Wrap-Up Insurance Programs (OCIP and CCIP)
Wrap-Up Insurance Programs (OCIP and CCIP). Large projects, such as highway construction, involve many contractors and subcontractors. Under a traditional insurance program, all of the entities involved would make their bids and all bids would include the cost of that entity's insurance coverage. Under the traditional approach, a lot of inefficiencies and extra expenses exist which spurred the development of wrap-up programs.
A wrap-up is a sponsored insurance program covering all parties involved with a particular, typically major, construction project and which fall under two major types.
The named insured on a wrap-up is called the sponsor. The sponsor can be either the owner of the project or the general contractor.
1 - An owner-sponsored wrap-up is called an Owner Controlled Insurance Program (OCIP). The sponsor can be the general contractor of the project.
2 - The general contractor sponsored wrap-up is called a Contractor Controlled Insurance Program (CCIP). On rare occasions the owner and contractor jointly sponsor the project.
Both want to control it in order to reap the financial benefits but also to retain control of the jobsite.
There are also Rolling Owner Controlled Insurance Programs (ROCIP) which are used to cover more than a single project.
The standard lines of business written as part of a wrap-up are Workers Compensation, General Liability, Excess or Umbrella and Builders' Risk coverages. Professional and pollution liability policies are sometimes included. There is no ineligible line of business.
Wrap-ups gains most of their savings from the Workers Compensation coverage. Therefore, there are few, if any, wrap-ups that don't include Workers Compensation.
Any type of risk the sponsor, broker and insurance company can agree upon can be written in a wrap-up, subject to state laws. The more important consideration regarding wrap-ups is which types of risk should be covered.
Only risks that can more than offset the cost of administration and risk management by cost savings and/or coverage advantages should use this approach.
Another major issue when considering use of wrap-up insurance programs (OCIP and CCIP) is insurance market conditions. Naturally, conditions that contribute to insurance availability and affordability are ones that make wrap-up programs less viable.
Wrap-up insurance programs (OCIP and CCIP) cover all parties including the owners, general contractors and subcontractors involved with a particular, typically major, construction project.
Below are some answers to commonly asked wrap-up insurance programs (OCIP and CCIP) insurance questions:
- What Is A Wrap-Up Insurance Program?
- What Are The Benefits Of Wrap-Up Insurance Programs?
- What Are The Advantages Of Wrap-Up Insurance Programs?
- What Are Potential Problems With Wrap-Up Insurance Programs?
- What Are The Disadvantages Of Wrap-Up Insurance Programs?
- What Are Mini-Wraps?
What Is A Wrap-Up Insurance Program?
Wrap-up insurance programs (OCIP and CCIP) are insurance programs for a particular construction jobsite or major project. Coverage is limited to activity at the jobsite. Most traditional wrap-ups contain workers compensation, general liability coverage and umbrella/excess coverages. Additional coverage may be included.
However, since most wrap-ups are purchased as a financial mechanism, the sponsor will normally only add coverages for exposures that can be reduced through an active safety program. Most sponsors gain the majority of their cost savings in the workers compensation programs so wrap-ups are most popular in states with high workers compensation rates.
The sponsor chooses a significant self-insured layer of coverage and uses insurance to cover the excess layers. The program also includes dividend features so that the sponsor can gain additional financial rewards.
The wrap-up provides coverage for the project owner, the general contractor and every subcontractor who works on the site. In return for participating in the wrap-up, the contractors must submit bids that are absent of an insurance costs component.
What Are The Benefits Of Wrap-Up Insurance Programs?
The entities that are protected by wrap-up insurance programs (OCIP and CCIP) insurance are project owners, general contractors and all levels of sub-contractors. All of these parties may benefit from their participation.
Project Owner And/Or General Contractor Benefits
- Coordinated risk management that reduce injuries and damage
- Coverage enhancements because of the premiums available
- Financial reward from controlling the insurance costs and holding a portion of the risk in loss sensitive and high deductible programs
- Minority and small contractors can be attracted
- More contractors can bid on parts of the project since they are relieved of providing their own insurance
- No coverage gaps due to uninsured contractors
- Project more likely to come in on time due to fewer lost man-hours
- Reduced project cost due to reduced insurance costs
All Levels Of Subcontractors Benefits
- Opportunity for jobs that might be denied if insurance costs were included
- Receive insurance coverage not normally available
- Receive risk management services not normally available
- Reduced cost since no insurance is purchased
What Are The Advantages Of Wrap-Up Insurance Programs?
The financial benefits for the sponsor can only be realized if losses are minimized, so a project must include a strong risk management program.
