentially when you're talking about the savings component, what you're looking at in a traditional method is when the RFP goes out for the general contractor, they're going to insert their insurance costs, which means that they're going to bundle together the general contractor's insurance. They're going to bundle together all of the sub tiers and they're going to insert a line item for insurance costs. When you employ an OCIP and you do the same RFP process, you actually put wording into the RFP that public entity is going to employ in OCIP. And that line item gets taken out because again, the public entity would be the one that's going to procure the insurance. Now keep in mind contractors make a huge profit in the traditional method, so all of the cost savings from a traditional model are going to be going back to the contractor. When you employ an OCIP, essentially there's possibilities of getting anywhere between half a percent to one and a half percent of construction values.

And a lot of these OCIP are extremely large. So, if you're talking about a 300 or a $400 million project, half a percent to one and a half percent of cost savings can be substantial. And one of the reasons that public entities have been looking at OCIPs much more than in the past is simply because they look at the value that they're getting back, not only on a single project, but a lot of times they end up going into what we call a rolling OCIP program, where over a period of time, typically five years or so, they will just continue to roll in more and more projects. So, in the aggregate, as you can imagine, that cost savings continues to multiply. So, it can be very substantial to a public entity. And as you had mentioned, Carleen, in the beginning, budgets are strapped, and this is really one way that public entities have really focused on looking at alternative methods for their construction projects.

Carleen Patterson (7:59):
Yeah. I was working with the water and sewer district, and they put together several rolling OCIPs and they could document cost avoidance or cost savings over a 12-year period of something like $14 million. And so, that's a lot of money to put back into capital improvements when you're saving that much money. So, it is a great tool when you're being budget conscious. So, let me ask you another question, what kind of public entities and what kind of projects are typically good fits for an OCIP?

Shawn Kraatz (08:35):
Yeah. So, when you look at various types of public entity projects and keep in mind, it's pretty expensive in regard to what qualifies for an OCIP. So, one of the larger segments that we feel closest imply or employed on our school projects. So, there's as you can imagine, a lot of bond initiatives around the state and those bonds build new schools, they renovate schools. And so, schools is one huge area, whether it's higher education or K-12, that we see a lot of this work being done. There's also jail projects. So particularly in California, when Governor Brown shifted all of the inmates from the state prisons to the county jails, there was an initiative to essentially fund the counties to build new jails. So, we Alliant in our construction services group and public entity group have done many of the jail projects up and down the state of California for that initiative. Airport projects is another area that we see a lot of OCIPs employed on. You have convention centers; you have standalone county and city projects. So, it can be either a brand-new city hall or a renovation of a city hall, and then Carleen to your point, we do a lot of water and wastewater projects with OCIPs.

Michael Davidson (9:53):
To expand on that a little bit. If it's a building, if it's infrastructure, if it's something that the public entity is doing and it's on the right size, then that's something that you can throw into an OCIP program.

Carleen Patterson (10:04):
So, when you say the right size, if I've got a risk manager that's contemplating that, and so if they look at their capital improvements budget, what are they looking for? And what does that mean “Right. Size” Mike?

Michael Davidson (10:15):
Yeah. So, I'll pick on California, and it does vary from state to state on what level you're allowed to, based on state laws and the implementing an OCIP program, but in California, it's at the minimum of a hundred million in size. And generally speaking, that's also about the size across the country, that the economics of it starts to make sense. What we have actually been able to do through a JPA Alliant client is put together in California, a large rolling program for the JPAs members that allows the projects to drop down to 20 million in value to makes sense, economically, because we have an economy of scale through a rolling set of projects where we have multiple projects throughout the state, inside the program, and then also helps to meet that threshold of the a hundred million dollar plus a requirement from the state to be able to implement an OCIP program, because the values that we have into the program aggregate up in excess of a hundred million.

Carleen Patterson (11:13):
That's a really good point. What you, when you're talking about California, is that each state does have different rules with regard to OCIPs and what can be put into a public entity OCIP. Is that right?

Michael Davidson (11:26):

Carleen Patterson (11:29):
Okay. All right. So, when I hear the word “owner-controlled” and when some of my clients and prospects have heard the word, I typically get two kinds of pushback. One because procurement is used to putting out bid specs a certain way, and they don't want to have to do anything differently or new or figure something out. And also, from our risk control or risk management folks is how much more work is this going to be for us? So, Mike, can you shed some light on it from both a procurement perspective and then also from a risk management perspective, as far as how much work this is going to be for them?

