Wrap-up insurance

The structure

What a wrap-up actually is

A wrap-up is often described as a way to insure everyone on a construction project under one program. That is true and it is incomplete. A wrap-up that works is a combination of insurance, contract administration, risk allocation, claims strategy and financial controls, and the insurance is only the part you can hold in your hand.

Under a conventional structure the owner, the general contractor, the subcontractors and the lower tier subs each bring their own liability insurance to the job. On paper that looks adequate. In practice the policies do not fit together nearly as well as everyone assumes. One contractor has a residential exclusion. Another has a subsidence restriction. A third carries lower limits, or a different completed operations provision, or a deductible nobody has read.

Then a claim happens. Instead of one program responding to the project, several carriers get involved, each working out whose work caused the damage, whose policy applies, whether an additional insured endorsement responds, whether contractual indemnity applies, and who pays what share of the defense. That argument is the problem a wrap-up is trying to solve.

Varieties

The shapes a wrap-up comes in

Wrap-up is the umbrella term. Underneath it there are three arrangements that come up regularly.

The owner-controlled and contractor-controlled versions are the same machinery with a different name on the policy, and the choice between them has real consequences for who holds the retention, who controls the defense and whose balance sheet backs the tail. The OCIP versus CCIP page compares them line by line. The rolling version introduces a shared limit question that the single project version does not have, covered on the multiple projects page.

Scope

What is in it, and what is not

A typical wrap-up provides general liability and excess liability, and in most cases workers’ compensation and employers liability, for work performed at the designated project site. Builders risk is a separate placement that often sits alongside it rather than inside it.

What a wrap-up does not do is make a contractor’s own insurance irrelevant. Enrollment covers the enrolled party for its operations at the site. Everything else remains the contractor’s own problem:

• Work on every other project it has.
• Automobile liability, which is almost never inside a wrap.
• Professional liability, where the trade carries design responsibility.
• Pollution liability, unless specifically arranged.
• Tools, equipment and its own property.
• Anything the program excludes, and anything that happens outside the covered location.

The excluded parties list is its own subject. Suppliers who only deliver, haulers, design professionals and hazardous material contractors are commonly left out, and every one of them still has to produce a certificate. That is covered on the exclusions page.

Money

How the money actually moves

The most important financial rule in a wrap is that the project should not pay for the same insurance twice.

Subcontractors price insurance into their bids. If the wrap is going to provide the project liability coverage, that cost has to come out of the bids, and there has to be a defensible method for taking it out. There are three common ones. Insurance cost is deducted from the bid after the fact. The contractor provides a stated bid credit. Or the work is priced net of the insurance being provided, from the start.

Whichever method is used, it has to be defined before bids are finalized. If it is not, the argument arrives later, about whether the cost really came out and whether the expected saving was ever achieved. In California that argument has a statutory answer: under Civil Code 2782.95, a credit not disclosed before the bid leaves the bidder free of its bid. The California rules page sets out what has to be disclosed and when.

On the sponsor’s side the premium is normally rated against hard construction value for the liability lines and against payroll for workers’ compensation, with a premium audit at the end. The variables that move the number most are the length of the completed operations tail, the size of the retention, whether limits are dedicated to the project, and whether defense costs erode the limit.

Running it

Administration is part of the program

A wrap-up does not remove complexity from a project. It moves the complexity to a different place. Instead of asking whether every subcontractor has the right insurance, the project team has to answer a different set of questions, continuously, for the life of the program:

• Who is enrolled, and who has been missed.
• Who is excluded, and whether their certificates have been collected and read.
• What happens to work done off site.
• How long completed operations coverage stays in force, and whether anything has to be done to keep it there.
• Whether defense costs are inside or outside the limits.
• Who pays the deductible or self-insured retention, and how it is allocated between trades.
• Whether payroll and contract values are being reported for the audit.
• And, above all, whether the insurance matches the contracts.

That last one deserves saying plainly. If the subcontract requires a trade to indemnify the general contractor for obligations wider than the wrap covers, the trade has uninsured exposure and does not know it. The construction contracts and the insurance program have to be designed together, not in sequence by two different departments.

The decision

Whether this project should have one

The question is not whether this project should have an OCIP or a CCIP. The better question is which insurance structure gives this particular project the most reliable protection, the clearest allocation of responsibility and the fewest gaps when a serious claim arrives.

Sometimes the answer is a wrap-up. Sometimes it is a project-specific liability policy covering the owner and the general contractor, with the trades keeping their own insurance. Sometimes conventional contractor insurance with well drafted requirements is entirely appropriate. The mistake is assuming one structure is better because it is the familiar one.

Insurance should follow the project. The project should not be redesigned around the limitations of the insurance.

As a rough marker, a wrap tends to start paying for itself somewhere around twenty-five million dollars in hard construction value, earlier on residential where the coverage gap is real and later on commercial where it usually is not. That is a rule of thumb and nothing more. There is no minimum to ask, and a good share of the projects we price end up placed on a conventional structure instead.

Questions

Common questions

Next

Where to go from here

Wrap-up covers a family of structures. The next question is usually which one, and for what kind of project.

Who you would be working with

Cary W. White

Managing Director · ISU Insurance Services of San Francisco

Cary handles the wrap-up placements here. He has spent 38 years in construction insurance. The first ten were on the carrier side, underwriting builders’ risk and complex property exposures. The 28 since have been in retail brokerage, advising residential developers, general contractors and other construction clients on project-specific and annual programs.

He is also one of the original authors of the project liability application that much of the industry still uses to submit wrap-ups to carriers. In practice that means he knows what each question is actually asking for, and where a thin answer will cost you at quote.

cwhite@isusf.com · 415-613-5589