ocips - look before you leap

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Look Before You Leap!

A Contractors Guide

ToOwner Controlled Insurance Programs

May 10, 2001


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The typical contractors preferred position on each issue is in fourth column. The contact and other documents where contractors shouldseek to address each issue is in the fifth and final column.

Contractors can use this guide to identify potential problems. Where contractors find that they are at risk, they can also use this guide to

help them determine the best way to approach the project owner or other insurance program sponsor. With the aid and assistance of this guide,contractors can identifymany of their potential exposures, the best way to address their exposures, and the best places to do so.

This guide cannot, however, substitute for competent legal, accounting or other professional advice. This guide is offered with theunderstanding that its publisher is not engaged in providing legal advice or in rendering any other professional service.

Acronyms

For convenience, this manual uses the following acronyms to refer to the various policies or coverages that a particular issue may affect:

AU/L = Automobile LiabilityAV/L = Aviation LiabilityB/R = Builders RiskCGL = Commercial General LiabilityE/O = Errors and Omissions

EPL = Employment Practices LiabilityP/L = Pollution LiabilityUMB = Umbrella CoverageW/C = Workers CompensationW/L = Watercraft Liability

This manual also uses these five acronyms to refer to the various documents that may be the best place to address a particular issue:

CC = Construction Prime ContractCRIP = Contractors Regular Insurance ProgramCS = Construction Subcontracts

IB = Instructions to Bidders/Request for ProposalsIM = Insurance Manual


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Are Any Firms, Operations or Locations Omitted or Excluded from the OCIP?

IssueAffected

CoverageDescription

Preferred Position Where to

Address

1. Specific Firms orOperations (such asSecurity Guards,Suppliers or

Truckers, orBlasting, Demolitionor JanitorialServices)

W/C

CGL

UMB

B/R

Ideally, the OCIP will cover all work at the project site.Normally, it does not.

OCIPs typically exclude suppliers, material vendors, haulers

and truckers. It is also common for them to exclude certainhigh hazard operations, such as blasting and demolition.Sometimes, OCIPs also exclude all contractors orsubcontractors below a certain size or tier. There are noindustry standards for either including or excluding differentfirms or operations, and as a result, different OCIPs takedifferent approaches.

Under these circumstances, it is important for the contractor toreceive a clear written statement of who is in and who isout of the OCIP. Among other things, this statement shoulddefine the on site labor that the OCIP will cover (except tothe extent that the OCIP may expressly provides otherwise).Although typically excluded, suppliers, material vendors andothers often perform some work on the project site.

It is also important for all of the potentially affected firms to

have all of this information in advance of the deadline forsubmitting bids, quotes or proposals. If that is impossible,because the final details of the insurance program are still beingsettled, the contractor should attempt to obtain some level ofcommitment to minimum parameters for the insuranceprogram. The program sponsor should not attempt to redrawthe boundaries of the insurance program in terms of either the

The contractor receives aclear written statement ofwhich firms andoperations fall under the

OCIP and which do not.In addition, the programsponsor provides itswritten assurance that theinsurance requirementsfor excluded firms andoperations will bereasonable.

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firms or the operations that the OCIP will cover after theowner has awarded the construction contract.

2. Furnish and InstallContractors

W/C

CGL

UMB

B/R

These contracts can be particularly troublesome. Often theinsurance manual will have very specific language to the effectthat the OCIP only applies at the project site and theinsurance carrier may take this language literally.

The problem is that a furnish and install contractor may

subcontract the actual installation or erection of the projectcomponent that the firm is responsible for providing. Underthese circumstances, the furnish and install contractor maynot have any on site payroll exposure.

Nevertheless, there are times when this contractor may well beon the project site. It may, for example, need to check itssubcontractors work. In addition, even if the furnish andinstall contractor will not have any onsite payroll exposure, it

is still important for this contractor, as well as its subcontractor,to be enrolled in the OCIP.

Otherwise, the OCIP may lose its contractual integrity. Whilethe OCIP need not (and normally will not) cover off sitefabrication in a contractors shop, it is important for theprogram sponsor to preserve the contractual chain of commandrunning from the prime contractor to any second or lower tier

subcontractors. Any lawsuit involving the furnish and installcontractor is also likely to involve its subcontractor.

One approach is to define on site operations and then make itclear that the OCIP applies to all such operations, whereverthey may lie in the contractual chain of command.

The contractor receives aclear written statementthat the program sponsorwill enroll any second orlower tier subcontractorthat otherwise qualifies

for coverage even ifworking for asubcontractor that doesnot, itself, have any onsite payroll exposure.

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3. Staging Areas andFabrication Facilities

W/C

CGL

UMB

B/R

As noted elsewhere, the insurance manual may have veryspecific language to the effect that the OCIP only applies atthe project site.

Particularly where this is true, the contractor needs to take ahard look at the way that the construction contract and theinsurance manual define or describe the project site. Often,the language found in the two documents is different. Even ifthe same, the language may be ambiguous.

It is important for all of the potentially affected firms to getanswers to any questions they may have about staging areas,fabrication facilities, warehouses or transportation operations.In addition, it is appropriate for these firms to request thisinformation before they have to submit their bids, quotes orproposals.

The program sponsor can normally add these locations to theOCIP if they are well defined and dedicated to the project. Thebiggest problem may be the permanent shop that a contractor

uses to fabricate the components of many different projects. Itis often impossible to separate the shop work performed for thecovered project from the shop work performed for otherprojects.

One option is to seek broad coverage of all losses emanatingfrom the project site, subject to specific exclusions. In thealternative, the parties could identify any areas that may be indoubt and then provide that the OCIP applies to all workperformed in those areas.

Once the project has begun, and a loss has been incurred, theparties should resolve any doubts by determining the carrierthat received the premium for the exposure. The loss shouldnormally follow the premium.

The OCIP provides broadcoverage of all lossesemanating from the

project site subject tospecific exclusions.

