Construction

U.S. Department of Transportation Federal Highway Administration

MEMORANDUM

This document constitutes the Federal Highway Administration's (FHWA) policy on Wrap-up or Owner Controlled Insurance Programs.

On January 8, 2002, an Interim Owner Controlled Insurance Program (OCIP) Policy was issued by this office. That action was taken in response to a report issued by the Office of the Inspector General (OIG) on the experiences and activities involved with the administration of an OCIP on the Central Artery and Third Harbor Tunnel Project (CA/T) in Boston. In addition, FHWA had contracted with a consultant to have a resource document developed by a team of individuals in the insurance field who had experience with federally funded OCIPs. This resource document is currently in the final stages of preparation and it is expected that it will be released later this year. The NCHRP is presently finalizing its synthesis of best practices developed from reviewing OCIPs used on highway projects. This document should also be released in the fall.

On July 22, 2002, the OIG issued its Report on Actions Taken by the Federal Highway Administration to Recover Excess Reserves From the Central Artery/Tunnel Project's Owner Controlled Insurance Program, Report No. IN-2002-095. This report was a follow-up on the report cited above. The actions taken to resolve the recommendations of this report have now been completed with this issuance of the FHWA OCIP Policy. The FHWA has taken its actions in line with the direction given by Congress to more narrowly construct its requirements for the way an OCIP using Federal-aid highway funds will be administered than is the norm for other federally funded insurance programs.

Background

Owner Controlled Insurance Programs are an effective way to improve the safety of construction operations and reduce the cost of insurance on large projects. The basic operational features of an OCIP are: (1) the owner purchases insurance coverage (all or some specific elements) to cover all contractors and subcontractors on a project; (2) there is an integrated owner-contractor managed safety program on the project; and (3) claims are processed centrally. Generally, the use of an OCIP can save money on large projects through lower bulk insurance rates, improved safety management processes, and reduced disputes between contractors over who was responsible for a particular loss.

There are many variations in how an OCIP can be set up. For example, the project owner can purchase coverage, self-insure, or devise a program that blends the two. By retaining more of the risk (through self-insurance or higher deductibles) the owner can obtain lower premiums for the coverage actually purchased. When the insurance program contains a significant element of self-insurance (either a direct self-insurance program or a program with large deductibles) the owner is usually required to provide assurance they will have the money to make those long-term payments as they come due. The State Insurance Agency (and the insurance company, when it pays claims and then recovers deductibles from the owner) may require the owner to provide a letter of credit or establish a reserve account to guarantee it will have the resources to meet its obligations.

Policy

Federal-aid funds can be used to participate in OCIPs on Federal-aid projects. The OMB Circular A-87 provides guidance and establishes limits on Federal reimbursement of insurance costs. The FHWA will generally follow the OMB guidance or as specifically stated in the following. Typical costs that may be eligible for Federal-aid funding include:

1. Costs incurred in the preparation of an OCIP plan, including the procurement of consultant services, the establishment of a letter of credit or the establishment of reserve accounts, and the selection of an insurance provider;
2. Premiums for purchased coverage, up to reasonable limits consistent with standard industry practices;
3. Costs incurred because of losses not covered under nominal deductible insurance coverage, and minor losses not covered by insurance, such as spoilage, breakage, and the disappearance of small hand tools, which occur in the ordinary course of operations;
4. Contributions to reserve accounts to pay allowable retained costs (e.g., self-insured losses/losses under deductibles, and associated expenses) provided:
   1. The reserve account balance does not exceed the actuarially projected value of incurred claims. Incurred insurance claims include claims: submitted and adjudicated but not paid; (b) submitted but not adjudicated; and (c) incurred but not submitted. These amounts should be determined not less than annually by an independent actuary.
   2. For incurred claims that will pay out in future years (e.g., disability), the reserve is limited to the present value of the expected payment. The difference between the present and future value of the payment is made up by the interest earned on the reserve account, thereby reducing the total cost of the program to the owner and the Federal Government.
   3. The reserve account balance is adjusted annually, as necessary, to ensure compliance with this policy.

Costs that will typically not be eligible for Federal-aid funding include:

1. Any costs or reserve amounts for damage to Federal property;
2. Actual losses that could have been covered by permissible insurance (including self-insurance);
3. Future costs (except for the present value of incurred claims as described above);
4. Insurance that protects contractors against losses for the cost of correcting the contractor's own defects in materials or workmanship.

Insurance refunds must be credited against insurance costs in the year the refund is received.

If annual actuarial reviews of reserve accounts disclose excess balances, the Federal share of the excess amount shall be promptly removed from the reserve account(s) and applied to other allowable project costs or returned to the State's Federal-aid account.