Protecting residential construction risks with OCIPs
Residential construction throughout the country surged to an all-time high in 2005, according to the United States Commerce Department. And though economists forecasted a slowing of construction and sales activity in 2006, construction of new homes shot up in January at the fastest pace in more than 30 years. When it comes to the state of Texas, however, the opinions are mixed. Some insurance industry professionals see the momentum in the commercial construction arena, while others feel that many of the evacuees from Hurricane Katrina will remain in Texas, creating the need for more housing.
The fact is, builders will continue to construct homes in Texas. The question is: will they–and their subcontractors–take advantage of owner-controlled insurance programs (OCIPs)/contractor-controlled insurance programs (CCIPs)?
Many states, such as Hawaii, Washington, Arizona and Nevada, are transitioning from traditional methods of insurance to OCIPs and CCIPs, but the impetus for this transition is not always well understood. The drive is not from carriers’ desire to create better funding models for their policies or from brokers who want increased commission bases. Instead, it stems from the fact that appropriate insurance for subcontractors to work on residential projects is becoming increasingly scarce. This was particularly true in California in the 1980s, when the abundance of construction defect claims all but killed the building of condominiums, and subcontractors could not find insurance. OCIPs turned that tide.
For a builder to act prudently risk management-wise, he must be fully aware of not only the coverage his subcontractors can provide him today, but also have a crystal ball to look into the future. That future is OCIPs or CCIPs. It only makes sense: when a builder knows exactly what his insurance coverage is going be because he buys the policy, he sleeps better at night. Although this type of policy provides better coverage than traditional insurance, there is not enough awareness of it in Texas.
In Texas, an OCIP or CCIP policy is purchased by an owner/contractor/developer, and is annual-policy or project-specific based. That is, every construction participant is covered under one protective insurance “umbrella” for a given policy period. (This differs from such states as California and Nevada where the policy is “project specific.”)
There are many significant differences between an OCIP/CCIP and a traditional policy. With an OCIP/CCIP:
- All covered claims are paid for under the policy, regardless of which insured the claims are made against.
- The carrier owes the same insurance obligations to all insureds listed on the policy.
- A single attorney and a single claims adjuster will defend all participants.
- Cross-suits are eliminated, reducing disputes and litigation expenses.
- Coverage is provided to enrolled participants for the entire statute of limitations (some states have exceptions).
There are also many advantages to an OCIP/CCIP; in fact, many in the industry feel that they provide a win-win situation for builders and subcontractors. Consider the following benefits:
In addition to these advantages OCIPs/CCIPs include subsidence coverage, which is vital in Texas because the state has expansive clay and expansive soil issues. Also, OCIPs could provide coverage for property damage caused by mold, water intrusion or other related issues. And, if desired, the policy could be designed to include occupational accident coverage; most policies don’t cover workers’ compensation.
There is a down side to OCIPs/CCIPs, however. For instance, in Texas the operating margin makes OCIPs too expensive for the ‘stick-built’ project. You see the majority of OCIPs in the mid-rise, the high-rise or the mixed-use construction. These general contractors and subcontractors are more familiar with the advantages of OCIPs. The owners of smaller projects think the GC’s occurrence policy will protect them, and the GC thinks the subs’ occurrence policy will protect them.
The solution? Education. Builders and general contractors must closely examine the coverage being provided by subcontractors and keep their fingers on the pulse of what is happening in the subcontractor market, with an eye toward complete operations coverage. On the flip side, carriers need to write the risk at a reasonable rate.
In essence, in Texas, both sides need to come to the table. There’s the responsibility of developers to build better quality projects, and the insurance industry needs to provide more affordable coverage and develop a better understanding of their clients’ risks.
Paul Bryan is the vice president, Business Development of DBH Resources, a risk management consultancy and full-service provider of wrap up administration for residential and mixed-use commercial projects. E-mail: pbryan@dbhresources.com.