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4. Incidental Travel W/C

CGL

UMB

B/R

This can become an issue when, for example, a craft workermust drive from the project site to another location to pick updocuments, equipment or materials. As noted elsewhere, the

insurance manual may have language to the effect that theOCIP only applies at the project site and the insurance carrieror broker may take this language literally.

The workers compensation component of the OCIP willnormally cover a worker travelling from the covered project topick up something for the same project. It may not, however,cover the employee while he or she runs to a second project even if the employee is on his way back to covered project.

Before the work begins, the contractor should raise the issue. Ifthe OCIP already provides for broad coverage of all lossesemanating from the project site, then the only questionwould be whether such incidental travel is among the specificexclusions. If not, then the question would be whether theinsurance manual addresses incidental travel in any other way.

Once the project has begun, and a loss has been incurred, theparties should resolve any doubts by determining the carrierthat received the premium for relevant period of time. Onceagain, the loss should normally follow the premium.

The OCIP provides broadcoverage of all lossesemanating from the

project site subject tospecific exclusions.

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Are There Any Periods of Time Omitted or Excluded from the OCIP?

IssueAffected

CoverageDescription Preferred Position

Where to

Address

5. Warranty Work andCallbacks

W/C

CGL

UMB

B/R

OCIPs do not normally cover warranty work. The reason isthat, in most cases, the owner calls the contractor back to theproject after the OCIP has closed out. In addition, in practice,

most contractors do not report their few hours of warrantywork to the OCIP administrator.

Whatever the case, it is important for the contractor to confirmthat the OCIP will or will not cover warranty work orcallbacks.

If the OCIP excludes them, the contractor should continue its

normal coverage for these items, even while working underthe OCIP. If the OCIP covers these items but only for alimited period of time, the contractor should promptly removeany related exclusions from its regular insurance program assoon as the contractor completes its work on the project.

It is appropriate for all of the potentially affected firms torequest information about these items in advance of thedeadline for submitting bids, quotes or proposals. It is also

appropriate for these firms to seek written assurance that theywill be able to exclude the cost of continuing their coveragefor warranty work, callbacks and/or completed operationsfrom any insurance credits that the OCIP requires the firms togive to the owner.

The contractor receives aclear written description ofthe point at which the

OCIP will cease to providecoverage and (1) anopportunity to price itswork accordingly and/or(2) to exclude the cost ofcovering warranty work,callbacks and/orcompleted operations from

the credits that the OCIPrequires the firm to give tothe owner.

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6. Extended CompletedOperations

CGL

UMB

This is a particularly important issue for contractors toconsider. Completed operations coverage under an OCIPtypically continues for only three years from the date of

substantial completion. A states statute of repose and/or itscommon law may extend a firms exposure to tort liability fora much longer period of time. The indemnification clause inthe construction contract may also extend the firms exposurefor more than three years.

Even if the OCIP provides coverage for completed operations,the OCIP probably does not insure the contractor against therisk of loss for the full term of its exposure to tort orcontractual liability. The contractor should endorse its regularinsurance program to pick up the coverage for completedoperations at the point at which the OCIP coverage willexpire.

While owners may be reluctant to make any allowance for thecost of continuing this coverage, it is also appropriate for thecontractor to seek the owners approval to exclude the cost of

continuing this coverage from any insurance credits that theOCIP requires the firm to give to the owner (or an agreementto reimburse the contractor for the cost of continuing thiscoverage, depending on other terms of the constructioncontract).

At a minimum, the OCIP should provide coverage forcompleted operations for a period of at least five years. Thecontractor may well be able to justify much more, given theduration of most statutes of repose.

The contractor receives aclear written description ofthe point at which the

OCIP will cease to providecoverage and anopportunity (1) to price itswork accordingly or (2) toexclude the cost ofcoverage for extendedcompleted operations fromany insurance credits.

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Are There Any Other Omissions or Exclusions that You Need to Consider?

IssueAffected

CoverageDescription


Address

7. Automobile Liability AU/L OCIPs typically omit this coverage. The contractor thereforeneeds to continue the coverage that it already has in place.

In addition, the contractor should seek written assurance that itwill be able to exclude the cost of continuing such coveragefrom any insurance credits that the OCIP would otherwiserequire the contractor to give to the owner.

The contractor receiveswritten assurance that itwill be able to exclude

the cost of continuing itscoverage for automobileliability from anyinsurance credits..

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8. Design/BuildElements of the

Project

CGL

E/O

If the construction contract requires the contractor to assumethe responsibility for the design as well as construction of any

elements of the project, the contractor needs to ensure that theOCIP provides professional errors and omissions coverage forthe contractor orits subcontractors.

Commercial general liability policies normally do not providesuch coverage. If certain elements of the project aredesign/build, but neither the owner nor the broker have focusedon that fact, the OCIP may omit this key coverage.

If so, the contractor has to determine the specific coveragerequirements for the design/build elements of the project andthen negotiate with the owner and broker to modify the OCIPto meet those requirements. In the alternative, the contractorshould continue or to purchase its own coverage for anyprofessional errors or omissions. In addition, the contractorshould seek written assurance that it will be able to exclude thecost of continuing

The owner and brokerhave clearly identified

any design/build elementsof the project, determinedthe coveragerequirements for thatwork and written theOCIP to meet thoserequirements. In addition,the contractor receiveswritten assurance that it

will be able to excludethe cost of continuing itsown coverage from anyinsurance credits.

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or purchasing such coverage from any insurance credits that theOCIP would otherwise require the contractor to give to the

owner.

9. Damage to the Work B/R

CGL

UMB

It is important for the contractor to determine exactly how the

OCIP deals with this important exposure. First, the contractorneeds to examine the builders risk policy that the ownerproposes to include. The contractor needs to ensure that thepolicy provides broad coverage and names all parties to theproject. The contractor also needs to ensure that the owner willrequire all parties, including the owner, to execute waivers ofsubrogation.

