The Department of Labor predicts the economy will add 1.6 million construction workers by 2022. Other surveys report midsize construction companies are increasingly optimistic about their revenue and hiring forecasts—predicting more than 5 percent employment growth for the next 12 months, which is more than twice the growth projected at the same time last year.
Amid this rebound, it’s more important than ever for firms to remain committed to smart growth, and that may mean redefining a commitment to safety.
One way for a firm to redefine its commitment to safety is to put some skin in the game through controlled insurance programs (CIPs) or “wrap-ups.” These programs, either controlled by owners (OCIP) or contractors (CCIPs), offer several key advantages, including control over costs, coverage terms and conditions, claims processes and accident prevention, and thus make safety a prerequisite for profitability. While “control” probably is not a word most project owners associate with insurance costs and a safety culture, a wrap-up can change the conversation because it allows owners to streamline the administrative process and gain better control of insurance costs today and in the long term. It’s a solution that can make a significant impact on the bottom line of construction businesses.
Wrap-ups provide general liability insurance, workers’ compensation and excess liability for the length of a construction project for all or a majority of the contractors and subcontractors involved in onsite construction activities rather than requiring each individual participant to be responsible for the procurement of insurance. Wrap-ups are used on large individual projects or on a “rolling” basis by aggregating smaller projects completed over time. A well-run wrap-up offers an opportunity for significant cost savings: anywhere from a 1 percent to 1.5 percent savings on hard construction costs.
Wrap-ups enable a project owner (or a contractor in a CCIP structure) to purchase insurance at a lower cost through economies of scale and to purchase insurance on a loss-sensitive basis (i.e., a large deductible), which is where the potential cost savings are derived. In a large deductible program, the sponsor of the wrap-up pays the losses below the deductible in exchange for significantly reduced fixed costs (usually in the 35 percent range). If a project owner is able to control the losses on a project, it benefits directly.
In contrast, on a non-CIP project, contractors and subcontractors incorporate their insurance costs in their bids, which includes the fixed-cost component of the insurance (about 40 percent) and the loss-funding component (about 60 percent), regardless of whether there are any losses on the project. Key cost-controlling benefits include:
- lower overall insurance costs;
- access for smaller contractors and subcontractors to work on larger-scale projects, where previously insurance costs made participation unrealistic or unmanageable;
- higher insurance limits than normal; and
- quicker proof of insurance obtained by wrap-up enrollees because all insurance certificates will come from a single source.
Control Terms and Conditions
Sponsors of wrap-ups gain peace of mind that all contractors and subcontractors on a construction site have the same coverage, so there are no gaps in coverage. The level of coverage that can be negotiated when purchasing in bulk is significantly greater than what individual contractors and subcontractors can purchase on their own. The total liability limits available through a CIP (usually a minimum of $100 million) are much greater than the limits provided by the individual contractors.
Control Claims Processes
Having consistent coverage provided by one insurance carrier is beneficial to the claims process for several key reasons:
- streamlined claims process;
- reduction in the delays that may occur while sorting through the claim;
- reduction in litigation costs because one insurance carrier defends all enrollees in a lawsuit; and
- increased ability to influence the claim and dictate how it should be handled by assuming the first $250,000 or more of every workers’ compensation and general liability claim with a large deductible program.
The most successful wrap-ups focus on safety because it’s the key to cost savings. A well-run safety program will lead to fewer accidents and the project being delivered on time and in the highest quality manner possible.
The wrap-up sponsor can implement the necessary controls to reduce the potential for an accident on the project. One of the keys to OCIP safety is to establish uniform and standardized safety requirements for all contractor and subcontractor employees via a project safety manual, which then becomes part of the contract documents. The goal of the wrap-up sponsor should be to establish accountability with all enrolled contractors and subcontractors through their project safety manual and actions onsite.
Key elements within the project safety manual include:
- assignment of safety responsibilities to contractors and subcontractors;
- establishment of drug and alcohol testing programs;
- establishment of minimum personal protective equipment requirements;
- a 100 percent fall protection requirement for all trades working 6 feet or higher above a lower level;
- safety training requirements, including safety orientation, toolbox talks, daily huddle talks, OSHA 10-hour and 30-hour training;
- daily task planning in a manner that can be reviewed and tracked;
- hot-work controls;
- crane management;
- heavy equipment controls;
- project security; and
- scheduled safety audits.
Many wrap-ups also have extensive safety prequalification procedures prior to a contractor or subcontractor being awarded a contract. This process may identify contractors or subcontractors whose safety programs are not adequate for the type of work to be performed or firms with undesirable loss experience. The most successful prequalification programs review both lagging and leading indicators and normalize the data for contractor or subcontractor size and type of work performed.
The results of the wrap-up also must be monitored monthly from a claims and safety standpoint. Individual contractors or subcontractors must be evaluated for exposures in order to address safety performance issues prior to an accident occurring. If safety performance is not at an acceptable level, the contractor or subcontractor needs to establish a recovery plan that is monitored until safety performance has improved.