Construction Wrap-Up Insurance

Construction wrap-up insurance policies insure against third-party exposures for all participants. Tailored properly, this insurance provides uniform coverage for both general contractors and their subcontractors that meet the insurance needs on individual projects. Lasting for a fixed period of time, the policy will cover individual liability claims up to a predetermined limit, as well as total claims up to an aggregate limit.<.p>

A wrap-up is a program of insurance where the controlling entity, usually the owner or general contractor, purchases insurance on behalf of all the trades performing work on the jobsite. The policy is job specific, and runs for the duration of the project. It can cover both workers’ compensation and general liability under a master contract. Individual workers’ compensation policies are issued to the subcontractors in order to maintain a record of their experience and payrolls. Wrap-up policies are written for the term of the project plus any extended periods. This assures continuity of the insurance policy terms, conditions, and exclusions. Wrap-up programs provide some unique advantages:

• There is no difference in insurance coverage and limits among all the various participants.
• The owner/general contractor is assured that no uninsured workers are on the job.
• Budgeting is a clear-cut issue as the insurance cost is assessed consistently.
• The carrier is providing loss control and claim services to the insured’s specifications, assuring effective overall management.

Consideration for a Wrap-Up Program

The owner or general contractor must determine whether or not to utilize a wrap-up program before the project is bid. This usually involves a feasibility study on the part of the owner’s staff, consultant, or, frequently, the owner’s agent or broker. The feasibility study considers a number of variables that will affect the potential for success of the program. The variables include the project size, the number of contractors involved, the type of work to be done, the ability to manage and control the project particularly with respect to loss control and claims administration, and the location of the project.

Project size.The project must be large enough to provide sufficient savings to warrant the time and expense involved to administer the wrap-up program. Historically, a “rule of thumb” regarding project size was that the contract amount should be at least $20 million. However, many authorities now believe that the contract should involve at least $50 million.

When analyzing the project size, consideration should be given to the type of work being performed and the amount of labor involved. A large portion of the savings involved by utilizing a wrap-up program comes from workers’ compensation premiums. The more labor involved, the greater the potential savings can be. A wrap-up program may not be needed if the main expenditure is on material or equipment rather than labor.

Type of work. The amount of labor involved in a construction project must be considered when determining the feasibility of a wrap-up program. However, additional considerations regarding the type of work should be taken into account. One main consideration is the geographic spread over which the construction project will take place. A project in a relatively confined area will be more manageable, particularly in terms of loss control activities and claims administration. A project confined to a single, relatively identifiable and manageable location is more controllable than a project spread out over many locations.

Number of contractors. The number of contractors involved in a project will also affect the need for a wrap-up program. If one or only a few contractors are needed, combining the administration of numerous insurance programs into a single program may not be efficient. This mitigates one of the primary reasons for implementing a wrap-up program. When there are a limited amount of contractors involved, the owner will be in a better position to negotiate with each of the contractors regarding the insurance charges in their bids. The owner may be able to negotiate lower charges rather than implementing a wrap-up program for cost savings.

Loss control capabilities. From a financial standpoint, the success or failure of a wrap-up program is dependent upon the implementation and effectiveness of a safety and loss control program. The inability to implement an effective safety and loss control program is the primary cause of failure of a wrap-up program.

Types of Wrap-Up Programs

There are three basic types of wrap-up programs:

• A Traditional Wrap-up program covers a single site or multiple sites consisting of a similar type of construction.
• Rolling Wrap-up or ROCIP usually applies to a multiple site/ on-going construction project. Capital improvement programs fall into this category.
• Gatekeeper Wrap-ups apply to maintenance programs where contractors are continually on site expanding, maintaining, or repairing an owner’s property.

The coverages that are included in a wrap-up program are:

• Workers’ Compensation.
• Employer’s Liability.
• General Liability.
• Excess/Umbrella Liability.
• Optional Coverages: Builders’ Risk (all risk), Environmental Liability, Asbestos Abatement, Efficacy/Force Majeure/Delay, Architects & Engineers Errors & Omissions.

The coverages that are not included in a wrap-up program are:

• Auto Liability: Autos are usually not site specific; but can be covered for large construction projects where autos are confined to the construction site.
• Coverage for Vendors and Suppliers: This coverage is usually not site specific.

Phases of a Wrap-Up Program

A wrap-up program generally consists of three phases:

• Pre-construction: This includes feasibility studies that analyze the type of construction, labor allocation, regulatory and insurance environments, as well as reference checks of the general contractor and subcontractors. [1]
• Construction: This phase ensures that all contractors are enrolled in the wrap-up program. As the construction continues, it also includes a loss control program with regular inspections, the collection of monthly payroll forms for the wrap-up administrator, claims administration and monthly status reports as well as quarterly and annual financial and summary reports.
• Post-construction: Before the program is closed out, payroll audits are conducted and final reports and financial results are supplied to the project manager.

