Risk Management

A necessary evil

Wrap-up programs require careful scrutiny by all parties concerned

By Donald S. Malecki, CPCU

Although wrap-ups, both owner-controlled (OCIP) and contractor-controlled (CCIP), have been in existence for several decades, they still present some complications for the participants, the producers of the wrap-ups, and the insurers of all parties.

Briefly, a wrap-up program, also known as a consolidated insurance program (CIP), is where the interests of the project owner, general contractor, construction manager, architect, engineers and approved subcontractors of all tiers are combined (wrapped up) into a single, centrally managed insurance program covering job-site risks.

When properly implemented, the CIP can eliminate costs of overlapping coverages and delays due to coverage disputes, which are likely to be the case if each enrolled party maintains its own insurance. Whether it is an OCIP or CCIP, it typically involves a safety program that monitors and maintains records on claims by injured workers and others.

With its primary objective being savings— particularly with workers compensation—The OCIP was initially the more common of the two approaches. But with contractors’ expertise in construction matters, site safety, control, and opportunities for profit, the CCIP has grown in popularity.

Some problems

When a problem arises, there usually is plenty of fault to go around to everyone involved in a wrap-up program. Not even the producer of a wrap-up is immune. In SMI Owen Steel Company v. Marsh USA Inc., No. 06-41387 Versus Law (U.S. Ct. App. 5th Cir. 2008), a subcontractor sued the broker that administered the CCIP for negligent failure to procure insurance.

As part of the CCIP scheme, the insurance consisted of professional liability (which included design errors and omissions), subcontractor default, and excess liability. Under the contract between the owner and general contractor, coverages were required for both, including related entities, but not for subcontractors.

What had happened was that a subcontractor (SMI) was awarded a bid to design, engineer and install structural steel and foundation work. The Insurance Information Booklet, furnished by the broker, stated that enrolled subcontractors of all tiers would be covered and provided with professional liability insurance. In fact, the broker issued insurance certificates representing that SMI was an additional named insured on the owner’s professional liability policy.

Unknown to SMI, however, was the fact that the broker’s project manager advised his employees to stop issuing insurance certificates for professional liability coverage to subcontractors and to amend the Contractor Handbook accordingly. Despite this warning, the broker sent yet another inaccurate certificate stating that SMI had professional liability insurance under the CCIP.

As it turned out, suit was filed against SMI in a dispute where it learned for the first time that the broker never obtained professional liability insurance for it.

SMI alleged that because of the two inaccurate certificates and their usual disclaimers, along with the Handbook, it was led to detrimentally rely on the broker to procure professional liability insurance. With the evidence sufficient for such a finding, both the trial and appeals courts ruled against the broker.

This is a case worth reading because of the various defenses raised by the producer, and the testimonies of the expert and underwriter, the latter over the insured vs. insured exclusion. It would appear that the underlying problem here was a misunderstanding and miscommunication over what was to be provided to the respective enrolled parties.

Producers for participating subcon-tractors (referred to interchangeably as contractors of all tiers) also are confronted with problems. One of these is in arranging coverage under the subcontractors’ own liability insurance portfolio in the event the wrap-up coverage falls short of expectations.

As producers have come to learn, when an OCIP or CCIP is implemented, it is necessary for contractors of all tiers to have their insurers informed of the coverages to be provided by the wrap-up so that they can be excluded under their own insurance portfolio. Once an insurer learns about a subcontractor’s involvement, its commercial general liability and workers compensation policies will be modified with endorsements precluding coverage being provided by a wrap-up.

The one ISO-type endorsement issued by insurers to preclude coverage is Exclusion—Designated Operations Covered by A Consolidated (Wrap-Up) Insurance Program CG 21 54, which excludes both ongoing and completed operations. With contractors’ limitation endorsements commonly applicable to umbrella/excess liability policies, coverage for wrap-up programs is automatically excluded.

The hard part for producers, with regard to the liability policies issued to their subcontractor insureds, is to arrange excess or difference in conditions coverage in the event of any gaps or shortage of limits within the wrap-up program. This is not an easy task, particularly when insurers are reluctant to issue such endorsements.