Second, the contractor needs to examine the CGL policy, whichwill normally cover damage to the work except for damage thatthe contractors work causes to its own work. The typicalpolicy covers any damage that the contractors work causes to asubcontractors work, or damage that one subcontractors work

causes to another subcontractors work. Most contractorsmodify their CGL policy to provide coverage for damage totheir own work arising out of their own work. (Except for thatparticular part of the work that causes the loss.)

If the OCIP does not amend the standard exclusion in the CGLpolicy this broader coverage, it increases the contractorsuninsured risk of liability for damage to the work. Someowners may be tempted to suggest that they have no obligationto provide coverage for any damage that may result from thecontractors own negligence. The short answer is for thecontractor to purchase and carry liability insurance for thespecific purpose of protecting themselves from such liability.

This broader liability coverage is something that the contractorwould normally have and something that the owner shouldprovide.

The contractor verifiesthat the builders riskpolicy OCIP providesbroad coverage, that itnames all parties, that theowner will require allparties to execute waiversof subrogation and thatthe CGL exclusion isproperly amended.

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If the owner excludes this liability coverage from the OCIP, thecontractor should seek written assurance that it will be able toexclude the cost of continuing its own coverage from any

insurance credits that the OCIP would otherwise require thecontractor to give to the owner.

10. HazardousMaterials and OtherPollutants

P/L Although it can be significant, OCIPs typically fail to insure thecontractor against the risk of pollution liability, including butnot limited to the risk of disturbing pollutants or releasing theminto the environment.

If the OCIP omits or excludes this coverage, and particularly ifthe construction contract requires the contractor to indemnifythe owner and hold it harmless from any liability for pollutionclaims, the contractor may need to continue its coverage forpollution liability or to purchase such coverage.

If the contractor needs to purchase separate coverage, it shouldalso seek written assurance that it will be able to exclude cost

of continuing or purchasing such coverage from any insurancecredits that the OCIP would otherwise require the contractor togive to the owner.

The OCIP covers anypotential liability forpollution claims or thecontractor receiveswritten assurance that itwill be able to excludethe cost of purchasingsuch coverage from anyinsurance credits.

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11. Aircraft orWatercraft

AV/L

W/L

Many contractors carry no coverage for aircraft or watercraft,and not surprisingly, OCIPs also tend to overlook theoccasional need for such coverage.

That need arises where, for example, the contractor intends tomake a helicopter lift or to employ work boats, barges orfloating platforms.

At the outset, the contractor needs to ask whether this exposureexists. For example, the contractor needs to see whether theconstruction contract contemplates hull coverage, water borne

The OCIP provides all ofthe aviation andwatercraft liabilitycoverage that the projectmay require. In thealternative, the contractorreceives writtenassurance that it will beable to exclude the cost ofpurchasing such coveragefrom any insurancecredits.

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property or slung cargo. The contractor should also look forany requirement that it transport materials or equipment fromwatercraft to the project site. If the contractor identifies any

watercraft or aviation exposures, the contractor also needs toknow how the contract addresses them.

OCIPs rarely provide this coverage. If the contractor needs it,the contractor will normally have to purchase a separate policy.In that case, the contractor should also seek written assurancethat it will be able to exclude the cost of purchasing suchcoverage from any insurance credits that the OCIP wouldotherwise require the contractor to give to the owner.

12. ContractorsConsequentialDamages

CGL

B/R

UMB

The contractor needs to question whether the OCIP providescoverage for any consequential losses that the contractor maysuffer from any insured perils. The contractors CGL policynormally covers any loss that meets the definition of propertydamage.

If the OCIP does not cover such losses, the contractor shouldcontinue any coverage that it already has in place or purchaseadditional coverage. In addition, the contractor should seekwritten assurance that it will be able to exclude the cost ofcontinuing or purchasing coverage for any consequential lossesfrom any insurance credits that the OCIP would otherwiserequire the contractor to give to the owner.

The OCIP covers anyconsequential lossesarising out of insuredperilsor the contractorreceives writtenassurance that it

will be able to excludethe cost of purchasingcoverage for such lossesfrom any insurancecredits.

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13. Indemnification W/C

CGL

UMB

The contractor needs to find out whether the indemnificationclause in the construction contract is broader than the insurancecoverage that the OCIP will provide. The contractor could wellfind that the indemnification clause holds the contractor liablefor any losses that the owner may suffer from the pollution ofthe environment, professional errors or omissions, railroad

The risks that thecontractor must assumeshould be no greater thanthe coverage that theOCIP provides. In thealternative, the contractorreceives writtenassurance that it may

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B/R

P/L

AV/L

W/L

E/O

exposures or the contractors employment practices eventhough the OCIP omits or excludes coverage for such risks.

The contractor similarly needs to question whether the

construction contract would hold the contractor liable for anybusiness interruptions or other consequential losses that theowner may suffer and if so, whether the builders risk policyor liability policies provide coverage for such losses.

If the contractors duty to defend and indemnify the owner isbroader than the OCIP coverage, the contractor should maintainany broader coverage that it already has in place or purchaseadditional coverage.

In addition, the contractor should seek written assurance that itwill be able to exclude the cost of maintaining or purchasingcoverage for any gaps between the indemnification clause andthe OCIP coverage from any insurance credits that the OCIPwould otherwise require the contractor to give to the owner.

exclude the cost ofmaintaining orpurchasing coverage forany gaps between the two

from any insurancecredits.

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Are There Adequate Limits on the Coverage that the OCIP Provides?

IssueAffected

CoverageDescription


Address

14. Shared Limits ofOCIP Coverage

CGL

UMB

The contractor needs to determine the total (primary plusumbrella) limits of the coverage that the OCIP will provide. Ineach instance, the question is whether the limit is adequate to

protect the contractor from the risk of a catastrophic event.

