Owner Controlled Insurance Programs versus Traditional Insurance Programs - Term Paper Example

? Owner Controlled Insurance Programs versus Traditional Insurance Programs Table of Contents Introduction 3 Risks Associated with OCIP 4 Risk of Owners 4 Risk of Contractors 5 Alternative Perspective 6 Literature Review 7 Supporting the Position of Being in Favor of OCIP 10 10 Recommendations 11 Conclusion 12 References 13 Bibliography 15 Introduction An Owner Controlled Insurance Program (OCIP) is a scheme through which an owner of a project tries to provide diverse types of insurances to contractors as well as subcontractors in United States. It is a recognized insurance acquiring/purchasing option that provides risk coverage to insurance owners. OCIP is a liability policy which serves as a protector for all contractors and subcontractors engaged in huge projects in the United States. These types of insurance programs are intended for the large construction projects worth over $10 million. It is purchased by construction owner for the benefit of builders or contractors engaged with the project, which includes compensation of workers, general liability, pollution liability, builders risk and professional liability among others. OCIP is a comparatively new vehicle in insurance sector for residential projects. Due to rapid growth of defective constructive designs, these policies are becoming highly popular among the builders and the contractors (Grenier, 2001). The study is mainly based on the analysis of OCIP versus Traditional insurance programs. Both the insurance policies play vital roles in the construction sector but OCIP provides advanced reliability than traditional insurance policies, as OCIP wraps up multiple policies provided by the owner to the contractors or the developers in a project including the facilities which are not supported in traditional insurance policies. Risks Associated with OCIP OCIP is commonly known as Wrap-Up Policy in United States. Both the OCIP and traditional policies were developed in 1950’s. The difference between the owner controlled insurance program and traditional insurance program lies with those who procure the policy. In OCIP, an individual party purchases insurance policies for all contractors involved in the project but in case of traditional insurance program, it is not applicable (Olson, 2006). Although OCIP provides numerous benefits, there are various risks associated with it both for owners as well as contractors which are stated below: Risk of Owners The risk can be identified through various factors including administrative burden which signifies that if OCIP is not managed accurately, it can provide huge administrative load on the contractors. Subsequently, the liability of the construction owners is also likely to increase. OCIPs are useful mainly in large projects, small construction owners are deprived from the facilities of this policy. The small contractors of United States have been witnessed at times to prefer acquiring higher limits of insurances than that provided by owners which can place a negative impact on the contractors (Gibson, 2006). There is always a market risk associated with every program. The market risk signifies that if the market of insurance hardens, there is a possibility of financial risk which can result in increase of premium cost. Bid Preparation aspect signifies that there are certain additional costs involved in it, such as retention of a risk consultant, a complete study of advantages and disadvantages of OCIP, submission of proposals and detail interviews (Taylor, 2011). Risk of Contractors The risk of the contractors can also be observed by certain significant factors. For example, limited insurance coverage is one of the vital aspects which focuses on the limitations in the insurance policies provided through OCIP to contractors. This acts as a barrier which the contractors have to face in this policy. Further, is the complicated bidding which highlights on the view that if bidding is done with the contractors of the United States, the insurance also gets included. The contractors would not be able to recover the cover cost from the insurance cost as it becomes accumulated with the fundamental cost of the project. In this policy, the safety minded contractors are penalized which means all such contractors may lose competitive biddings by the imposition of many inherent costs occur due to the inclusion of unsafe contractors (Taylor, 2011). Furthermore, experts describe that there should always be a requirement of a proper documentation in order to run a program successfully for all contractors. The segregated payroll which depicts that OCIP costs must also be differentiated from other costs involved in the project during construction. Duplicate records for payrolls should also be maintained. Thus, it can be stated that it is not a complete risk free policy as along with advantages it also carries the above mentioned risks. Therefore, this clearly depicts that there are various risks present in the owner controlled insurance policies (Pike, 2007). OCIP is not only a risk pronged policy but it also includes many benefits as well for the contractors and subcontractors of the United States. Alternative Perspective Similarly, like recognitions of the OCIP, the deprivations are also highlighted that attracts many significant alternative perspectives. The fundamental recognition of OCIP can be stated as the overall cost saving benefit which it provides to the construction contractors in the United States. Hence, it is most likely to be preferred by the contractors and subcontractors. Contradictorily, the interest of receiving higher limits from the projects for the owners of small construction projects which have higher liability limits in the United States and thus can be regarded as a limitation of the program. Next appears another significant aspect which relates to the association of historic risks. This is also another benefit of OCIP which has a remarkable impact on the contractors of the United States. The OCIP claims are not included in the contractors’ own history limits which can be beneficial for them (Carroll, 2009). OCIPs also reduce gaps in the traditional insurance coverage. The underlying gaps present in the traditional insurance