Expert Commentary

Top Wrap-Up Dos and Don'ts—Preconstruction

We have discussed many different wrap-up issues in these articles over the years, and hopefully many of you have benefited from some of the simple suggestions made in those writings. I figured it was time for a little "Top Ten" of the "Dos and Don'ts" of wrap-ups. Now, let us keep in mind that these pointers are just my opinion, and I do not expect everyone to agree. If this at least gets you thinking, then, as a writer, I will feel satisfied.


Wrap-Up Programs
May 2014

In this first of two articles, we deal with the preconstruction phase. The construction and post-construction issues will be addressed in a subsequent article.

The Earlier the Better

  • Do not wait too long and miss out on all the preconstruction fun.
  • Do begin your dialogue as early as possible.

It is always good to begin your discussions at an early stage. You can be instrumental in assisting with the contract documents and many other activities that take place early on. Early on, you will want to start building relationships with the general contractor, participate in contract discussions, learn all about the project, begin to anticipate the information you will need to broker the wrap-up, and certainly leave enough time to discuss the all-important question of feasibility. Additionally, you will want to leave time on the calendar for the all-important kick-off meeting. It is also critical to be there early because the general contractor may potentially be bringing a contractor controlled insurance program (CCIP) to the project. More time will be needed to vet their program and compare traditional to an owner controlled insurance program (OCIP) and a CCIP. (More on CCIPs later.) That is a lot to do even before we put a shovel in the ground.

Here is the bottom line. If you were to make a checklist of all the action items prior to the start of construction, you would visually see why I urge all to begin early. Don't wait until it is too late and many critical risk management decisions have already been made.

Feasibility

  • Do not use the feasibility report as a sales tool.
  • Do use the feasibility report as a discussion.

Okay, here is the challenge. Next time you do a feasibility study, do not think of the "sale" word. Too many times, we all have looked at the feasibility study as "winner take all." Whoever can show the best numbers wins. Take control of the process. Try not to let the end user set the expectation. Take my word for it, a wrap-up that goes "south" is never a good thing, and it will probably be the last one you do for that sponsor. Worse, you may actually lose a client if it is already one.

The feasibility (or pro forma, as many call it) is nothing more than an illustration of what may be. If you truly believe the losses will be "X," and by illustrating the true reality you may lose the deal, this writer says, lose the deal rather than lose the client in the long run. We have all been conditioned to make the credits look more enticing, the losses lower, and the overall OCIP costs more reasonable. There are many other reasons to do wrap-ups (especially today) besides simply saving dollars. Be sure to make that part of the conversation.

We have come a long way in our approach, and many of our colleagues are providing excellent advice and counsel to their clients (or prospects) when it comes to feasibility. Be sure not to fall back on old habits.

OCIPS versus CCIPs When Representing the Owner

  • Do not shade your objectivity just because you are representing the owner.
  • Do be objective and do right for the project as a whole.

Anyone who has been in this situation (and many of us have) realizes it is not an enviable position in which to be. One of the biggest differences today, as compared to years ago, is that more and more general contractors are proposing CCIPs as an alternative to OCIPs. It has become a viable alternative, and quite a few underwriters are very favorable toward CCIPs.

In certain jurisdictions, such as New York, the underwriting community has shown a preference toward rolling CCIPs, and only those developers with a history of successful OCIPs may be able to compete with these programs.

Just as discussed in the feasibility section above, it is better to think objectively. Unless your client truly understands the commitment necessary to do an OCIP and has some history doing so, the CCIP should be given strong consideration. Before that decision is made, though, a word of caution. Please ask some very important questions on behalf of your owner, such as: Will my client be a named insured or additional insured? Will there be a shared savings? What payment terms will be provided to the owner? These are just a few questions to ask.

Once you are satisfied with the answers, it would certainly be advisable to perform a comparison of a traditional program to a CCIP and an OCIP quote, if you have one. A side-by-side comparison of the OCIP versus the CCIP is helpful. At least you can be sure that you performed your due diligence within an objective framework.

Manual as Part of the Contract

  • Do not automatically assume the manual should be part of the contract.
  • Do have a thoughtful discussion on the merits of putting or not putting the manual in the contract.

This issue rarely gets the attention it deserves. Believe it or not, there are interesting opposing views. While both sides have good arguments, it is safe to say that the discussion definitely needs to take place.

First, look at the manual as a document, and see what its true purpose is. I personally never looked at the manual as a "contract" document per se. To me, it always was—and continues to be—a very fine administrative procedural manual, addressing areas such as enrollment issues, description of the wrap-up coverages, claims procedures, closeout procedures, and a brief description on safety issues.

The conflict is basically the consistency among other documents, including pre-bid instructions, construction management agreements, subcontractor documents, etc. If the manual is made part of the contract, any changes in that manual need to be sent to all parties for agreement and subsequent execution. How far you can take this is anyone's guess. For instance, if there is a change in personnel, does a contract amendment need to be sent out?

If the manual is to be incorporated as a contract document (perhaps it can simply be referenced in the contract), the contractual language needs to be compared to the contractual language in all documents. The last thing anyone would want is a discrepancy among the different contract parts. The key is a good coordination among all the parties. The contract language for all documents needs to be reviewed carefully. Only then can there be a comfort level that all is in line.

Wrap-Up Administration

  • Do not downplay the critical importance of administration.
  • Do give all potential third-party platforms consideration.

The handling of wrap-up administration has evolved tremendously over the years. Years ago, there were very limited options to brokers performing their own administration. Things changed when the large "alphabet houses" began to develop their own proprietary wrap-up software. In time, many of the strong regional firms specializing in construction did the same. The challenge was to balance carefully the two platforms, one platform being the traditional brokerage function of placing the insurance, and the other was technological. It is safe to say that most brokers never saw themselves as "software companies," but they soon became like them as the world evolved.

So, the question soon became, who is best suited to handle the wrap-up administration?

Recognizing this changing environment, specialty wrap-up companies (non-brokerage) were created to offer administrative and technology services to handle what was becoming a very critical wrap-up function. And, as the platform has evolved even further, there are now companies offering just the wrap-up technology for those brokers so inclined because they may have in-house expertise but not the technology. While many brokers continue do an excellent job of administrating wrap-ups, the options available nowadays are many and need to be considered carefully.

Part 2, construction and post-construction wrap-up tips, is coming soon.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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