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.
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.
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