coverage get eliminated in OCIP because of which it is much preferred by the contractors of United States. The other adjacent points include elimination of overlapping in insurance coverage. This is another proposition which is a highly useful course for holding a successful position by the program in the market of the United States. OCIP eliminates the overlapping of the insurance coverage. Furthermore, there are fewer chances for occurrences of disputes on the job sites between the contractors even if they are involved in a single project in the United States with the virtues of OCIP. Another important aspect in OCIP is competent management of claims. This is also a very important advantage of OCIP which helps it to be focused in the markets of the United States. The claims of OCIP are efficiently managed by the higher management authorities (Carroll, 2009). Literature Review According to Schexnayder (2002), the owner controlled insurance programs are mainly utilized for the protection of the risks associated with the construction sectors. Various types of risks are present in this particular area which can be overcome through this policy. Due to the market risks, failure of the insurance market shall lead to increase of financial hazards, which can be resolved through the OCIP. Thus, the program can maintain a standard position in the industry of construction in United States (Schexnayder, 2002). These factors justify the success of this policy providing varied reasons behind it. Wrap-Up Policy is preferred as it is a cost saving policy for owners. The owner tries to reduce the cost of the numerous participants involved in the project by removing the insurance costs in exchange of the coverage provided by the owners. But from a realistic point of view, this policy can be observed as much more complex than the traditional programs. The contractors and the subcontractors of the United States should be very careful while participating in this policy as different types of costs may get involved in it. The contractor should also be cautious from the procedure of ‘bid-deduct’ through which the insurance cost is minimized properly and timely from the actual price. Every owner controlled insurance program is designed according to the need of the owner but there may be certain defaults present in the designs as well, for which the owner may have to retain designers. Despite of all these risks, OCIP is successfully accepted by numerous contractors and owners of the United States, as it has infinite number of benefits. For example, it provides extreme coverage than any other regular policy to the contractors and subcontractors. Similarly maximum contractors and subcontractors are unable to deal with works involving more than one residential project. Such projects are prohibited from the OCIP insurance coverage. OCIP provides very limited extent of insurance protection which implies it is confined only to the project site activities. But workers’ compensation, general liability and risk involvement with builders are certain areas of concern for owner controlled insurance programmes in the United States (Schexnayder, 2002). According to Griffith (2011), the policy of owner controlled insurance has both positive and negative aspects comprised in it. In construction of residential projects, wrap-up policies are becoming increasingly popular in United States. These are often denoted as ‘rolling wraps’, as it rolls the virtues of one traditional project with another and forms a new framework. However, this creates problems when the project is under construction. As numerous residential projects take indefinite time period, when risks are identified in management structures, the builder shifts its liability program to rolling wraps, in which both the builder and the contractor are insured. This helps the program in the perspective that in spite of having many barriers, it has become successful in the United States market. Other than this, liability insurances are configured for damage coverages which are the result of impaired work. However, in owner controlled insurance programs, the liability claims and the contractual claims become obscure as they are partly covered by insurance programs. The owner controlled insurance programs are applicable only for the large construction sites and therefore the small contractors cannot utilize the facility of this policy. Apart from this, the risk of market is also present in owner controlled insurance programs, if the market declines (Griffith, 2011). The owner controlled insurance program requires a proper documentation in order to capture more attention in the eyes of the owners in the market of United States. Moreover, the owner’s controlled insurance costs must be segregated from other project costs (Griffith, 2011). According to Hicks (2010), implications of OCIP have a series of confusions and objections. Most of the contractors are not well aware about the facts underlined in the policy. Still they are quite satisfied in using this policy, as it is well established in the market of the United States. The policy requires severely accurate safety programs. This policy eliminates many gaps in insurance coverage as well as there are fewer chances of disputes among the contractors in this policy as many of them are involved in a single project. On the other hand, only the large projects can be a part of Owner Controlled Insurance Programs excluding the involvement of smaller ones. However, the small contractors enjoy high insurance limits in this policy, so it is gaining popularity in the United States. Even in the ethical ground, the implementation of OCIP can be contradicted. For instance, if a worker is seriously injured in the jobsite and the individual is unable to sue the owner then OCIP can be profitable in this case. Therefore, the owners’ ethical consideration can also be termed as vital in implementing the program (Hicks, 2010). Supporting the Position of Being in Favor of OCIP In the 21st Century, the owner controlled insurance program is growing rapidly. As it has already gained a sustained position in the preference list of the owners and contractors, a few more beneficial factors may help the policy to become more trustworthy for the users. It is an overall cost saving program