In the early 2000’s, Owner-Controlled Insurance Programs (OCIP) or WRAPS, were traditionally used in large commercial projects of over $50 million in construction costs. As construction defect lawsuits became more prevalent, subcontractors found themselves unable to meet the insurance requirements of their contracts with developers and general contractors because they could not find insurance companies that were willing to insure the risk. This presented a problem for developers and general contractors and left them with no option but to look into new insurance products that would insure them and all subcontractors who worked on the project. OCIPs became in some instances the only insurance option for developers, general contractors, and subcontractors to build single-family or multi-family projects in California and other western states.
OCIPS or WRAPS, often likened to the layers of a savory burrito, offer both enticing benefits and potential pitfalls. Just as a burrito’s ingredients can harmonize or clash, OCIP policies can shape the outcome of legal battles, impacting contractors, developers, and insurers alike.
Pros – Savoring the OCIP Burrito:
1. Wrapped Protection: Much like a well-folded burrito envelops its contents, OCIP policies offer comprehensive coverage for construction projects. Developers, general contractors, and subcontractors find comfort in knowing that their liability risks are bundled into a single policy, ensuring all enrolled parties have coverage in the event of a claim.
2. Cost Savings: Similar to ordering a value-packed burrito deal, OCIP policies can lead to cost savings. By consolidating coverage, redundant premiums are minimized, and administrative expenses are streamlined, allowing stakeholders to allocate resources more efficiently. Often the cost of the OCIP policy is calculated into the costs for the project and payment for the OCIP can be negotiated and written into the contract between the developer and the subcontractor. For example, the parties can agree that the developer will withhold a certain amount or percentage of the subcontractor’s total payment to pay the subcontractor’s share of the OCIP policy.
3. Collaboration Flourish: A perfectly rolled burrito blends ingredients harmoniously, much like how OCIP policies encourage collaboration. With all parties under one policy umbrella, disputes are reduced, fostering a collaborative atmosphere that can expedite issue resolution. For example, if a non-OCIP project is involved in litigation, typically the Owner sues the developer/general contractor and the developer/general contractor in turn sues the subcontractors who performed the work that the Owner alleges is defective. Depending on the nature of the dispute and size of the project, this could result in litigation that involves 10-20 parties with different counsel, different experts, and different opinions. This often results in litigation lasting longer as coordinating the schedules of all parties alone to schedule a site inspection or mediation is a challenge. Too many cooks in the kitchen sometime spoils the soup!
By contrast, if an OCIP project is involved in the litigation, typically the only party sued by the Owner is the developer or general contractor and the developer/general contractor defends the entire action on behalf of all parties enrolled in the OCIP. The only parties that are traditionally not enrolled in the OCIP are manufacturers and design professionals. Thus, in this instance the litigation may be a 2-3 party case that makes it easier and more efficient to coordinate and resolve.
Cons – Navigating the Ingredients:
1. Clash of Flavors: Just as clashing flavors can disrupt a burrito’s enjoyment, OCIP policies can lead to disputes over coverage terms and responsibility allocations. Differences in interpretation can arise, potentially slowing down the resolution process. This often becomes a problem when the OCIP requires the subcontractors to contribute to payment of a self-insured retention or deductible. The developer/general contractor contacts the subcontractors and informs them of the claim/lawsuit and that their work is implicated. Next, the developer/general contractor asks each subcontractor whose work is implicated to pay their allocated share of the self-insured retention or deductible. The allocation is oftentimes described in the subcontract and agreed upon during contract negotiations. Allocations are generally calculated based on the amount of work that the subcontractor performs on the project. For example, a finish carpenter or lower tier contractor’s allocated share of a self-insured retention or deductible is substantially less than a framer or concrete subcontractor’s share. Many times, when asked to pay their allocated share of the self-insured retention or deductible, the subcontractors have a difference of opinion on whether their work is implicated which would trigger their payment and this places the developer and subcontractor at odds with each other and the collection of the allocated shares of the self-insured retentions or deductibles results in further litigation between the developer and the subcontractor.
2. Limited Customization: Just as some burrito enthusiasts prefer custom orders, OCIP policies might not accommodate the unique needs of every project. The one-size-fits-all approach can omit specific risk considerations, leaving certain parties vulnerable. One example is if a subcontractor’s work has a design or material supply component which may not be covered by the OCIP and may leave some work with no coverage unless the subcontractor maintained general insurance coverage for that work.
3. Control Complexity: A meticulously crafted burrito balances ingredients to perfection, but OCIP policies might not provide all stakeholders with an equal level of control. Typically, the developer/general contractor secures the OCIP policy and the subcontractors may feel that they have no control or input in this decision.
4. Limited Policy Limits: In a traditional construction projects where the developer/general contractor has its own primary insurance coverage and each subcontractor who worked on the project has theirs, there are multiple levels of insurance coverage and often several millions of dollars in coverage available to resolve a matter or pay a judgment. However, when there is one OCIP policy that insured everyone the policy limits are capped to those of the OCIP policy which depending on the nature and extent of the alleged defects and damages, may leave the OCIP enrolled parties exposed to personal liability if the OCIP policy limits are insufficient to satisfy the claim.
Additionally, the majority of OCIP policies have provisions wherein defense costs contribute to the erosion of the aggregate limits of the OCIP policy. This means that the longer the matter is litigated the less aggregate coverage available.
In the realm of construction defect cases in California, OCIP policies are akin to assembling a burrito, with layers of protection and challenges to navigate. Contractors and developers, much like discerning burrito connoisseurs, must weigh the pros of comprehensive coverage and cost savings against the potential cons of clashes over interpretation and limited customization. Just as constructing the perfect burrito requires careful consideration of each ingredient, making the most of OCIP policies involves thorough assessment, open communication, and a dash of legal expertise.