Ever wonder why certain parties are excluded from wrap-up programs? Or, if you're a contractor, why you are enrolled in certain controlled insurance programs (CIPs) but are excluded from others? This article explores the types of parties often deemed "not eligible" for wrap-up coverage and the reasons the sponsor considers when making those determinations.
Wrap-up programs insure most, if not all, of the parties performing work at the project site. The insurance manual and/or wrap-up contractual addendum to the construction agreement will define "Enrolled Parties" and "Excluded Parties." The word "party" versus "subcontractor" is used in the manual or addendum to acknowledge that the definition extends to other entities beyond prime and lower-tier subcontractors to the owner or construction manager/general contractor (CM/GC).
"Enrolled Parties" refer to those people or firms that (a) do not fall under the definition of "Excluded Parties" and, (b) have completed and submitted the necessary paperwork to the wrap-up administrator and have received written confirmation from the administrator that they have been "enrolled" in the wrap-up program (i.e., coverage is in effect for that enrolled party). Most wrap-ups require all parties to be enrolled in the wrap-up unless their scope falls under the definition of "Excluded Parties."
The wrap-up manual and/or wrap-up contractual addendum will define which parties are specifically excluded from being insured under the wrap-up. The list of "Excluded Parties" varies by program, but elements typically include the following.
Hazardous material remediation and abatement contractors
Architects, engineers, and other design professionals and consultants
Material suppliers and manufacturers
Equipment rental companies
Truckers, haulers, and others who merely transport materials or personnel to and from the site
Parties that do not perform any labor at the project site
Any party the wrap-up sponsor, in its sole discretion, deems to be an "Excluded Party"
While these parties are typically excluded, there may be reasons to seek underwriter approval to enroll certain parties. For example, the demolition contractor may have low general liability/excess (GL/XS) limits, and the sponsor may want the benefit of higher policy limits afforded by the wrap-up to apply. Likewise, if the wrap-up is used on an airport project, the project may have truckers and haulers that operate on the project site exclusively, and the sponsor may seek to enroll them in the program.
Other examples of "Excluded Parties" can include the following.
Crane rental companies that assemble/disassemble cranes or operate the cranes
Demolition or blasting contractors
Installers of window washing systems
Contractors installing exterior insulation finishing systems
Scaffolding suppliers and installers
Temporary labor service companies
Subcontractors with contract values below a certain payroll or contract dollar threshold (e.g., less than $5,000)
Rationale Behind Excluding Certain Parties
The decision to exclude certain parties can be determined by insurance market conditions, state regulations, insurance underwriters, program sponsor, or a combination thereof.
Insurance Market Conditions
One of the primary reasons for sponsoring a wrap-up is the ability to insure adequate risk transfer among the various parties. If the insurance market conditions through exclusions and restrictions in insurance coverage don't allow for quality insurance protection for both the contractor and its upstream additional insureds, a wrap-up is the best mechanism for ensuring consistent, known, and quality insurance protection.
For example, in certain parts of the country, it's common for certain trade contractors to have residential exclusions on their general and umbrella liability policies. This market condition prevents adequate risk transfer and has led to an increase in the use of general liability wrap-ups on residential projects. While residential exclusions are highlighted in this example, there can be multiple problematic exclusions or coverage restrictions in general and umbrella liability practice policies.
State Insurance Regulations
Many states have regulations that govern the use of wrap-up insurance programs. State statutory or insurance administrative code requirements may include a minimum project size, specified duration of the project, geographic limitations, or specific safety standards or limit who is eligible to sponsor a wrap-up or require approval from the state in order to utilize a wrap-up.
Most states regulate the use of workers compensation coverage in a wrap-up program, either through subscribing to National Council on Compensation Insurance rules, which require a minimum standard workers compensation (WC) premium level (ranging from $250,000 to $1 million), to qualify for retrospective rating or via state-specific regulations. States generally do not have specific regulations on the use of GL/XS liability, with the exception for residential construction in California1 and various state regulations on anti-indemnity and waivers of subrogation that should be considered.
Generally, there are no prohibitions on excluding certain parties from the wrap-up program. However, the state of Wisconsin requires that all parties working on the project must be insured under workers compensation if that line of coverage is provided under the wrap-up program.