Benefits of a Wrap-Up Program

A construction wrap-up allows the owner to purchase workers’ compensation and general liability insurance for all contractors and subcontractors working on a project. A consolidated insurance program provides many benefits to the project and the owner, including better coverage, a safer work site, claims management and financial savings as follows:

Better Coverage

• A single program insures all involved parties.
• Policy limits are specific to the project.
• The owner’s standard insurance programs are protected from construction losses.

A Safer Work Site

• Creation of uniform standards for all contractors.
• A coordinated safety program with the owners, construction manager, insurance company, broker and all contractors.

Claims Management

• One insurer handles any workers’ compensation and liability claims.
• Proactive claims management returns employees to work as soon as possible.
• Immediate attention is given to minor injuries allowing workers to stay on the job.
• Reduction of cross-liability claims.

Financial Savings

• Volume discounts are given on the required insurance.
• Potential cost savings range from 2% to 6% of the total contract cost.
• Overhead costs are reduced for contractors by removing the insurance requirements from the bid specifications.

Additional key benefits include:

• A coordinated insurance mechanism to address inter-related exposures.
• A reduction in the total cost of risk by instituting coordinated safety management and claims management activities.
• Assurance that all subcontractors have adequate limits of the required insurance.

Advantages and Disadvantages to the Owner

Advantages

The main advantage to owners to implement a wrap-up program is the possibility of reduced costs. Significant advantages are:

• Reduced costs through mass buying power.
• Elimination of redundant insurance company services.
• Reduced premiums for independent contractors (all in the same group, same carrier).
• Improved loss control effectiveness.
• Uniform claims handling.
• Improved public relations.

Disadvantages

The primary disadvantage to an owner to implement a wrap-up program is the increased administrative burden and possibility of higher than expected costs. Other disadvantages are:

• Potential problems resulting from the separation of general liability and automobile insurance categories.
• Possibility of non-jobsite related claims being charged to the wrap-up program.
• Possible lack of cooperation in the administration and safety policies by contractors.
• Bidding difficulties, budgeting and accounting problems, increased responsibility and potential liability.
• Possibility of insurer cancellation.

Advantages and Disadvantages to the Contractor

Advantages

The primary advantages to a contractor when a wrap-up program is implemented include insurance coverages that are known and identical for all contractors, the potential for an effective loss control program, and the potential for an accurate claims administration process. The implementation of a wrap-up program identifies to the owner a more equitable risk transfer to the contractor within the construction documents in regard to hold harmless agreements and waivers of subrogation.

Disadvantages

In general, contractors do not like to participate in wrap-up programs since by doing so; they relinquish control of an important business function to an outside party. Owners should consider how each bidding contractor would react to their request for the implementation of a wrap-up program.

Other disadvantages to a contractor include:

• Disruption of the contractor’s normal process for coordinating the insurance program.
• Increased overall bidding difficulties.
• Loss reports will not be provided on a timely basis for estimates needed to bid on other projects.
• The possibility of reduced limits of liability and additional insurance restrictions.
• Contractors have to relinquish some or all control of both the loss control and claims administration when a wrap-up program is implemented.
• An increased administration burden.

Final Considerations for Wrap-Up Insurance

Another significant factor to assess when deciding if a project is suitable for a wrap-up program is the premium it will generate. Insures in general will not consider a wrap-up policy that does not produce at least $1 million in annual premiums. The phasing and time schedule for the project is another important issue.

Wrap-up programs work best on complex, labor-intensive projects. Labor should be a large component and a significant number of contractors (8 or more) are usually needed in order to make a wrap-up program workable. Wrap-up programs are designed to encompass a specific period, and the contracts of insurance are written to accommodate that specific period.

The wrap-up carrier insures the entire project and all trades and professions who are working on the job. Underwriters can eliminate protective liability charges for sublet work, contractual liability charges for hold-harmless agreements and some of the completed operations premium. These combined premium savings are in themselves appreciable. With a wrap-up program, everyone is automatically insured to the same extent, with no unforeseen gaps in coverage from one policy to the next. Coordinated programs also eliminate potential quarrels between different insurance carriers.

A final key element when implementing a wrap-up program shows a major concern for safety, both for the worker and public relations. This image can help an owner defend its safety philosophy if questioned by OSHA or a court of law if an accident occurs. This centralized program reduces litigation among contractors and between the contractors and owner by simplifying the claims settling process. A wrap-up program can provide broader coverage and higher limits of liability than individual contractors may be able to procure. Contract provisions indicating the terms of the wrap-up program must be included in the bid documents. The insurance program should be designed and in place for the wrap-up program prior to awarding the contract.

For more information on loss control and managing business risks, check out the American Family Insurance Loss Control Resource Center.