Whether the limits are adequate will depend on several factors.Some are whether the limits are reinstated annually, span theentire life of the project or apply per project. In the case of arolling-wrap-up, the contractor also needs to compare the limitswith the total value of all work subject to the limits.

Whether the limits are adequate may alsodepend on whetherthe contractor has to share the limits with the project owner, thesubcontractors and any others working on the project.Normally, these limits are shared.

In advance of the deadline for submitting bids, quotes orproposals, the contractor should seek a clear understanding ofthe way that the OCIP limits will work. Whether shared limitsare adequate may ultimately depend on the way the OCIP

prorates the coverage among the many insureds. What wouldhappen if two or more of the insureds found themselves jointlyliable for a judgment that exceeded the available limits of theOCIP coverage? In the past, owners, brokers and insurancecarriers have had trouble telling contractors exactly how theirOCIPs would respond to various scenarios, making it importantfor contractors to put its questions in writing for a writtenresponse.

If the limits of the OCIPcoverage are sharedlimits, (1) the OCIP limits

are on a per occurrencebasis, (2) they are highenough to cover acatastrophic event and (3)they provide forautomatic reinstatementfor rolling OCIP limitsshould be provided on aper project basis. Inaddition, the contractorreceives a clear writtenstatement that it will beentitled to exclude thecost of maintaining itsown umbrella policy fromany insurance credits.

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.The contractor should look for, and if necessary, seek a

contractual provision that would require the project owner topurchase a reinstatement of the original limit of the umbrellapolicy if a catastrophic event prematurely exhausted the OCIPlimits.

If the project owner is unwilling to raise the limit of theumbrella coverage to an adequate level, or provide for thereinstatement of such coverage, the contractor may find itnecessary to maintain its own umbrella policy. In thatsituation, the contractor should, however, be sure to make itspolicy secondary to the umbrella policy included in the OCIP.In addition, the contractor should seek a clear written statementthat it will be entitled to exclude the cost of maintaining its ownumbrella policy from any credits that the OCIP will require thefirm to give to the owner.

15. Separation ofInsureds

CGL

UMB

Most CGL policies include a provision to the effect that all ofthe insureds will have the same rights and coverage, except tothe extent that the insureds share the limits of coverage. Thisprovision can be very important where, for example, two moreor more of the insureds dispute the responsibility for aparticular loss. The provision would normally entitle each ofthe insureds to its own attorney. In this situation, the duty todefend can and should be broader than the duty to pay.

Because OCIPs insure multiple entities, any restrictions on thenormal separation of insureds can be a problem. The contractorneeds to identify any such restrictions, and if the contractorfinds any restrictions, it may have to continue at least a portionof its normal coverage for the same items.

The OCIP includes thestandard language on theseparation of insureds. Inthe alternative thecontractor receives a clearwritten statement that itwill be able to excludethe cost of continuing itsnormal coverage for legaland other expenses fromany insurance credits.

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It is appropriate for the contractor to seek this information inadvance of the deadline for submitting any bids, quotes or

proposals.

In addition, it is appropriate for the contractor to seek a clearwritten statement that it will be able to exclude the cost ofcontinuing its normal coverage for any legal or other expensesthat the OCIP may exclude from any insurance credits that theOCIP requires the firm to give to the owner.


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How Does the OCIP Relate to Your Regular Insurance Program?

IssueAffected

CoverageDescription


Address

16. Primary and ExcessCoverage

CGL

UMB

It is important to make it clear that the OCIP will provideprimary coverage. The contractor does not want to run therisk that its own carriers may have to bear all or part of a loss

before the OCIP has exhausted all of its limits.

If loosely written, the insurance manual may leave an openingfor the OCIP carrier to argue, for example, that the ownersumbrella coverage is excess to everything that the contractorhas also put into place.

The contractor should discuss the relationship between theOCIP and the contractors regular insurance program with thecontractors broker or insurance carrier. Among other things,the contractor should ask the latter for an endorsementexpressly declaring that the OCIP will provide primarycoverage.

The contractor should not seek to exclude OCIP exposurefrom its CGL and umbrella policies but should endorse thosepolicies to provide coverage (1) in excess of the OCIP

coverage and (2) where differences in conditions would apply.

The OCIP provides that allof its coverage is primaryand the contractor arranges

its commercial generalliability and umbrellapolicies only to provideexcess coverage and tocover any differences inconditions.

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17. Difference inConditions (DIC)

CGL

UMB

If the contractor can identify any differences in the conditionsthat its insurance policies normally cover, or any differencesin the limits, the contractor should seek difference in

The contractor receives aclear written statement tothe effect that the owner

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B/R conditions (DIC) coverage. Moreover, the contractor shouldmake it clear to the owner that the cost of purchasing any suchcoverage is an expense of constructing the project andproperly charged to the project.

will compensate thecontractor for the expenseof any DIC coverage thatthe contractor may require.

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CRIP

18. OCIP Exclusionfrom theContractorsRegular InsuranceProgram

CGL

W/C

UMB

If an OCIP is in place, and the contractor has paid attention tothe relationship between the OCIP and its regular insuranceprogram, the latter plays a very limited role. The contractorsregular program merely provides excess coverage andaddresses any differences in conditions.

The question is whether the contractors carrier will make anappropriate adjustment to the premiums that it charges thecontractor for its regular program. Project owners aregenerally unwilling to pay their contractors for the cost ofmaintaining duplicate coverage.

To coordinate coverage, and to qualify for an appropriateadjustment, the contractor should seek to ensure that its carrier

will exclude any exposures that fall under the OCIP from anycalculation of the cost of the contractors regular insuranceprogram.

The contractor and itscarrier agree to endorsethe contractors regularinsurance policies toexclude any exposures thatfall under an OCIP from

any calculation of thecontractors insurancepremiums. (Note: NCCIand ISO have such

endorsements in their

forms manuals.)

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How are You Supposed to Calculate Your Premium Deductions?