There are many subcontractors who want to bid on a project. Some have excellent loss ratios and some have struggled. Some may be new in business while others are more experienced. There are large and small contractors.
Their skills may be similar but their insurance prices may vary because of relationships, past problems, lack of experience or a lack of understanding of the industry.
The subcontractor with an excellent loss ratio and attractive rates gains an advantage in a bid situation because he or she can take a smaller insurance mark up. The newer contractor will be forced to take a higher mark up or accept less profit.
Some subcontractors may not be able to bid at all because they cannot supply the minimum policy limits and coverages.
If the project is to be handled in wrap-up insurance programs (OCIP and CCIP), some subcontractors lose their advantages while others are given an opportunity to bid on a project. The owner or general contractor can choose the subcontractor based on his or her work product and bid, not on their ability to obtain insurance coverage.
The owner or general contractor has an opportunity to financially gain from a well-run wrap-up. A wrap-up starts with a substantial self-insurance layer. Additional layers are added with their own structure, coverages, carriers and sponsor participation. Investment is gained on the set-aside and dividends are possible based on loss performance.
Many owners are sold on the Wrap-up insurance programs (OCIP and CCIP) concept strictly for the upfront savings and the potential dividends. Unfortunately, these owners can be shortsighted and try to squeeze too much out of the wrap-up by using overly aggressive claims handling techniques and not spending the appropriate money on risk and safety management.
Maintaining underlying coverages is a major administration headache for most general contractors and project owners. The subcontractors are supposed to obtain coverage per the bid specifications but often their certificates are presented with only the limits and basic coverage shown. The certificates may also be valid on the day of the bid but cancelled the day after.
Coverages that may be easy for a larger concern to obtain may be impossible for a smaller subcontractor. As an example, the CG 20 10 11 85, Additional Insured - Owners, Lessees Or Contractors - Scheduled Person or Organization, is not popular with many insurance carriers even though general contractors continue to ask for it. The problem is that the 11 85 edition was revised in '93, '97, '01, '04 and ‘13.
The resultant changes have reduced coverage for additional insureds and equivalent coverage does not exist even with the creation of the following additional endorsements:
- CG 20 33-Additional Insured - Owners, Lessees Or Contractors - Automatic Status When Required In Construction Agreement With You
- CG 20 37-Additional Insured - Owners, Lessees Or Contractors - Completed Operations
- CG 20 38-Additional insured - Owners, Lessee or Contractors - Automatic Status for Other Parties When Required in Written Construction Agreement
In essence, with the later forms, additional insured status may only be granted when a party is specifically scheduled and, rather than ongoing coverage, protection ends when the subcontractor's work is completed (no completed operations coverage exists).
If subcontractors cannot obtain the required coverage, the project owner or general contractor may be forced to choose between the right coverage and the right subcontractor. A wrap-up allows the sponsor to negotiate the coverage needed for the particular project. This eases the administration headaches and allows the choice of subcontractor to be based on their contracting ability not their ability to obtain insurance coverage.
Streamlined Claims Handling
When multiple defendants are accused of a particular injury or damage, the negotiations become much more complicated as each party attempts to blame the other, allowing the plaintiff attorney to build a case based on the arguments of the defendants attempting to flee the case. However, when damage can be traced to one and only one defendant, negotiations can be straight forward.
Wrap-up insurance programs (OCIP and CCIP) prevents the finger pointing since the sponsor is in charge of all investigating and negotiations, simplifying the process and increasing the ability to minimize claim payouts.
Coordinated Safety Activities
Whenever multiple entities are operating at the same location there is the potential for injuries, often due to a lack of communication. The wrap-up dividend provides the financial incentive for the project manager to prevent accidents.
Since the premium is significant, the carriers and the wrap-up sponsors can designate money for loss prevention programs. Advance planning for the project with safety issues in mind can cause the entire job site to be safer. One entity actively concerned with safety should mean less conflict on the jobsite and more coordinated work schedules.
Wrap-up sponsors are also aware that accidents delay a projects completion. Therefore, the sponsor is also encouraged to prevent accidents in order to gain work completion bonuses.
What Are Potential Problems With Wrap-Up Insurance Programs?
Wrap-up participants also face adverse situations. Agencies that are experienced in negotiating wrap-ups can work with all parties to address the situations raised below. However, ultimate program decisions are in the sponsor's hands.
Sponsors who are interested in only saving costs may provide the minimum required coverage which can leave many contractors with inadequate protection.
