The objectives of this paper are to (i) review the risk financing and insurance options available to public sector managers for those increased exposures of large construction projects, (ii) describe the advantages and disadvantages of the popular Owner Controlled Insurance Programs (OCIPs) and (iii) explore some of the implementation issues and strategies for OCIP success.

Introduction

Over the last ten years and across the United States, the public sector has witnessed an explosion of construction activity including new schools, infrastructure and transportation projects, airport construction, arenas and stadiums, and all manner of other projects. The prognosis is that the construction efforts will continue as demand for these essential services and modern facilities grows.

With the significant commitment of public funds for these projects, public sector managers will look for ways to reduce long-term costs and control their construction budgets. The insurance program designed in conjunction with public construction should support this cost containment goal while focusing on preservation of human life, reduction of injuries and damage, and completion of the project within budget and schedule constraints. There are a number of options available to public entities.

One approach is the so-called Owner Controlled Insurance Program or, as it is sometimes known, the "wrap-up." Understanding how such a program fits within an entity's construction and risk financing strategy is critical to making a good decision about whether to institute an OCIP or use some other alternative. There are public sector considerations that affect such a decision resulting in outcomes different from the private sector. Further, the success of an OCIP often depends on the appropriate use of resources, both contracted and in-house, in areas of program administration and design, safety and claims management. These requirements must be appreciated and included in a successful project.

Elements of Public Sector Construction Risk Management

In the public sector, six (6) basic risk management strategies lead to a successful project. In the simplest terms, an entity focusing on the following areas will increase the chances of successfully meeting its risk management objectives:

  • Comporting with the legal requirements governing the project

  • Selecting the appropriate contractor(s) and designer(s)

  • Negotiating and executing proper contractual agreements among the various parties

  • Applying loss prevention and risk control techniques to reduce the incidence of losses (frequency)

  • Implementing a risk financing plan to pay for losses that do occur

  • Targeting claims management and litigation management to reduce the impact of losses that do occur (severity).

Well-designed and executed OCIPs may involve all six strategies. In addition to the protection and services they provide, OCIPs provide a vehicle for the communication and control so critical to managing the relationship with contractors and designers. Further, the contractual agreements are the basis for assigning responsibilities and obligations. Absent proper contracts, an OCIP cannot deliver the promised benefits.

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