Is a Wrap-Up Insurance Program Feasible for Your Construction Project?

Is a Wrap-Up feasible to use on your Construction and Infrastructure project?

The first step in the process of building a better wrap-up is to prepare a comprehensive Wrap-Up Insurance Program Feasibility Study. This study is a detail analysis of all the specific attributes of the construction and infrastructure project under consideration. It is prepared to provide a project owner with an empirical and objective risk assessment for making a determination on whether a wrap-up program (owner controlled insurance program [OCIP] or contractor controlled insurance program [CCIP]) is an appropriate and viable risk financing approach to use on their construction and infrastructure project in lieu of using the traditional method where each party to the contract is responsible for purchasing their own insurance policy coverages independently to protect themselves and organizations from any potential financial losses on the construction project.

The wrap-up insurance program feasibility study is used to evaluate advantages and disadvantages, statutory and regulatory requirements, potential cost savings, timing, and other issues that a project owner is concerned with to mitigate or eliminate risk.

The wrap-up insurance program feasibility study is designed to provide more than a cursory risk assessment for a Go/No-Go decision on using a wrap-up program. Its main purpose is to identify any “make or break” issues which could be impediments and prevent the grantee/sponsor of the wrap-up program (owner for OCIP or construction manager or general contractor for CCIP) from a beneficial result on the wrap-up.

An objective and realistic evaluation of an owner’s or contractor’s prior track-record with the enforcement of construction contracts, more importantly contractor compliance, will determine if a wrap-up can be effectively managed by either an owner or a contractor. This will require a thorough and objective evaluation of all the stakeholders who will be directly involved with the formation, implementation, and management of the wrap-up. This includes the structuring of the wrap-up insurance program policy coverages as well as the enforcement of construction contract terms and conditions on the wrap-up. The contract provisions that stipulate the wrap-up administration requirements cannot be ambiguous and need to be specific and a mandatory part of all construction contracts with enrolled contractor participants. This is a critical success factor and probably one of the most important considerations for any project owner considering using a wrap-up.

Enforcing contractor compliance with construction contract provisions starts with crafting stringent contract language for the indemnification clauses and the wrap-up insurance requirement provisions. It includes being very clear on the insurance coverages being provided in the wrap-up that are owner-furnished insurance coverages and the required contractor-provided insurance coverages outside of the owner-furnished coverages.

Another critical success factor is wrap-up administration. Who will manage the wrap-up? There needs to be unambiguous contractual risk-transfer language for each insurance coverage policy included in the wrap-up that stipulates deductible or retention amounts. The deductible responsibility for claims against the individual wrap-up policies should be transferred to the individual enrolled contractors who are responsible for any claims that are submitted by third-party claimants against the wrap-up program so contractors have some “skin in the game”. Integration of the construction contract general conditions with specific sections stipulating the wrap-up insurance requirements is imperative. Wrap-up insurance policy(s), safety manual, claim manual, and administration procedures, need to be explicit. The comprehensiveness of the wrap-up program documents is a required best practice. But, making sure they are adhered to is more critical to ensure success.

The Devil is in the Details

Now that we have covered generalities of what goes into a wrap-up insurance program feasibility study, lets dive into some specific areas that involve doing a risk assessment of the construction project to see if the project meets the size requirements or critical mass. The criteria for wrap-up program suitability for a construction project are typically determined by doing a risk assessment of the type of project and physical location, but more importantly by evaluating the following list of items and considerations:

1.???Type of construction and infrastructure

2.???Project size; buildings, structures, sites

3.???Project cost (high payroll component of project cost for WC)

4.???Project schedule, duration, phases

5.???Number of contractors, subcontractors, vendors, suppliers

6.???Potential for catastrophic loss (e.g., flood, hurricane, earthquake, etc.)

7.???Safety and Risk / Loss Control

8.???Funding source (e.g., private money, investors, public funding, bonds, etc.)

9.???Legal capability (State Department of Insurance / Legislative Approval)

10. Small / Disadvantaged / Minority contractor participation

11. Owner / General Contractor commitment to project and wrap-up program

12. Timing of decision and projected start of construction project

The timing of the decision is important to ensure there enough time to develop and implement the necessary program, systems, and processes to effectively do a wrap-up. The wrap-up team must be formed, and the wrap-up insurance coverages purchased before the project owner or contractor can issue the invitation for bid (IFB) and request that all eligible trade contractors who will be enrolled into the wrap-up understand that the grantee/sponsor is providing insurance, the contractors should be able to request credits from their own insurance companies, and should be in a position to pass these insurance cost savings to the grantee/sponsor in the form of lower bid prices for their awarded contract work on the project. All trade contractors must clearly understand the coverage terms, conditions and limits on the wrap-up insurance program, contractual and insurance obligations, and be allowed to bid on contract bid packages accordingly.

