A Primer to Understanding Wrap-Up Insurance Programs
Policyholder Insurance Coverage News
Whether you are a property owner, general contractor, or subcontractor, understanding wrap-up insurance programs—when to consider one, what they insure, and how they affect the project—is vital to a construction project’s success. From bidding to managing, a wrap-up insurance program can affect almost every aspect of a construction or renovation project.
This article provides a general overview of wrap-up insurance programs, answering what they are, what and who they insure, as well as the potential benefits and risks.
What is a wrap-up insurance program?
Insurers offer two types of wrap-up programs, Owner Controlled Insurance Programs (OCIPs) and Contractor Controlled Insurance Programs (CCIPs). In an OCIP, the property owner sponsors and controls the insurance program. In a CCIP, the general contractor sponsors and controls the program. Otherwise, OCIPs and CCIPs are largely similar. The relevant differences are discussed below.
Generally, a wrap-up insurance program is just what it sounds like—several insurance policies wrapped up into one insurance program. Each program is different. A program can include almost all of the project’s insurance—from General Liability to Excess Liability to Worker’s Compensation to Builder’s Risk and Inland Marine—or it can include only one insurance policy.
Additionally, wrap-up programs are most often used with large, single-site projects, although they can also be used for multi-site projects.
What types of losses does a wrap-up program insure?
Because programs vary widely regarding which policies are “wrapped,” what each program insures also varies. As a general rule, however, wrap-up programs insure general liability exposure for claims arising from the construction project at the construction site during the policy period. Wrap-up programs often cover damages arising after construction is completed through completed operations coverage. Completed operations insures bodily injury or property damage claims that occur after the completion of a project but arise out of the project itself. For instance, if six months after the building is completed, the roof leaks and causes water damage, the completed operations coverage potentially insures against this damage.
Liability occurring away from the project site is generally not covered. Similarly, tools and equipment not at the construction site is not covered. Depending on the program, tools and equipment at the construction site may or may not be covered. To avoid this gap, the program’s sponsor should consider adding Builder’s Risk and Inland Marine coverage to the program. Programs typically do not insure specific operations such as blasting, demolition, or other high-hazard operations. But again, each program is different. It is crucial that the program’s sponsor is intimately familiar with exactly what is and is not covered.
Likewise, liability for work at the construction site that is not related to the project and warranty work done after the project’s completion are not covered.
And it is important to remember that some states impose various coverage requirements or restrictions on wrap-up programs. For instance, 12 states specifically regulate OCIPs for public work projects.
Who does a wrap-up program insure?
Wrap-ups insure the property owner, the general contractor, and the subcontractors. Traditionally, wrap-ups excluded professionals such as architects, engineers, and designers, but this trend is reversing. Because the program most likely covers only work done at the construction site, wrap-ups typically (but not always) exclude haulers, truckers, suppliers, and vendors.
In an OCIP, the property owner is the first named insured, and the general contractor and the subcontractors are named insureds. In a CCIP, the general contractor is the first named insured, and the subcontractors are named insureds. The property owner is either an additional insured or a named insured, depending on the program.
What are the benefits of a wrap-up program?
Wrap-ups offer many benefits, including:
- Consolidated coverage: Program sponsors do not need to rely on contractors and subcontractors to procure the correct limits and types of coverage to protect the sponsor from losses.
- Higher limits/site-specific limits: The program’s sponsor can design the scope of coverage provided for the owner and contractors and set the amount of limits that will be dedicated to the project.
- Fewer disputes: Wrap-ups lead to quicker claim turnaround and less cross litigation between insurance carriers before deciding who pays for the claim.
- Easier, more accurate bidding: The bidding contractor removes the cost of insurance provided under the wrap-up from their bids, including any markups.
What are potential issues and risks?
First, wrap-up programs offer broad coverage, so a program can be fairly expensive to purchase. The program’s cost depends on the limits and scope of the policy. Sponsors are often able to mitigate costs by opting for a higher deductible and/or spreading the cost of the premium to all the contractors and subcontractors protected under the policy. Second, because a wrap-up program can involve several insurance policies, the sponsor will most likely want to hire someone to help design and/or administrate the program, and this can be costly. The sponsor must take time to issue detailed requests for proposals to contractors and make sure that the contractors and subcontractors are aware that the project is covered under a wrap-up program. Lastly, like any insurance policy, a wrap-up program’s cost is subject to market fluctuations, so cost savings are never guaranteed.
Best practices when considering a wrap-up program
Determining how much and what type of insurance you need can be daunting. Each project requires careful consideration of the insurance options and the characteristics of the project. Wrap-up programs are complicated and require extensive review before purchasing. Below is a helpful checklist to use as a guide.
- Address insurance in bidding: When bidding for a project, make sure all parties are clear that this project is using a wrap-up program and who the sponsor is.
- Understand the project’s scope: Where is the site? What is the project’s duration? Is this a large or a mid-sized project?
- Be mindful of coverage gaps: Have a thorough understanding of your coverages and how they interrelate with a wrap-up program.
- Purchase adequate limits: Do not underinsure.
- Identify insureds by status: Owner, general contractor, subcontractors, and professionals.
- Understand governing state law: Make sure your program meets all state requirements.