IssueAffected

CoverageDescription


Address

19. Basis for EachDeduction

W/C

CGL

UMB

B/R

The contractor needs to determine exactly how the owner willexpect the contractor to calculate the insurance credits that theowner expects for each line of coverage. What discounts,

credits (i.e., deductible or SIR credits) or rate variances willthe owner allow or disallow? How does the owner propose tohandle flat rated coverages?

The appropriate deduction for umbrella coverage can beparticularly difficult to determine because the contractor oftenpays a flat premium for such coverage and the OCIP causes noreduction in the contractors premium.

The owner provides aclear formula forcalculating any insurance

credits, includingexamples.

Where Flat umbrellapremiums are paid, thecontractor should notinclude a deduction fortheir umbrella.

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20. Deductibles andPenalties

CGL

B/R

W/C

The contractor needs to identify any deductibles and anypenalties that the OCIP may contemplate and to determinewhether it will be responsible for them.

The key question is whether the owner has any intention ofpassing any deductibles or penalties along to the contractor. Ifso, the contractor needs to ask whether any such amounts

apply to all risks, including acts of God, without regard tothe contractors negligence or other culpability.

If the liability for deductibles or penalties will depend on thecontractors negligence, the contractor also needs to determine(1) how the owner or broker will decide whether the

The contractor receives aclear written statement thatthe owner will not passalong any deductibles orpenalties or, in thealternative, that the ownerunderstands and accepts

that it will only receive apartial credit --proportionate to thecoverage that the owner isproviding.

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contractor is at fault and (2) whether the contractor will haveanyopportunity to challenge any finding that it isat fault.

The contractor may find it useful to point out that workerscompensation and builders risk are intended to be no faultpolicies. Introducing negligence or any other standards ofculpability into either area therefore conflicts with at least oneof their central purposes.

If the owner intends to pass along any deductibles or penalties,the contractor should also make it clear that the OCIP is not

providing full coverage. Under those circumstances, thecontractor may be entitled to some assurance that owner willnot expect the same credit that it would get for providing fullcoverage.

Most contractors will not accept a deductible of more than$5,000 on their builders risk. At a minimum, the contractorshould be entitled to exclude the cost of buying down any

higher deductible from any insurance credit that the OCIP willrequire the contractor to give to the owner.

21. Insurance CreditWorksheet

W/C

CGL

UMB

B/R

At the time of bid or enrollment in the OCIP, the contractorwill usually be required to complete a worksheet to identifythe amount of insurance cost to be eliminated from its finalprice. Beware. Some of these worksheets do not providespace to incorporate schedule credits, premium discounts and

the like. The unwary contractor can be lured into overstatingthe amount of credit due.

The contractor and the program sponsor also need to reach anunderstanding on how they will handle any disputes, mistakesor changed circumstances. What happens if the contractors

The owner or its brokerprepares a worksheet thatnot only lists all of theobviously relevant itemsbut also leaves space for

the contractor to add andexplain other items thatmay also bear on theamount of the credit due.The contractor has anopportunity to verify all of

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experience modifier either rises or falls? What about theregular insurance policies that are likely to come up forrenewal during the life of the project?

Contractors should also be aware that some owners decide touse OCIPs only after making or receiving some estimate of thecontractors own cost of providing insurance for the project.Contractors are rarely involved in the process and the resultingestimates may or may not be accurate. Nevertheless, if theowners virtual savings fail to materialize, the contractorsrelationship with the owner can suffer.

It is possible and perhaps most appropriate to focus on theamount the contractor has put into its bid, regardless of anyother factors.

the identified rates andcredits.

22. Premium Overrunsand Underruns

W/C

CGL

UMB

B/R

In advance of the deadline for submitting any bids, quotes orproposals, the owner should inform all of the potentiallyaffected firms of how the owner intends to handle payroll

overruns or underruns and the resulting departures from theexpected insurance premiums. The owner needs to be upfront.

If the owner is asking the contractors to include insurance intheir bids or proposals (and intends to use the gross figures toaward the contract), then premium overruns and underrunsshould cut both ways. In other words, the owner should beentitled to compensation for any overruns and the contractor

should be entitled to compensation for any underruns.

If the owner is taking bids or proposals (and intends to awardthe contract) net of insurance, the owner may still be entitledto compensation for any overruns but disinclined to share thesavings from any premium underruns. If the bids or proposalsare net of insurance, and the bidders or proposers are entitled

At the very outset, allpotential bidders orproposers receive a clear

written statement of thebasis on which the ownerwill award the contract,including an explanationof exactly how the ownerwill handle any premiumoverruns or underruns.

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to share the savings from any premium underruns, competitorsmay be tempted to manipulate the system. In that situation,they could purposely overstate their payroll and insurance

premium credit in the hope of appearing to be low and thenmake up the difference when the owner realized savings fromthe inevitable underrun.

The parties also need to address how they will handle anychange orders.


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How does the Owner or its Broker Intend to Administer the OCIP?

IssueAffected

CoverageDescription


Address

23. OCIP Documents W/C

CGL

UMB

B/R

Every OCIP has its own insurance, safety and claimsprocedure manuals. At the outset, it is important for thecontractor to ensure that the owner incorporates these manuals

into the other contract documents for the project. The reasonis that these documents require the insured contractors andsubcontractors to accept responsibilities that the other contractdocuments do not even address. If these responsibilities arenot made contractual obligations, the contractor could finditself in a precarious position. In particular, the contractorcould find it difficult to compel lower tiers to comply with allelements of the insurance program.

If the construction contract fails to incorporate the OCIPdocuments, or to impose any contractual obligation to complywith such documents, the contractors own obligation to do somay also be in serious doubt. The contractor may or may nothave an obligation to perform any functions that the OCIPdocuments purport to assign to the contractor.

