Following the construction industry and related legal topics in the United States.

Thursday, October 12, 2006

Controlled Insurance Programs - Changing the Emphasis from Cost-Saving to Control

CIPs, OCIPs, CCIPs, wrap-ups - these are all acronyms or abbreviations for insurance programs that have been applied in large construction contexts. Defined generally, they include CGL, worker's compensation, and umbrella coverages for all parties on a construction site. An OCIP is an "Owner" controlled program, while a CCIP is contractor controlled. Initially, these programs were marketed as a mechanism to cut overall insurance premium costs to enhance a project's bottom line. Now the industry is taking a different tack.

Leading up to its Annual Construction Insurance Conference held this week in San Diego, the International Risk Management Institute ("IRMI") performed a survey of contractors and subcontractors to assess satisfaction with Controlled Insurance Programs or "CIPs." Six-hundred parties responded to the informal survey. IRMI reported that among general contractors, 60% like CIPS; 35% tolerate them; and 5% hate them. Among subcontractors, 20% like CIPs, 50% tolerate them and 30% hate them. For those generals and subs who like CIPs, the satisfaction usually stems from their ability to control a project's insurance and risk management. Owner controlled programs are less favored, since the contractors believe that they are better qualified to manage risk on the project.

There are no known industry studies as to whether CIPs actually yield any cost savings to any participants - the benefits are difficult to quantify; so, cost does not seem to the key driver for whether to employ a CIP. Experts tend to agree that CIPs or wrap programs may only be cost-effective on projects with values exceeding $150MM, but if "control" is the driver, maybe they should be considered on smaller sites. They do expand the availability of coverage for subs who might otherwise have difficulty getting contractually required coverages.

In the end, CIPs seem to make sense when the party who is in the best position to acquire the coverage, manage and administer the program - not usually an owner - controls the CIP with an eye toward effective risk management and breadth of coverage. For more information on this topic, visit IRMI's website. (Today's entry was published by Laura Luger of Womble Carlyle's construction and real estate group, with the assistance of Garth Gersten.)


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