The following article provides a perspective on the financial and insurance implications of managing contractor safety, based on DuPont experience specializing in construction and contractor safety. Gary Birchall, manager of the DuPont Safety Resources contractor safety practice, offers the following insights.
There are numerous regulatory, financial, legal liability and societal drivers causing owner firms to consider how they interface with contractors working in their facilities. When managing contractor safety, today’s owners must consider a variety of implications: contractor selection and qualification, contract conditions, coordination of contractor work, communication between owner and contractor, potential disruption to operations and considerable insurance and financial decisions.
For more than 30 years, DuPont has used a rolling owner-controlled insurance program (OCIP) arrangement with many of our major, internationally recognized partner contractors. By using an OCIP, owner firms can wrap all major project contractors into one insurance policy. We have found that an OCIP can allow owner companies to realize significant, measurable savings as contractors work safely on company projects.
In its most simple form, an OCIP means that the managing company procures and provides liability insurance coverage (typically workers’ compensation and general liability) to contractors for worksite-related risk. Whereas in a traditional arrangement, contractors procure, prorate and pass on the cost to the owner as part of their fee and owners have limited control over the quality and cost of the coverage.
Materials, labor and insurance combine to generate the greatest cost for contractors. Typical labor-dependent insurance costs incurred by contractors can equal anywhere from 10% to 20% of payroll. And the typical insurance cost passed onto the managing company can run 4% to 7% of the total fee.
So, how can an OCIP help owner firms uncover savings?
Without leveraging the insurance buy through an OCIP, each contractor procures insurance independently from a variety of sources and then passes the insurance cost to the owner through the individual contractor bid. When owners consolidate the purchasing power of all contractors (measured as payroll) and the owner, and place the entire coverage with one carrier, they can achieve a leveraged buy and see immediate savings. These savings can be further optimized when a company demonstrates good contractor safety performance on their projects.
Today, the pass-through cost of insurance by contractors is based on their corporate exposure (from all the clients for whom they work) and historical loss history. The contractor’s risk history is then included as overhead in the bid. Subsequently, the owner assumes and pays for the contractor’s overall historical risk experience, when the owner’s experience is likely superior to their overall loss profile. An OCIP allows insurance underwriters to rate the risk based on a more controlled, contained and safe environment, which optimizes the savings coupled with the leveraged buy.
Insurance underwriters value demonstrated safety performance, and partnering with a company that has a proven OCIP track record can bring additional savings. For example, DuPont OCIP performance has been superior to average (measured by losses and loss ratios) and underwriters have given credits to clients for partnering and leveraging the DuPont OCIP experience.
Savings are also derived when losses underrun the owner’s retained risk (deductible). Dependent upon contract structure, the insurance carrier typically assumes the higher level of risk above deductible limits and in exchange expects the insured to pay first dollar coverage for any loss up to those limits (individual occurrences and aggregate). Simply speaking, it is like the deductible on an automobile policy; the car owner pays up to $500 out of pocket and the insurance carrier picks up the balance, within the limitations of the policy.
To the extent that the insured controls injuries (both frequency & severity), out-of-pocket losses yield additional savings compared to expected losses. In the auto example, being accident free for the policy year saves the full $500.
While an OCIP can provide significant financial benefits for owner companies, DuPont has also found that the program can help integrate contractors on owner sites and positively influence contractor safety performance. In turn, contractors benefit from lower Experience Modification Rates, equaling lower insurance costs and collateral benefits in improved corporate safety culture, project schedules, productivity and project cost. Ultimately, there are many compelling financial reasons for wanting to improve safety. And it certainly helps a company’s management process when owners know why safe work habits are good for the bottom line.
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