Controlled Insurance Programs

When working on big jobs with several companies, a CIP can often work for your business.

A controlled insurance program (CIP), also known as a “wrap-up” or owner-controlled insurance program (OCIP), enables multiple company owners to protect their businesses under one policy when various contractors are involved on a significant project or big job.

Typically, CIP policies cover workers’ compensation, commercial general liability, excess liability, design errors and omissions, and builder’s risk insurance.

These programs are fairly straightforward. The owner—or lead contractor on certain types of jobs—purchases insurance for all contractors and subcontractors involved in a project. Then, all participants will reduce their price by eliminating their insurance costs in exchange for the coverage provided by the owner.

Through this process, the owner strives to save money by purchasing insurance for the entire project to avoid paying for contractor markups on insurance costs. Also, by having a single insurance carrier for the project, the risk of claims is less prominent and claim resolution tends to be less expensive.

By having a single insurance carrier for the project, the risk of claims is less prominent and claim resolution tends to be less expensive.

CIP coverage is outlined in a document known as an OCIP Manual, which describes the bid-deduct process, claims management, and safety requirements for the project. This document remains a large part of the bid solicitation process and eventually becomes part of the contract documents.

Who Is Included in a CIP Policy?

The following parties are covered under a CIP policy:

• Sponsor of the policy (i.e., the general contractor).
• Contractors, subcontractors, and others involved in the project. There may be limits on coverage for subcontractors with contract values over a certain amount.
• Architects and engineers are included as insureds but are not covered for professional liability.

Benefits and Uses of a CIP Policy

CIP policies have several benefits:

• Lowers insurance costs by lumping coverage into one policy.
• Eliminates contractor markup on insurance costs.
• Increases coverage limits. Coverage may also be broader than that obtained by contractors and subcontractors.
• The OCIP administrator takes full responsibility for handling claims and safety initiatives, which may increase loss control objectives of all parties involved.
• Allows for coordinated medical treatment for injuries which may allow them to avoid public scrutiny and spotlight.
• With a CIP in place, it is not necessary to obtain certificates of insurance from contractors involved in a specific project.
• CIP provides investigation for work-related accidents and injuries, and defenses against claims. This decreases the investigation’s legal costs.
• Coverage brings all participants together as co-defendants in construction defect claims.
• Coverage does not negate from the participants’ other coverage for non-CIP projects.

Disadvantages of a CIP Policy

You should also be aware of the disadvantages of CIP policies:

• CIP coverage may not be always sufficient to replace an existing insurance policy for contractors and subcontractors.
• Owners become responsible for the bid-deduct process, which will require more time and resources.
• Owners may be exposed to a premium increase if labor costs and loss experiences exceed their estimates. However, owners can benefit if claims are less than anticipated through premium rebates.
• It may be more difficult to manage contractor and subcontractor performances concerning insurance-related claims.
• It may be more difficult for owners to enforce obligations to repair work before disputes are resolved.
• Obtaining an OCIP policy may discourage bidders if they are unfamiliar with the coverage, are worried about unfair credit calculations for insurance costs, are nervous about uncompensated overhead, or are concerned with a loss of markup costs.
• OCIP deductions may exceed actual insurance costs for contractors and subcontractors.
• Contractors and subcontractors must have their broker or attorney review the CIP policy thoroughly to avoid gaps in coverage.
• The OCIP deduction process may be applied to a single progress payment, which can reduce cash flow. This also affects change orders, as the owner generally requests that the contractor provides additive change orders with insurance costs included. If additive changes are significant, the OCIP deduction process for change orders may drag on.
• Since an OCIP policy serves as total coverage, contractors and subcontractors cannot profit from insurance-related administrative cost markups.

Big projects can significantly impact your bottom line, but making sure you are properly protected is crucial as are your local business relationships. Contact your insurance company and attorney to learn more about controlled insurance programs and see if they are right for your business.

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This column is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Go to the NGWA webpage at www.ngwa.org/members/member-benefits/Business-insurance to find out more information about companies it has partnered with.

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