Michael Davidson (12:07):
Yeah. So, I'll take the procurement side first. So, within any procurement, as it relates to insurance, the entity is going to have a standard set of documents that they plug in as part of their overall 100-page procurement, right? There's about a three-to-five-page section of that really related to an insurance and indemnity. What we do at Alliant, is we have a best practices approach to helping implement an OCIP through the procurement process. In that we have standardized insurance requirements in implementing an OCIP. And then what we do is mesh the entities, regular requirements with ours, submit that over to them for review and approval. And once that's approved, probably go back a little bit of track changes here and there, and then plug it in after that. And in terms of additional work for the owner, absolutely it can be if the administration and management isn't done properly from the broker side. Properly around OCIP is done through an administration process that takes the work away from the project owner, away from the public entity and at Alliant we have developed national standards across the country so that if California, the quake happens and we're wiped off and out into the ocean, our team in Texas can pick up a program that we had been previously running and it'd be run the exact same way. In addition to that, we have dedicated professionals on every aspect of OCIP management that are specific to OCIP. So that's from claims advocacy to the administrators that run, the projects. They know how to speak contractor because those are the folks that they're dealing with every day. So that keeps the contractors from calling up the owner and letting them know that something is going wrong with the insurance side. And then we have down to loss control and safety services dedicated folks from, to the OCIP as well. So again, just to summarize that, if it's done properly from the broker and administrator side, the owner can kind of go to sleep and forget about it. If it's not partnered with the right folks, it can be a burden on them.

Carleen Patterson (14:08):
That makes a lot of sense, especially if you are controlling the project that you would want to have as much control from the ground up being safety. And then if a claim occurs, making sure you're trying to control that. One of the things you mentioned had to do with the insurance requirements that are included in a OCIP versus some of the standard contract language. And it kind of triggered a thought with me with regard to, more from a reputational community standpoint and some advantages to an OCIP. And that has to do with the use of small-business minority contractors. Can you talk a little bit about how an OCIP is actually good for some of these smaller contractors that might not normally work with a public interview or some of these contracts?

Michael Davidson (14:58):
Yeah, absolutely. Most public entities are going to have a small local disadvantage veteran, women owned, business goal for their projects and OCIP can help meet that. It's not the end all be all for it, but under a traditional approach where every contractor is required to provide their own insurance it can be a barrier to entry for them. For some projects, you may have a $5 million limit with certain additional insured endorsements that for no fault of their own, disadvantaged businesses can't get. They can't access it in the market because they don't have enough premium volume, or they don't have enough experience to be underwritten towards. So, they're not able to bid on the project because they can't meet those insurance requirements. But under the OCIP, because everybody is covered under the same program and they're afforded the same pack of coverage and they're afforded upwards of a hundred million dollars in total limit, that barrier to entry is gone. The OCIP is still going to require basic evidence of insurance from those contractors once they're enrolled in the program. But that's really just going to be a standard 1 million, $2 million liability limit, which pretty much anybody can get. So, it does help to eliminate that barrier and encourage participation in those SLB deals.

Carleen Patterson (16:10):
A lot of times with some of these smaller contractors, the amount of insurance that they purchase is based on what they can afford. And as we all know, and as we've run into with contract review questions, the contract's only worth ‘X’. Why do I need this much in liability insurance? And the value of the contract is never equal to the value of the exposure from some sort of a claim. So, that is a great advantage. So, what have you seen change Mike over the last few years when it comes to OCIP and construction and public entities in the space of your career?

Michael Davidson (16:46):
Yeah. So back when I started 14 years ago, everything was paper. We had file cabinets stacked to the roof full of contractor enrollments, contractor claims and payroll reports. A lot of it was managed through Excel spreadsheets, and then it started to develop a little bit further administratively online. And now those online administrative services have expanded to fully automated processes. Contractors are able to log in themselves and have their own user ID and passwords. Reports are sent out to project owners on a weekly or monthly basis. So, the administration has really improved over the last decade. From a market standpoint, I think it's like anything, some carriers will drop in and drop out from time to time, but I would say that the carriers have started to be a lot more involved directly with the projects and helping allocate resources to risk mitigation for the project and wanting to see the overall success of the program. I think there's been some improvements there over the years as well. And, lastly just in general. Controlled insurance programs are much more prevalent now. So, contractors are used to using them, they know it's part of the game, that it's something that they're going to have to do. There's not as much pushback from the contractor community as there used to be. Again, it's just something that folks are used to doing. And more and more people from a public entity standpoint are realizing the benefits and potential uses for their own projects.

