There are hundreds of ways for prime contractors and subcontractors to lose money in wrap-up insurance programs. The savvy insurance agent will help contractors protect their profits.
Wrap-ups enable a project sponsor to purchase general liability, excess/umbrella, builders' risk and workers' compensation insurance for contractors and subcontractors on projects. In return, contractors deduct the costs of these insurance premiums from their bids.
These programs commonly are used on federal, state and county jobs--such as highways, military bases, prisons and airports--and large commercial projects, such as mixed-use hotel/shopping centers, apartment complexes and entertainment and sports facilities. There are several varieties of wrap-ups: owner controlled insurance programs (OCIP), contractor controlled insurance programs (CCIP) and rolling wrap-ups, which cover multiple projects. Without the guidance of an insurance agent, contractors and subcontractors are at the mercy of wrap-up administrators, routinely held hostage by confusing documents, additional paperwork and unexpected expenses.
Wrap-up administrators, employed by the project sponsor (owner/developer), are responsible for the daily administration of the owner-controlled (or wrap-up) insurance program. Administrators can purchase insurance much less expensively than individual contractors. Almost all wrap-ups have a deductible or self-insured retention (typically between $250,000 to $500,000) to reduce premiums. A wrap-up might pay only $2 million in premium plus claims cost for a project that would have $10 million in premium under traditional programs. Because the wrap-up sponsor wants to protect that $8 million, wrap-ups have stringent safety standards that could exceed OSHA guidelines, mandatory return-to-work programs and penalties, fines and deductibles that could drain profits from the unsuspecting contractor
Because the contractor moves payroll from their traditional programs, the resulting lower premium can reduce commissions. But agents can recover this financial loss and bring value to their construction clients and prospects by learning the intricacies of wrap-ups and consulting--for a fee or on a contingency basis--on avoiding the pitfalls of these programs.
Agents can play a crucial role in helping contractors navigate a wrap-up, protecting their clients' profits in every phase of the wrap-up:
Phase I: Pre-bid
- Conduct a feasibility analysis to determine if the contractor should be involved in a wrap-up
- Ensure accurate insurance deductions on the bid worksheet--a common mistake is overstating the cost of insurance because the forms are confusing
- Look for gaps, limitations and exclusions in policy coverage
- Examine wrap-up contracts and documents for safety compliance, fines and claim deductibles
- Watch for return-to-work compliance--some wrap-ups fine contractors $5,000 per day for not putting an employee back on the job in time. Alert your client and make sure the contractor has a program in place.
- Determine any impact of moving payroll from traditional insurance to the wrap-up--some contractors have flat-rate, minimum premiums or retrospective rated workers' compensation plans based on payroll
- Compare insurance bid deduction due date and commencement or start date for the project workers' compensation rates, or experience modifiers could move between these times costing the contractor money
- Let your client know there will be additional administrative and accounting costs involved in maintaining duplicate payroll records to segregate wrap-up costs from other project expenses along with audits of each wrap-up insurance program in addition to traditional program audits.
Phase II: Project monitoring
- Verify certified payroll reports
- Make sure the wrap-up deduction matches the original percentage, or that the deduction reflects any change order that called for using a lower workers' classification
- Monitor project for claims--you may be assigned to the wrong contractor in a wrap-up
- Attend any midterm audits.
Phase II: End of the project
- Do not delay wrap-up audits as this can delay final payment and data filings for experience modification
- Attend audits of traditional insurance; ensure that wrap-up payroll was completely deducted
- Ensure no claims were attributed to your client by mistake
- Make sure payroll reflected work classifications
- Look for errors: Don't let your client suffer for errors
- Review experience modification worksheets for errors and missing data.
Because contractors don't think to tell their insurance agents that they are considering getting involved in a wrap-up, agents need to be proactive, watching for signs such as payroll movement or the contractor's involvement in a large construction projects. It's important to offer your wrap-up services in any phase of the construction project.
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