The Wisconsin Administrative Code requires "[a]ll contractors and subcontractors shall be included in the wrap-up program."2 The Administrative Code goes further to address requirements of material suppliers: "All material suppliers shall be included in the safety program on the job site while unloading and handling material and performing other work, but material suppliers shall be excluded from the rest of the wrap-up program."3
It is common for the insurer providing wrap-up coverage to identify, as a subjectivity of their quote, that certain types of parties be excluded from the program. Some insurers may have an endorsement to the wrap-up policy that states that certain types of parties are excluded from coverage. There are several reasons why the insurer would want to exclude certain parties.
Difficult to loss control certain exposures. One of the foundational aspects of a wrap-up program is to invoke a project-specific safety program for all parties performing work at the project site. The safety program can include a safety orientation for all workers, drug testing, daily stretch-and-flex, and other elements that can be effectively implemented at the project site. However, there are certain parties that perform work away from the project, such as manufacturers or material suppliers, which make it impractical to implement and monitor the safety protocols.
Limited exposures at the project site. Parties that deliver materials, equipment, or personnel to and from the job site perform limited operations at the project site and, again, make it impractical to implement and monitor the safety protocols.
Parties with more applicable insurance coverage. Most insurers don't want to assume the occupational disease exposure for hazardous material remediation or abatement contractors as part of the wrap-up. The insurer can be brought into an occupational disease case many years in the future for limited premium. Additionally, most GL/XS liability policies have a total or substantial pollution exclusion.4 Thus, abatement and remediation contractors are typically excluded parties. Architects, engineers, and other design professionals fall under this same category.
No premium generated by insuring certain parties. Insurers have little incentive to insure parties that don't perform work on-site as they don't receive any premium for insuring those parties. Wrap-up premiums are calculated either based on construction hard costs or on-site WC payroll. If the premium basis is WC payroll and the party with no on-site labor is enrolled in the program, the insurer would have no premium basis to collect premium for the exposure.
A typical example is when the prime subcontract is with a steel fabricator and they subcontract out the erection. In this case, the steel erector would be insured in the wrap-up, but the steel fabricator would be excluded.
The philosophy of the sponsor will generally fall into two distinct philosophical approaches to excluding certain parties: insure as many parties as possible, or selectively exclude certain parties. The decision by the sponsor to exclude certain parties is often dictated by the insurer, but there may be philosophical reasons to exclude additional parties from the program.
The approach to insuring all or as many parties as possible is based on the philosophy that the sponsor looks to the wrap-up as the one policy to address insured liabilities arising out of the construction project. Like builders risk, the philosophy is based on the premise that the wrap-up policy responds to all on-site parties on a primary and noncontributory basis.5
The highlighted benefits of wrap-up insurance including known coverage, catastrophic limits of protection, completed operations extension, named insured status, and coordinated legal defense are most realized when all parties performing work on-site are insured. Further, excess liability premiums are generally on a flat charge basis,6 which alleviates additional premiums by enrolling all on-site parties.
One of the main advantages of the holistic approach if the wrap-up includes WC is to leverage the favorable exclusive remedy defense. Exclusive remedy is a foundational protection of the employer that bars an employee from suing his or her employer in tort for a work-related injury covered by WC insurance.7
When workers sustain a significant injury, they will collect WC and may bring suit in tort against a variety of parties, most notably the owner, CM/GC, or other at-fault subcontractor. Several states (California, Connecticut, Kentucky, Louisiana, Maryland, Nevada, Texas, Utah, and Virginia)8 have case precedent that granted exclusive remedy protection to the WC CIP sponsor, and the courts in Ohio and Texas have extended the exclusive remedy protection to all enrolled subcontractors in the program.9
If the project is in a state that expands the exclusive remedy protection, one could argue that the sponsor would want to include as many parties as possible in the WC wrap-up to retain that protection.
Adverse Selection Approach
This approach selects certain parties to be excluded to accomplish one of the following objectives.
