Construction Wrap Up vs Traditional Insurance
Construction projects can be quite complicated when identifying potential risks and more importantly–who is responsible at the time of loss. In our prior blog “Construction Insurance – Coverage Considerations” we defined and outlined some traditional insurance options for the project owner/developer, general contractor, or subcontractors. Typically, these coverages (including Builders Risk, General Liability, Workers’ Compensation, Umbrella) are placed as separate policies with varying coverage forms and definitions and a variety of different insurance carriers.
In this segment, we will explore construction “wrap-up” insurance as an alternative approach to the traditional structure and evaluate two program options – Owner Controlled Insurance Program (OCIP) and Contractor Controlled Insurance Program (CCIP).
In short, a “wrap-up” changes the way insurance is handled for large construction projects. A “wrap-up” lives up to its name and wraps the insurance for all contractors on the job and owners in one program. The result is a simple combination of several insurance policies. Traditional solutions are more complicated, where individual contractors provide their own insurance and risk transfer methods including specific and required additional insured and hold harmless verbiage.
Wrap-up programs can be used with large single-site projects as well as multi-site projects, new construction projects and renovations. Construction wrap-up insurance programs meet a variety of risk management needs including overall cost savings and control over coverage and limits.
Wrap-up programs need critical mass to work – so consider them for projects over $100,000,000 of hard construction costs. Knowing wrap-up policies help provide some peace of mind and consistency of coverage throughout the project, let’s explore the advantages in more detail below.
- Owner Controlled Insurance Program (OCIP) – An OCIP is controlled (sponsored) by the owner of the project, and therefore the owner is responsible for obtaining the coverage, payment of premium, and administering the insurance program. In contrast to the traditional construction insurance model, the property owner or developer, general contractor, and subcontractors are all insured under one program. While OCIPs are typically set up on a project-specific basis, you can place a Rolling OCIP which can be used for several projects.
- Contractor Controlled Insurance Program (CCIP) – A CCIP is similar to an OCIP in that the insurance program is consolidated to cover all parties at the job site, but in contrast a CCIP is controlled/sponsored by the general contractor.
Wrap-up programs usually include at a minimum:
- Commercial General Liability
- Workers’ Compensation
- Excess Liability
Depending on the project additional coverages may include:
- Builders Risk Insurance
- Pollution Liability
While OCIP’s and CCIP’s are not new, they are trending because of the increase in popularity from buyers and remain competitive as new insurers enter the wrap-up marketplace.
Advantages and Disadvantages of Wrap-Ups
- More efficient administration of the insurance policies by not needing to collect and review policies and endorsements from individual subcontractors.
- Control of the quality of coverage, limit, and negotiation of rates and premium often resulting in lower overall insurance costs.
- Ability to pass along some or all the premium expenses to the program participants, which increases the opportunity to profit on the project.
- Claims management is more streamlined and easier to track and control the process
- Coverages are consistent and less of a risk that subcontractors have policy gaps (also true if multiple general contractors are working a project).
- Insurers often enforce more stringent safety and loss control procedures to apply for all members of the wrap up program.
- Potential for higher overall limits and scope of coverage breadth and depth that individual contractors could not otherwise obtain.
- Assumes risk of the deductible along with other financial risks associated with the policy.
- Adverse loss experience for the project can drive up insurance rates on core business.
- The sponsor will most likely have a collateral requirement (especially for large deductible. programs).
- Cash flow is reduced by a larger upfront insurance premium which include at least a 25% deposit.
- First Named Insured – Since the sponsor will have less control of coverages included, they will need to ensure an adequate additional insured status is provided.
- Depending on expertise of the owner, management of the program may create an unwanted administrative burden.
- Loss of individual contractor control for claims handling.
Each project is unique and requires a comprehensive and tailored approach to meet your risk tolerance and coverage needs. It is important to engage with a qualified broker to build your wrap-up program. Please reach out to any member of the Sentinel team for advice, counsel and guidance in the design and structure of your construction risk management program.