Owner Controlled Insurance Programs (“OCIPs”) and Contractor Controlled Insurance Programs (“CCIPs”), also known as “wrap-up” insurance programs, are consolidated insurance programs purchased by a single entity (the “Sponsor”) to provide comprehensive insurance coverage to the majority of participants in a large construction project. The use of OCIPs and CCIPs (“CIPs”) has been increasing in popularity in recent years, and is generally considered for projects with at least $100 million in hard construction costs; with the continued use of these programs, it is very important that enrolled subcontractors understand the key issues that arise when faced with a project insured in this manner.
While the potential benefits to CIP Sponsors are well known (e.g. cost savings, comprehensive coverage for all participants, use of a standardized project safety plan, potential for reduced litigation, etc.), CIPs present unique challenges to participating contractors that are worthy of careful consideration. This article will address a few of these challenges, and provide suggestions to help subcontractors avoid a few common CIP “pitfalls.”
When bidding to work on a “traditional” project, a subcontractor will normally include its insurance costs (and potentially a mark-up on these costs) as part of its bid. On a CIP, the Sponsor will look for all participating subcontractors to exclude certain insurance costs from the contract price, specifically those where coverage is contemplated to be provided by the CIP. Additionally, a common feature of many subcontractors’ insurance policies is an exclusion of coverage for projects subject to a wrap-up insurance program. Given these facts, it is very important that subcontractors maintain very careful records of all payroll and costs associated with a wrap-up project, and to exclude these totals from the exposures used to calculate premiums on their own insurance policies. If careful records are not maintained, a subcontractor could unknowingly end up paying premiums related to coverage for projects on which no coverage is afforded by its own program.
Advice: Pay close attention to all documentation sent to your office by the CIP administrator, and make certain to double-check this data against your own records to verify accuracy. If your own policies exclude coverage for “wrap-up” projects, make sure your standard program auditors do not use CIP payroll to calculate standard program premiums.
Warranty and Punch List Work
Another key issue that subcontractors must address when working on a wrap-up project is how (or if) general liability coverage is afforded for warranty or punch list work that is performed after substantial completion of the project (or after the CIP expires). As mentioned, many subcontractors’ general liability and umbrella policies feature some variation of a “wrap-up exclusion,” which generally states that coverage is not afforded for work performed on a CIP. Further, the policy expiration of a CIP may occur upon “substantial completion” of a project, or based on any number of triggering events. The CIP Sponsor will typically extend “Completed Operations” coverage for some period beyond the policy expiration date, but this coverage does not address the premises/operations exposure associated with follow-up work performed on-site by subcontractors. In the event of a claim resulting from bodily injury or property damage caused by a subcontractor while on-site performing warranty or punch list work, both the CIP and the subcontractor’s policies could potentially deny coverage. The CIP could issue a denial because after CIP expiration, only “Completed Operations” coverage is afforded on the project; the subcontractor’s insurance carrier could deny coverage based on a “wrap-up exclusion.”
Advice: If you are planning to perform work on a wrap-up project after the expiration of the CIP, make sure you are clear on how your liability exposure would be covered in the event of a premises/operations liability claim. Often, insurance carriers can alter the “wrap-up exclusion” to specify that coverage will be afforded for warranty or punch list work.
Coverage for “Off-Site” Exposures
Another major concern for certain subcontractors relates to how coverage is afforded for “off-site” exposures, such as the shop manufacturing or prefabrication of building components at one’s own facility that will ultimately be installed on a wrap-up project. CIPs often do not provide coverage for general liability, product liability, workers’ compensation, employers’ liability or excess liability exposures related to work that is not performed on the project site. Because of this, a subcontractor needs to be aware of how its own insurance program will address a claim resulting from work that is performed for the wrap-up project, but outside the physical limits of the actual project site.
Advice: Clarify in advance with the CIP Sponsor how “off-site” work for the project will be covered, if applicable. If this coverage is excluded under the CIP, make sure your standard program will step in to provide coverage. If you must rely on your standard program to offer this coverage, make sure to keep detailed records of your cost/payroll incurred “off-site” vs. “on-site,” i.e. during manufacturing/prefabrication vs. installation.
This article certainly does not address all of the key issues and potential pitfalls that a subcontractor is faced with when enrolled in an OCIP or CCIP. Other considerations include the necessity to (1) determine the Sponsor’s procedures surrounding deductible payment in the event of a claim and (2) understand the Sponsor’s claims handling procedures (especially with respect to workers’ compensation claims involving subcontractor employees). That said, the early consideration of key issues and potential pitfalls will help subcontractors ensure the successful and profitable participation in wrap-up projects.