Top 10 Favorite Wrap-Up Questions (and Answers)
July 2006
For those already familiar with my wrap-up
articles, I thought it might be a novel approach to offer our readers my "Top
10 Favorite Wrap-Up Questions" (but not necessarily in proper order) commonly
asked by potential wrap-up buyers. This should serve as a good reference piece
for those attempting to respond to the most common concerns.
by Richard
Resnick
Willis of New York
One caveat before we begin: Obviously, this is not an all-encompassing list,
but I would surely agree (based on popular demand) to continue the list at another
time.
Question 1: Do wrap-ups really save money?
Many firms that embark on wrap-ups do it because they are concerned that
the contractors on the project are not bringing adequate coverage to "the table."
Savings are secondary at that point. However, it is safe to say that with a
proper safety management and claims management program, established specifically
for the project site, a savings will result from lower losses. This will reduce
the cost of the wrap-up program assuming it is written on a loss-sensitive basis.
By combining favorable loss experience with a diligent effort to negotiate the
maximum contractor deducts the sponsor will certainly obtain savings.
Question 2: Do wrap-ups cause a tremendous administrative burden on the
sponsor?
Here we have a typical case of perception versus reality. Back in the old
days, when wrap-ups were less common, we did not have the administrative tools
available to the insurance broker to handle a multitude of data. Much of this
burden to track information was a combined effort by both the sponsor and broker.
With the advent of wrap-up software programs and better trained professional
career administrators, almost 100 percent of the burden has been shifted to
the broker. The fee charged by the broker encompasses all the administrative
activities necessary to successfully run the wrap-up program.
Question 3: What does the wrap-up cover?
The traditional wrap-up we are most familiar with will cover workers compensation,
commercial general liability (CGL), and an umbrella/excess limits program. This
is not to say that other combinations of single or multiple coverages could
not be written in a wrap-up format. For example we have seen pollution-only
general liability wrap-ups (sometimes called "dirty wraps"). Also, today many
residential projects in certain states such as California are written as general
liability only wrap-ups. There are also other construction coverages that may
be written alongside the wrap-up in what I like to call the construction insurance
portfolio—i.e., "subguard," builders risk, professional liability, and pollution
to name a few.
Question 4: One of the problems often anticipated in wrap-ups is the length
of time they remain open. How do we overcome this problem and make sure we can
close our projects in a reasonable period of time?
Ah yes. I have heard this one many times. Let's just start out with the premise
that wrap-ups do not stay open as long as they used to (in the good old days).
Those of us handling wrap-ups for more years then we care to admit recall the
days of "retro adjustments" that stayed open for 8-10 years (after the project
ended). Today, we find underwriters more willing to close out programs in the
first few years postconstruction. For those wondering, the close out usually
refers to the moment when all open claims are finally paid or the moment when
the underwriter is willing to negotiate a "buy out of the claims." Additionally,
at this point in time, the underwriter is comfortable enough that there are
no "incurred but not reported" claims lingering out there.
By establishing a procedure at the beginning of the program, the sponsor
will have put into motion the process to close the claims in a reasonable period
of time. This will usually necessitate waiting at least 24 months postconstruction
to negotiate a reasonable closure of claims. Additionally, sponsors are very
concerned from a financial perspective that security used as collateral (letters
of credit) for losses puts an undue burden on their balance sheets.
One last word on this topic; if you ask for a close out too soon, the number
provided by the underwriter will be very "defensive." Wait a little longer for
the losses to mature, and the underwriter will have a better comfort level and
provide you with a more realistic buy out.
Question 5: I still don't get this "deduct thing." How do I know I am not
paying twice for insurance—my own and the contractors?
This is probably the number one question asked about wrap-ups. We can obviously
see the issue here. The sponsor is convinced that without obtaining the maximum
amount of contractor insurance credits, the wrap-up will not yield the projected
savings. One must establish a standardized "credit system" to make sure the
contractors are giving back their true cost of insurance. This is usually done
by the administrative team and presumes a certain level of insurance and construction
expertise to understand workers compensation codes, classes, rates, and rating
procedures. It is a matter of being diligent when reviewing estimated payrolls
and their comparison to construction value and hours worked. It's a question
of setting up procedures to capture change order credits. This way, the sponsor
will reach a level of confidence that the insurance credits will be there to
fund the wrap-up and not be an additional cost burden.
Question 6: Is it necessary to amend my standard contract wording?
It most certainly is necessary. The standard insurance wording in a trade
contract requires the trade contractor to provide evidence of its own insurance.
Under a wrap-up scenario, it is mandatory that the insurance clause be amended
to reflect that the sponsor (owner, construction manager, or general contractor)
is purchasing the insurance on behalf of the contractor. The revised amendment
will include such items as wrap-up insurance coverage, off-site insurance requirements
that the contractors need to comply with, enrollment instructions, as well as
bidding instructions (net bid or dual bid).
Question 7: Do all contractors get enrolled in the wrap-up?
Because the success of the wrap-up is based on critical mass, you should
want to get as many trades enrolled as possible. Underwriters will use minimum
payroll penalties to assure they are getting the numbers anticipated. However,
there are decisions that need to be made. Do we weigh "exposure to loss" against
the "insurance credit"? Elevator contractors, for instance, have been known
to provide very low insurance credits. Based on the exposure, many sponsors
elect not to enroll them.
Should we establish a minimum threshold for enrollment? For example, any
contract value under $50,000 does not get enrolled. Or maybe any contractor
working on site for less than a week should not be enrolled.
As can be seen, there are many different approaches to take. The important
thing to note is that these decisions should be addressed up-front at the beginning
of the project. This way, everyone is on the same page and in tune with one
another.
Question 8: Is there a very limited marketplace for wrap-ups?
Unfortunately, this is very true. While 10 years ago we had at least 10 to
15 insurers willing to provide such coverage, today we are down to approximately
5 key players in the marketplace. This list gets smaller based on type of risk.
For example, residential construction (for sale units) projects bring the fewest
number of insurers to the plate. Some will only write contractor controlled
insurance programs (CCIPs) for their own clients; others will entertain CCIPs
more liberally. There is an entirely different marketplace that exists for residential
(for sale units) general liability only wrap-ups in California.
Simply put, the marketplace continues to see a reduction in major players.
Hopefully we are at a point where we will see some stability in those insurers
that have chosen to stay in the game.
Question 9: Are there any trades that are traditionally excluded from the
wrap-up?
You do have some choices when it comes to who gets enrolled. Traditionally,
off-site fabricators, material suppliers, and delivery firms are excluded from
the wrap-up. Also, in some states, a particular trade may be excluded. For instance,
in New York City, the Electrical Workers Union Local 3 is usually excluded from
wrap-ups and must bring its own coverage to the project.
Question 10: What incentive do contractors have to run a safe job site?
This is a legitimate question that concerns many sponsors. The answers, though,
are quite simple. Foremost, the contractor has a contractual obligation to be
safe on the job site. Contractors usually are required as part of the qualification
process to provide a copy of their safety plan to either the owner or general
contractor. Next, the contractor always looks for repeat work. Even recognizing
that there is so much work available, it is a small industry and word can spread
easily about who to hire and who not to hire. When all else fails, there is
always the ever present experience modification incentive to draw upon. Keep
in mind, in almost every state, a contractor's workers compensation losses on
a wrap-up site still goes into their individual experience modification rating.
Want to know more about wrap-ups? Check out
The Wrap-Up Guide. It was updated and expanded in 2006 with Mr. Resnick's
help.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.