As the cost of commercial, public entity and residential construction continues to increase, more owners and developers are seeking inventive ways to reduce insurance costs while maintaining effective coverages for the various parties engaged at project sites.
Demand for comprehensive, high-efficiency wrap-up programs–a single insurance program covering the jobsite risks of the project owner, build team or program manager and all tiers of subcontractors–is on the rise. For example, owners of large projects are increasingly dependent on wrap-ups or owner controlled insurance programs (OCIPs) to manage their potential financial risks. At the same time, small to midsize general contractors, in the commercial sector and in particular the multifamily and condominium residential space, are able to bid and be more competitive on more projects through the use of contractor controlled insurance programs (CCIPs).
Regardless of the sponsor of the wrap-up program (owner or general contractor), the financial benefits of wrap-up programs come from economies of scale, potential dividends on favorable loss experience and the elimination of duplicate coverages. From a program structure perspective, in addition to the project-specific limits, contractual compliance features and depending on the jurisdiction, combining workers’ compensation and general liability coverages under a single wrap-up program can result in savings of up to 1.5 percent of construction value. The other beneficial financial impact offered by wrap-ups is measured by eliminating or minimizing potential coverage gaps associated with underinsured or non-insured contractors.
Following are four common business issues and solutions that contractors need to weigh when sponsoring or participating in a wrap-up program.
Reducing Costs While Complying with Contracts
A traditional wrap-up or controlled insurance program (CIP) includes workers’ compensation and general liability insurance coverages. When structured properly, the consolidated program provides general contractor sponsors with reduced costs and an additional potential revenue stream that is an effective way to gain fiduciary control of risk management program while improving profit margin and competitiveness.
In addition to structuring and placing such programs, the broker should review contracts for compliance with lender requirements. The financial impact resulting from a well-structured CCIP can range between 0.25 percent and 1.5 percent of enrolled contract values, depending on jurisdiction and claim results.
In a recent case, a mid-size general contractor that was awarded a three-year multi-project building program achieved savings equal to 0.5 percent of the enrolled contract values after implementing a combined line workers’ compensation and general liability rolling contractor controlled insurance program (RCCIP). Rolling wraps are designed to cover more than one project. In this instance, the general contractor, which had construction contracts with hard cost values in excess of $200 million, was exploring ways to be more competitive with larger general contractors as well as improve its operating margins. After the rolling wrap was implemented, the general contractor realized more than $1 million in additional profits. Overall, general contractors should consider sponsoring a wrap-up program if:
- they can enroll at least $50 million in annual contract values for a minimum three-year window;
- the owner is either unwilling or unable to qualify to sponsor a workers’ compensation and general liability wrap-up; or
- the general contractor and its subcontractors are contractually required to provide project dedicated limits.
In the event a project has condominium exposures and depending on the jurisdiction, the general contractor should utilize this project-specific risk management option.
Securing Project Specific Limits
Project specific wrap-up policies often provide better coverage than those acquired under separate conventional commercial general liability policies. It is also a tried-and-tested method for sponsors to reduce costs, especially for workers’ compensation coverage.
For example, a project lender and owner required the general contractor to provide project-specific limits of $100 million with completed operations coverage equal to the statute of repose for a $600 million commercial project. The general contractor and its subcontractors could not provide this requirement under their traditional practice policies. As a result, the general contractor implemented a combined line workers’ compensation and a CCIP program for this project that was structured to provide $100 million in project dedicated limits for the owner, lender and all tiers of contractors, as well as providing completed operations coverage for the 10 year statute of repose period. Consequently, the general contractor was able to meet its contractual obligations as well as increase the project’s profit margin by 0.6 percent of the contract values, which equated to $3.6 million.
Addressing ‘For Sale’ Residential Exposures
A major trend in the construction industry is increased use of general liability only wrap-ups for commercial construction projects with project values as low as $10 million as well as for condominium (“for sale”) projects. For example, general liability only wrap-up programs can be structured to provide coverage for “for sale” residential exposures with project dedicated limits for the owner, general contractor and all tiers of subcontractors. Typically, most general contractors and trade contractors have an exclusion on their commercial general liability policies for condominium exposures. As mentioned earlier, general liability only wrap-up programs are being used to meet lender and owner contractual requirements especially since the general liability only program deductibles are much lower ($10,000-$25,000) and, therefore, collateral typically is not required to fund for losses.
Covering Completed Operations
Many lenders require owners and contractors to provide general liability coverage during the construction period and completed operations coverage for the statute of repose. This period can range from two to more than 10 years, depending on the jurisdiction.
For contractors and owners, general liability only wrap-up programs should be structured to provide coverage for the construction period as well as for the completed operations exposures for a period of 10 years or the applicable statute of repose, whichever is less, to ensure contract compliance. The ability to structure coverage for post-construction claims is one of the essential advantages of wrap-up programs over traditional programs.
Items for Wrap-up Participants to Evaluate
There is also another side of the wrap-up program for general contractors and subcontractors that are wrap-up program participants. General contractors and subcontractors that participate in wrap-up programs should be aware of the following.
- Ensure that the wrap-up carrier properly and accurately reports workers’ compensation payrolls incurred under the wrap-up to the National Council on Compensation Insurance or appropriate jurisdiction to ensure proper calculation of the experience modification ratings (EMR).
- Make certain that the wrap-up carrier properly and accurately reports all claims incurred under the wrap-up to the NCCI or appropriate jurisdiction to ensure proper calculation of the EMR.
- Evaluate all wrap-up safety and claims requirements including early return to work provisions.
- Confirm the wrap-up program structure to ensure it meets contract insurance requirements.
- Verify wrap-up program limits to ensure they are project dedicated limits with completed operations coverage equal to the applicable statute of repose.
- Confirm enrollment and insurance credit calculation methods and processes.
This is not intended to be an exhaustive list of all the solutions and issues relating to wrap-up insurance. Each company’s risk profile and needs are different, and understanding unique circumstances is crucial when it comes to choosing the most effective wrap-up insurance. As such, using the services of an experienced insurance broker is critical.