To avoid any confusion, and to reduce the potential for any

dispute, the construction contract should clearly identify theOCIP documents and incorporate them by reference, as if theyhad been included in the body of the contract itself. Examplesof these documents would include anything that defines theproject site, explains who is and is not covered, sets forthprogram enrollment procedures or forms, outlines

The construction contractclearly identifies all of theOCIP documents and

incorporates them byreference.

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coverage under the program or the key exclusions, establishesinsurance credit calculation procedures or providesworksheets, defines audit procedures, provides key contactinformation, determines accident or claim reportingprocedures, determines the insurance that program participantshave to provide, sets payroll reporting or auditing procedures,or sets safety program requirements, such as modified duty ordrug testing programs.

24. ContractorsResponsibilities

W/C

CGL

UMB

B/R

E/O

Because the costs of administering an OCIP are indirect andoften hidden, owners and their brokers tend to minimize them.Nevertheless, the costs are real and someone will have to incur

them.

In advance of the deadline for any bids or proposals, thecontractor should ask the owner and/or its broker clearly toidentify any administrative functions that either or both ofthem will expect the contractor to perform. Will thecontractor be responsible for setting up meetings between theOCIP administrators and the subcontractors on the project?

Will the contractor be responsible for ensuring that allsubcontractors (1) enroll in the program, (2) provide therequired documentation, (3) furnish certificates of insurance or(4) provide timely payroll reports?

If so, the contractor should also ask the owner how it proposesto compensate or reimburse the contractor for performing suchfunctions.

The contractor also needs to assess the potential forprofessional liability for any errors or omissions in theadministration of the OCIP, and to find out whether the OCIPcovers this risk. If not, the contractor has to persuade theowner or its broker to modify the OCIP.

The owner or its brokerclearly identifies theadministrative functions

that the OCIP will requirethe contractor to performand the way that the ownerproposes to compensate orreimburse the contractorfor performing thosefunctions. At the sametime, the owner or broker

assume all responsibilityand potential liability forthe administration of theOCIP.

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In the alternative, the contractor has to continue or to purchaseits own coverage for any such errors or omissions. In thatcase, the contractor should also seek written assurance that itwill be able to exclude the cost of continuing or purchasingsuch coverage from any insurance credits that the OCIP wouldotherwise require the contractor to give to the owner.

25. SubcontractorDeductions

W/C

CGL

UMB

B/R

The contractor needs to determine whether it will have to bearthe ultimate responsibility for subcontractors deductions. Ifso, the contractor also needs to seek an up-front agreement onthe rates, job classifications and experience modifiers that thebroker will use throughout the life of the project.

Where the contractor has to bear this responsibility, thecontractor may well find that any disagreements between theowner and the subcontractors end up straining the contractorsown relationships with the latter. At some point, thecontractor may have to use its position to compelsubcontractors to comply with decisions that the owner hasmade.

There are, however, ways to make this responsibility easier forthe contractor to bear. The contractor should, for example,seek assurance that the broker will give the contractor timelynotice any problems with any subcontractors deductions.Once a subcontractor has been fully paid, it can be verydifficult to ensure compliance with the insurance program.

The contractor should also ask whether the subcontractors

insurance deductions will based on a sliding-scale thataccounts for any differences in the limits of the coverage thatthe OCIP requires for smaller subcontracts.

A third question is whether the OCIP requires deductions fromliterally every subcontractor, or whether, in the alternative, it

The contractor receiveswritten confirmation of therates, job classificationsand experience modifiersthat the broker or other

program administrator willuse throughout the life ofthe project. The contractoralso receives a writtenassurance that the brokeror other programadministrator will providetimely notification of anyconcerns regardingsubcontractor deductions.

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exempts small subcontractors performing only small amountsof work. In the past, prime contractors have found that theadministrative cost of pursuing deductions from smallsubcontractors can exceed the potential savings. Even if it isbetter to enroll everyone in the insurance program, it maymake sense to forego deductions from any firm performingless than $25,000 in work on the project.

In the absence of an agreement on the rates, job classificationsand experience modifiers, the contractor may find it difficultto deal with any misclassification of a subcontractorsemployees, or any change in its experience modifier, duringthe life of the project.

26. Safety Services W/C

CGL

UMB

B/R

E/O

In advance of the deadline for any bids or proposals, thecontractor should ask the owner or its broker clearly toidentify any safety services that either or both of them willexpect the contractor to perform. Does the owner expect thecontractor to exceed OSHA standards? Will the ownerprovide any resources that the contractor may need to meetany higher standards that the contractor has set for itself?

If OCIP requires the contractor to implement a drug program,or a return-to-work program, the contractor also needs to askthe owner how it proposes to compensate or reimburse thecontractor for providing those services.

The contractor also needs to assess the potential forprofessional liability for any errors or omissions in the

performance any safety-related services, and to find outwhether the OCIP covers the risk of such liability. If not, thecontractor also has to encourage the owner or broker tomodify the OCIP.

The insurance manualclearly identifies anyspecific safetyrequirements imposed onthe contractor or itssubcontractors and theconstruction contractexpressly incorporates thatmanual. The OCIPprovide broad coverage forany errors or omissions inthe performance of anysafety-related services.

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In its discussions with the owner or its broker, the contractorshould point out that it does not have the same legal protectionthat an insurance carrier would normally have for any safety-related services that the carrier may provide. Nor do moststate statutes on workers compensation protect contractorsfrom third-party-over actions.

In the alternative, the contractor has to continue to purchase itsown coverage for any such errors or omissions. In thatcase, the contractor should also seek written assurance that itwill be able to exclude the cost of continuing or purchasingsuch coverage from any insurance credits that the OCIP wouldotherwise require the contractor to give to the owner.

27. Certificates ofInsurance

W/C

CGL

UMB

B/R

Contractors need to track their subcontractors certificates ofinsurance and most have developed a set of specificprocedures for doing so.

