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Construction insurance wrap-up programs: big savings, but not for everybody.

The Metropolitan Washington Airports Authority (Authority) began its $1.6 billion Capital Development Program in 1988 to rehabiliate Washington National Airport and expand the facilities at Washington Dulles International Airport. The capital development program was expected to span six to 10 years and include about 150 specific projects at the airports using well over 1,000 contractors. By September of 1991, the Authority had begun 129 projects and enrolle more than 1,000 contractors.

To insure the construction exposures of this myriad of projects, the Authority's Risk Management Branch researched a number of options before recommeding the use of a wrap-up insurance program as the most efficient method. In 1988, the Authority designed an Owner Controlled Wrap-up Insurance Program (OCWIP) to provide both the primary and umbrella insurance for its airport construction, and the Board of Directors and approved its adoption.

Wrap-up insurance programs are not approriate for every construction project. Insurance brokers believe the hard construction costs must generate, on an average, a premium volume of at least $1 million to attract insurance companies that are qualified to handle this type of program. A construction project must be large enough, as well, to justify and full-time attention and administrative effort required to make the program work. a construction program of less than $50 million would probably nto be a good candidate for wrap-up insurance. An owner-controlled program of any type, however, can provide a lower net cost, more comprehensive coverage and the ability to reduce on-the-job accidents through a strong safety program. The safety features identified in this article can be used in any construction program.

What Is a Wrap-up?

Wrap-ups are not new. They were first used during and after World War II under the War Projects Rating Plan, and later by the National Defendse Projects Rating Plan, which still requires contractors to obtain certain types of insurance coverage. Quasifederal agencies began using wrap-ups in 1966 for the construction of the John F. Kennedy Center for the Performing Arts. Today the concept has become common-place, and it is easy to identify a variety of organizations using this approach to insure large construction projects.

Traditionally, contractors hired by a business or government purchase their own insurance coverage for all the job-site activities. The prime contractor is asked to provide an indemnification clause, minimum insurance requirements and additional insured status or an Owner's & Contractor Protective (OCP) policy. The cost associated with these coverages is then included in their bids and is actually paid by the owner.

There are several problems associated with the approach outlined above:

1) courts have limited, and even erased, the value of indemnification language;

2) indemnification is only as good as the indemnitor's financial strength and, given the current economic condition of most contractors, their individual strength is diminishing;

3) it is difficult to obtain and evaluate every contractor's insurance certificates;

4) it is hard to remove the coverage "gaps" not provided in the contractor's policies; and

5) often small businesses cannot meet the minimum insurance limits required by the owner.

An alternative is for the owner to cover all parties related to the construction through a war-up program. In this approach, the owner purchases all of the on-site insurance to cover every enrolled contractor in one policy, called project insurance. Project insurance can have higher limits, broader coverages, and better control over the safety and claims administration for a lower premium. The wrap-up approach removes the contractor's obligation to purchase adequate and appropriate insurance, and all parties benefit throughout the construction project.

The Authority's Wrap-up Program

For the Metropolitan Washington Airports Authority, the decision to implement a wrap-up program was the easiest part of the process. The decision to create
 Exhibit 1
 Work Comp
 Standard Audit and
 Policy Premium Paid and Retro Retro
 Period Deposit Reserved Premium Return
2/1/89-90 1,637,266 225,331 * 329,941 1,307,325
2/1/90-91 2,496,000 424,730 ** 675,576 1,821,424
2/1/91-92 915,750 118,394 *** TBD TBD
 * Valued as of: 8/31/90
 ** Valued as of: 8/31/91
 *** Valued as of:9/30/91
 TBD: To Be Determined

a wrap-up was based on three main reasons: to maintain control, to reduce the cost to an affordable price and to sustain good public relations. Control was the most important element, with projects involving hundreds of nonaviation employees working beside a Boeing 747 or a contractor boring a utility trench under an active taxiway. Maintaining control over the safety aspects of the construction allows the Authority to institute and enforce standards in all areas of the airport. The following description outline some of the program advantages.

Control. a wrap-up program can accomplish several objectives.

* Standardize the contractor's insurance policies. Wrap-ups eliminate conflicting insurance provisions, remove overlapping policies and close coverage "gaps." They also provide the flexibility to write special coverages to meet specific needs. In the case of the Authority, the necessary aviation exposures were added to the construction liability policies.

* Obtain substantially higher liability limits. Contractors usually purchase $2-$5 million in general liability coverage. These limits would not adequately pay for most types of aviatin accidents, therefore, it was important for the Authority to buy additional protection. Under the OCWIP, the Authority was able to obtain a $200 million limit to cover the airside catastrophic exposures.

* Offer dedicated limits only for the specific project. The owner need not worry about the contractor's policy being eroded by a major accident that happens while the contractor is working for another owner.

