The times are changing and construction projects are changing too. Many contractors are moving from typical insurance policies to “wrap-up” policies. A “wrap up” policy (also known as an owner controlled insurance policy or OCIP) is an increasingly popular insurance procurement option that allows coverages for multiple insureds to be bundled (or wrapped up) into a consolidated program. A wrap up policy is a single insurance policy naming all construction participants for coverage on all general liability and/or workers’ compensation risk on a given project. Wrap up policies are typically used on very large construction projects involving many contractors and subcontractors. In addition to consolidating all insureds into one policy, wrap up policies often provide occurrence coverage for a period of years from the date of the completion of the project, thus eliminating the need to purchase ongoing policies for the duration of the exposure to construction defect claims. They provide an owner with certain cost savings, and they also offer advantages for the contractors and subcontractors working on the project.

Typically, a commercial general liability (CGL) policy is broad enough to encompass most bodily injury or property damage claims arising out of the construction, regardless of how the loss happened. If a workers’ compensation policy is also chosen for the project, all job-site injuries are also covered. Under a wrap up policy, a contractor or project owner provides various insurance coverages to contractors and subcontractors. There is no need to allocate blame for injury or property damage since all participants are under the same policy. This type of policy allows consolidation of claims in the handling process between the owner and the claimant and usually leads to speedy and early resolution. For example, one area rapid transit system is using its construction insurance to save the equivalent cost of four railcars or three rail stations by using a wrap up policy to manage the construction risk and to save on total building cost at the same time. ¹

Owners typically like the wrap up policies because they can save as much as 20% to 30% on conventional insurance costs. Contractors like wrap up policies because their insurance, in effect, is free. The contractors no longer have to include the insurance cost as part of their bid. The project owner pays for the contractor’s insurance because the bid reduction off-sets the cost of providing insurance. Some experts estimate that wrap up coverage saves an owner about 1% to 1.5% of the total construction cost. In the above-mentioned transit system case, an estimated $9 million savings was reported over the total $870 million project. Id.

Wrap up policies, or OCIPs, have been around for more than 40 years. In the last decade, we have seen a proliferation of this type of insurance program on construction projects due to several factors. The main reason wrap up policies have been used more lately appears to be the highly competitive construction insurance market. An OCIP can be site specific or it can be for multiple job sites. The OCIP normally applies to all contractors and subcontractors performing work at the job site. An OCIP generally includes workers’ compensation insurance, employers’ liability, the CGL, and an excess umbrella policy. An OCIP can also include a builders risk policy, professional liability for design professionals, and even environmental liability insurance policies. In the last few years, policies have been bundled by some insurance carriers to provide professional and pollution coverage. Automobile liability insurance is normally excluded from these policies.

In the 1980's, protracted construction defect litigation began and developers have been working ever since to effectively limit as much liability risk as possible. Starting around 1990, most major builders required contractors to purchase additional insured endorsements which named the builder as the additional insured and required contractual indemnity clauses ensuring that the subcontractor defend and indemnify the builder. The builders expected they would be fully protected and defended and even indemnified for construction defect cases, however, is not always the case. Often, a builder or developer is still pays a percentage of the overall construction defect settlement. The reasons for this are many, including coverage exclusions for various parties’ work product, substandard insurance carriers, and sometimes no insurance at all. The mere fact that there are different forms of exclusions issued is enough in and of itself to create a great deal of litigation. Other carriers are offering coverage for work done only during the relevant policy period and excluding damages from projects completed after the policy. The wrap up or OCIP policy allows building owners or builders to buy workers’ compensation and general liability insurance for all contractors and subcontractors which runs for the duration of the construction project. These types of programs provide unique advantages, particularly for the owner or general contractor who then knows there are no uninsured workers on the job.

The terms OCIP and wrap up are frequently used interchangeably because the underlying premise is relatively the same with both policies. Both insurance coverages can include workers’ compensation, general liability, and umbrella policies. The wrap up concept originally emerged as a form of consolidated insurance program that places responsibility for providing insurance coverage on the prime contractor or general contractor for all of its subcontractors. This is sometimes considered a contractor controlled insurance program (CCIP). In comparison, the OCIP provides similar coverage, but the owner is the sponsor and provides insurance for all parties. In the latter case, the owner would take responsibility for the insurance procurement, payments, and management.

There are many ways to structure a wrap up insurance program, but the critical success factor is the capabilities of the people who are responsible for the program design, implementation, and administration. With an OCIP, as construction contracts are awarded over the term of the policy period, the names of the contractors and all subcontractors would be added to the policy as named insurers. The advantages to this approach includes the owner knowing for sure that its contractors have adequate coverage. Additional advantages include the workers’ compensation insurance premiums being at a discount because of the size of the policy. With some smaller or newer contractors, they may have difficulty getting insurance and a wrap up program may improve their ability to compete for work. Often, the cost of settling claims is greatly reduced because the injured party does not have to prove the contractor is at fault, only that a loss has occurred.

When an owner or developer can predict their financial exposure on a project, they have a competitive advantage over their peers. A wrap up or OCIP policy enables insurance costs for the entire project to be set in advance. Therefore, the entire exposure for defects from one development can be accurately assessed at the time of the planning and the budgeting stage of that project. Cost reductions are derived from an emphasis on safety and loss control, a reduction in litigation between insurers, and by combining smaller insurance programs into one larger one which creates economies of scale and generates better discounts and leverage. The cost of a wrap up or OCIP on a project depends on factors such as the size of the project, the location and nature of the project, as well as the current pricing and availability of coverage for subcontractors.

There are certain concerns to be aware of when obtaining a wrap up or OCIP. Some of these concerns include determining whether workers’ compensation will be included in the wrap up policy. The workers’ compensation coverage could increase the policy cost, beyond the benefits of such a policy. These type of policies can also be project specific or rolling wrap up policies which cover a period of years, not specific projects. These policies can also cover the developer and all subcontractors or the developer and certain subcontractors who the developer determines to insure. One important concern with these type policies is that a wrap up or OCIP policy will have one set of policy limits. For a major catastrophe, the one policy limit could be potentially reached with one catastrophic accident or injury. Depending upon the number of parties and types of parties being insured, wrap ups or OCIPs can be expensive. Another important consideration in determining whether to obtain these types of policies is that the subcontractors can reduce their bids for the amount of insurance premiums they would have included in their bid. With the subcontractors reducing their bid amounts by the amount of insurance premiums, and the owner or general contractor obtaining the policy to include all subcontractors, the cost of the premiums for the wrap up or OCIPs may be the best choice in some cases. An OCIP may not be the best choice on all projects, but warrants consideration for many single site projects with large construction values or portfolios of smaller projects aggregated together for large construction values.

The OCIP provides an owner with definite advantages over traditional insurance programs including savings potential, broader insurance coverage, higher policy limits, more efficient management, and better safety and loss control procedures. However, owners should structure an OCIP carefully and with the help of a professional. The most significant advantages include potential insurance cost savings, broader coverage, higher limits, better claim management, and more effective safety and loss control.

Finding subcontractors with the proper CGL coverage can sometimes be quite difficult and expensive. A wrap up policy can eliminate this problem by allowing the developer or owner to choose the best subcontractors, regardless of the type of CGL coverage they carry. While wrap up policies are certainly not for every project, they can provide an attractive option for developers on certain sizes and types of projects.


¹  Dallas Business Journal, June 29, 1998