Owner-controlled insurance programs can help cut costs.

At the construction law firm of LePatner & Associates, an increasing number of our owner-clients request construction agreements that reflect their decision to employ an Owner Controlled Insurance Program (OCIP).

An OCIP is a wrap policy that encompasses all of the work performed on a project, covering the owner, the construction team and the trade contractors and subcontractors.

Purchased by a single entity and administered by the same broker and insurance company, this coverage typically includes general liability, excess liability, builder's risk insurance and workers' compensation. It is frequently used when working with large construction projects valued at $100 million or more, or in the case of multiple, ongoing projects.

An OCIP delivers several benefits, including reduced insurance costs. Because the OCIP is placed on a project basis, the premium is placed at the start of the project and locked in for at least two years.

As an added bonus, the owner is able to pass on the insurance cost to the construction team. Traditionally, construction teams include insurance costs in their contract bid price. However, if the owner is contemplating using an OCIP, subsequent to receiving the construction team's bid, the owner can deduct those insurance costs from the bid, reducing the contract price. At that point, the owner may also charge back the insurance costs of the OCIP to the construction team.

In addition, there is power in numbers. Since the owner is soliciting insurance coverage for itself as well as the entire construction team, the owner is in a stronger position to negotiate with the insurance carrier for a reduced premium.

Safety is also a factor. Unlike contractor insurance programs that lack coordination and safety plans for the construction team, an OCIP frequently includes an aggressive, coordinated safety program. This helps reduce the number of accidents at the site, which becomes an added incentive for the insurance carrier to lower premiums.

Another benefit stems from the fact that OCIPs are placed on a project basis. Since conventional contractor insurance policies are placed annually, a construction manager or contractor could sustain a loss of coverage during a project.

For example, a member of the construction team may face a number of lawsuits in a given year. If liability insurance proceeds are used to pay for any number of plaintiff claims during that year, there is less money available for additional claims that may be filed in the same year.

Thus, an owner having a claim against its construction manager/general contractor may obtain a favorable award, but is restrained by a situation where there are no insurance proceeds available to pay out the award.

An OCIP protects the owner from this scenario because it is placed solely for a project. An OCIP ensures that ample insurance exists for an owner's award, provided the owner maintains a sufficient amount of insurance for the entire construction team.

Owners also maintain more control over coverage terms and conditions when using an OCIR Under traditional insurance, construction managers and general contractors are often underinsured, exposing the owner to claims by third parties. Since the owner controls the amount of insurance maintained for the project under an OCIP, it is more likely that there will be an adequate level of coverage.

Once an OCIP is in place, what happens if a claim should arise as a consequence of the project? If a claim is asserted against the owner, the owner submits the claim to its broker/insurance company. The insurance company handles the owner's claim, and any claims filed by the construction team, on an individual basis.

The owner may elect to have a self-insured retention of, for example, $100,000. In this case, the owner pays the first $100,000 towards the claim. A third party administrator (TPA) administers the claim, charges the owner a designated fee, and then may seek to dispose of the case quickly as a means of limiting the owner's costs and expenses.

Under a second option, the owner may choose a $100,000 deductible, in which case the insurer pays the deductible and seeks reimbursement from the owner. In this situation, the insurance company has more control over how the first $100,000 is expended.

Thus there are clearly several benefits to using an OCIP when embarking on a large construction project. Owners should carefully consider this program to help reduce their premiums, avoid a loss of insurance coverage and maintain better control over their insurance coverage. At the end of the day, an OCIP will help an owner maximize profit from a construction project.

RONALD B. FEINGOLD, ESQ. PARTNER

BARRY B. LEPATNER & ASSOCIATES