Dennis J. Artese, Finley T. Harckham and Luma S. Al-Shibib | Construction Executive
In the construction industry, owner-controlled insurance programs (OCIPs) and contractor-controlled insurance programs (CCIP), also referred to as “wrap-ups,” commonly are used to provide insurance coverage for the owner, general contractor and subcontractors on a project.
Under these programs, one set of insurance policies is “wrapped” around a specific project to provide coverage for the enrolled parties. A wrap-up thus provides one set of policy limits that is shared by all enrolled parties. This differs from the “traditional” approach to construction insurance coverage, where each project participant is required to obtain its own insurance coverage for the project through its individual corporate insurance policies.
Because of the benefits provided by wrap-up insurance programs, the utilization of wrap-ups has increased recently and these programs are no longer limited to large-scale construction projects. Whether an owner or general contractor considering the implementation of a wrap-up, or a subcontractor likely to be involved in a project involving an OCIP/CCIP, it is important to understand how these programs work and the typical coverages that they afford so as to adequately protect their interests.
Each wrap-up program will contain differences in the scope and conditions of coverage. It is necessary, therefore, for contractors to read the governing documents pertaining to both the project and the wrap-up in which they are involved to understand the project’s insurance requirements and the scope, conditions and limits of coverage afforded by the wrap-up program.
Following are some of the common provisions usually found in OCIPs/CCIPs and typical issues of which wrap-up participants should be aware.
THE BASICS
The decision to implement a wrap-up is made by the party procuring the insurance, i.e., the “sponsor”—either the owner in the case of an OCIP or the general contractor in the case of a CCIP. As an initial matter, the sponsor cannot implement a wrap-up unless the contract governing the construction project authorizes the procurement of insurance coverage through a controlled insurance program. If CCIP enabling language is not already provided for in the project contract, then amendments to that contract will be necessary in order to institute a wrap-up insurance program on the project.
Once permissible under the project contract, the sponsor may implement a wrap-up program by purchasing insurance coverage on behalf of all or the majority of participants in the construction project, usually including the owner, the general contractor and most subcontractors (the “enrolled participants”).
Wrap-up programs typically include commercial general liability coverage, workers compensation and business auto liability coverage. Additionally, a wrap-up program generally contains primary, umbrella and excess policies, the limits of which are shared by the enrolled participants.
Stand-Alone Wrap-Up vs. Rolling Wrap-Up
A “stand-alone” controlled insurance program refers to a project-specific wrap-up program. This is the more common type of wrap-up program implemented within the construction industry. Another kind of wrap-up program—not as prevalent—is becoming more commonplace: the “rolling” controlled insurance program. Unlike a stand-alone OCIP/CCIP that insures one specific project, a rolling wrap-up insures multiple projects. The sponsor establishes the rolling wrap-up program to cover its ongoing projects.
Projects are rolled into the rolling wrap-up program upon their commencement and subsequently rolled out of the program upon completion—typically with extended coverage for completed operations claims.
Subcontractor Enrollment in Typical Stand-Alone Wrap-Ups
Once a wrap-up is implemented, enrollment is typically mandatory for all qualifying project participants. Depending on the project and its applicable contractual provisions and insurance specifications, some wrap-up programs may exempt subcontractors with smaller bids from enrollment.
For those parties for which enrollment is mandatory, the wrap-up insurance program replaces and supplants the enrolled participant’s individual corporate insurance policies in connection with any project-specific claims, except to the extent that those individual corporate policies are endorsed to provide coverage in excess of the wrap-up for specifically identified projects.
Depending on whether the wrap-up is implemented prior to the start of construction or after it is underway, subcontractors either submit bids excluding the cost of their individual insurance for the project or receive a subsequent deduction for the costs of insurance included in their original bids.
WHY IMPLEMENT A WRAP-UP?
Generally, the implementation of a wrap-up program has several potential benefits.
First, it provides a streamlined process for the administration of claims. A properly implemented wrap-up should eliminate or reduce disputes between insurance companies for the enrolled participants regarding which of their policies are triggered for project-related losses and the order in which these policies will provide coverage. This is because a wrap-up provides one set of policies for project-related claims and one administrator that services the claims on behalf of the enrolled participants.
Notably, standard general commercial liability policies in the construction industry typically contain wrap-up endorsements that exclude coverage for claims arising from a loss or occurrence on a project for which an OCIP or a CCIP has been implemented. In theory, as a result of this exclusion, claims on projects subject to a wrap-up program are covered under the wrap-up insurance policies only—and not under the individual corporate liability policies of the general contractor and subcontractors involved.
The benefit of this structure is that when a claim arises, the potential for finger-pointing between insurance carriers (as they try to avoid or limit their individual exposures) is eliminated. This, in turn, reduces the need for enrolled participants, and their respective insurance carriers, to sue each other for coverage and priority determinations. The reduction in litigation theoretically should amount to a cost savings for the enrolled participants.
Second, depending on deductible losses, the sponsor of an OCIP/CCIP may be able to realize a financial benefit from its implementation in the form of lower insurance premiums versus those incurred under “traditional” insurance, i.e., the sponsor’s individual corporate liability policies. Overall, wrap-up programs are intended to reduce the cost of insurance by providing wholesale pricing for a project.
Third, while policy limits are shared by all enrolled participants, a wrap-up program often affords a subcontractor higher limits for an OCIP/CCIP project than it would have available for the same project under its own corporate insurance policies in the absence of a wrap-up.
Part II of this article will cover how to protect interests.