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Big jobs can benefit from owner-controlled insurance

Big jobs can benefit from owner-controlled insurance

Many large U.S. airports now recognize the need to increase capacity and services to meet growing traffic demands. Passenger traffic resurgence has led
  • Written by Muse, Fred
  • 1st May 1995

Many large U.S. airports now recognize the need to increase capacity and services to meet growing traffic demands. Passenger traffic resurgence has led to major expansion and improvement of existing airport facilities in addition to the construction of new airports.

The complexity of these projects presents a huge challenge for airport operators who must implement effective management programs to prevent delays or interruption in operations while keeping the construction project on time and within budget.

The William B. Hartsfield Atlanta International Airport, the major airport in Georgia and the southeast United States, is among the three busiest airports in the country. It also is considered to be one of the nation’s best operating airports.

In 1991, the city began construction of a new international concourse and instituted a capital improvement project at the airport. Construction costs were estimated at $275 million for a three-year period. Plans included some 30 separate projects, stretching the length of the airport and affecting nearly all operations.

The construction project involved 30 different general contractors and more than 350 subcontractors.

The airport’s Risk Management Department was responsible for designing a project insurance program to respond to the critical goals of promoting safety and minimizing claims, achieving significant cost savings and ensuring consistency and quality of coverage and limits throughout the life of the project.

It was determined that the independent purchase of insurance by contractors and subcontractors was neither the most cost-effective nor prudent risk management practice. The number of contractors involved and the close proximity of construction to large aircraft and active runways motivated the airport to implement an Owner Controlled Insurance Program (OCIP) as a more appropriate risk management solution.

An OCIP, or wrap-up, is the placement of a single project-driven insurance program covering all job-site risks of the project owner, the general contractor or construction manager and all contractors and subcontractors. Under such plans the owner procures workers’ compensation, commercial liability, excess liability and builder’s risk coverages for contractors and subcontractors performing job-site operations.

Yet, although an OCIP consolidates the insurance program for the construction project, the legal relationships between the parties to the construction remain unchanged. An OCIP does not shift the chain of liability; consequently, the negligent party is still responsible for his or her own actions.

Control of the site and coordination of a single safety program was – and continues to be – a major objective. Safety is the most important aspect of any owner-controlled insurance program.

Centralizing the multitude of independent safety programs of contractors and subcontractors involved in the construction into a single system with central accountability dramatically reduced both the potential for injury and the overall program cost.

Control of contractors’ and subcontractors’ insurance coverages on-site for certain key construction insurances (principally workers’ compensation and general liability) was also a critical factor in the airport’s decision to use an OCIP. The wrap-up eliminated a myriad of conflicting insurance provisions, overlapping policies and varying policy limits that contractors and subcontractors traditionally bring to a job site.

In addition, the airport had the flexibility to tailor certain coverage extensions specific to the risks of this site that otherwise would have been unavailable.

By procuring liability insurance centrally, the airport was able to obtain substantially higher liability limits — dedicated only to its site — for essentially the same cost as contractors could have independently purchased policies with $1 million to $5 million limits.

Additionally, by centralizing the insurance purchase through a single carrier, the owner could be much more involved in the management of any sizable claim.

Centralizing insurance procurement also helped the airport eliminate barriers to entry for minority businesses that often cannot obtain required coverages at acceptable costs.

The airport’s OCIP included a number of unique features to reduce total cost, improve services to contractors and increase the performance of the program. These included:

* High-deductible workers’ compensation. Use of a high-deductible workers’ compensation program to provide individual workers’ compensation policies for each contractor helps avoid payment of certain residual market loadings inherent in the majority of contractors’ and subcontractors’ workers’ compensation bid insurance deductions. On average, the Hartsfield Airport Authority was able to save an estimated $300,000 in fixed costs without any increase in risk assumption.

* Project safety manual. In order to control the site effectively, a safety manual on the airport exposures was developed, and contractors were required to follow it. The manual included certain mandatory procedures: 100 percent fall protection, a substance abuse program, safety incentive program, emergency procedures and pre-construction contractor orientation.

* On-site safety manager. A full-time loss control manager was hired to coordinate all safety activities between contractors, investigate claims and assist with contractor enrollment. This individual was the owner’s on-site representative and had full authority to remove contractors or shut down the project in the case of serious safety violations.

* Safety review committee. A committee of representatives from the airport, its insurance brokerages and the designated safety manager from each general contractor met at least once a month to review contractor compliance, hold mock OSHA inspections, conduct safety training programs and review all large claims.

* Management information system. The efficient management and control of the massive amounts of information (enrolled contractors, payroll, losses) calls for the use of a sophisticated management information system. The airport used an automated OCIP system that provided accurate tracking of all information, produced management reports and eliminated administrative burdens for the airport.

After three years of operation, the airport’s OCIP has provided savings of more than $2 million dollars in workers’ compensation and general liability premiums. The results have prompted Hartsfield International to implement a second phase of the OCIP that will include major renovation projects at the airport in preparation for the 1996 Olympic Games.

This article was written by Fred Muse, an assistant vice president with Johnson & Higgins Construction Group, New York.

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