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Workers’ compensation subrogation has another growing adversary—one that can slip in during the cover of night, gutting subrogation, and reimbursement rights, even after an insurance company or third-party administrator has spent thousands of dollars in recovery efforts. It is known as an OCIP, CCIP, or CIP, acronyms which spell trouble for workers’ compensation carriers which zealously pursue recovery opportunities on behalf of their insureds.
In an effort to save money on construction projects, some insurers have begun to enter into arrangements with project owners or general contractors, by which the owner or general contractor obtains insurance – including workers’ compensation insurance – and thereafter requiring all subcontractors to be covered under the same policy, something known as a Consolidated Insurance Program (CIP). A CIP is also commonly referred to as “wrap-up insurance.” This shouldn’t be conflated with “Wrap-Around Insurance” programs; insurance policies which “wrap around” because they are set up in conjunction with an Employment Practices Liability Insurance (EPLI) policy and provide punitive damage coverage.
An Owner-Controlled Insurance Program (OCIP) means that the project owner, or general contractor, buys one policy to cover the entire project. All subcontractors are usually enrolled in the project. If the owner purchases the program, it is known as OCIP. If the general contractor purchases the program, it is known as a Contractor Controlled Insurance Program (CCIP). Either way, everyone working at the project site is covered under one liability insurance policy. When the project is bid, each contractor/ subcontractor subtracts out its line-item for liability insurance and the owner receives a portion of the cost of the OCIP premium back in the form of lower construction costs. OCIPs typically provide coverage through substantial completion of construction plus a period of years thereafter, typically ten years. The benefits to the owner are significant because they guarantee they will have coverage and force the limits they selected for the applicable statute, and they can be comfortable that any contractor setting foot on the site is covered.
OCIPs were developed to make the insurance programs used primarily for construction projects more equitable, uniform, and efficient. OCIPs eliminate costs of overlapping coverage and delays caused by coverage or other disputes between the parties involved in a project and, at the same time, protect all the contracting parties by bringing the risk of loss from the project within the insurance coverage of the OCIP. By intent and design, OCIPs are most effective for larger construction projects. The owner negotiates the appropriate price and terms of the policies for the project and directly benefits by eliminating the cost of overlapping coverage. The greater the number of contractors involved in the OCIP, and the greater the number of overlapping policies that are eliminated, the greater the savings are to the owner. The money the owner saves does not come from the contractors’ pockets. The contract price is reduced because insurance costs are not incurred by the project’s contractors. The cost of doing the work should be constant, and the owner and contractors alike would be amply covered by the insurance policies covering the project.
In an OCIP or CCIP program, the owner or contractor essentially takes on the responsibility of the employer for employees of all subcontractors on the project. The problem arises when a state determines that an owner or contractor which has purchased an OCIP or CCIP program becomes the “statutory employer” of all workers on the job site, giving it immunity from suit under the exclusive remedy bar of that state’s workers’ compensation laws – essentially immunizing the owner or general contractor from any third-party claim of virtually everyone on the job site who is in the contractual chain. Persons within such a program which become immune from suit include a subcontractor or specialty contractor, but generally does not include anyone who merely furnishes materials or supplies without fabricating them into, or consuming them in the performance of, the work of, a contractor. The law in this area varies widely from state to state. The law regarding the effect of OCIPs on subrogation is not yet well-developed in many states, but that is changing.
Nevada leads the pack in dealing with this potentially devastating subrogation-killer. Nevada’s § 616A.020(4) provides that the Exclusive Remedy Rule applies to the owner of a construction project who provides an OCIP pursuant to § 616B.710, “to the extent that the program covers the employees of the contractors and subcontractors who are engaged in the construction of the project.” If the owner provides OCIP workers’ compensation coverage, the owner will be considered an employer and the Exclusive Remedy Rule will apply, at least to the extent that the program covers the employees of the contractors and subcontractors engaged in the construction project.
The law in this area varies greatly from state to state. Texas, for example, recognizes that in an OCIP situation, the owner may be considered a “deemed employer” of employees on the project, but it must be established that the owner actually provided workers’ compensation insurance for these employees in order to be immune. Rice v. H.C. Beck, Ltd. 2006 WL 908761 (Tex. Civ. App.- Fort Worth 2006).
A Michigan federal district court has held in an unpublished opinion that when an OCIP is in place, the OCIP effectively transforms all enrolled contractors into the employer of the injured plaintiff. Stevenson v. HH & N/Turner, No. 01-CV-71705-DT, 2002 U.S. Dist. LEXIS 26831(E.D. Mich.2002). The court found persuasive the fact that Michigan’s legislature had enacted regulations governing OCIPs that ensured a “primary condition for approval of the OCIP by the Michigan Department of Consumer and Industry Services is that ‘liability under this act of each employer to all his or her employees would at all times be fully secured….’.”
A Wisconsin federal court, on the other hand, noted that Wisconsin law merely requires that all contractors and subcontractors “shall be included under the wrap-up program” under Wis. Adm. Code. § 80.61(3)(b)(5). Pride v. Liberty Mutual Ins. Co., 2007 WL 1655111 (E.D. Wis. 2007). That court held that if the Wisconsin legislature had truly intended to allow employers at a construction site to bundle together their worker’s compensation liability, it would have been simple enough to craft a provision stating that the owner of an OCIP-insured project is deemed the sole employer of any employee of any contractor injured on that project. In Wisconsin, therefore, courts will apply the Exclusive Remedy Rule only when the injured plaintiff is functionally and intentionally fulfilling the role of an employee, because it is only in those cases that the original bargain between employers and employees is fulfilled.
A 50-state chart detailing the law in every state with regard to the impact of OCIP programs on workers’ compensation subrogation can be found HERE. Very few states have established case decisions or statutory law dealing with the effect of OCIPs and the like on subrogation and/or the right of an injured worker to proceed against a third-party in a construction setting. Subrogation professionals should be on the lookout for OCIPs and similar programs in any large construction setting losses they are confronted with. Finding out early that an OCIP may affect the ability of both the injured worker and the subrogated carrier from proceeding with subrogation can save a carrier both time and money – both of which are key components to any successful subrogation program.
For more information on workers’ compensation subrogation in construction and other large project settings, contact Gary Wickert at [email protected].