Overview of Wrap-up Programs

OVERVIEW OF WRAP-UP PROGRAMS

(March 2019)

Large projects, such as highway construction, involve many contractors and subcontractors. Under a traditional insurance program, all of the entities involved would make their bids and all bids would include the cost of that entity’s insurance coverage. Under the traditional approach, a lot of inefficiencies and extra expenses exist which spurred the development of wrap-up programs.

A wrap-up is a sponsored insurance program covering all parties involved with a particular, typically major, construction project and which fall under two major types. An owner-sponsored wrap-up is called an Owner Controlled Insurance Program (OCIP). The sponsor can be the general contractor of the project. The general contractor sponsored wrap-up is called a Contractor Controlled Insurance Program (CCIP). On rare occasions the owner and contractor jointly sponsor the project. There are also Rolling Owner Controlled Insurance Programs (ROCIP) which are used to cover more than a single project.

The standard lines of business written as part of a wrap-up are Workers Compensation, General Liability, Excess or Umbrella and Builders’ Risk coverages. Professional and pollution liability policies are sometimes included. There is no ineligible line of business. Wrap-ups gains most of their savings from the Workers Compensation coverage. Therefore, there are few, if any,  wrap-ups that don’t include Workers Compensation.

Any type of risk the sponsor, broker and insurance company can agree upon can be written in a wrap-up, subject to state laws. The more important consideration regarding wrap-ups is which types of risk should be covered. Only risks that can more than offset the cost of administration and risk management by cost savings and/or coverage advantages should use this approach.

Another major issue when considering use of a wrap-up is insurance market conditions. The Federal Highway Administration offers a useful description of market influences. The following is an adaptation of an illustration available at its website.

 

Market Influences

 

Naturally, conditions that contribute to insurance availability and affordability are ones that make wrap-up programs less viable.

Wrap-up Benefactors and Benefits

The entities that are protected by a wrap-up are project owners, general contractors and all levels of sub-contractors. All of these parties may benefit from their participation.

Project owner and/or general contractor benefits:

  • Financial reward from controlling the insurance costs and holding a portion of the risk in loss sensitive and high deductible programs
  • Reduced project cost due to reduced insurance costs
  • Coverage enhancements because of the premiums available
  • Coordinated risk management that reduce injuries and damage
  • Project more likely to come in on time due to fewer lost man-hours
  • No coverage gaps due to uninsured contractors
  • More contractors can bid on parts of the project since they are relieved of providing their own insurance
  • Minority and small contractors can be attracted

All levels of sub contractors benefits:

  • Reduced cost since no insurance is purchased
  • Receive risk management services not normally available
  • Receive insurance coverage not normally available
  • Opportunity for jobs that might be denied if insurance costs were included

Wrap-up Potential Problems

Wrap-up participants also face adverse situations.

Project Owner (as sponsor) problems:

  • Wrap-Up policies often contain customized language that, in the event of a dispute, can complicate litigation
  • Losses may exceed the anticipated savings
  • Administrative costs of developing and maintaining the program may turn out to be prohibitive
  • Lack of knowledge of the potential risks may lead to poor choices of brokers, loss control and claims handling
  • Insurance placement may be with non-admitted markets and the owner loses the protection normally provided by guaranty funds

Project owner (when general contractor is sponsor) problem - The general contractor controls the project and will be difficult to replace. If a sponsoring general contractor is released from the job, the insurance moves with that general contractor. Therefore, when a new general contractor is brought onboard, that party must sponsor a new wrap-up. Many wrap-up writers are not interested in covering partially finished projects.

General Contractor (as sponsor) problems:

  • Losses may exceed the anticipated savings
  • Administrative costs of developing and maintaining the program
  • Lack of knowledge of the potential risks may lead to poor choices of brokers, loss control and claims handling
  • Wrap-up policies often contain customized (manuscript) language that, in the event of a dispute, can complicate litigation
  • Insurance placement may be with nonadmitted markets and the owner loses the protection normally provided by guaranty funds
  • No coverage for losses that occur away from the project site
  • If released from a project before finished, may suffer severe penalties from the wrap-up caused by minimum premium requirements and one-time fees that were amortized over the length of the contract

General Contractor (when project owner is sponsor) problems:

  • Project owner selects coverages and risk management services while the general contractor is forced to work within the selected program
  • General contractor loses control of the project site to the project owner’s selected risk management causing tension on the site
  • No coverage for losses that occur away from the project site

Subcontractors (all levels) problems:

  • Insurance carrier is “on the side of“ the project sponsor making insurance appeals risky
  • Coverage is provided at only the project site which means off-site activities such as fabrication not covered
  • Coverage ends with the project which means that after project repair work may not be covered
  • If insurance limits are exhausted by other claims, there may be no coverage available

Possible Solutions

Agencies that are experienced in negotiating wrap-ups can work with all parties to address the situations raised above. However, ultimate program decisions are in the sponsor’s hands. Sponsors who are interested in only saving costs may provide the minimum required coverage which can leave many contractors with inadequate protection.

Contractors who bid for work that is part of a wrap-up project have the right to review the insurance coverage being offered. While they may not keep their workers compensation premium outside the program, they can continue their other policies simply by not excluding the project. This option creates double coverage which could slow down claims-handling. However, this option assures the contractor that a source of coverage is available when needed. The disadvantage of this approach is the bid pricing since the project sponsor will not permit a bid with insurance pricing shown.