As the cost of commercial, public entity and residential construction continues to increase, owners and developers are seeking inventive ways to reduce insurance costs while maintaining effective coverages for the parties engaged at project sites.
Demand for comprehensive, high-efficiency wrap-up programs – a single insurance program covering the job-site risks of the project owner, build team or program manager, and all tiers of subcontractors – is on the rise. Owners of large projects, for example, are increasingly dependent on wrap-ups or owner controlled insurance programs (OCIPs) to manage their potential financial risks. Meanwhile, small to midsize general contractors in the commercial sector and in particular the multifamily and condominium residential space are able to bid and be more competitive on more projects through the use of contractor controlled insurance programs (CCIPs).
The financial benefits of wrap-up programs come from economies of scale, potential dividends on favorable loss experience and the elimination of duplicate coverages. From a program structure perspective, in addition to the project specific limits, contractual compliance features and, depending on the jurisdiction, combining workers’ compensation and general liability (GL) coverages under a single wrap-up program can result in savings of up to 1.5 percent of construction value. The other financial benefits are measured by eliminating or minimizing potential coverage gaps associated with underinsured or non-insured contractors.
The following are four common business issues and solutions that clients need to weigh when considering a wrap-ups.
Reducing Costs While Complying With Contracts
A traditional wrap-up or controlled insurance program (CIP) includes workers’ comp and GL insurance coverages. When structured properly, the consolidated program provides general contractor sponsors reduced costs and an additional potential revenue stream. For owners, the OCIP is an effective way to gain fiduciary control of the risk management program while improving profit margin and competitiveness.
In addition to structuring and placing such programs, brokers should review contracts for compliance with lender requirements. The financial impact resulting from a well-structured CCIP or OCIP can range between .25 percent and 1.5 percent of contract values, depending on jurisdiction and claim results.
In a recent case, a mid-size developer that was expanding on a three-year multi-project building program saved 0.5 percent of the enrolled contract values after implementing a combined line workers’ comp and GL rolling owner controlled insurance program (ROCIP). Rolling wraps cover more than one project. The developer, which had construction hard cost values in excess of $150 million, was exploring ways to be more competitive with larger developers and increase its operating margins. After the rolling wrap was implemented the developer saved $750,000.
Securing Project Specific Limits
Project specific wrap-up policies often provide better coverage than those acquired under separate conventional commercial GL policies, and owners can reduce costs, especially for workers’ compensation coverage.
For example, a project lender was requiring an owner to provide project-specific limits of $100 million for a $600 million commercial project. When the general contractor and its subcontractors could not provide this requirement, a workers’ comp and GL OCIP was implemented, with $100 million in project dedicated limits for the owner, lender and all tiers of contractors. The owner saved 0.6 percent of the contract values, equal to $3.6 million.
Addressing ‘For Sale’ Residential Exposures
A major trend in the construction industry is increased use of GL-only wrap-ups for commercial construction projects with project values as low as $10 million as well as for condominium (“for-sale”) projects.
For example, GL-only wrap-up programs can be structured to provide coverage for “for-sale” residential exposures with project dedicated limits for the owner, general contractor and all tiers of contractors. Most general contractors and trade contractors have an exclusion on their commercial general liability policies for condominium exposures.
GL-only wrap-up programs are being used to meet lender and contractual requirements, and because the GL-only program deductibles are much lower ($10,000-$25,000), collateral typically is not required.
Covering Completed Operations
Many lenders require owners and contractors to provide GL coverage during the construction period and completed operations coverage for the statute of repose. This period can range from two to 10 or more years, depending on the jurisdiction.
For contractors and owners, GL-only wrap-up programs should be structured to provide coverage for the construction period as well as for the completed operations exposures for a period of 10 years or the applicable statute of repose, whichever is less, to ensure contract compliance. The ability to structure coverage for post-construction claims is one of the essential advantages of wrap-up programs.
This is not intended to be an exhaustive list of all the solutions and issues relating to wrap-up insurance. Each company’s risk profile and needs are different, and understanding the unique circumstances is crucial when it comes to choosing the most effective wrap-up insurance.
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