The problem is that an OCIP will typically require thecontractor to modify those procedures. While the contractorstill has to request, validate and file certificates of insurancefor all exposures that fall outside the OCIP (such asautomobile liability and offsite exposure for workerscompensation), most of the OCIP manuals call for allsubcontractors to submit their certificates of insurance to thebroker or other OCIP administrator.

To avoid confusion and still meet its own requirements, thecontractor needs to ensure that the administrator will promptly

forward copies of all subcontractors certificates of insuranceto the contractor. Unfortunately, owners and their brokers aretypically slow to get this done.

The construction contractand the insurance manualexpressly provide that theOCIP administrator willpromptly forward copiesof all subcontractorscertificates of insurance tothe contractor and that theadministrator will supportand cooperate with thegenerals contractors effortto ensure that allsubcontractors areproperly enrolled in theOCIP.

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28. Premium Audits W/C

CGL

UMB

B/R

Contractors need timely and accurate premium audits.Otherwise, they cannot ensure the accuracy of experiencerating data. They may also have trouble either collecting orpaying retainage. Nevertheless, the contract and insurancedocuments frequently omit any reference to such premiumaudits, and when working under OCIPs, contractors have oftenfound that such audits are neither timely nor accurate.

It is important for the contractor to find out how the programmanager intends to handle such audits, and if possible, to seeksome way of triggering a timely audit. It is difficult to getpremium data from a subcontractor once that firm leaves thejob site.

The contractor is an insured and the insurance carrier thereforeowes the contractor a duty to perform the premium audits in atimely and accurate manner.

The contractor has theright to trigger an audit,and to have it completed,before a subcontractorsretainage is due. Theinsurance manualestablishes a procedure forthe premium audit, and theconstruction contractexpressly incorporates thatmanual.

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29. Loss Runs and LossData

W/C

CGL

UMB

B/R

Losses suffered under an OCIP can be just as detrimental aslosses suffered elsewhere. Both affect a construction firmsfuture experience rating. As a result, the contractor needs tobe involved in the claims management process and to reviewits loss data for any work performed under an OCIP. It isimportant for the construction firm to review all such databefore it is filed.

Before starting to work under an OCIP, the contractor shouldseek assurance that it will receive at least quarterly loss runs.Contractors who take an aggressive approach to claims

management need this information.

Some brokers may insist that they can provide loss runs onlywith the approval of their client, meaning the owner. If thatshould occur, the contractor should remind the broker and theowner that contractor is the brokers client.

The contractor receives anup-front commitment fromthe program sponsor thatthe contractor will beinvolved in the claimsmanagement process andthat the carrier willprovide loss runs at leastquarterly. The contractorcan count on havinganopportunity to review and

approve all loss databefore it is filed with theapplicable rating bureaus.

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30. ExperienceModifier Filings

W/C While the contractor should try to exclude any exposures thatfall under the OCIP from any calculation of the premiums forits regular insurance program, the contractor needs to ensurethat its workers compensation carrier includes its experienceunder the OCIP in any future calculation of its experiencemodification rate (EMR).

Several things can delay the filing of the unit statisticalinformation that the workers compensation carrier needs.Sometimes, the problem is the administrative process. Othertimes,the contractor causes the delay. It may be slow toprovide its payroll records. Brokers and carriers complainthat they cannot get data from a contractor once it has

completed its work and left the jobsite.

All too often, however, the OCIP broker and carrier pay toolittle attention to the contractor and its subcontractors, on thefalse premise that they are only working for the owner. If thatshould occur, the construction firm should remind the brokerand carrier that the contractor and its subcontractors are alsoinsureds.

At the outset, the contractor should ask the project owner forsome kind of assurance that the owner will cause the brokerand carrier to make timely filings, once the contractor hasprovided all of its payroll records.

The contractor should also note that the insurance carrier isrequired by the rating bureau to provide the unit statisticalcards (payroll by class and losses) information to the

applicable rating bureau 18 months from the inception ofcoverage.

The owner agrees torequire the OCIP carrier tomake timely filings andthe insurance manualcovers all of the relateddetails.

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31. Claims

Management

W/C Contractors who take an aggressive approach to managing

claims can be very disappointed at the lack of such anapproach found in some OCIPs. In most jurisdictions, theworker compensation experience under wrap-up programsfollows the contractor and will impact the contractors EMR.This is why it is imperative to take an active role in the claimsmanagement process, to receive loss runs, and to be involvedin periodic claim reviews with the carrier and broker.

The relevant documents

specify the level ofactivity expected of thecarrier, the broker and thecontractor.

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32. Alternative DisputeResolution

W/C

CGL

UMB

B/R

Many if not most construction contracts have some kind ofprovision on dispute resolution. The problem is that neitherthe broker nor the insurance carrier is a party to that contract.The construction contract only binds the owner and thecontractor and does not provide a means of resolving disputeswith either the broker or the carrier over coverage, claims,services, premiums or the like.

The contractor should therefore ask whether the owner, brokeror carrier have incorporated any procedures for resolving suchdisputes into the OCIP. If not, the contractor should seek analternative dispute resolution provision for resolving anyservice, claim, coverage, premium or other issues that mayarise.

The insurance manualpredetermines a procedurefor resolving any and alldisputes that may arise outof the OCIP.

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33. Broker/Carrier

ServiceAgreements

W/C

CGL

UMB

B/R

As noted above, neither the broker nor the insurance carrier is

a party to the construction contract. Nevertheless, theirservice agreements with the owner, and how they actuallyimplement those agreements, have great implications for thecontractor working under an OCIP.

The contractor can therefore make a case for some kind ofcontractual tool that it can use to hold the broker and thecarrier accountable for their performance. While the owner

The contractor receives a

strong writtencommitment that theowner will support thecontractors efforts to holdthe broker and insurancecarrier accountable for anyfailure to live up to theirservice agreements.

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may be unlikely to do so, the owner could, for example,

require the broker to enter into aseparate service agreementwith the contractor. The owner could also make the contractoran intended third party beneficiary of its own serviceagreements.