* Eliminate the need for verification of every policy provided by the contractors. This process, usually performed through the customary exchanged of insurance certificates, can be very time consuming. Eliminating this requirement keeps the project movng; the selection process is not delayed by insurance verification.

* Make the construction projects as safe as possible. Safety is the most important aspect of any wrap-up program. A proactive, successful program requires everyone's participation and safety is no exception--it is everyone's responsibility.

* Provide a coordinated approach to claims management. A wrap-up program permits the use of one agency to provide all of the on-site claims administration. This simplifies the process and eliminates the conflicts which arise when multiple insurance carriers each share an insurable interest in one claim. A wrap-up eliminates this needles delay.

* Minimize inter-contractor lawsuits. Construction work can involve very hazardous activities such as blasting, demolition and excavation, inherent dangers that make any major construction project a natural and prolific breeding ground for litigation. Consolidating the insurance protection into one set of policies to cover all the insureds helps eliminate the endless possibilities for cross-claims among the engineers, architects, contractors and subcontractors.

Price. A wrap-up program reduces cost in the following ways.

* Generates volume discounts. It is realistic to expect significant savings under a wrap-up approach through a reduction of administrative costs from multiple policies. Other projects have reported savings between 25 percent and 37 percent over the traditional approach.

* Offers opportunities for dividends as a result of good loss exposure. After only two years, the Authority produced a 1.1 injury rate, which measures the frequency of loss time injuries, well below the 6.4 computed by the National Safety Council as the national average. As a result of better than expected losses, the Authority recouped more than $1.3 million premiums from the workers' compensation program for the first year and another $1.8 million for the second year, as shown in Exhibit 1.

* Eliminates contractor's mark-up on insurance premiums. The cost is reduced by direct purchase of the liability, workers' compensation and builder's risk policies rather than reimbursing the contractors through overhead expenses.

* Enhances cash flow. The reserve requirements under the workers' compensation insurance policies can be met by negotiating a letter of credit. This allows the organization to maximize its investment earnings.

Public Relations. Wrap-ups enhance public relations by the following ways.

* Expediting claim payment to injured parties. The purchaser of the wrap-up insurance policies controls the insurance carrier, the claims adjusters and any other party with an insurable interest. If someone is not paid, the owner knows it and can control its image by managing the adjusting activities, especially with prompt claims payment.

* Encouraging/supporting minority business enterprises. Many minority or small contractors have difficulty purchasing all or part of the insurance required to bid on construction contracts. Wrap-ups eliminate the cost and unavailability of insurance as a "structural barrier.'

Pros and Cons of a Wrap-up

As in anything new, there will be initial objections to the wrap-up program. Confronting the objection a real disadvantage, or just an excuse for a different problem? Some common disadvantages espoused by contractors and management are discussed below.

Disruption of Contractor's Insurance.

* Contractors already provide workers' compensation coverage. Traditionally, contractors provide minimum or limited coverage for workers' compensation and employers' liability. By default, it is possible that the owner will become liable for any uninsured contractor. A wrap-up program provides adequate coverage for all insured parties.

* Contractors are currently paying for their coverage. A wrap-up does not require duplicate reporting or payment. The payroll from the wrap-up program are not reported to the contractor's primary insurance carrier, and the premium for the program is paid by the owner. The contractors do not incur any additional cost. In fact, after the OCWIP's loss experience produced lower compensation rates, the Authority's concern changed to assuring that the contractor is not reporting work performed off the airport property, which is not insured under the Authority's policy.

* Changing the workers' compensation procedure is confusing. The contractors complain that their employees already know how to report injuries/accidents through their procedures. The wrap-up requires a new workers' compensation insurance carrier with different procedures, which can be confusing to their employees. In reality, each construction site still has the same rules: the employee reports the injury to a supervisor, gets a form from the on-site trailer, goes to the nearest treating facility and returns to work when released from treatment. From the worker's point of view, nothing has changed. Thw owner, however, has controlled the claim activity and the cost by standardizing where and how medical treatment is obtained.

* Administrative burden is too great. When the contract award is issued to the prime contractor, that firm and each subcontractor has two weeks to complete and return six enrollment forms to the insurance administrator. During construction, the contractors may be required to complete seven other forms: three are submitted as monthly reports, the remaining are completed when there are claims. These forms request the same type of information already's submitted to the contractor's insurance carrier. Under the Authority's program, every contractor receives a copy of the OCWIP Insurance Manual containing instructions on how to complete all of the forms.

* Contractors do not understand wrap-ups. This has an easy cure: early, frequent and complete communication. Once the contractors understand how the program benefits them, the objection go away.


