Construction managers, general contractors, and subcontractors are routinely required to being insured under an owner-controlled insurance program (OCIP) or a contractor controlled insurance program (CCIP). This article identifies the key areas to understand as a participant in a wrap-up insurance program.
You're excited about bidding on a project and are notified that you will be required to be insured by an OCIP or CCIP. Notification of such requirement can be as simple as a statement in the construction agreement that the owner or construction manager/general contractor (CM/GC) may require you to participate in a wrap, should they choose to incept such a program. Alternatively, the bid documents may include specific contractual information specific to the wrap-up, CIP insurance manual, and even a prebid meeting to review the coverages and administrative requirements of the program.
For certain residential1 wrap-up programs in California, the sponsor is required2 to provide in the contract documents a disclosure that specifies, among other things, the method of calculation of any insurance credit, policy limits, scope of policy coverage, policy term, basis on which the deductible or occurrence is triggered by the insurer, and, if the policy covers more than one work or improvement, the number of units insured under the coverage.
Because the costs of the wrap-up are funded by reductions in each contractors contract value, you may be required to provide an Insurance Cost Worksheet as part of your bid. This form documents the amount of insurance costs that would be added (add alternate) or deducted (gross bid) from the contract value in exchange for having the specified on-site coverage provided by the CIP sponsor versus your normal practice insurance program.
Of particular importance, as a prime subcontractor, you will be required to identify your insurance costs as well as any subcontractors. This can be particularly challenging at bid time as you may not have specific subcontractors identified or difficulties obtaining the insurance cost information from known subcontractors as the estimators focus on scope reviews.
If you and/or your subcontractors are going to be insured under a wrap-up program, it is critical to understand and evaluate the following risk issues.
Eligible versus Excluded Parties
Most wrap-up programs identify which parties are eligible to "enroll" (be insured) under the wrap-up program. The CIP manual and/or CIP contractual addendum will identify which parties are eligible to enroll or are excluded from consideration. For prime subcontractors, it is important to understand if you or any of your subcontractors are excluded from the CIP because (1) all excluded parties are required to meet the insurance requirements required by the contract, which may be more stringent than enrolled parties, and (2) when completing any insurance cost worksheet, be sure to remove any insurance credit associated with excluded parties.
Bid Credit Methodology
It is important to understand if your insurance costs for coverage provided by CIP are to be included or excluded from your base bid. Moreover, it is important to review the contractual CIP addendum and CIP manual to determine if the initial insurance credit will be adjusted (so-called "true-up" provision) at the completion of your work, based on actual exposures (contract value and worker's compensation payroll) expended on the project. If there is a "true-up" provision, it is critical to monitor your subcontractor's exposure during the project to ensure you can adjust the subcontract value by the estimated final insurance credit.
Documents Required To Enroll in the CIP
The process and requirements to enroll in the CIP or satisfy the insurance requirements for excluded parties are addressed in the CIP contractual addendum and/or the CIP manual. Requirements may require you to upload certain documents to the CIP administrator's website and often include a certificate of insurance or copies of specified endorsements and may require historical loss and exposure data.
Non-CIP Insurance Requirements
It is common to require contractors enrolled in a CIP to provide evidence via a certificate of insurance for the same coverages provided by the CIP (e.g., workers compensation, general liability, excess liability) for operations away from the project site. Coverage for off-site operations is required as the CIP coverage is limited to the project site as defined in the designated premises endorsement. In addition, there are contractual requirements for other lines of coverage not afforded under the CIP, including automobile liability, and may include contractor's pollution liability and/or contractor's professional liability. It is important that if you don't carry the insurance coverages required under your practice insurance program, you will need to include the costs of the additional coverages into your bid.
It is critical to evaluate the limits relative to the size, complexity, and nature of the operations to validate whether the excess liability limits are adequate for the exposure. Understand that the risk transfer from the owner to CM/GC and CM/GC to subcontractors is not altered by the presence of a CIP. If you deem the limits inadequate, you can request higher limits from the sponsor or attempt to structure your corporate excess liability to be contingent and excess of the CIP coverages for your interest-only. It is also critical to evaluate whether the limits provided are dedicated solely to the project or shared by multiple projects, which increases your risk that the limits may be exhausted by insured parties for separate projects.
Particularly at the prebid stage, the specific coverage endorsements and exclusions may not be known to the sponsor. This puts the contractors in a difficult position as clarity on the quality of the coverage is unknown. Prior to enrolling in the CIP, it is appropriate to request a copy of the policy (or binder if policies haven't been issued yet) to have your insurance professional review for adequacy. Pay particular attention to the exclusions, if the coverage provides insurance for work performed during your warranty period, the length of the products/completed operations extension should ideally extend through the applicable state statute of repose.
It is common for the wrap-up sponsor to assume significant deductibles in order to lower the fixed insurance premiums of the CIP and, by controlling claims on the project, lower the overall cost of providing the CIP coverages. On commercial projects, it's not unusual for the sponsor to assume a $250,000 deductible, and it could be as high as $1 million each occurrence. For residential projects, deductibles of $25,000–$250,000 are most common.
