Single Insurance Policies that Insure All Parties on a Specific Construction Project Offer Benefits and Risks

With the use of wrap-up insurance policies on the rise for commercial construction projects, many contractors and subcontractors have questions about how these policies work and what unique concerns and questions they present.

Generally, wrap-up insurance refers to single insurance policies written to insure all parties involved in a specific construction project—providing coverage for the job-site risks of the owner, construction manager, general contractor, contractors, subcontractors and design firms—instead of the individual parties each purchasing and carrying their own insurance policies. Wrap-up insurance policies are most commonly used on very large commercial or public projects. Many project owners and general contractors have found that using these policies is an effective risk-management technique for handling loss exposures related to single and multiple-site construction activities.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

Benefits

There are two primary types of wrap-up insurance policies: Owner Controlled Insurance Policies (OCIPs), in which the project owner is the primary sponsor, and Contractor Controlled Insurance Policies (CCIPs), which are controlled by the general contractor. Additionally, owners and general contractors can cover multiple projects under a single program in Rolling Controlled Insurance Policies (RCIPs). Typically, wrap-up insurance policies include general liability, workers’ compensation/employer liability, excess liability and builder’s risk as standard coverages, but many owners also add coverage for project environmental liability and project design team errors and omissions.

The benefits of using wrap-up insurance are numerous, especially for the owners or contractors who sponsor them. A successful wrap-up insurance program can significantly reduce risk for owners or contractors, giving them more control over insurance coverage for all the parties and avoiding unpleasant surprises about the extent of coverage parties have. Under the traditional model, owners or general contractors establish minimum insurance requirements for subcontractors and require them to furnish a certificate of insurance specifying coverage areas and limits. However, because all insurance policy terms differ slightly, there is no guarantee that a given subcontractor’s insurance will be adequate, or still in force, at the time of a loss. Furthermore, contractors and subcontractors normally have to build their insurance costs into their contract costs, and this increases bid amounts.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control. When sub-contractors no longer have to increase their bids to factor in insurance costs, owners claim they can utilize the cost savings to fund the costs of the wrap-up insurance. And the potentially more streamlined process for handling claims can make prospective litigation less time-consuming and costly.

Risks

OCIPs and CCIPs, of course, come with their own set of risks and drawbacks for owners, contractors and subcontractors, and the parties who are asked to enroll in these policies do not always look upon them favorably. Some subcontractors and contractors have found that enrolling in wrap-up insurance policies is administratively burdensome and that the resulting decrease in volume of insurance purchases for their companies can increase the costs of other insurance they must purchase. Additionally, subcontractors should make an effort to understand the limits of coverage; it may differ from the coverage in the policies they have been accustomed to using. This should be done at the procurement stage, before a project begins, and not later, after project contracts have been signed.

Those investigating the level and limits of coverage will want to determine how responsibility for any injuries, losses or damage will be addressed and confirm that the responsibility is outlined in the building contract or the written wrap-up policy. One potential source of misunderstanding is builder’s risk coverage. Often, builder’s risk insurance is carried by the builder. With wrap-up policies, owners and general contractors may be particularly concerned with the scope of the builder’s risk coverage. For example, if a wrap-up policy excludes property damage occurring during construction but the builder’s risk policy excludes faulty workmanship, a potential gap in coverage would exist. The wrap-up insurer might take the position that it won’t pay for what is essentially a builder’s risk claim. To prevent such an outcome, owners may find they need to add coverage to the builder’s risk policy to cover faulty work or at least repairs.

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