Contractors who bid for work that is part of a wrap-up project have the right to review the insurance coverage being offered. While they may not keep their workers compensation premium outside the program, they can continue their other policies simply by not excluding the project.
This option creates double coverage which could slow down claims-handling. However, this option assures the contractor that a source of coverage is available when needed. The disadvantage of this approach is the bid pricing since the project sponsor will not permit a bid with insurance pricing shown.
Following are some issues that that participant in wrap-up insurance programs (OCIP and CCIP) insurance could face:
Project Owner Problems
These problems can happen when the project owner is the sponsor:
- Administrative costs of developing and maintaining the program may turn out to be prohibitive
- Insurance placement may be with non-admitted markets and the owner loses the protection normally provided by guaranty funds
- Lack of knowledge of the potential risks may lead to poor choices of brokers, loss control and claims handling
- Losses may exceed the anticipated savings
- Wrap-Up policies often contain customized language that, in the event of a dispute, can complicate litigation
Project Owner Problem With GC Sponsor
This can be a big problem when general contractor is the sponsor.
The general contractor controls the project and will be difficult to replace. If a sponsoring general contractor is released from the job, the insurance moves with that general contractor.
Therefore, when a new general contractor is brought onboard, that party must sponsor a new wrap-up. Many wrap-up writers are not interested in covering partially finished projects.
General Contractor Sponsor Problems
These problems can pop-up when the general contractor is the sponsor:
- Administrative costs of developing and maintaining the program
- If released from a project before finished, may suffer severe penalties from the wrap-up caused by minimum premium requirements and one-time fees that were amortized over the length of the contract
- Insurance placement may be with non-admitted (E&S) markets and the owner loses the protection normally provided by guaranty funds
- Lack of knowledge of the potential risks may lead to poor choices of brokers, loss control and claims handling
- Losses may exceed the anticipated savings
- No coverage for losses that occur away from the project site
- Wrap-up policies often contain customized (manuscript) language that, in the event of a dispute, can complicate litigation
General Contractor Problems With Owner Sponsor
These problems can surface when the project owner is the sponsor:
- General contractor loses control of the project site to the project owner's selected risk management causing tension on the site
- No coverage for losses that occur away from the project site
- Project owner selects coverages and risk management services while the general contractor is forced to work within the selected program
These subcontractor problems can happen at all levels:
- Coverage ends with the project which means that after project repair work may not be covered
- Coverage is provided at only the project site which means off-site activities such as fabrication not covered
- If insurance limits are exhausted by other claims, there may be no coverage available
- Insurance carrier is "on the side of" the project sponsor making insurance appeals risky
What Are The Disadvantages Of Wrap-Up Insurance Programs?
The subcontractors lose control of their insurance coverage in three different ways.
Workers Compensation - Premium and losses for work performed at wrap-up insurance programs (OCIP and CCIP) projects are not reported as experience for the subcontractor's workers compensation account. This means that if injuries are low and premium significant, the subcontractor loses the experience modification reduction.
If the subcontractor has a dividend-paying program, all premium and losses that are part of the wrap-up are excluded, therefore reducing the dividend potential.
Jobsite General Liability - Coverage exists under the wrap-up for a subcontractor only for the term of the project. Unless the wrap-up coverage extends beyond the project term, the subcontractor has no protection for losses involving return work activities.
Further, a subcontractor does not have an individual limit for protection. If the project limit is exhausted, the subcontractor is without coverage.
Off Jobsite General Liability - Wrap-up insurance programs (OCIP and CCIP) protects a subcontractor only when performing work on the project site. There is no coverage when the subcontractor is doing fabrication or other work at any other location.
General Contractor Considerations
When the general contractor is not the sponsor of the wrap-up, it can lose control of the safety and morale aspects of the jobsite in a number of ways:
Lack Of Coordination - A general contractor is hired based on its ability to complete a project. Part of that ability comes from coordinating all aspects of the jobsite. Since a safe jobsite is important to bringing a project in on time, when the safety aspect is transferred to a sponsor-chosen safety management entity, conflict can arise due to differences in practices. Differences in experience and outlook can result in significant discord on the jobsite.
Insurance Coverage - The general contractor's insurance coverage is supplied through the wrap-up, just like the subcontractor's insurance. The same pitfalls explained under the subcontractor's considerations apply to the general contractor.
The one plus for the general contractor is that they can require levels of coverage prior to starting a job that can be to their advantage. The general contractor must then be aware of any changes the sponsor makes to the insurance coverage in order to prevent a coverage gap.
Instead of being concerned about subcontractors insurance, the general contractor must be concerned about the sponsor maintaining coverage.
