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SAN DIEGO—Wrap-up programs are commonly agreed on as the most effective means of insuring a large, complex construction project and the workers building it, experts say.
Wrap-up policies usually can provide superior coverage, higher policy limits and greater contract certainty for commercial general liability, workers compensation and, most often, builders risk for all contractors and subcontractors than traditional policies segmented by subcontractor and risk category.
But deciding who ultimately is responsible for procuring and administering the program often can become a contentious issue between project owners and their contractors, experts said during the Dallas-based International Risk Management Institute's 31st Construction Risk Conference in San Diego.
Experts' opinions diverged on how to decide between a wrap-up program on an owner-controlled insurance program and contractor-controlled insurance program. Some said policy control should go to the entity with the greatest financial risk, while others said it should be given to the entity with the more robust risk expertise. Other factors in those negotiations should include any requirements set forth by project lenders, administrative capacity and, of course, the nature of the project itself.
“In general, people like to control their own purchase of insurance,” Jim Conroy, senior vp and chief underwriting officer for construction at Boston-based Liberty Mutual Group Inc., said in an interview.
If executed well, wrap-ups can lead to a safer and more cost-effective project as well as eliminate much of the cross-litigation that tends to infect construction projects. A wrap-up policy also can translate into profit for the program sponsor based on loss experience over the life of the policy, a key bargaining chip in negotiations over policy control, Mr. Conroy said.
“Usually, I believe the party that has the most to lose should be the party providing the insurance,” said Charles Moore, president of Nashville, Tenn.-based insurance consulting firm Moore-McNeil L.L.C. “The problem is, you can have a lot of debate on that between the financial side of the partnership, meaning the owners and their lenders, and the contractors, who likely have the greater risk knowledge.”
OCIPs can be the more advantageous model in certain situations. Reputable, large-capacity residential developers still can find favorable rates and/or more complete coverage in wrap-up markets over CCIPs. Even commercial and industrial project owners with relatively little construction expertise but some experience with prior wrap-up agreements might be viewed more charitably by an underwriter than a contractor submitting its first CCIP request, experts said.
Additionally, a project owner's agreements with its financial backers—whether private investors or institutional lenders—often require the owner to maintain control of the project's wrap-up policy.
“Depending on the exact nature of the project, there are some instances where it's going to make more sense commercially to let the owner insure the project,” said Susan Staff, director of risk management at San Antonio-based Zachry Holdings Inc.
In recent years, especially in the commercial and industrial sectors, many construction underwriters have begun to favor wrap-up programs sponsored by general contractors and construction managers, experts said. Largely, that favoritism is driven by an emerging consensus that contractors are better equipped to manage safety and reduce loss events on the worksite.
“Contractors are going to pursue a safe site no matter how you insure it, but you crank it up if you've got contractor-controlled wrap-up in place, because you're going to have much better and more direct degree of control over how your subcontractors maintain safety on the site,” said Richard Resnick, a New York-based senior vp at Aon Risk Solutions, a unit of Aon Corp. “The owners don't have any control over the contracts with the subcontractors, and there's no teeth in a contract you don't have.”
Risk appetite and expertise being equal, experts said the project owner and the contractor should conduct a rigorous self-assessment to determine which type of program is truly the most appropriate. Owner- and contractor-controlled programs usually come with a premium rate that is several times higher than traditional general liability, builders risk and workers compensation policies.
“If you cannot sell your senior executive team on this kind of program, and if they don't get behind it, it's done,” Mr. Resnick said. “You have to understand that there's going to be some sticker shock on the premium price, and you have to be able to overcome that psychological barrier.”
Also, experts said, management of the policy—including safety and wellness training, loss prevention and claims management for all subcontractors—usually is a labor-intensive exercise. More often, Mr. Conroy said, that element is a deterrent for project owners, but can quickly become an issue for contractors that underestimate the scope of their responsibilities.
“There's a fair amount of administrative work that goes along with running a wrap-up,” Mr. Conroy said. “Either party might not really relish the amount of work that goes into running a wrap-up, or it might simply be impractical for them to take on that responsibility.”
SAN DIEGO—If their policy forms are well-written and diligently maintained, construction project owners and contractors should see very little overlap between their builders risk and commercial general liability policies—two of the core insurance lines builders and developers use to protect their projects.