A Look at Wrap-Up Insurance and Its Use
by Emily BrownWrap-up insurance policies are increasingly being used on large construction projects. For a wrap-up insurance policy, the construction project owner, manager, or general contractor purchases insurance for itself and other parties working on the project, rather than having each subcontractor or contractor provide their own insurance. If the owner purchases the wrap-up, it is called an Owners Controlled Insurance Program (OCIP); if the construction manager or general contractor purchases, it is called a Contractors Controlled Insurance Program (CCIP). The wrap-up programs are designed to provide coverage for the length of the construction project as well as a completed operations period extending three to five years after construction is completed. This coverage for completed operations addresses the market need for construction defect exposure (Mentz, 2005).
A wrap-up program generally includes general liability, workers’ compensation, umbrella, and builder’s risk coverages. Combining the insurance purchased into one program eliminates the traditional insurance approach in which owners, general contractors, and subcontractors all purchase coverages from multiple insurance agencies. Under these traditional methods, there is a duplication and overlap of coverage as parties are insuring themselves against the same accidents. This overlap can result in litigation between insurance companies over claims as insurance agencies seek to pass off liabilities. Wrap-up policies eliminate this duplication of coverage with the use of a single insurance company. Avoiding duplicate insurance coverage and reducing litigation through the use of one insurance company results in cost savings for the project owners.
Wrap-up policies also bring cost savings to the project by utilizing bulk buying power. A report by the US General Accounting Office (GAO) (1999) cites industry officials who estimate that wrap-up insurance can save up to 50% on the cost of traditional insurance. These cost savings are possible as wrap-up coverage can usually be purchased at a lower premium than individual policies. In addition, insurance credits can be charged to the subcontractors and deducted from the overall cost of their services. Since insurance is purchased for the project, contractors and subcontractors remove the cost of insurance from their initial bids. The size of the project does affect buying power. Nationally, large labor-intensive projects with construction costs between $75 and $100 million will benefit from purchasing wrap-up policies. However in California, differences in insurance rates mean that the project generally should be bigger (as high as $200 million) before a cost savings is realized (Houweling, 1999).
The purchaser of the wrap-up policy works with the insurance company to develop a plan for workplace safety. When traditional insurance coverage is used, each contractor and its insurance company may have a safety program. On the job site, however, each contractor and subcontractor is only responsible for safety on their segment of the project, and there are times when timeliness may seem to be more of an objective than safety. In contrast, wrap-up programs establish a centralized safety program that is generally more enforced and effective as one safety team oversees all aspects of safety at the job site. Using centralized safety programs with a uniform approach to safety for all involved with the project leads to cost savings when there is a reduction in general liability and workers’ compensation claims. When deciding whether to use wrap-up insurance or traditional insurance, project owners or general contractors should be aware of the additional administrative duties that can be incurred with a wrap-up program. Either additional staff will be needed to administer wrap-up insurance, or brokers and other third parties can provide their services for a fee. Data must be gathered from each subcontractor, claims must be documented, and safety programs must be implemented. There may also be higher premiums at the initiation of the wrap-up policy. Additional factors to consider are state insurance regulation laws. A report from GAO (1999) lists North Dakota, Ohio, Washington, West Virginia, and Wyoming as states requiring contractors to pay into a state workers’ compensation fund. This system eliminates any potential cost savings from wrap-up insurance since the bulk of its cost is related to workers’ compensation. Several other states have also established laws that designate a minimum project cost to be eligible for wrap-up insurance. Some contractors dislike the use of wrap-up insurance because it removes the competitive advantage these contractors have with lower insurance premiums for maintaining safety records. However, eliminating insurance from bids can offer more equal opportunities for disadvantaged businesses, minorities, and women contractors (GAO, 1999).
Wrap-up insurance programs have proven to offer cost savings as insurance is purchased in bulk, litigation is reduced by using a single insurance company for the project, and a comprehensive safety program is established to reduce injuries and claims. While there are some additional factors to consider when deciding whether or not to use wrap-up insurance for the construction project, project owners and general contractors can be certain that wrap-up insurance is an effective approach to managing risk.