September 20, 2011
Owner Controlled Insurance Program Liability Claims Challenges, Part 1
Owner Controlled Insurance Programs, or OCIPs, are the logical consequence of insurance underwriters and project owners trying to control costs and speed the resolution of construction-related insurance claims (including builders risk, workers compensation, and liability claims).
This is the first article in an 11-part series on Owner Controlled Insurance Programs. Subsequent articles in this series can be found here: Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, and Part 11.
Owner Controlled Insurance Programs, or OCIPs, are the logical consequence of insurance underwriters and project owners trying to control costs and speed the resolution of construction-related insurance claims (including builders risk, workers compensation, and liability claims). Indeed, it would be difficult to find an experienced claim manager who has not slapped his head (or someone else’s) in exasperation over the amount of time and money that it takes to resolve a construction bodily injury or construction defect claim.
For owners, there is a built-in incentive to find a better way to more efficiently manage the claims that inevitably occur on a large construction project. The amount of money spent on insurance premiums is a significant portion of the cost of construction. Moreover, the amount of money spent, not to mention the time commitment, is substantial because of the number of people and interests to protect.
From an insurance company’s perspective, an Owner Controlled Insurance Program premium is significant. Further, the ability to receive the premium for all parties on the job site while simultaneously eliminating the allocated expense makes Owner Controlled Insurance Programs an attractive underwriting risk.
An Owner Controlled Insurance Program, or wrap-up policy, may include all or part of the insurance needed on a project, including builders risk, workers compensation, and liability insurance. Experienced professionals in each line of insurance each have their own unique perspective on the process and the effect of insuring all parties on the project. Here, we concentrate on liability claims and policies.
As viewed from the perspective of the people who are attempting to resolve liability claims under an Owner Controlled Insurance Program, the industry is maturing. Underwriters, owners, contractors, construction managers, and brokers are becoming more sophisticated with regard to underwriting and claims presentation. Specifically, in our practice we have noted the following trends in the handling of such claims “in the trenches”:
- Owners, as the sponsor of the program, assert control over claims under the insurance program, which can create tension with the insurance company and the contractors on the project.
- Brokers are increasingly sophisticated and acting as coverage advisors for the insureds to maximize recovery under the Owner Controlled Insurance Program policies.
- There are often differences between the insurance policy issued by the company and the coverage as represented to enrolled subcontractors.
- There is an increasing tendency for owners, brokers, and contractors to treat the Owner Controlled Insurance Program as a single program, a concept that is sometimes at odds with the concept of liability insurance.
- Inconsistencies between liability policy language, Owner Controlled Insurance Program manuals provided to contractors, and the actual subcontracts blur the definition of what is the governing Owner Controlled Insurance Program contract.
- Lack of complete enrollment by all subcontractors on the project or phase complicates the claims process and impacts the cost of the program.
- The timing of the inception of a “rolling wrap” can create hybrid liability claims that are partial wrap and partial non-wrap for purposes of a construction defect claim.
- Lack of sophistication by subcontractors and their counsel creates tension in the claims process.
The insured contractors must bear in mind what an Owner Controlled Insurance Program is and what it is not. An Owner Controlled Insurance Program is an insurance policy, intended to provide all of the contractors on a job site with necessary coverage. From the perspective of the claims department, the Owner Controlled Insurance Program is not a new kind of insurance. Therefore, this series concentrates on applying existing rules in the context of an all-encompassing policy.