What is a Wrap-Up or OCIP (Owner Controlled Insurance Program)?
The "perfect storm" seems to have hit the construction industry. At the same time that hurricane-related construction projects have led to building material shortages, rising litigation expenses are creating a shortage of construction insurance capacity to builders and contractors of residential and hospitality projects.
These soaring costs are encouraging many developers to turn to Wrap-Up Insurance Programs also known as an OCIP (Owner Controlled Insurance Program). A well-designed wrap-up insurance program can lower costs related to litigation and offer a cohesive basis of coverage with more options.
The wrap-up concept has been around for almost 40 years. It entails the owner of a building project furnishing a single source of liability insurance for all involved parties from the owner/developer to the general contractor and all subcontractors and sub-tier subcontractors for the project's duration. The more common format is a program that provides general and excess liability, but wrap programs can be written to cover general liability and workers compensation, too. Coverage for all participants is provided during the construction process through completion. In addition, it also provides construction defect liability, usually for another 10 years, which approximates the statute of repose depending on which state the work is in.
During the last 20 years, these policies have become quite common-often being used for federal or municipal infrastructure projects, transportation construction and ongoing residential construction. States such as California, Nevada and Arizona exclusively use these insurance programs for condominium construction.
Most trade or artisan contractors have exclusions on their insurance policy for any new residential attached housing construction so coverage availability can be problematic. Finding subcontractors with proper general liability coverage can be quite difficult and quite expensive, if not altogether impossible.
This is due to the rampant increase in construction defect litigation. Plaintiff attorneys know it's lucrative to sue a developer because multiple subcontractor insurance policies can be targeted to allocate blame and remedy a claim. This makes it very expensive to defend these claims, and there's always the possibility of a jury verdict that assesses blame on an insured contractor whether or not the defect was related to the contractor. This has made insurance unavailable to contractors in many regions.
Rising insurance rates are the result. "The litigation costs have led to increased insurance costs," says Guy Sansom, senior broker with Price Forbes Ltd., based in London, England. "In the West, wrap policies have become the norm because it's almost impossible for a subcontractor to provide appropriate insurance. I've seen it move to Florida, too, but I haven't seen it go a great deal in the North. In due course, it will happen."
How a Wrap-Up Helps
Two of the main advantages of wrap-ups are that they ensure continuous, uniform coverage and coordinated claims handling on a site. When using a wrap-up, owners ensure continuous insurance on a project since they don't have to worry about contractors losing their coverage arrangements mid-project. "When developers buy the insurance, they know it's dedicated to their product and in place for the statute of repose," Sansom says. "When you have subcontractors providing their own insurance, that may not be the case."
There may also be varying levels of coverage when subcontractors provide their own insurance. With an OCIP (Owner Controlled Insurance Program) or CCIP (Contractor Controlled Insurance Program) uniform coverage is provided since the wrap-up policy covers most all contractors and their subcontractors (vendors, suppliers and material dealers are not covered).
This single policy also simplifies the claims handling process as there is only one insurance company to deal with when a claim arises.
Ultimately the wrap-up gives the developer or general contractor more control and flexibility when selecting a subcontractor since they are free to select any subcontractor they choose without having to consider what level of insurance coverage they can provide.
Saving Money with a Wrap-Up
There are a couple of ways owners save money using a wrap-up policy.
Because developers can obtain bid credits for the general liability insurance component from subcontractors, actual construction costs go down. It can be anywhere from 1.5 percent to 3 percent of the hard construction costs back to the developer. Getting these bid credits is one of the most important tasks for the Wrap-Up administrator. An experienced wrap-up administrator like BuildersWrap Administrators will help the contrators determine their appropriate bid credits and track them through out the project.
In addition, owners can reduce insurance costs by negotiating a volume purchase and overseeing safety to reduce job site claims. The safety and inspection companies play a vital roll for the long term mitigation of loss. The safety company will often provide inspection and documentation services.
As a job progresses a third-party peer review company will provide a written evaluation and photographic record of each milestone of construction. This information provides two key services. First, the company will work with contractors to verify that the contractors' employees are using best practices for safety and the best construction methods. Second, the construction survey and photographic records are important visual documents to catch and correct mistakes and to provide as evidence if a construction-defect claim should arise. If workers compensation is part of the program, they can also reduce workers compensation losses through the documentation of construction safety best practices.
Is a Wrap-Up Right for You?
In some states, developers can't build a condominium project without wrap insurance; they have to use a wrap-up policy because subcontractors can't get their own insurance.
When you have an option, look at the feasibility of going this route and the practicality of it. Wrap-ups do put some administrative responsibilities on owners and require them to implement and monitor safety and third party construction peer reviews. In comparison to the traditional method of collection of certificates insurance and insurance company verification, there's less administrative work.
That being said, "anybody who enters into a wrap insurance program needs to realize it is 85 percent administration and 15 percent insurance," Sansom says. "They would need to employ the services of someone who could do that for them such as a Wrap-Up Administrator. That person would enroll the subcontractors and make sure they're familiar with the protocols."
Within the industry there are several experienced service providers. Those service providers also help developers structure their construction contracts with downstream contractors, eliminating unjustified costs.
"Not only do you get the benefit of the known insurance cost, but you also reduce the potential litigation within the parties because you no longer have finger-pointing," Sansom says. "If it's well managed, a wrap-up can get you a much better project because everyone is looking in the same direction as opposed to being out for their own interests."
Possible Disadvantages of a Wrap-Up for Contractors and Subcontractors
If you're considering a wrap-up policy, you'll need to watch out for possible gaps in coverage and uncompensated administrative costs. Inadequate limits of insurance can be another pitfall, but overall, many developer find such plans are worth exploring.
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