By Donald S. Malecki, CPCU

Agents/brokers are receiving more and more inquiries from clients (contractors) who are becoming involved in wrap-ups but who know little about them. What the clients do know is what they are told: Bid your work estimates to exclude insurance costs for workers compensation and general liability.

Wrap-up programs present opportunities for clients to obtain work where none may otherwise exist. But on the other side of the coin, these programs may create work for the agent/broker without much opportunity for compensation. The work involves modifying the client's policies in order to avoid charges for exposures being transferred to the project owner of the wrap-up, and to protect the client in the event that insurance being procured by the project owner ends up being insufficient.

Wrap-up defined

A wrap-up program is one where the interests of the project owner, general contractor, construction manager, architects, engineers, subcontractors and sub-subcontractors are combined (wrapped up) for insurance purposes. How the insurance will be handled is up to the project owner or general contractor who is spearheading the project.

The less common insurance approach is to require all participants to obtain the specified insurance through the pre-selected producer and insurers designated by the party managing the project. While each participant is required to pay premiums, any savings, dividends, etc., go solely to the one controlling the project.

The more accepted approach requires the party controlling the project to arrange and pay for the insurance to cover all interests through one or more insurers. The rationale here is that through careful loss reduction and control measures, the party controlling the program will realize the savings that sometimes result from excellent claims experience.

These wrap-up programs can be sponsored by project owners or general contractors. When owners require and control them, they are commonly referred to as "owner-controlled" insurance programs (OCIP), and "contractor-controlled" (CCIP) when general contractors require and control them.

Generally, the two required coverages are workers compensation and general liability. (Without workers compensation insurance, the potential savings probably would not be worth the trouble of these programs.) However, it is not unusual for wrap-ups to include course of construction policies. What other coverages may be necessary, such as professional liability, aircraft or watercraft liability, or difference in conditions coverages, will hinge on the nature of the program. Automobile insurance is not usually included.

While wrap-ups were originally instituted for single construction programs, they now are often used for construction work to be performed over a number of years, a so-called "rolling wrap-up;" for very short projects, "mini-wraps;" or for on-going maintenance work, also known as "gatekeeper programs."

Agents' and brokers' concerns

Not all contractors who become involved understand the ramifications of wrap-up programs, even though they are given the opportunity and are encouraged to read the contract documents. But they do become inquisitive when they learn that they are to bid their work exclusive of insurance costs. It usually is at this point that they contact their own agents/brokers for assistance.

It is no problem for agents and brokers of participating contractors to modify the individual contractors' policies to exclude coverage to be handled by the wrap-up. Where it becomes problematic, however, is in assuring that contractors' policies apply when the insurance promised by the party controlling the program falls short. (Another concern not discussed in this article involves obtaining the wrap-up data for purposes of entering it into the contractors' experience modification.)

Generally, the liability policy limits obtained by the party in control run into the millions, and there is not a great concern that the limits will be exhausted. Even if they are, some of the well thought-out wrap-ups are arranged so that additional limits can be purchased if the aggregates are exhausted before the project's completion.

One Rough Notes subscriber recently lamented, however, that some of his contractors are being required to participate in a wrap-up sponsored by a large processing plant where the contractors are to perform on-going maintenance and construction services. The coverages to be obtained by the owner are workers compensation and general liability.

The bone of contention is that the owner intends to maintain liability limits of about $2 million per occurrence and $4 million annual aggregate for the eight to 10 participating contractors--with the idea that the contractors' liability policies (general and umbrella) will apply if the limits of the wrap-up turn out to be insufficient.

The reality here is that no matter how ridiculous these demands of owner-controlled or contractor-controlled programs may be, contractors are going to agree to them because they need the work. In many cases, contractors do not even know the extent to which they will be protected by the wrap-up program. They simply sign their names on the contract's dotted line and relay the problem to their agents/brokers.

Points to consider

Contractors contact their agents and brokers at this point because they want to eliminate premium charges allocated to their own liability insurance in relation to the wrap-up. (The same goes for payroll under workers compensation.) One of the common endorsements issued to the contractors' own CGL policies is a standard ISO, one referred to as "Exclusion - Designated Operations Coverage Program," CG 21 54 01 96.

This endorsement adds an exclusion that affects bodily injury and property damage by confirming that coverage does not apply to the contractors' CGL policy for injury or damage arising out of its ongoing or completed operations, at the location described in the endorsement schedule, in light of the contractors' (named insureds') involvement in a consolidated insurance program being administered by the prime contractor or project owner. (The italicized section makes it clear that wrap-up programs usually do not extend to off-site exposures, so that the contractors' CGL policy coverage remains unaffected by the contractor's involvement in a wrap-up. However, there still is a concern that excess protection may be required if the limits of the wrap-up fall short.

In this event, an endorsement needs to be manuscripted, unless the insurer has one, to give excess coverage for contractors' involvement in wrap-ups. (Given today's hard market situation, it may be doubly difficult to obtain such an endorsement.)

In an actual endorsement issued by an insurer, excess coverage is said to apply for the named insured's involvement as a participant in a wrap-up program, subject to the following conditions: the wrap-up program (1) is limited to a specific construction project, (2) requires some or all of the contractors on the project to be program participants, and (3) the insurance is purchased by the named insured, or is purchased for the named insured by an owner (OCIP) or contractor (CCIP) of the project.

Another contractor's liability policy automatic excess wrap-up coverage provision modified the other insurance provision to read this way: "This insurance is excess over any other insurance, whether primary, excess, contingent or on any other basis . . . This is available to you through any Owner Controlled Insurance Program, or similar type of project-specific insurance program." It may also be advisable to add a provision which states that if no other insurer defends the named insured, this insurer will undertake to do so.

It is obvious that there are many different ways to deal with this subject--if the underwriter is willing. What can be particularly agonizing for contractors and their agents and brokers is the requirement that the owner of an OCIP or a contractor of a CCIP be added as an additional insured on the liability policies of participating contractors.

There could be at least two reasons for such requests: to protect the owner of an OCIP or a contractor of a CCIP (1) for off-site exposures of contractors related to the wrap-up, or (2) when the limits of the wrap-up are deemed to be insufficient. Since the contractor's business auto policy will automatically protect the project owner or general contractor, as an additional insured, no endorsement is necessary.

Underwriters often are reluctant to give additional insured status to the party sponsoring a wrap-up, unless the coverage is limited solely to the fault of the named insured. Whether that will be sufficient will depend on what the contract of the OCIP or CCIP requires. It may turn out to be sufficient. If not, the contractor may be responsible for the deficiency.

The subject of OCIPs and CCIPs is complex. Not all of these complexities can be addressed in this article. One point that needs to be raised, however, has to do with umbrella policies--although, in reality, umbrella policies have become almost non-existent, having been replaced by excess policies.

Whatever the case may be, a common endorsement attached to these policies for contractors is titled the "Contractors' Limitation Endorsement." These endorsements vary. Some of them, for example, exclude the explosion, collapse and underground (X, C, and U) hazards, unless coverage is provided by the CGL policy. Most of them, however, specifically exclude, without exception, the named insured's involvement in wrap-up programs.

It may be difficult to modify this exclusion, but it is not impossible. It may be advisable to do so in order to provide continuity of excess protection to named insureds. It is important to remember that such an exclusion exists. In one case, a broker overlooked that exclusion and applied it to the umbrella policy of an OCIP, until it was called to the owner's attention.

Wrap-up programs present some challenges to contractors, as well as to their agents and brokers; however, these programs are a "fact of business" today. Although these programs will cover some of the major exposures, there still is room for agents and brokers to service their clients--and to be compensated for it. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.