Welcome back to my most trusted readers. My latest article deals with a trend
I initially mentioned about a year ago—the rising popularity of contractor controlled
insurance programs (CCIPs). All technical issues discussed previously are equally
applicable to different types of wrap-ups; i.e., those that an owner may secure,
a contractor may secure, and even a financial institution may purchase.
Why Are CCIPs So Popular?
First of all let me explain what we mean by "contractor." We are referring
usually to a construction manager at risk, a general contractor, or what may
be referred to as a prime contractor. Generally, these will be the parties that
have privity of contract with the trade contractors. Which brings us to the
first question of "Why are CCIPs so popular now?" The contracting community
has made a very compelling case to the owners that they (the contractors) are
simply in a better position to control the procurement process because they
are contractually controlling the subcontracting process. Makes sense, does
In previous articles, we discussed how the sponsor of the wrap-up can save
money by the wrap-up method. Because most wrap-up insurance programs are loss
sensitive (the sponsor is responsible for the deductible losses), safety becomes
priority number one. Although still contractually obligated to provide a safe
site—wrap-up or no wrap-up—the contractors have opined that they are best able
to control the claims through a safe work environment. If that is the case,
then they should be rewarded with the savings. In other words, logically thinking,
the procurement of a CCIP simply is nothing more than an extension of the contractors'
scope of work responsibilities.
Not only will an excellent safety culture result in monetary rewards, so
will the ability to extract the highest level of "deducts" from the trades.
Remember, the final cost of the wrap-up insurance program will be compared to
the final collected insurance deducts. The contractor is in a wonderful contractual
position to control this process. By having a privity of contract with the trades,
contractors are in the best position to negotiate the highest level of deducts.
What about Completed-Operations?
One of the more critical differences between a CCIP and OCIP has to do with
the completed-operations exposure. Completed-operations coverage extends typically
3 years beyond the construction period and quite often beyond the closing of
the developer’s/owner’s construction loan. Although, coverage continues to be
in place to protect all insureds in the event of a completed-operations claim,
this coverage continues with the large deductible in place, which is the responsibility
of the sponsor. Under an OCIP, the owner is the sponsor and remains exposed
to the deductible for the completed-operations extension period. This exposure
makes it difficult for owners to ultimately cap their project costs and close
their construction loans within a year or so of the project completion. In addition,
unlike an OCIP, owners need not concern themselves in a CCIP with the overall
CCIP administration that can include:
CCIP trade enrollment
Project payroll reporting
Claims management and administration
Meetings and communications with CCIP brokers/underwriters, etc.
Furthermore, insurance companies that write wrap-up programs are usually
the same insurers that write the insurance programs for large construction managers
and general contractors. These insurers have a high comfort level in writing
CCIPs. Unlike most owners, the construction manager usually has significant
critical mass in the insurance marketplace and can generate cost efficiencies
for the mutual benefit of the owner and the manager.
As respects the loss-sensitive nature of wrap-ups, owners may not have an
appetite for deductible reimbursement in controlled insurance programs; especially
with deductibles in the range of $250,000 to $500,000. Moreover, the days of
guaranteed cost CIP’s (i.e., no deductibles) are gone.
Depending on program design, sponsors of wrap-up programs may elect not to pre-fund the losses in the premium
payments. This deferral of loss payments means that the sponsor must provide
some form of collateral to the insurance company guaranteeing that the losses
will be paid when due. Owners have demonstrated less enthusiasm about providing
letters of credit, collateral requirements, or surety instruments required by
underwriters for future OCIP claims (i.e., actuarially projected and developed
Contractors with large asset bases and substantial surety programs have more
capacity to deal with carrier collateral requirements in CCIPs. Similar to the
completed-operations issue noted above, the sponsor in an OCIP must bear the
claims exposure until all claims are closed or a buyout is negotiated with the
insurer. It may take upward of 3 to 5 years to close all claims and buyouts
do not begin to be feasible until 18 to 24 months following project completion.
Construction managers are familiar and stay involved with the ongoing claims
management process well beyond project closure. Development firms contemplate
operational concerns and, up until recently, were not very involved with construction
claims. The due diligence and overall approach are different due to the nature
of the contractor’s operations. A CCIP is in many ways a natural extension of
the construction manager's master risk management program and can add value
by applying a more sophisticated insurance claims management process.
This is not to say that in every instance a CCIP is favorable over the OCIP.
In the spirit of partnership, all parties should decide beforehand, which is
the best way to proceed. Many owners may be quite comfortable assuming the risks
inherent in procuring the wrap-up. They might even be willing to share a portion
of the savings with the contractors for a job well done. By the same token,
the contractor may be willing to do the same under a CCIP. Regardless, this
does not have to be adversarial. Pick the most logical approach given the specifics
of the project. It can be a win-win for all parties.