Legal and Regulatory

Considerations to Overcome the Unintended Challenges of Wrap-Up Policies

Wrap-up insurance policies provide an alternative to traditional commercial liability insurance policies. OCIPs are sponsored by the project owner, whereas CCIPs are sponsored by the general contractor.
By Sean J. McKinley and Jason A. Heller
January 16, 2018
Legal and Regulatory

Wrap-up insurance policies, also known as Owner-Controlled Insurance Policies (OCIP) and Contractor-Controlled Insurance Policies (CCIP) are becoming more common in the construction field, providing an alternative to the traditional model of one commercial liability insurance policy for each distinct contractor. An OCIP is sponsored by the owner of a construction project whereas a CCIP is sponsored by the general contractor of a project.

Typically, OCIPs and CCIPs provide general liability and workers’ compensation insurance to all enrolled contractors and subcontractors for a specific project at a specified job site. Traditional insurance models require that the general contractor and sub-contractors all maintain valid general liability and workers’ compensation insurance to ensure coverage for an unexpected occurrence. By utilizing OCIPs or CCIPs, a project owner or general contractor can reduce the overall cost of insurance coverage and unilaterally manage workers’ compensation risk by instituting a comprehensive safety program and aggressively managing post-accident risk through claims management.

Benefits of OCIPs/CCIPs

Workers’ compensation risk is inherent with construction projects due to the physical nature of the work. OCIPS and CCIPs allow project owners and general contractors to negotiate one insurance policy that will cover an entire construction project. According to “12 Questions Businesses Need Answered Before Starting an OCIP,” project owners and general contractors can expect lower costs overall due to reduced administrative outlays. “How Construction Companies Are Simplifying and Saving on Insurance Costs” maintains that owners and general contractors can simplify the insurance process by knowing that all participants in the OCIP or CCIP have uniform coverage and policy limits. Further, sponsors of the OCIPs and CCIPs are able to implement their own safety and loss-prevention models, resulting in improved management of risk and subsequent claim handling. According to Expertlaw, OCIPs and CCIPs allow the sponsors to ensure the adequacy of insurance coverage across all sub-contractors. This results in peace of mind for both project owners and general contractors.

There are practical benefits for sub-contractors, too. Specifically, OCIPs and CCIPs will create trickle-down benefits for sub-contractors. If sub-contractors are not required to maintain their own workers’ compensation insurance, the bids submitted to general contractors will reflect the reduced costs. In addition, enrolling in an OCIP or CCIP may allow sub-contractors to submit bids for projects they otherwise could not afford to insure under the traditional insurance model.

Legal Hurdles Caused By OCIPs/CCIPs

Despite the many benefits of OCIPs and CCIPs, these wrap-up insurance policies can create additional challenges when managing and defending workers’ compensation claims. With respect to the on-site challenges, project owners or general contractors become responsible for the safety of all of the project’s employees rather than only their direct employees. Similarly, protecting against fraudulent claims becomes challenging when there is an absence of control and supervision over employees of a sub-contractor, who may act as a witness at trial.

There are also challenges for compensable claims. Oftentimes, claimants are given physical restrictions following an accidental injury. Under a traditional insurance model, the claimant’s employer is responsible for accommodating the claimant’s physical restrictions to mitigate indemnity exposure and avoid the payment of temporary total disability benefits. Sponsors of OCIPs and CCIPs, however, are typically unable to directly control the availability of modified duty for a sub-contractor. As a result, project owners and general contractors may sustain increased indemnity exposure if a sub-contractor is unable or refuses to offer a claimant a modified duty position. Penalties can be incorporated in the insurance contract to incentivize light-duty accommodations.

In addition, workers’ compensation claims often trend toward litigation. To properly contest the compensability of claims, limit the payment of temporary total disability benefits, or mitigate the payment of permanent partial disability benefits, witness participation and testimony is often required at administrative hearings or jury trials. Under a traditional model, employers control their own fate with respect to witness testimony at workers’ compensation proceedings and the testimony’s effect on the defense of the claim. Sponsors of OCIPs or CCIPs, however, lose their direct control over a sub-contractor’s participation in the legal process. This may result in an inability to rebut a claimant’s testimony leading to unfavorable decisions by the administrative body or jury. Of course, the consequence of an unfavorable decision results in increased indemnity and medical exposure, oftentimes out of the control of the project owners or general contractors.

Considerations to Protect the Holder of an OCIP/CCIP

Despite the legal hurdles created by OCIPs and CCIPs, these policies are beneficial — and policyholders can take steps to protect against these hurdles. Protections against the challenges of OCIPs and CCIPs start with the policy itself. The threat and enforcement of fines should be contained within the provisions of the OCIPs and CCIPs. If a subcontractor refuses to accommodate a claimant’s physical restrictions, a fine should be assessed. If a subcontractor refuses to respond to discovery requests, a fine should be assessed. If a subcontractor fails or refuses to participate in a legal proceeding requiring attendance and testimony, a fine should be assessed.

Oftentimes, modest fines are already provided for within the OCIPs or CCIPs if a subcontractor does not assist the project owner or general contractor with the workers’ compensation claim. Despite this, these small fines are not sufficient to encourage and require a subcontractor’s participation in the workers’ compensation process. Instead, OCIPs and CCIPs should require shared liability for the contracted parties with respect to the workers’ compensation exposure. If a subcontractor is found to have failed or refused to participate in the workers’ compensation process, the subcontractor should absorb a percentage of the indemnity and/or medical exposure. These stringent provisions will encourage participation of a subcontractor in workers’ compensation claims and will serve to protect project owners and general contractors from incurring unnecessary and uncontrollable indemnity and medical expenses.

by Sean J. McKinley

Sean J. McKinley focuses his practice on workers’ compensation at Goldberg Segalla. He defends insurance carriers and self-insured employers in a wide range of workers’ compensation claims, including those involving slips and falls, motor vehicle accidents, World Trade Center claims, occupational disabilities, repetitive stress claims, psychiatric injuries and fraud claims under the Workers’ Compensation Law. His experience includes cases arising from numerous industries, including retail; construction; health care, including long-term care facilities and home health providers; and hospitality, including hotels, restaurants and casinos.

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