With no standard endorsement available for this purpose, one generally has to be manuscripted. One such endorsement, which was issued as part of an insurer’s CGL policy for a subcontractor, provided automatic excess cover that read: “This insurance is excess over any other insurance available to you covering liability for damages arising out of a consolidated insurance (wrap-up) program to which you have been added as an insured. If no other insurer defends you, we will undertake to do so, but will be entitled to rights against others.”

The caveats in arranging coverage, even with a manuscript endorsement, are many. For example, the wording selected for the endorsement should address the characteristics of the wrap-up program involved; the exposures posed by a given wrap-up; and the coverage chosen to cover it. The wording selected to apply coverage must be carefully crafted.

Complicating matters

The foregoing suggestions are easier said than done. Another problem area is that many participating contractors of all tiers are ill-informed about the coverages provided by an OCIP or CCIP or do not fully understand the implications and do not always communicate their insurance needs properly to their insurance providers.

How can producers, for example, arrange for coverage beyond a wrap-up unless contractors communicate their insurance needs? Actually, these contractors not only have to understand the coverage shortages, but also communicate them to their producers.

A complication here is that it is sometimes difficult to understand some of the insurance provisions; some, in fact, could be appropriately labeled as a trick or trap. One such example concerns completed operations.

As a general rule, completed operations coverage should apply for as long as the appropriate statute of repose, which is the time within which claim can be made after the work has been completed. In some jurisdictions, these statutes can stand for as long as 10 years.

If some repair work were to be necessary after the completion of work, any bodily injury or property damage emanating from the repair work would be subject to completed operations coverage. This is spelled out in the definition of the “products-completed operations hazard,” which states: “Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.” This provision, incidentally, has been a part of CGL policy provisions since at least 1941.

The trick or trap here is that some insurers of a wrap-up will add an endorsement to their CGL policy, which may appear to be a coverage extension but is actually a limitation. One such endorsement is titled “Limited Coverage—Repair Work.”

This endorsement states, in effect, that the insurance is extended for an additional period with respect to bodily injury or property damage arising from repair work. This extension is stated to commence on the date the work is completed and ends as of (1) the expiration of any express warranty for the named insured’s work; (2) the statutory time period for such repair work; or (3) up to 24 months from the date of completion of the named insured’s work, whichever comes first.

What this means is that even though completed operations coverage is provided for as long as 10 years, a subcontractor may have completed operations coverage for only two years. Any injury or damage occurring after the two-year period and involving repair work would not be subject to the wrap-up! The subcontractor would either have to have some type of excess liability coverage on a difference in conditions basis, or be forced to retain the finan-cial consequences of any claim or suit.

Contractors of all tiers are not the only ones who are exposed to coverage gaps. Owners also can find themselves assuming too much of the exposure without being able to rely on insurance. During review of one such program, it was noted that the insurer inserted a Waiver of Rights of Recovery that stated, in effect, that the owner was to waive all rights of recovery against the insurer and all contractors who are accepted into the OCIP or CCIP. Actually, such a waiver should apply only to the extent of applicable insurance coverage.

For reasons such as these, reference to owner-controlled or contractor-controlled programs may be misnomers because the one who is in control is not the owner or general contractor but, instead, the insurer.

Having said this, wrap-ups are nonetheless necessary because they enable contractors of all tiers to obtain work and coverage that might not otherwise be available in traditional work projects where every participant must supply its own insurance.

Contractors, however, should not be satisfied simply with having the opportunity to obtain work involving a wrap-up and nothing more. They need to understand the shortcomings of these programs, and they need to communi-cate them and their needs to their producers. These contractors also need to understand that their producers may not always be in a position to close the loopholes. Much may depend on the contractors’ business longevity, loss history, and potential for growth.

The author
Donald S. Malecki, CPCU, has spent 48 years in the insurance and risk management consulting business. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C. headquartered in Erlanger, Kentucky.