Maximize wrap-up profit. As most two-line wrap-up programs (GL/WC) have a large retention or deductible, the profit generated by the aggregation of the insurance spent in a single program are maximized when losses are managed through safety and claims management. In order to maximize the profit potential, the sponsor may exclude certain parties if the insurance credit or deduction10 they receive is low relative to the risk. A common example is elevator contractors. A sponsor may also exclude a contractor with an adverse experience modification rate or Occupational Safety and Health Administration statistics.
Preserve excess limits. The sponsor may exclude certain high-risk operations (e.g., a crane operator) to preserve excess limits for the completed operations exposure. The sponsor will rely on additional insured coverage from the insurance coverage carried by the excluded party to protect its vicarious liability. The sponsor would have additional protection from the wrap-up policy for its vicarious liability if the loss occurred at the job site and was not otherwise excluded from coverage.
Implications of Not Enrolling a Party
Potential of Inadequate Insurance Protection from Excluded Party
Should a party not enroll in the wrap-up, there should be even more scrutiny by the sponsor or wrap-up administrator to ensure the excluded party has proper insurance. Beyond the typical review for problematic exclusions (e.g., residential exclusion), additional insured endorsements, waiver of subrogation endorsements, or primary and noncontributory and notice of cancellation endorsements, particular care should be spent on any wrap-up/CIP exclusions in the excluded parties' GL/XS liability policies.
There have been several good articles written on the topic of the implications of the wrap-up exclusion on contractor GL and excess practice policies. Central to this discussion is that some insurers excluded all GL/XS liability coverage if the party is enrolled in the wrap-up. That makes sense since the wrap-up policy is meant to be primary to any claim occurring at the project site.
More problematic are the wrap-up/CIP exclusions that exclude all coverage whether the party is enrolled or not. The following is an excerpt from the Insurance Services Office, Inc. (ISO), CG 21 54 01 96 Exclusion—Designated Operations Covered by a Consolidated (Wrap-Up) Insurance Program endorsement.
This insurance does not apply to "bodily injury" or "property damage" arising out of either your ongoing operations or operations included within the "products-completed operations hazard" at the location described in the Schedule of this endorsement, as a consolidated (wrap-up) insurance program has been provided by the prime contractor/project manager or owner of the construction project in which you are involved [emphasis added].
In this situation, one could certainly interpret that the contractor is involved in a project, thus, excluding all coverage under the GL/XS policies whether they are enrolled or excluded parties. Furthermore, upstream parties would be barred from additional insured protection under the policy.
ISO recently addressed this issue in its 12/19 edition of the CG 21 54 endorsement that narrowed the scope of the exclusion to the following.
[A]t the location(s) described in the Schedule of this endorsement, but only if you are enrolled in a controlled (wrap-up) insurance program (emphasis added) with respect to the "bodily injury" or "property damage" described in Paragraphs A.1. and A.2. above at such location(s).
Given the various versions of the CG 21 54 and a number of various insurer versions of the wrap-up exclusion, it is critical that the actual wrap-up exclusion for each excluded party be reviewed to assure proper risk transfer to these excluded downstream parties.
Unintended Additional Insured Coverage in the Wrap-Up for Excluded Parties
Another important consideration is the unintended additional insured protection that an excluded party may gain under the wrap-up. Going back to the steel fabricator (excluded party) and steel erector (enrolled party) example, the fabricator hires the erector and contractually requires the fabricator to be an additional insured on the erector GL/XS policies. The erector is insured under the wrap-up, which may or may not have the proper additional insured endorsement or excludes certain scopes of work (e.g., manufacturers or suppliers).
If either of these situations exist, this could place the erector in breach of contract. If the wrap-up has an adequate additional insured endorsement, barring any other exclusions, the fabricator gains additional insured protection under the wrap-up, which may be unintended by the insurer or sponsor.
It's important to determine at the onset of the project the sponsor's philosophy and goals to implementing the wrap-up as this will guide the strategy toward excluding certain parties from the program. Additionally, the insurer may have requirements that certain types of parties are excluded, and those should be carefully coordinated and specified in the contract, wrap-up manual, and wrap-up policy. Lastly, if a party is excluded, additional scrutiny of the insurance coverage provided by the excluded party is required.
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