The process for determining wrap-up feasibility, preparing the wrap-up coverages and service specifications, interviewing and selecting a wrap-up administrator (if needed), marketing the wrap-up insurance program to insurance carriers, binding and issuing the insurance coverages, and engaging the on-site wrap-up administration personnel and processes could take up to four to six months if not longer based on market conditions.

Cost- Benefit Analysis / Pro Forma for Potential Wrap-Up Program Cost Savings

Most cost-benefit analyses are based on doing a comparative analysis of the projected costs of using a wrap-up insurance program (OCIP or CCIP) versus the cost of using a traditional contractor-provided insurance program. Determining potential cost savings is not an exact science and entails making assumptions and performing estimates using several variables for insurance costs based on the lines of coverage to be included in the wrap-up, global insurance market conditions at time of purchase of wrap-up policies, actuarial input on projected claims for each coverage line and deductible responsibility, administration costs, and financing costs over the duration of the wrap-up program.

Historically, the rule of thumb has been that a wrap-up insurance program used as an alternative project delivery and risk financing mechanism can yield a potentially cost savings of approximately 1% to 3% of the total construction project hard costs on most large construction and infrastructure projects. This percentage of total cost savings?is relative based on type of?project and?the specific insurance program?structure utilized.

A simple equation for calculating whether a construction wrap-up insurance program will produce any potential cost savings is determined by using the following equation:

Premium Cost of Traditional Insurance Program

(minus - ) Premium Cost of Wrap-Up Insurance Program?

(equals = ) Gross Potential Wrap-Up Cost Savings? ??

(minus - ) Wrap-Up Insurance Claims Costs

(minus - ) Wrap-Up Administration Costs?????????????????????????? ?

?????????(equals = ) Net Potential Wrap-Up Cost Savings

Recommended Steps to Implement a Wrap-Up Insurance Program??????????????????????????????

A wrap-up insurance program requires planning and oversight management. It is not a group of insurance policies thrown together to provide economies of scale. It is a viable risk transfer, risk financing, and risk management approach for creating an effective way to control and transfer risks related to large construction and infrastructure projects. The success or failure of a wrap-up insurance program is directly dependent on the quality of its program structure formation, execution, management, controls, and monitoring.

Key components of a successful Wrap-Up Insurance Program are:

1.???Insurance Requirements

2.???Contracts

3.???Safety Program

4.???Roles & Responsibilities - General Contractors & Subcontractors

5.???Wrap-Up Administration

6.???Financial Management

7.???Claims Management

8.???Risk Management Information Systems

9.???Communication, and

10. Audits

Why use a Wrap-Up Insurance Program now?

It’s all about timing! There is currently a focus on the rebuilding America’s deteriorating infrastructure to stimulate growth in the construction, transportation, and manufacturing sectors. Knowing construction and infrastructure projects play a major role in economic competitiveness and in strengthening economic growth in urban and rural areas, these are key factors that should provide a significant boom in the building industry.

Combining this fact with an abundance of private capital from investors and a growing interest in the creation of public-private partnerships (P3s), will present new construction and infrastructure project opportunities. In addition, there will be renewed interest in P3s and the implementation of wrap-up insurance programs on these construction projects on the horizon that will require the use of innovative risk funding and financing methods.

Wrap-up insurance programs may have been around for more than 50 years, but now may be the best time to consider using a wrap-up program on your next construction and infrastructure project. As part of your due diligence process for fiscal responsibility, it is imperative that you engage a competent insurance broker and/or risk management professional to prepare a wrap-up insurance program feasibility study and analysis.

If the shoe fits, wear it! In the past decade, wrap-up insurance programs have been utilized on numerous types of commercial, industrial, and manufacturing construction and infrastructure projects. This includes the proliferation of using wrap-up programs for large public works and rail & transportation projects. These types of megaprojects are great candidates for using wrap-up programs because they tend to attract a lot of public attention, have substantial impacts on communities because of generating tax credits, have large construction capital development budgets, and many of these megaprojects can typically cost upwards of $1 billion or more to build.

Hope this article/post was helpful and insightful to assist you in your evaluation process of determining if implementing a wrap-up insurance program on your construction and infrastructure project is a feasible alternative risk transfer and risk financing solution.

?Prepared by David Grenier, MBA, Principal / Director, C-RISK, LLC