The traditional method of obtaining insurance for participants in construction projects is for each party to obtain insurance individually. This would mean that the project owner, general contractor and each subcontractor would purchase insurance independently to protect themselves from the risk of financial loss. In recent years, an alternative to the traditional method has emerged called “wrap-up” insurance programs. In a wrap-up program, the project owner can purchase an insurance policy that will cover all participants involved in the project. The most common type of wrap-up program is called the Owner Controlled Insurance Program (OCIP). This basic concept has been adopted more recently by contractors and is referred to as a Contractor Controlled Insurance Program (CCIP). Both programs share the same key concept, advantages, and disadvantages.
One of the main benefits of wrap-up insurance over traditional insurance is the cost savings. The project owner’s bulk-buying power results in a lower premium than piecemeal policies through the individual contractors. Wrap-up insurance is also more cost efficient, as there is a streamlined process for processing claims. The coordinated claims process is the result of having a single insurer as the control point for all claims. Overall, the U.S. General Accounting Office has found that wrap-up insurance can save project owners up to 50 percent over the cost of traditional insurance.
In addition, wrap-up insurance eliminates duplications in coverage that occur when each contractor purchases independent insurance. Traditionally, the contractors and subcontractors purchase an overlap in coverage, because they are insuring themselves for the same accidents. This duplication also results in litigation among the respective insurance companies over claims. Wrap-up insurance has the advantage of reducing potential litigation because a single carrier is responsible for all claims. Under wrap-up insurance programs, project owners can also ensure that there are no gaps in coverage with regard to general liability and workers compensation, as well as sufficient specific coverage for the contractors. Finally, wrap-up insurance allows the owner to create a comprehensive and centralized safety program in contrast to traditional insurance where there is no coordinated safety program among the individual carriers. This results in better safety records and fewer injuries.
The two main disadvantages to wrap-up insurance are increased administrative costs and the potential for up-front premiums. With wrap-up insurance, project owners are responsible for administering the insurance and must provide the administrative support either internally or through outsourcing. In addition, some insurance companies require owners to make large premium payments at the start of a construction project and/or establish a special reserve. Under traditional insurance arrangements, the owner often does not have to make a lump sum payment and instead would make payments to the general contractor. Finally, depending on the size of the construction project and the state laws, some owners may find wrap-up insurance to be less beneficial. For example, some states require all contractors to pay into a workers compensation fund in addition any coverage through wrap-up insurance.
Finally, not all contractors view wrap-up insurance to be as beneficial as owners. Contractors traditionally include the cost of insurance in their bids and can thus generate a profit if they receive a rebate from their insurance carrier. These profits are not realized to the subcontractors when a wrap-up program is employed by the owner. On the other hand, many smaller or disadvantaged construction contractors have a difficult time obtaining insurance under the traditional method. A wrap-up insurance policy can improve the competitive environment and allow these contractors to compete for work.
In summary, due to the substantial cost savings and the removal of many insurance disputes, wrap-up insurance plays an increasingly important role in large construction projects today.