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Wrap-up Policies: advantages and disadvantages

Wrap-up policies insure a project rather than a company. The various contractors, subcontractors and builders each contribute to the premium in order to smooth out the typical liability issues that force construction to slow down. Included coverage is workers compensation, general liability, umbrella liability, property, and specific project coverage. Like all good and simple ideas, this one begins with a difficult decision.

Is your wrap-up going to be owner controlled or contractor controlled? If we're all in the same insurance boat, why would this matter? We're not in the same boat.

The "controller" is responsible for all deductible payments, excess premium and audit payments. The policy controller administers subcontractors and makes the safety decisions. Arguably, contractors or construction managers are in the best position to negotiate and administer their subcontractors; and this arrangement gives a clear line of authority.

The contract close-out completed operations issue becomes a potential source of controversy in an owner controlled policy. It takes about three years to close out a completed operations policy; but the construction loan needs to be closed out sooner.

Hands-on developers may want to purchase a wrap-up that rolls from project to project. Or, they may have a different tolerance for risk than the contractor. Or, they may have infrastructure similar to construction managers. Owner may just want a bit more control.

Wrap-ups have one major advantage over conventional insurance methods. Every party involved in the site has the same levels of insurance and the same safety rules, and pays a prorated portion of the premium. Contractors are free to choose small artisan subcontractors without insisting they carry more insurance than they can afford. Every contractor becomes scale-able from a risk perspective.

Focus shifts to project responsibilities rather than potential liabilities. Large municipal projects, like stadiums or public works, could utilize wrap-ups through a construction manager to reduce post-construction litigation.

Because deductibles tend to be high for these policies, most loss decisions can be made on-site, without insurance company input.

Have your risk management professional explain the details of these policies before you bid your next huge project.
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