Different construction insurance mechanisms currently utilized by the construction industry - Essay Example

Material loss may result from the death of an employee, worker's compensation or defects on construction. Construction insurance although in theory is not very different from any other type of insurance, the main difference lies in the enormous risk a construction company is exposed to while undergoing the project, thus, resulting to a higher premium. As a matter of fact, "the market for general liability insurance has taken a disastrous turn over the past two years. Builders and remodelers in every part of the country are experiencing dramatic increases in premiums and big changes in deductibles and exclusions.

In some states, coverage may not be available at any price. If a company's insurance is too costly, it can't be competitive." (Miller) This is the reason why several mechanisms are used in the construction industry to minimize the risk or the amount of premiums to be paid. Some mechanisms are provided for by law whereas some evolved from general practice. Several examples of these mechanisms are the Additional-insured endorsements, Owner Insured Risk Programs, reinsurance and the inclusion of a mediation and/or arbitration clause in the insurance contract.

One of the mechanisms used, particularly in Oregon, is the "additional-insured endorsements." These endorsements, "which . An additional-insured endorsement states that in addition to the insured contractor, another party is an additional insured party under the insurance contract, thus giving the additional party the right to make a claim directly on the policy." (Christensen) This simple mechanism ensures that the insurance is available among the various participants in construction projects including owners, general contractors, subcontractors, and sub-subcontractors.

This mechanism in effect lowers the overall cost for risk-allocation on the project. Another mechanism is the Owner Controlled Insurance Program or OCIP. In an OCIP, "the owner purchases insurance for other participants in a construction project." (Thelen Reid Brown Raysman & Steiner LLP) An Owner Controlled Insurance Program will cover the owner, the contractor , the subcontractors and sometimes include the design professionals. The coverage is tailored to the needs of the party applying for it but generally it includes general liability (CGL), builder's risk, worker's compensation, design errors and omissions as well as excess and other special coverages.

The OCIP process is pretty complicated, contractors and subcontractors need to be cautious when participating in an OCIP project. "They must ensure that the coverage offered by the OCIP is sufficient to replace their existing insurance coverage. They also must be careful that the bid deduct process by which the cost of insurance deducted from their price is properly and timely performed." (Thelen Reid Brown Raysman & Steiner LLP) The OCIP was generally used in large scale constructions, however, it is slowly becoming popular even with small-scale projects especially in condominium and