Often, the sponsor will pass along a deductible obligation to the CM/GC and subcontractors to avoid a frequency of smaller claims being reported to the CIP insurer and to mirror the deductibles that most contractors have on their practice insurance program policies. The deductible obligation largely applies just to general liability property damage claims, but there are programs that apply the deductible to general liability bodily injury claims and even workers compensation claims. Typically, deductibles range from $2,500–$25,000 each occurrence and are imposed if the CM/GC or subcontractor causes the loss.
There are two issues to consider: (1) what is the amount of the deductible obligation, and if it is meaningfully higher than on your corporate insurance program, you may need to price extra dollars into your bid to cover the increased risk, and (2) does the deductible obligation apply "each occurrence" or "each claim," the latter increasing the risk to the CIP participant.
Return-to-Work Obligations and/or Penalties
Particularly if the CIP includes workers compensation coverage, there may be a contractual requirement to offer modified or "light duty" to a recovering injured worker. This can take the form of requiring each enrolled contractor to have a return-to-work program in place and utilize it if they have an injured worker or if there may be financial penalties (e.g., $500/week) if the enrolled party does not offer modified duty to an injured worker.
When the sponsor is obtaining quotes for CIP insurance, the underwriters evaluate the safety program and contractual requirements to determine if they meet their minimum requirements. If the CIP includes workers compensation coverage, it won't be unusual to impose a requirement of all enrolled contractors to adhere to a 6-foot fall protection standard and require every worker to attend a safety orientation meeting. Additionally, there may be a requirement for each employer to pay for drug testing for each employee or staff full-time safety resources to the project should the crew size exceed a certain size. The cost of complying with these requirements needs to be contemplated in the price of the bid.
Once enrolled in the CIP, you will be required to perform certain administrative requirements, including notifying the CIP administrator of lower-tier subcontractors, typically via a Notice of Subcontractor Award form or through the CIP administrators website; if workers compensation coverage is provided by the CIP, submitting payroll data on a monthly basis to the CIP administrator; providing annual updates to your certificate of insurance and any required endorsements; and notifying the CIP administrator when you have completed the work under your contract.
The CIP manual will identify claims contacts and may include claims reporting procedures and state or coverage-specific loss reporting forms. It may also identify designated medical treatment and vocational rehabilitation facilities. It is important to have a clear understanding of the procedures and your obligations for managing claims. In addition, if the CIP includes workers compensation, you will want to be involved with the claims adjusters and routinely obtain loss runs as your loss experience will be calculated in your workers compensation experience modifier rate (EMR) in future years.3
As a participant in a CIP, there are a few best practices to ensure you are not taking on unintended risk. These include the following.
Do Your Due Diligence
Using this article as a guide, evaluate each of these key elements of the CIP to ensure you understand the bid requirements, quality of coverage, administrative requirements, and safety and claim responsibilities for you and your subcontractors. If specific information isn't available, request it from the sponsor. If unavailable at bid time, qualify your bid (if allowable or practical) to establish standing in receiving the information about the program and evaluating its implications to your risk tolerance.
Obtain Copies of All CIP Policies
Every enrolled contractor is an "insured" under the policy, and it is my opinion that you are entitled to a copy of the policy. Some CIP sponsors refuse to provide copies of the policies due to unique endorsements they have been able to negotiate into their programs. If you can't obtain a copy of the policy, at the very minimum, I recommend you request the opportunity to have you and your insurance professional review the insurance policies in person to ensure there aren't any problematic exclusions or restrictions of coverage.
Store and Archive All CIP Documents
Because coverage is likely to extend through the statute of repose, you will want to store all of the CIP documents, including CIP contractual addendum, CIP manual, CIP policies, and any correspondence from the CIP administrator, including CIP certificates of insurance. One doesn't want to be in a position of having to find these documents 8, 9, or 10 years after the job is closed out.
Review Your Practice Insurance Program
Ideally, your corporate insurance program should be structured to provide coverage for your interest should you be liable for a claim and the CIP coverage either didn't insure the loss or the limits available were inadequate to fully pay the loss. This is easier to accomplish with larger contractors that have large deductible programs. Additionally, some insurers require that each project with which you were enrolled in a CIP be listed on the policy in order to have this contingent/excess liability protection, so be sure to request an update to that endorsement each time you enroll in a new CIP.
Finally, review any wrap-up exclusions on your practice insurance program to ensure it only excludes coverage if you are "enrolled" in the CIP versus the more limiting exclusions that exclude any project insured by a CIP (whether you are enrolled or not). Likewise, if you have a subcontractor that will be considered an "excluded party" and not eligible to enroll in the CIP, you will want to review the excluded subcontractors wrap-up exclusion to ensure their coverage is not void by the more restrictive wrap-up exclusion language.
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1 A residential construction project as defined by California Civil Code §§ 895 et seq.
3 The one notable exception is the state of Michigan in which the loss experience does not get reported for each individual contractor; instead, the loss experience is used to promulgate an EMR for the project.