Traditionally, each participant in a construction project obtains insurance individually to protect against the risk of financial loss. In recent years, “wrap-up” insurance programs have emerged as an alternative to the traditional method of risk management. In a wrap-up program, the project owner can purchase an insurance policy that will cover the participants involved in the construction project, including the owner, construction manager, general contractors and subcontractors. Typical wrap-up policies provide coverage for workers’ compensation, general liability and builder’s risk; however, program features vary based on the insurance company and the type of project.
The most common type of wrap-up program is an Owner Controlled Insurance Program (OCIP). The same approach has been adopted more recently by construction managers and general contractors, and is referred to as a Contractor Controlled Insurance Program (CCIP). Both programs share the same key concept and many advantages and disadvantages.
One of the main benefits of wrap-up insurance is cost savings. This benefit is derived primarily from the project owner’s bulk buying power, as it can purchase insurance coverage at a lower premium than if purchased piecemeal through individual contractors. Wrap-up insurance is also more cost efficient because a single insurer is the control point for all claims and can streamline claims processing. Additionally, wrap-up insurance allows owners to isolate the risk associated with construction away from their core operational insurance.
Wrap-up insurance eliminates duplications in coverage that occur when each contractor purchases independent insurance. Traditionally, contractors and subcontractors purchase an overlap in coverage because they are insuring themselves for the same accidents. This duplication also can result in litigation between the respective insurance companies due to claims. Ideally, wrap-up insurance should reduce potential litigation because a single carrier is responsible for all claims. Under wrap-up insurance programs, project owners can ensure there are no gaps in coverage with regard to general liability and workers’ compensation, as well as ensure sufficient specific coverage for contractors. Finally, wrap-up insurance allows the owner to create a comprehensive and centralized safety program.
The two main disadvantages of wrap-up insurance are greater administrative costs and the potential for upfront premiums. Project owners are responsible for administering wrap-up insurance and must provide administrative support either internally or through outsourcing. In addition, some insurance companies require owners to make large premium payments at the start of a construction project or to establish a special reserve. Under traditional insurance arrangements, the owner would not be required to make a lump sum payment and instead would make payments to the general contractor.
The success of wrap-up insurance depends on the size of the construction project and state laws. Owners involved in large projects typically get a better rate from the insurance company than owners involved in small projects. The Government Accountability Office suggests $50 million as the project cost threshold for considering a federally funded wrap-up program.
Additionally, not all contractors view wrap-up insurance to be as beneficial as owners. Contractors traditionally include the cost of insurance in their bids and can generate a profit if they receive a rebate from their insurance carrier. These profits are not realized by subcontractors when a wrap-up program is employed. Subcontractors also experience added administrative burdens when engaged in projects that use wrap-up insurance. Instead of working with their own insurance company on all of the projects they are involved in, subcontractors must report to a different wrap-up insurance company, many of which require audit reports on a monthly basis. Subcontractors engaged in multiple wrap-up projects could be preparing several monthly reports instead of the one they normally would provide to their insurance company.
Subcontractors also should be aware of potential gaps in coverage that can occur if their primary general liability insurer excludes the work done by the subcontractor on a wrap-up project. This typically is done to reduce costs of duplicate coverage to the subcontractor, but can be problematic if the wrap-up denies coverage to the subcontractor on a specific claim. Further, not all risks are always covered by wrap-up policies. For example, offsite work, pollution cleanup and damage to other contractors’ work may not be covered under a wrap-up policy. Inadequate policy limits and a shorter coverage duration are other issues that can catch a subcontractor off guard. Subcontractors can protect themselves by learning what the wrap-up policy covers, obtaining excess coverage through their primary insurance carrier or through specialty coverage carriers, and including the added administrative costs and excess coverage costs in their bid.
Despite these drawbacks, many smaller subcontractors and Disadvantaged Business Enterprises (DBEs) view wrap-up programs as a way to obtain more work. DBEs can find difficulty in obtaining insurance under the traditional method because their insurance expenses tend to be higher. A wrap-up insurance policy can improve the competitive environment and allow these contractors to bid for work that previously was unattainable.
When it comes to a wrap-up insurance program, the main strategy for owners and contractors is to be informed of what the policy covers and to look for potential gaps and limits in coverage. Subcontractors also should evaluate the costs of the wrap-up policy and include the costs in their bids in place of the insurance premium. By taking these steps, owners and contractors can be better prepared to handle the risks—and realize the benefits—that wrap-up programs offer.