Carleen Patterson (18:20):
I remember a few years ago, when you were pitching the concept of an OCIP, you also had to pitch community meetings and meetings with contractors and really do some outreach so that the subcontractors get comfortable with the concept. And now, if it's not an owner-controlled insurance program, many times it's a contractor-controlled one.

Michael Davidson (18:41):
Yeah. I was in a few of those meetings myself getting everybody copacetic and happy with “Hey, we're going to do this. Are you okay with it?” So, it's been a while since I've had to. Thankfully.

Carleen Patterson (18:53):
Yeah, definitely. So, question for you Mike. We've been talking in our podcasts about how difficult and how hard the insurance market is. How has the market impacted the markets who write construction or write OCIPs? Have you seen the same kind of impact with regard to rates in the construction markets as well?

Michael Davidson (19:15):
Yeah, absolutely. The interesting thing so far to me is that the primary market hasn't hardened a ton. I think as everybody that is listening to this now knows the excess market is. How do I put this slightly screwed up? Rates are drastically increasing on the excess side in building a typical, a hundred-million-dollar tower for a project where you could do it with four carriers. It's now taking 5, 6, 7 to get there. So, you're just having to get more participation there. Sometimes you're having to go to the quota share route to make sure that it pencils correctly still, and a big driver of that is on the primary access, the lead access side, where you used to be able to get a first $25 million chunk above the primary. It's now only 10, nobody's doing 25 million anymore. I would say part of it is from a selfish, personal standpoint. It's a little bit more difficult to do, but I don't think the public entity side and our clients see that. But from a rate standpoint, took on a hundred-million-dollar project where you used to be able to do it for around 0.4% or 0.2% of hard costs. You're upwards around 0.5% to 0.6% of hard costs for a hundred-million-dollar tower on a hundred-million-dollar project now.

Carleen Patterson (20:32):
And one of the advantages being that when you're writing, especially a single project OCIP, you're writing the coverage from beginning to end, right? It's not something that's renewed on an annual basis. Are you able to get rates that will go for the life of the project?

Michael Davidson (20:48):
Correct. So, a typical OCIP term is five years, and you know, a lot of that on the back end has to do with reinsurance, right? And then also that the carriers don't want to lock in those rates for much longer than that. So, if you build a typical five-year program those rates from inception to end are the same. As you get into, call it mega projects, upwards of 700 million north up 2 billion, plus, you might be able to get a six, seven-year term. We've that successfully in the past, but generally that magic number is five.

Carleen Patterson (21:22):
So, Shawn. I am a risk manager; you are my insurance broker. I'm looking at my capital improvements projects and all the talk of the infrastructure funding that's going to be coming from the federal government. And I want to know if an OCIP is the right thing for me. What is it that a risk manager should be looking at? And what can you do as a broker to help me make that decision?

Shawn Kraatz (21:46):
So, it really kind of sums up the entire conversation that we've been having over the last 30 minutes. So, one of the first things to be considered is, is the project the right size for an OCIP right? Because again, typically outside of California, a hundred billion dollars is kind of the starting point. So, you're going to want to make sure that your project outside of California is at least a hundred million dollars. In California, as we talked about, Alliant has developed a rolling OCIP program through one of our JPA clients that Mike had mentioned, and we can actually get projects as low as $20 million. So, really if looking at the project size, looking at the state that you're in, and then understanding working with your Alliant broker, what are the legalities as well around what you can actually place. Certain states will only allow you to place the GL and the XF.
It's really understanding and working with a broker that truly knows your state and the laws around placed in an OCIP. The other is: will the project duration fit within the normal timeframe of an OCIP? Because as Mike mentioned, typically we put together five-year programs in certain circumstances, we've been able to actually place six-to-seven-year deals, but on very large projects. So, really looking at your project duration and understanding that five years is typically what you're going to be looking at for a starting point. As mentioned, the legal jurisdiction that implements the OCIP is paramount because you have to be very careful when you place an OCIP in a state where there's actually written language or laws that state you can't do it, or you have to do it a certain way. So, different states have different rules, all being around things like the size of the project, the type of the project and AC standards. There's a whole list of things. And so, your broker really has to understand all of those metrics. The state of the insurance market, you really have to look to Mike's point, is this really going to pencil out it? And fortunately, OCIP not only in California, but throughout the U.S. has been a huge benefit to public entities and based on the state of the insurance market currently, they've been working very well compared to a traditional program and the cost benefits and all the other benefits that we've talked about throughout the podcast. The other is again, having confidence in your broker and the administration team. One of the things that we hear most from a feedback standpoint from our clients is that we really understand this business and the administration and the technology that Alliant has is hands down the best of the business. So, it's really making sure that the broker you're dealing with truly understands the business, but also has the back room, the technology and everything else that Mike had outlined, parts where OCIPs have kind of a paradigm sense change.

