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July 14, 2014 By admin Leave a Comment

Top 10 Favorite Wrap-Up Questions (and Answers)

Misc_QuestionMarkSignFor 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.

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.

 

Source: IRMI. “Top 10 Favorite Wrap-Up Questions (and Answers)” by Richard Resnick Project Risk Consultants, Inc. http://www.irmi.com. Accessed November 30, 2015. http://www.irmi.com/expert/articles/2006/resnick07.aspx

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Filed Under: Business, Theme 32

July 14, 2014 By admin Leave a Comment

OCIP’s Have Complex Issues

Workers_ConstructionWorkerMore and more construction contractors are being required to work under Owner Controlled Insurance Programs (OCIPs). At one time, these programs were limited to large single–site projects. As time goes by, they are appearing on smaller projects and in the form of rolling OCIPs that cover multiple projects. Though they lack experience with these programs, average AGC members are now finding it necessary to identify and deal with the many complex issues that these programs raise.

In and through its landmark guidance on OCIPS, entitled Look Before You Leap, AGC seeks to provide practice guidance for contractors preparing to work under such programs. This AGC guidance takes the form of a matrix that identifies the key questions that contractors need to ask project owners in each of eight major areas.

If they ask right questions at the right time, contractors can discourage owners from putting off important decisions. Contractors can also position themselves to address any gaps in the insurance coverage being offered, or other problems areas.

Source: The Associated General Contractors of America. “Owner Controlled Insurance Programs” http://www.agc.org. Accessed November 30, 2056. http://www.agc.org/cs/industry_topics/construction_risk_management/owner_controlled_insurance_programs

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Filed Under: Business, Theme 32

July 14, 2014 By admin Leave a Comment

Owner-Controlled Insurance Program

Workers_MenDiscussionAn owner controlled insurance program is an insurance policy held by a property owner during the construction or renovation of a property, which is typically designed to cover virtually all liability and loss arising from the construction project (subject to the usual exclusions). The policy package usually contains Commercial General Liability Policy, Workers Compensation policy with employers liability and depending on the project or program in place there are specific forms outlining coverage via forms endorsement. Also known as a “Wrap-Up” in the industry.

The traditional method for insuring construction consisted of each general contractor and sub-contractor obtaining their own insurance policies from any provider of their choosing. In turn, they would build their policy premiums into their cost structure, which in turn became part of their bids. This meant that by accepting a general contractor’s successful bid, the property owner was indirectly paying for administrative overhead at dozens of separate insurance brokers and insurance companies.

In OCIP, all construction, materials, hazard, workers’ compensation, terrorist, and other building-related insurance is purchased by the property owner as part of a single policy from a single insurer. Thus, property owners benefit from OCIP in that all insurance costs are collected into one transparent policy premium rather than spread across the bids of dozens of contractors and subcontractors, and they have direct control over administrative costs by dealing with a single broker and insurer.

A Contractor Controlled Insurance Program (CCIP), is similar to an OCIP except that the General Contractor (GC) or Construction Manager sponsors the insurance program. Sometimes even combination of an OCIP and CCIP have been formed on a loss sensitive basis where both Owner and GC share in the savings or additional cost if losses are higher than expected on the primary insurance program which usually includes Workers’ Compensation (WC) and General Liability (GL). There has also been a Developer Controlled Insurance program (DCIP) which may or may not include WC, but provides GL, Umbrella and Excess Liability mainly for the protection of construction defect claims.

OCIP advantages to owners over traditional insuring methods

  • Lower costs to the property owner as bulk purchase of insurance lowers total cost.
  • Owner controlled insurance broker and insurance underwriter requires more stringent safety and loss control procedures.
  • Reduction in time required for contractors to obtain insurance certificates
  • Workers Compensation X-Mod Factor falls on the sub-contractors not the Owners X-Mod Factor (enrolling the subs) into the OCIP
  • Improved risk control and claim handling

OCIP disadvantages to owners over traditional insuring methods

  • Increased administrator burden for broker and underwriter
  • Increased accounting effort required to isolate contractor and subcontractor costs and insurance burden
  • Potential for contractors insured under the OCIP to claim for non-project injuries

OCIP advantages to contractors over traditional insuring methods

  • Potential greater insurance limits that contractor could not otherwise obtain.
  • Potential for contractor to work on projects that contractor could not otherwise obtain.

OCIP disadvantages to contractors over traditional insuring methods

  • Potential gaps in insurance coverage
  • Potential losses in prepaid insurance premiums
  • Uncompensated administrative costs of the contractor
  • Deductions from contract value that exceed actual insurance costs

Source: Wikipedia. “Owner-controlled insurance program” http://www.wikipedia.org. Accessed November 30, 2015. http://en.wikipedia.org/wiki/Owner-controlled_insurance_program

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Filed Under: Business, Theme 32

May 15, 2014 By Julian Aston Leave a Comment

IN: Top 10 Favorite Wrap-Up Questions (and Answers)

Dear Valued Customer,

In this issue of the “—————–” we focus on explaining the difference between an Owner-Controlled Insurance Program (OCIP) and a Contractor-Controlled Insurance Program (CCIP), and much more.

Do wrap-ups really save money? Do wrap-ups cause a tremendous administrative burden on the sponsor? What does the wrap-up cover? You’ll find answers to these questions, plus, you’ll likely conclude that effective wrap-up coverage requires careful planning, because construction wrap-up insurance programs are an efficient way to cover the multitude of risks that arise out of construction projects, but only if they are well-planned and executed.

We appreciate your continued business and look forward to serving you.

Kind regards,

Filed Under: Business, Theme 32

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