Summary: The term “wrap-up” has become increasingly common in the insurance business — usually in reference to construction projects — without having become particularly precise in its meaning. One meaning of the term wrap-up is “owner-furnished general liability and/or workers compensation insurance for the owner and all contractors on a construction project.” Another meaning takes the concept a step further and states that a wrap-up “involves either an owner or general contractor providing and paying for general liability or some other line or lines of insurance for all interests involved in a construction project at one location.” Still another is control by a single entity of the liability or the workers compensation coverage or both (and perhaps some other coverage such as builders risk) of a construction project. Regardless of the precise meaning, the basic idea of wrap-up plans is uncomplicated: concentration of insurance coverages that would otherwise involve numerous insurers and producers, resulting in a competitively more attractive risk as well as the elimination of gaps and duplications among coverages.
These pages present a general discussion of the subject. However, no single statement here should be applied unqualifiedly to any existing or proposed wrap-up plan since the plans are subject to insurers' underwriting philosophies, individual construction exposures, and state regulations.
Basically, a program of wrap-up combines all interests involved in a construction project — general contractor, subcontractors, architects, and owners of the project — for insurance purposes, with one insurer chosen by the owner or general contractor of the project. These programs have been referred to as “controlled construction insurance plans,” and this name is illustrative as to the nature of wrap-up plans. The key word is “controlled,” implying the authority of some one entity — usually the owner or general contractor — to place one line or combine several lines of insurance with one insurer. The word “construction” is key to the types of projects amenable to wrap-ups: primarily new construction projects involving buildings, subways, tunnels, pipelines, bridges, and similar projects with a definite completion date. Note the point about a definite completion date — this is required for wrap-up plans.
In some plans only general liability insurance is involved in the wrap-up. Other plans may involve liability and workers compensation coverages and may also include builders' risk and some marine insurance. Infrequently, surety coverage is also combined in the wrap-up. Policies may be written to include personal injury liability and broad form property damage insurance. However, other hazards, such as contractual liability and independent contractors exposures, are often omitted when all interests are to be combined under one policy. And, automobile coverages are not usually written under this type program.
When a wrap-up plan is written, it is important for all parties involved to acknowledge and agree that the wrap-up coverages are issued to cover a specific construction job; in other words, coverage is to be limited to a specified location. Damages arising from other projects or other activities of the plan's insureds are not meant to be covered by the wrap-up plan and this has to be made definite from the inception of the wrap-up plan.
There are many ways in which a proposal for a wrap-up may originate. Arrangements may be instigated by the owner of the project, general contractor, architect, or any one of their insurance representatives. It all depends upon how well versed the person or organization is in this type of plan. For example, the general contractor could initiate the plan by selecting the insurance representative and insurer and continue as manager of the plan. Or the contractor may select the insurance representative and request that he or she approach several markets for quotations.
Once the preliminaries have been accomplished—insurer chosen and insurance policy coverages and wording decided upon—the contract specifications including insurance data are sent to bidders. Some of the items that may be included in the bidder's form are: the types of policies, coverages, and limits intended to be purchased by the owner or general contractor under the plan; a condition that the owner shall not be liable for equipment and other property belonging to subcontractors; the stipulation that subcontractors show proof of insurance for their vehicles subject to minimum limits; a requirement that subcontractors cooperate with the safety engineers of the insurer handling the program and comply with recommendations; an agreement that the subcontractors execute an assignment for the benefit of the owner for all return premiums, dividends, or experience credits that become due for the insurance purchased by the owner or general contractor.
The person or organization managing the wrap-up program may also request that contractors submit bids with and without insurance costs, so that it can be determined which of the two plans is more advantageous.
As for rating, the form of the rating plan chosen is up to the owner, general contractor or manager of the project. Usually, two plans are available: (1) guaranteed cost and (2) retrospective rating. The guaranteed cost basis appears to be advantageous for the single project with the overall premium discount based upon total premium derived from all interests combined. On the other hand, a retrospective rating plan is usually selected when a series of separate wrap-up programs is to be undertaken. A disadvantage of this plan is that there is a delay in determining the final cost of insurance, and if, as a result of poor experience, an additional premium is required, it must be paid by the purchaser of the plan. However, if the job has good overall loss experience, the purchaser stands to gain additional savings.
If the retrospective rating plan is chosen, a wrap-up construction project may be treated as a “long term construction project”, which basically means a project expected to require more than one year for completion. The project is eligible for retrospective rating as a long term project if the standard premium is an average of $75,000 or more per year, based on the entire period required for the completion of the project. Two or more policies under a wrap-up program may be combined for the purpose of retrospective rating.
Note that the normal experience modification applying to the individual contractors and subcontractors does not usually apply in setting up the rating plan nor does the final experience developed from the wrap-up project apply to the contractors' future experience.
As the term wrap-up is used today, it refers to two general types of plans, the second being the more common of the two. They are: designated carrier plan; and owner-controlled (or ex-insurance) plan. These terms can be somewhat confusing in that, in an owner-controlled wrap-up, a designated carrier is employed and in a designated carrier wrap-up, the owner may still retain control. However, there is a fairly clear distinction despite the cloudiness of the terminology.
