University Controlled Insurance Program

Case study

Background

The University of California generates one of the largest
volumes of construction in the State of California. Historically,
contractors performing work on the project site would provide
their own insurance for general liability and workers’
compensation. The University pays for this coverage through
costs embedded in contractor bids, which generally include
overhead and profit mark‐up. In light of recent budget
reductions, the University must find new avenues to reduce
costs and maximize efficiency in the use of construction funds.
If the University procured insurance for the entire project,
savings could be achieved through volume purchasing,
leverage in the insurance market, and the elimination of
contractor overhead and mark‐up. Even though contractors
perform the work, UC faces myriad risks related to
construction operations and defects. With contractorprovided
insurance, the University must rely on contractor
coverage; when a claim arises, contractor insurance may be
exhausted, insufficient, or unavailable to the University. If the
University procured the insurance, the University could more
effectively protect itself for the duration of the project.

Goal

Risk Services at the Office of the President (UCOP) aimed to
develop and implement a systemwide University Controlled
Insurance Program (UCIP) for all projects with construction
budgets over $25 million, with higher limits dedicated to the
UC project, broader coverage, and uniform/consistent
coverage for the project duration. The $25 million threshold
was determined to provide the greatest benefit.

Successes

This program concept has been in existence for the past 40
years. However, in the last ten years, it has received
widespread understanding and acceptance. Many private and
public entities have successfully implemented similar programs
– even contractors have implemented “Contractor Controlled
Insurance Programs” whereby the contractor procures
insurance for the entire project and thus reaps the cost savings
itself.

Challenges

Resistance to change has been the primary challenge. While
the Risk Services at UCOP maintains the authority to procure
insurance, implementing UCIP required collaborative efforts
with the Office of the General Counsel and with Facilities,
Design and Construction offices, which oversee and manage
construction projects. UCIP required changes to the
University’s construction contract documents to incorporate
UCIP language, reflect that the University would provide the
insurance, and ensure that projects are bid Net of Insurance.
UC uses various methods of contracting; each contract method
has its own set of contract documents, requiring multiple
documents to be reviewed updated.

Initial investment

There was no initial investment, other than time and effort, to
develop and implement UCIP.

Fiscal results, current and anticipated

The current pilot program has four completed projects with a
total construction value of $218 million and a total return
savings at close‐out of $1.9 million. The additional return
savings at project close‐out is made possible by UC’s financial
strength and posting of a Letter of Credit.

This program is unique to UC. This additional savings is driven
by the safety and loss experience specific to the project. UCIP
provides enhanced safety, leading to improved loss experience
and a safer construction site which creates the potential for
greater return savings. The average loss ratio for the pilot
program is under 20%, which reflects the benefits of the
increased safety awareness provided by UCIP. It is anticipated
that through the program, the University can save 1‐3% of
total construction value and up to $17 million annually. The
savings on insurance itself can be as much as 35% less than the
cost of traditional insurance.

Current action and next steps

A directive was issued in October 2009 by the University’s
Executive Vice President—Business Operations and Executive
Vice President—Chief Financial Officer, stating that UCIP
implementation would begin January 1, 2010. As of August
2010, there are five projects enrolled in UCIP; two are major
hospital projects: UC San Francisco Mission Bay Hospital and
UC San Diego Jacobs Medical Center. UCIP costs for UC San
Diego Jacobs Medical Center are estimated at $6 million
compared to the traditional insurance cost estimate of $12
million. Next steps are to continue enrolling projects into UCIP
and to monitor and maintain efficiency of the process.

Concluding statement

UCIP represents a change in how insurance is procured for
construction projects. While it will take time for staff to
become familiar with the program, UCIP will ultimately serve
as a cost‐effective risk management tool to improve safety at
our construction sites, provide broader and more uniform
coverage, and better protect UC from financial loss.