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.
What are the types of wrap-up insurance?
The first is a contractor-controlled insurance program, or CCIP, where the general contractor purchases the coverage on behalf of the subcontractors and also provides your insurance. The second is an owner-controlled insurance program, or OCIP, where the owner purchases the coverage.
There are advantages and disadvantages to both. If the owner wants to save money, he or she will purchase the coverage. But if the owner wants a project-specific insurance program without any of the administrative responsibilities or savings, that person will pick the CCIP. The ultimate decision is based on the owner’s goals and objectives.
What problems can occur if an owner does not use an insurance wrap-up?
The biggest issue is that an owner will pay the contractors to provide insurance protection for both parties, but it may not adequately insure the owner. If the owner tenders that lawsuit to the contractor and the contractor’s insurance doesn’t respond positively, the owner’s insurance would be required to pay both legal defense and claim costs. That can be problematic. An owner may have a high deductible, bearing, in some cases, up to $20 million in losses. The losses that get paid under the owner’s insurance program can also impact future premiums on operational insurance.
What are the benefits of an insurance wrap-up?
One significant benefit is that the owner will have insurance coverage control. He or she has first-named-insured status under the policy, known coverage limits and insurance carrier, and completed operations coverage. Often, these programs have much higher limits than the normal amounts carried by contractors.
There is also enhanced and heightened safety awareness on the project. The insurance wrap-up also provides a platform to formalize the risk management strategy regarding the owner’s construction risk.
There can also be a significant cost savings by using a wrap-up and pooling the insurance into one single package. An owner can save 25 to 50 percent of the total insurance cost, or one-half percent to 1 percent of construction costs. Contractors will also have reduced litigation because everyone is insured under the same policy.
In addition, it levels the playing field during the bid process to increase minority business enterprise and/or women business enterprise participation in the project.
Tim Walsh is regional director, national wrap-up group with Aon Risk Services Central Inc. Reach him at (248) 936-5321 or firstname.lastname@example.org.