The Current State of Wrap-Ups
December 2005
If you recall the simple wrap-up lesson provided
in one of my first articles, wrap-ups make
sense not only because they provide better coverage and control, but most importantly,
they save money. Remember the only formula
you needed to know: Contractor Deducts - Wrap-Up Cost = Program Savings.
by Richard
Resnick
Tanenbaum Harber
Co., Inc.
Well, allow me to say now, "The times they are a changing." Wrap-ups still
make sense. Wrap-ups are still the preferable insurance procurement choice on
projects $100 million and above. Wrap-ups will be with us for a long time. However,
many variables have complicated the current marketplace. Examples are a limited
number of insurers, programs for smaller wrap-ups, construction defect issues,
contractor controlled insurance programs (CCIPs) or owner controlled insurance
programs (OCIPs), general liability only residential programs, and not least
of all, a shift in reasoning with respect to "Why wrap-ups?"
The wrap-up marketplace today is dominated by 5 or 6 key insurance players
(down from 8 to 10 just 3 years ago). This has resulted from changes in underwriting
posture, insurer consolidations, and continuing changes in state statutes, particularly
those involving construction defects. One or two will write most any class in
any state. The remaining players have enormously different appetites for controlled
insurance programs. Some are unwilling to write particular classes in certain
states. Some are going so far as to not entertain any wrap-ups in a given state.
Some prefer "mega" wrap-ups, and some are actually offering programs for smaller
(under $75 million) wrap-ups.
Residential condominium projects are the most challenging to place today.
There are a group of alternate insurance companies writing general liability
only wrap-ups on residential projects in states such as California. However,
for the purpose of this article we are confining our discussions to the traditional
workers compensation/general liability wrap-up programs.
As the marketplace for wraps-ups becomes smaller, the willingness of insurers
to offer a wide range of coverage enhancements has become limited. Willingness
to provide longer tails on extended completed operations coverage is becoming
more of an issue. Are underwriters willing to offer per project aggregates on
rolling programs with numerous projects? When does the underwriter consider
the extended completed operations coverage to begin ticking? Is it when the
entire project is put to its intended use or when a portion of the project may
be completed? (Remember, you want the extension to begin as late as possible.)
With only a single aggregate applying to the extended coverage, you want it
available when you need it. The umbrella must dovetail the primary as well.
Please keep in mind these coverage restrictions may vary by type of project.
Residential construction mandates less flexibility on behalf of the underwriter
than a green field manufacturing facility project.
We are seeing similar restrictions in the umbrella marketplace where few
carriers are willing to offer the limits and terms necessary for large construction
projects. Umbrella underwriters are imposing "trailing deductibles for completed
operations." Trailing deductibles apply to the umbrella policy when the underlying
completed operations aggregate is exhausted. The deductible applies on a per
occurrence basis and is uncapped. We have actually seen some underwriters apply
this to all underlying aggregates. Are we heading toward occurrence only umbrellas
on residential projects? Umbrella underwriters are also restricting coverage
by not offering per project aggregate limits and in certain cases, not including defense outside of the limits.
Use of one policy aggregate for the entire project term is also becoming more
common.
It is not all doom and gloom. The five or six key wrap-up players are more
willing to provide favorable terms on nonresidential construction. Residential
issues gather most of the publicity due to the abundance of such projects currently
in the course of construction, as well as the publicity given toward construction
defect matters. However, most wrap-up insurers will write office buildings,
institutional projects, hospitals and industrial type construction. When writing
these types of projects, underwriters are more concerned with such issues as
project location and state labor laws (i.e., New York Labor Laws 240 and 241).
A Sea Change
As previously mentioned, there is a shift in reasoning as respects wrap-ups.
While wrap-up sponsors are still motivated by the savings element, the latest
trend appears to be a slight move from savings motivation to coverage enhanced
wrap-ups. This seems to be most prevalent in the residential area. With the
advent of a restrictive subcontractor insurance marketplace, many contractors
are bringing deficient coverage to the table. This could be in the form of residential
exclusions, contractual limitations, and aggregate limit inadequacies. Knowing
that the project is protected with broad insurance coverage and adequate limits
are compelling reasons to choose a wrap-up.
CCIPs are becoming more popular as a risk management tool. This can be in
the form of a specific project or a multi-project controlled program. The marketplace
is encouraging this approach by their willingness to consider some CCIP projects
in a more favorable light as compared to OCIPs. Underwriters perceive that the
CCIP project is better able to be controlled through a more effective safety
management and claims mitigation program. In addition, underwriters appear more
comfortable that the contractor has a better ability to control the subcontractors
underneath them. I firmly believe it is still too early in the game to quantify
the results. As more data becomes available we will be in a better position
to move from perception to reality.
One final word with respect to current pricing of controlled insurance programs:
We have seen increases in premiums for all controlled programs. As reported
last year at this time underwriters are still cautious in their pricing and
are offering aggregates rates higher than usual. Expense factors are somewhat
higher this year as well. We are currently seeing primary wrap-up programs being priced at approximately 4-5 percent of construction
value. These percentages are not cast in stone. The high and low ranges may
change based on such factors as project size and type, location, and general
contactor/construction manager.
One thing is sure as we move forward into 2006: While challenges remain for
all participants in the wrap-up arena, wrap-ups will remain a highly viable
solution to those sponsors seeking an avenue to control coverage and cost in
the most advantageous way possible.
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