Michael Culnen is president of C&H Agency, an insurance and surety agency based in Totowa, N.J., dedicated to the construction industry in the New Jersey-New York-Connecticut tri-state area.

Contractors Need to Learn the Ropes of Wrap-ups

While wrap-up insurance programs offer a streamlined approach to risk management, they can present various pitfalls for the unwitting contractor.

by Michael Culnen

When the Port Authority of New York and New Jersey started building the third tube of the Lincoln Tunnel in 1951, the volume of contractors and vendors involved in the massive six-year project made administration overwhelming. The agency used a wrap-up policy to consolidate the management of insurance requirements.

Yet despite an illustrious history of successes, wrap-up insurance policies to insure construction contractors remain a point of confusion and controversy to many in the industry.

The owner-controlled insurance programs, known as OCIP’s, and contractor-controlled insurance programs, or CCIP’s, can provide an attractive way to streamline risk in the large project or portfolio. But their complexity demands that all involved have a clear understanding of each party’s responsibilities. The risks for those who don’t understand how wrap-ups work include significant financial losses. 

Wrap-ups are most often used for projects of $100 million or more in revenue that require many different companies to perform parts of the work. The typical set-up has the owner or prime construction contractor purchase the policy to cover all of the companies involved, as opposed to traditional policies that each contractor and subcontractor purchases individually. The owner – or a firm retained to represent the owner, such as a construction manager, architect, engineer, or the general contractor – is designated as the policy’s administrator.

Theoretically, a wrap-up’s aggregate purchasing power, consolidated claims management, and aggressive safety programs designed for loss prevention provide cost savings to the owner and peace of mind that all parties on the job are equally and properly insured. 

But the contractors covered by the plan have to be aware of profit-zapping pitfalls, especially those attempting it for the first time. They  should seek advice from an experienced insurance agent, but also will benefit from paying special attention to a number of key checkpoints from pre-bid to closeout:

• Maintaining a pre-bid checklist specifically for wrap-up projects, and continuously updating it as new issues arise, to ensure that relevant experience is documented. (An experienced insurance agent should be able to provide a starting point for this document.)

• Obtaining copies of the actual policy and contract under the wrap-up plan in addition to the requisite bid specifications to allow for a comparison that ensures accuracy and consistency of the coverage.

• Determining the wrap-up policy’s methodology for calculating base bids and change orders – such as whether the policy requires deduction of insurance costs before payout – to allow the contractor to fully comprehend how the terms affect a specific project.

• Keeping track of differences in wrap-up policy terms across multiple projects, even if they are for the same owner, through a spreadsheet that tracks the bid, change order, and closeout audit basis for each one. Small differences in policy terms can mean a big difference in settling of change orders.

• Using a spreadsheet to prepare and record insurance calculations in order to promote consistency and provide an in-depth supporting document for wrap-up sponsors. (Your agent should be able to provide a starting point for this, too.)

• Verifying that your own subcontractors don’t include their standard insurance overhead costs in their bid price if you are preparing a bid for a project covered by a wrap-up policy.

• Entering into a confidentiality agreement with the wrap-up sponsor to protect your confidential corporate information from exposure to competitors and solicitors.

• Procuring copies of your company’s portion of the wrap-up’s quarterly management progress reports in order to verify the data and cross-check your payroll and credit status.

• Checking that your insurance agent is requesting, securing, and evaluating your wrap-up loss information semi-annually at a minimum.

• Working proactively with your insurance agent through the final audit to review closeout calculations, which positions you to catch errors and take advantage of any opportunities for negotiation.