During the early development of wrap-up programs, some insurers and regulators resisted the trend toward wrap-up rating, which they felt involved unfair discrimination and suppression of competition. An alternative proposed—that is still employed in some instances today—was the designated carrier wrap-up. Under this approach each interest involved in the project purchases separate policies from a “designated carrier” (a specified insurer), sometimes through a “designated producer” selected by the insurer. Each contractor, subcontractor, etc., pays its own premium. Under this plan no special rate advantages accrue to the owner (or plan manager), however the plan generally provides that dividend payments, experience credits, and any other premium modifications go to the owner or manager rather than to the individual insureds. There are no rate advantages in a true designated carrier plan, since each subcontractor has separate coverage. However, in addition to the control interest in this arrangement, the owner and insurer benefit from centralization of engineering, adjusting, and auditing.
As stated, the owner-controlled wrap-up is the more commonly employed. Under this form of wrap-up, the project owner or general contractor arranges and pays for all insurance involved in the wrap-up. Contractors, subcontractors, and others, along with the owner, are named as insureds. All coverages are placed with one insurer. The owner-controlled wrap-up makes it possible for the owner to negotiate exclusively with one insurer. The rating basis is thus much broader, particularly on very large projects. The owner has the full advantage of experience credits and other premium modification factors and, in contrast with the designated carrier approach, these are not piecemeal.
Owner-controlled wrap-ups are often referred to as “ex-insurance” plans. This is because each contractor bidding on the project may be required to submit a bid that includes the usual insurance costs and another without these costs (hence, ex-insurance). The owner can then compare the two bids submitted by each contractor and subcontractor and decide whether the wrap-up plan actually will result in significant savings on the project.
Wrap-up plans have not had uniform treatment from regulatory officials or under state laws. Some states do not allow wrap-up plans. Other states allow wrap-ups to include only liability insurance. Others restrict the plans to workers compensation insurance. And, still others permit both and other coverages as well. The point is, a jurisdiction's position on the use of wrap-up programs should be confirmed with the state's insurance department before writing the program is undertaken.
There are, however, some general guidelines on wrap-up plans that all states accept. For example, wrap-up programs are intended for large construction projects. Of course, what is meant by “large” depends upon the regulations of the jurisdiction, although many insurance experts advise that any project with an insured value of more than $100 million is a prime candidate for a wrap-up plan.
As another example, a wrap-up plan is restricted to a single location; operations must be clearly definable at the one location. And another common requirement is that the program applies only to projects that are self-liquidating—that is, with a definite completion or cut-off date.
First of all, the premiums for the coverages can either be paid by each individual or by the owner or general contractor. Hence, the approach can be seen to have some of the earmarks of group merchandising, ultimately resulting in lower insurance costs and a reduction in the overall cost of the construction project.
Other arguments favoring the wrap-up approach may be summarized as follows.
From the viewpoint of the buyer: it is a means of realizing a savings in overall cost of the project—while the buyer has to pay for the insurance coverages, he receives savings in eliminating duplication of coverages as well as the advantage of premium discounts and savings from favorable experience; wrap-up eliminates or reduces administrative functions such as the necessity of reviewing a multitude of policies and forms; with all the insurance—high limits, broad and uniform coverages—provided by one insurer, the buyer is in control in terms of adequacy of coverage; centralized facilities for handling claims are possible, and this should lead to improved claims administration; and one insurer handling the safety engineering program means that one set of standards must be complied with instead of several, as might be so if numerous insurers were involved—this should eliminate delay in complying with recommendations and provide for regular systemized attention, consistency in loss control and safety programs.
From the viewpoint of the insurer: the primary advantage is, of course, the additional premium volume resulting from automatically getting the business that might have gone to the insurers of the various subcontractors; the expense of claims adjusting can be reduced through centralized facilities; the same is true of engineering and auditing costs; there should also be some savings from the reduction of the number of cases in which conventional arrangements would require subrogation.
Dividends, discounts or experience credits inure to the buyer, while loss of the premium volume eliminated by wrap-up adversely affects the subcontractors' position with their own regular insurers, particularly when there is enough volume for premium discount or experience rating. Additionally, if the experience turns poor on those policies with regular insurers, the absence of premium volume that would have been recorded may even cause the subcontractor to lose his regular insurance market, or else lose insurance protection for some important exposures.
There can be an increased administrative burden on several fronts, taking up valuable time and effort from the insured and the insurer.
The sometimes difficult question of where general liability insurance leaves off and automobile liability insurance takes up becomes an issue, with the fact that few, if any, wrap-up programs include automobile coverages.
When wrap-up involves workers compensation insurance, the individual subcontractor's policy may be endorsed to exclude that cover provided by the wrap-up insurer. However, when employees of subcontractors interchangeably work on the wrap-up project and others, disputes as to which policy applies could become an additional burden on the subcontractor and result in delay for the injured employee.
Usually, the general liability under wrap-up does not include contractual liability. And, though each subcontractor is an insured, there remains a legal relationship between parties involved in the project. Should an individual subcontractor decide that he wants the contractual coverage, chances are slim that his regular insurer will provide him with it when the remaining business is with the wrap-up insurer. This same reasoning applies to various other coverages sometimes lacking in the wrap-up, such as completed operations coverage.
The principal opposing argument of insurance producers is that normal business relationship with the contractor is disrupted, resulting in loss of income. In addition, expense of paperwork is involved without compensation when policies must be endorsed so as not to conflict with the coverage provided by wrap-up.