Without going that far, the owner could also make a strongmoralcommitment to represent the contractors interests.


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What Are Some of the Other Issues that You May Need to Address?

IssueAffected

CoverageDescription


Address

34. Mutual Waiver ofSubrogation

W/C

CGL

UMB

B/R

The construction contract and the OCIP should include mutualwaivers of subrogation for all claims that fall under the OCIP.The contractor should not rely entirely on being a namedinsured.

At the same time, the owner or contractor should requirewaivers of subrogation from every firm that the OCIP does notcover.

The construction contractand the OCIP provide formutual waivers ofsubrogation from allpolicies at the jobsiteregardless of enrollment inthe OCIP.

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35. Safety Incentives W/C

CGL

Most OCIPs provide no financial incentives to maintain safe

working conditions. It would, however, be appropriate for thecontractor to seek such incentives from the owner. Becausethe contractor is in a uniqueposition to oversee the

The contractor will receive

a safety bonus forachieving the desiredresults.

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UMB

B/R

subcontractors and other firms working on the jobsite, it maywell deserve such incentives.

There is no standard form or other contract language that thecontractor would need to use. It should be enough to put anyagreement into plain English. It would be important todefine the results that would trigger a payment in clear andunambiguous terms. However written, the language shouldgive the contractor a clear incentive to maximize theOCIP savings.

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36. Substance AbusePrograms

W/C

CGL

UMB

B/R

The contractor needs to look for any requirement for asubstance abuse program. If the contractor finds such arequirement, it also needs to ask the owner or its broker (inadvance of the deadline for submitting bids or proposals)whether the contractor will bear any of the responsibility foradministering the program.

If so, the contractor also needs to take several more steps. Itneeds to needs to ask the owner how the owner proposes tocompensate or reimburse the contractor for cost of acceptingthis responsibility. It needs to find out whether the personal

injury component of the CGL policy will cover this activity.And it needs to identify and resolve any conflicts betweenrequired programs and any other programs that the contractorhas already put into effect.

The contractor receives aclear written assurancethat either the owner or thebroker will assume all theresponsibility foradministering thesubstance abuse programor the owner clearlyidentifies the functionsthat it will expect thecontractor to perform and

how it proposes tocompensate or reimbursethe contractor for doing so.

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37. Return-to-WorkPrograms

W/C The contractor needs to look for any requirement for a lightduty return-to-work program.

If the contractor finds such a requirement, it also needs to askthe owner in advance of the deadline for submitting bids or

proposals how it proposes to compensate or reimburse thecontractor for the productivity that the program will cause thecontractor to lose.

The benefits of reducing the indemnity payments to an injured

worker normally offset the costs of implementing such aprogram. Where an OCIP is in place, the situation is,however, very different. The benefits accrue exclusively tothe owner, and the contractor is left with only the cost, unlessthe owner makes some kind of adjustment.

The contractor receives aclear written explanationof the way that the ownerproposes to share thebenefits of implementing

any light duty programthat the owner will require.

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38.Subcontracts andLetters of Intent

W/C

CGL

UMB

B/R

P/L

AV/L

W/L

E/O

The contractor needs to be aware that its involvement in anOCIP will require it to amend its standard the insurancerequirements that it normally incorporates into itssubcontracts. The latter needs to provide that thesubcontractor will be required to participate in the OCIP andto identify the coverage that the program will provide to thesubcontractor. In addition, the subcontracts shouldincorporate the automobile liability and offsite insurancerequirements outlined in the OCIP insurance manual.

The same is true of any letters of intent that the contractor may

utilize.

The contractors amends itssubcontracts to incorporatethe OCIP provisions of theconstruction contract intothe subcontracts, byreference.

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39. Changes inProgram Policies

W/C

CGL

UMB

Because the construction project may run for several years, thecontractor runs a risk that the insurance carrier may, at somepoint, cancel, refuse to renew or make a material change inone or more of the policies that make up the owner controlledinsurance program.

The contractor receiveswritten assurance that theowner or its broker hasrequired the insurancecarrier to directly notify all

B/R

P/L

AV/L

W/L

E/O

As a threshold matter, the contractors needs to ensure that thecarrier has an obligation to notify all of the insureds, and not

just the project owner, of any such action. Otherwise, thecontractor may find itself with an uninsured exposure of whichit was completely unaware.

of the insureds of anydecision to cancel, refuse

to renew or make anymaterial change in any oneor more of the OCIPpolicies.


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A di


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Appendix

Nonexclusive Checklist of Things to Ask For

Item Comments Status

Firms Included and Excluded Acceptable

Not Acceptable

Operations Included and Excluded Acceptable

Not Acceptable

Definition of Covered Location(s) Acceptable

Not Acceptable

Coverages Being Provided Acceptable

Not Acceptable

Duration (Warranty Work and Completed Operations) Acceptable

Not Acceptable

Gaps in Coverage Acceptable

Not Acceptable

Limits and Whether Shared or Reinstated Acceptable

Not Acceptable

Specific Inclusions in Coverage Acceptable

Not Acceptable

Specific Exclusions from Coverage Acceptable

Not Acceptable

Deductibles

Acceptable

Not Acceptable

Penalties Acceptable

Not Acceptable

Contractor Furnished Coverages and Whether Compensable Acceptable

Not Acceptable

Safety Program Responsibilities Acceptable

Not Acceptable

Acceptable


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Drug Test Program Responsibilities Acceptable

Not Acceptable

Back-to-Work Program Responsibilities Acceptable

Not Acceptable

How Premium Audits Will Be Handled AcceptableNot Acceptable

How Other Program Components Will Be Administered Acceptable

Not Acceptable

How Credits Will be Handled Acceptable

Not Acceptable

How Claims Will be Handled Acceptable

Not Acceptable

Necessary Endorsements of Contractors Policies ImplementedNot Implemented

Necessary Amendments of Contract and Subcontracts Implemented

Not Implemented