And then the economic viability essentially will it pencil out. So, a lot of what we talk about again, and one of the things that we provide to our clients or prospective clients on projects as a performer, and that performer is hugely valuable to understanding what that half a percent to one and a half percent rate of return could be on your projects. If you have a hundred-billion-dollar project, we actually can demonstrate from a zero-loss project all the way to a hundred loss project and break that down in increments, the various levels to show exactly what those savings will end up being based on your loss picks for your project. So again, it's really just a matter of combining all of those various coins and again, making sure that the broker and the administration team that you're dealing with truly understands what they're doing.

Carleen Patterson (25:55):
Before we wrap up, I just have one last question for you Mike. I've had clients who, when I've pitched the subject of a wrap-up to them, they just kind of throw their hands up and say, it's much easier to just let the contractors do it. So, what do you say to those clients or prospects?

Michael Davidson (26:13):
That's a pretty typical answer because that's just the way that they've done it, right? The contractors building their building, letting out all of the subcontracts. They feel that the risk is all on the contractor, but at the end of the day, it's their project and it's their risk. They transfer that through contract, but ultimately, it's still will be funneling back to them. And I wouldn't say that there is necessarily a wrong way to ensure your project, whether that be the traditional approach, where everybody is providing their own insurance, where you go to a contractor-controlled insurance program, which is the inverse of an OCIP, right? Where the contractors in control with everything. I just think there's a better way personally. And that would be through the OCIP process and kind of pick on an OCIP versus a CCIP.

Shawn mentioned it kind of at the beginning of our podcast, that the savings that are generated through a wrap-up can go to one of two places. They can go to the contractor. So, you're paying the contractor for their premiums and their deductible fund and any savings from the money that they don't spend out of their deductible, go straight to the contract. You're under a CCIP versus under an OCIP. Those unused deductible dollars go back to the entities, and they could be used elsewhere on the project or go back into the places within the entities. But the other aspects of an OCIP are that is they're more flexible from a coverage standpoint. So, if you have an entity that is doing a multi-phase wastewater project with various general contractors involved, you can't really do a CCIP there because you're going to have multiple CCIP’s at play that are kind of going to be fighting against each other in the event of a bad claim that implicates different portions of the project. Whereas the OCIP, you can have all of those projects covered under the same program. In addition to that, if you look at taking on a project that we have up in Northern California Convention Center, that is not atypical, but the entity has a number of contracts outside of the general contract that they have to install artwork, install the different furniture, fixtures and equipment. And those contracts can't be covered under a CCIP because they're not directly in line with the contracting of the GC. So, to be able to cover outside contracts of the GCs contract from under the OCIP, the last two things I would say is touch on this a bunch, being the first name, insured on an insurance policy for the policy wonks out there. That's where you want to be. You're in the driver's seat of coverage selection. And most importantly, under the claims, any sort of claims scenario, you're the one that's leading the charge there. And then lastly, if the unfortunate event, if, as a public entity you have to replace or fire your general contractor mid project, there is a lot of hurdles that you have to go through in general to do that. But if you have a CCIP in place, it is almost impossible to go down that road of replacing your contractor because the insurance coverage is insanely expensive to replace mid project. You're going to save some potential coverage gaps there. And really, from a risk management standpoint, it's a bit of a nightmare. So, just having that flexibility under the OCIP to replace your contractor from an insurance standpoint, that's just a plug and play is something you really can't put a dollar figure on from that perspective.

Carleen Patterson (29:32):
That's a really great point. I really have enjoyed talking with the two of you about wrap-ups and as a renowned control-freak I think that it's a great opportunity for our risk managers in the public entity world to get a little bit more control over what's going on from a construction insurance standpoint. So, thanks very much to the two of you for joining us today. It is a challenging time to be a public entity risk manager, and we hope that our focus podcasts will help you and provide resources as we navigate 2021 and beyond.


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.