Every construction project has its risks, and while you may attempt to transfer those risks to the contractor, some liabilities may not transfer. As a result, you need to determine who should be responsible for the risk and who should provide the coverage if that risk should be insured.
One solution is an insurance wrap-up, an approach that has evolved over the last decade into the most widely used risk management approach for insuring large construction projects. An insurance wrap-up is a project-specific insurance program that insures the owner, general contractor and all subcontractors under a single program.
“A wrap-up can be used on a single project, multiple projects or for plants that employ third-party maintenance contractors,” says Tim Walsh, regional director, national wrap-up group, for Aon Risk Services Central Inc., located in Southfield, Michigan.
Smart Business spoke with Walsh about how to use insurance wrap-ups and how this type of coverage can help you simplify your insurance project.
How does an insurance wrap-up work?
The process begins by having a business owner clearly define his or her goals for managing the risks on the construction project. Another key element is senior management support for using a wrap-up and engaging the insurance broker as early in the process as possible. The broker can prepare a pro-forma of protected cost savings for the project and guide the client on regulatory issues regarding the usage of wrap-up insurance on a given project. In a wrap-up insurance program, the insurance costs normally charged by contractors are removed from their bids for the construction project. The owner then pools these contractor charges to pay for the wrap-up policy.
A typical wrap-up program insures workers’ compensation, general liability and excess liability. In addition, the project-specific insurance coverage can include builder’s risk (damage to work while being constructed), professional liability and environmental liability. Each state has different minimum project size requirements for wrap-ups; in Michigan, it needs to be $65 million.
What should an owner consider before purchasing a wrap-up program?
While the owner receives significant coverage benefits over traditional insurance programs, the owner should be aware that he or she assumes certain administrative responsibilities for the program. The owner is responsible for purchasing the insurance coverage and reviewing all program documents, and attends various meetings with underwriters, periodic claims reviews and quarterly stewardship meetings.
It’s also important to understand the assumptions used in the financial pro-forma so that the owner has a realistic expectation on the amount of cost savings and potential financial risk. This takes an experienced broker that specializes in these types of programs.
Another consideration is that the owner may run into resistance from the contractors, as they generally would prefer not to participate in an owner-furnished wrap-up program because of increased administration, loss of profits on insurance charges and lack of control over insurance placement and issues.