Morale - The handling of claims, in particular workers compensation claims, can have a significant impact on the morale at the jobsite. If injured workers must fight to obtain coverage or if they are encouraged to work while injured, overall productivity will drop.
In addition, good workers will seek work on other jobs, further eroding productivity. When the general contractor has no input on claims-handling, its hands are tied and can cause it to miss production timeframes which can impact the general contractor's bonus.
Wrap Up Benefits - The general contractor will gain none of the financial benefits from the wrap-up unless negotiated in the project contract. This gives them little incentive to encourage the safety programs advocated by the owner and the wrap up safety coordinator.
When the owner is the sponsor, it has to address disagreements between the general contractor and risk manager/safety coordinator. This increased responsibility can increase the owner's directors and officers exposure if a problem arises and they act contrary to their general contractor's advice.
When the owner is not the sponsor, the project can be held captive by the general contractor since wrap-up coverage is written at the beginning of a project and most insurance carriers are not interested in covering projects after they are started.
If the general contractor controls wrap-up insurance programs (OCIP and CCIP), the owner may find it very difficult and expensive to terminate the general contractor's contract even if there are serious problems.
What Are Mini-Wraps?
he term mini-wrap is also used for traditional wrap-ups that are written for a short duration.
Construction defect losses created an insurance crisis in California. Such losses as well as subsequent problems involving mold and EIFS claims led to insurers including highly restrictive clauses in general liability policies, including exclusions for defects and contractual liability.
Condominium and residential home developers, particularly those involving homeowners associations, began to feel the insurance market tighten, premiums rise, and limits drop. The crunch started with general contractors and quickly worked down to affect all levels of subcontractors. General contractors demanded coverage from their sub contractors that the subcontractors could not obtain.
The solution for the residential construction industry was a unique type of residential general liability-only wrap-up coverage sometimes called a mini-wrap.
Wrap-ups are primarily cost saving financial products that lead with Workers Compensation coverage. Their use is generally with large projects and they are characterized by high premiums, high limits and intense loss prevention and safety measures.
The mini-wrap (sometimes called a residential wrap-up), however, is a coverage driven product. It includes only general liability coverages, has low limits, applies to small to medium-size projects and incorporates standard loss prevention efforts.
While many brokers enthuse about the advantages and financial freedom of the large project wrap-ups, agents and brokers accept the mini-wrap as the only solution available. Users concede that the tool isn't ideal, but modest limits, narrow coverage and with defense coverage provided within the policy's limits are better than going without any coverage.
The construction defect issue is not going away. The coverage crisis it created has moved north and slightly east of California and markets now include Oregon, Arizona and Nevada. As condominium and home development building continues to spread the problem may expand. Mini-wraps may be the solution for similar coverage problems nationwide.
Wrap-Up Insurance Programs (OCIP and CCIP) - The Bottom Line
The success of wrap-up insurance programs (OCIP and CCIP) depends on the sponsor and its willingness to provide effective risk management. When viewed as an insurance and risk management process that can provide appropriate insurance coverage for all parties working at a jobsite, it can be a"win-win" situation for all involved.
However, when the sponsors only interest in the wrap-up is the potential financial benefits, all parties can lose when risk management and safety services are given short shrift, short cuts are encouraged, insufficient limits and coverages are purchased, and worker morale is allowed to bottom out.
These projects can end up costing the sponsor money and may even exhaust the limits so that coverage is not available for all parties.
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Get useful tips and information about how much commercial insurance costs, small business risks and exposures, how insurance regulations effect your businesses' and detailed descriptions of coverages and exclusions and more. Most small businesses need to buy the following four types of insurance at a minimum to cover their operations from every day risks:
Property Insurance: This policy covers a business if the property used in the business is damaged or stolen as the result of common perils like fire or theft. Commercial property insurance covers the buildings, structures and also business personal property - which includes furniture, inventory, raw materials, machinery, computers and other items.
Liability Insurance: Any company can be sued. Slip-and fall lawsuits are very common and be costly. Customers can claim you injured them or damaged their property - and lawsuits are very expensive. Commercial liability insurance pays damages and can include attorney's fees and other legal expenses. It also ca pay for the medical bills of injured third parties
Commercial Auto Insurance: For vehicles owned by the business. Commercial auto insurance pays bodily injury or property damage costs for which the business is found liable - up the the policy limits for liability and property damage.
Workers Compensation Insurance: In almost every state employers must provide workers comp when there are W2 employees. Workers compensation pays for the medical care of employees and can replace a portion of lost wages - regardless of who was at fault for the injuries.