for the owners. In this case, the owners enjoy a huge cost saving by eliminating the cost of the participants bringing changes in insurance cost in return of the insurance coverage provided to the owners. As stated by Schexnayder (2002), Wrap-Up policy is often referred as a cost redeeming policy. According to the statements made by the author, the owner tries to reduce the cost of the participants engaged in the project eliminating the insurance costs in return of the coverage provided to the owners. There are certain other points also present in owner controlled insurance programs, which need to be highlighted. In this policy the bidding process is quite complicated as the contractors try to include the insurance costs as well. Then, the cover cost of the program incurred in the project can never be refunded to the contractors. Schexnayder (2002) observed that during bids, every contractor should be very careful as many types of insurance costs might be included. Owner controlled insurance program should include proper documentation in order to make it clearer among the owners or contractors. According to Griffith (2011), appropriate documentation is necessary to capture attention of the construction owners in the United States. Similarly, according to the statements of Hicks (2010), this policy triggers off many gaps from the traditional insurance coverage to make it more useful for owners of the United States. In Owner Controlled Insurance Programs, the market risk is very high because in case it falls, there it is likely that financial risks might occur. Griffith (2011) is of the same view that OCIP involves huge market risk when the market reacts negatively. Recommendations With reference to the above discussion, it can be recommended that the Owner Controlled Insurance Programs can be made more efficient and satisfactory in the market of the United States, if a few changes are implemented. Initially, the OCIP policy facilities should become available to both the large as well as the small contractors. Moreover, the documentation of the program should be made proper. The process of bidding should be more transparent as well as the payrolls should also be unambiguous being performed under recognized owners. The gaps in the insurance policy should be reduced to the maximum extent. If these viewpoints are taken into consideration, it is likely that the concept of Owner Controlled Insurance Programs would prosper in the market (Grenier, n.d.). Conclusion OCIPs assure owners of the projects with the prospective benefits over traditional insurance programs. However, the advantages are not without risks. The owners should be aware of the underlying default risks and understand their expected results so that they can take immediate decisions to reduce the unknown prospects. Therefore, it can be concluded that in-spite of having a certain number of defects in the OCIP, it is more preferable than the traditional insurance policies by the construction owners in the United States. OCIP not only contains defaults but also provides various advantages to the owners and the contractors for which it has been able to acquire a stable and sustainable position in the United States market. References Carroll, O. H., (2009). The Journal of Insurance and Indemnity Law. State Bar of Michigan. Retrieved Online on November 04, 2011 from http://www.michbar.org/insurance/pdfs/InsApril09.pdf Grenier. L. D., (2001). Owner Insurance Programme. Expert Law. Retrieved Online on November 04, 2011 from http://www.expertlaw.com/library/business/ocip Grenier. L. D., (No Date). Owner Controlled Insurance Programs - Part 1. Sheet Metal and Air Conditioning Contractors’ National Association. Retrieved Online on November 04, 2011 from http://www.smacna.org/pdf/management/OwnerControlledInsuranceProgramsPart1.pdf Griffith, H., (2011). Owners Controlled Insurance Program Liability Claims Challenges. Insurance thought Leaders. Retrieved Online on November 04, 2011 from http://www.insurancethoughtleadership.com/index.php/site/property-liability/owner-controlled-insurance-program-liability-claims-challenges-part-11/ Gibson, J., (2006). The Wrap-Up Guide. International Risk Management Institute, Incorporated. Hicks, R., (2010). Wrap ups, Ocip’s, Ccip’s –Basics from the Subcontractor’s Point Of View. Insurance Overview. Retrieved Online on November 04, 2011 from http://EzineArticles.com/?expert=Ronald_Hicks Olson, J. R., (2006). The Ocip Or Wrap Policy. Insurance Journal. Retrieved Online on November 04, 2011 from http://www.insurancejournal.com/magazines/features/2006/07/03/71232.htm Pike, L., (2007). Understanding OCIPS. Finishing Contractors Association Contract Insight. Retrieved Online on November 04, 2011 from http://www.wwcca.org/pdf/OCIPs.pdf Schexnayder, C. J., (2002). Owner Controlled Insurance Programs. TRB Publication Index. Retrieved Online on November 04, 2011 from http://pubsindex.trb.org/view.aspx?id=734698 Taylor, M. J., (2011). The Use of Controlled Insurance Programmes as Risk Management Alternatives on Construction Projects. 47th ASC Annual International Conference Proceedings. Retrieved Online on November 04, 2011 from http://ascpro0.ascweb.org/archives/ed/2011/paper/cprt334002011.pdf Bibliography Alliant Insurance Services, (2011). Owner Controlled Insurance Programme (OCIP). Commercial Insurance. Retrieved Online on November 04, 2011 from http://www.alliantinsurance.com/Services/Commercial/OCIP/default.aspx Click Safety, (2010). Ocip, Ccip, Wrap-up. Training Solutions. Retrieved Online on November 04, 2011 from http://www.clicksafety.com/cspublic/solutions/ocip-ccip-wrapup.aspx Construction Risk Partners, (2011). Wrap-ups (CIPS). Wrap-up (OCIP, CCIP). Retrieved Online on November 04, 2011 from http://constructionriskpartners.com/wrap-up-insurance.php Griffin, W. G, (2008). Three Things You Must Know About OCIP’s. Riskvue. Retrieved Online on November 04, 2011 from http://riskvue.com/articles/fs/fs0803a.htm Servmax, (2011). Ocip/Ccip. General Contractors. Retrieved Online on November 04, 2011 from http://www.servmax.com/general-contractors/ocip-ccip Wrisc Inc, (No Date). OCIP Programs Or Owner Controlled Insurance Program. Wrapup Services. Retrieved Online on November 04, 2011 from http://www.wrapupservices.com/content/WU/ocip.html Read More