* Wrap-ups still require the contractors to maintain their own insurance. True. Even under a wrap-up, to protect the owner, every contractor must still provide certificates of insurance to ensure that there is off-site coverage. There is no additional cost to the contractor under this requirement unless the exposure (such as automobile liability) is not provided under the wrap-up program. Then, and only then, the owner reimburses the contractor for the additional coverage related to the project based on a percentage of the verified premium. No one should cancel a policy, the contractors need their own insurance for other contracted work.

* Politics. This is predictable objection: Contractors have friends and favors. If the objection is "pure politics," only the realization of the overall advantages can outweigh it. To counteract it, the "big-picture" must be communicated. The owner's management should know what a wrap-up can and cannot do for the project and try to use the politics to its advantage.

Vague Savings.

* Cost of insurance is built into the contractor's overhead. It is hard to prove contractors have removed all of their insurance costs from their bid, but the bidding competition itself will eliminate the majority of the cost. The procurement process should require the contractor to bid with and without insurance costs as a line item. Expected figures can be compared to national standards; the cost range will be less for wrap-ups. Exhibits 2 and 3 demonstrate this cost differential. The former, a consultant's study of four municipal transit systme's costs for wrap-up programs compared to estimates for traditional insurance approaches, shows cost savings ranging from 35 to 40 percent. The latter illustrates the Authority's cost savings through its OWICP program.

* Contractors may be self-insured. This is fine for the off-site insurance. The project owner's program can recognize self-insurance as a valid substitute for contractors' off-site insurance, provided the language stipulates a procedure to verify the financial reserves and unadmitted carriers. The wrap-up will not change any of the contractors' financial arrangement, because the program's claim activities will not affect their reserves.

* Difficult to predict the future. Pessimists are alarmed: what is the project doesn't continue, the plans change, the insurance carrier cancels the policy or is not there to write the insurance? These people argue it is easier to change all of these events when the contractors are responsible for providing their own insurance. While it may be easier for the owner to follow the traditional approach where all of the work involved in obtaining the project insurance is transferred to the contractors, still the same events could happen regardless of the method employed.

Insurance Market Commitment.

* Limited number of carriers willing to write wrap-ups. There are specialty areas as in any field. The important point is the quality of the carriers. Those currently involved in wrap-up insurance are top-rated carriers.

* Insurance carrier could become insolvent. The contractors assume the same risk with their policies; however, if a carrier became insolvent the contractor might not have the resources to expeditiously find another qualified carrier. By operating a wrap-up, the owner already has information on other carriers willng to underwrite the exposure.

* Fear the an insurance carrier would cancel the project. Most contractors' insurance policies cover one year at a time. Wrap-ups, because they are project insurance, can be written for longer periods of time, such as three to five years. Also, the policy can be a non-cancelable policy due to the volume and length of commitment.

Administrative Burden.

* Increased requirement for meetings, gathering of data. It is true that this requirement imposes a burden, but it is a positive addition: Wrap-ups provide more control and more useful information than might otherwise be captured and thus contribute to the overall efficiency and success of the project.

* Demands on time, attention and resources. Any major project needs more personnel, paperwork, computers and space for the owner; with a wrap-up program, much of the work associated with the procurement of insurance is transferred from the contractors to the owner.

* Management expertise needed. One of the benefits of wrap-up programs is the transferability of documents and information. When one examines the documentation from several major wrap-ups that have been in effect during the past 15 years, one discovers that a given document has probably been duplicated, slightly modified and refused by other entities--over and over again. For example, the Scope of Work identified in the Authority's Insurance Broker Request for Proposal was designed from a sample used by the Washington Metropolitan Area Transit Authority and the Metropolitan Atlanta Rapid Transit Authority. A variation of this same document was later used by the City and County of Denver, the Regional Airport Authority of Louisville & Jefferson County, and Puerto Rico Ports Authority during their selection process. A start-up program can use the documents and procedures already developed at other projects. Alternative resources, such as the insurance brokers or carriers, also can be called on to help perform the administrative work.

Disincentive for Loss Control.

* Lack of performance incentive. Critics claim that without penalties or claim deductibles, contractors do not have any incentive to operate safely. To counter this impression, it is necessary to reward the positive. A strong program with incentivescan be created: safety awards, luncheons or other recognition for outstanding safety records. Also, it is possible with wrap-up programs to eliminate from biddng on new projects those contractors with poor safety records or those who continually ignore safety standards.

Planning a Wrap-up Program

Managing a wrap-up program involves extensive administration, T-L-C--total-lengthy-commitment-and massive information collection and dissemination. The first key step is to hire help. Most owners start by engaging an expert who has wrap-up experience, either an insurance consultant or a local insurance broker qualified to procure the coverages desired. The Authority did both tasks, using a consultant to assist in the selection of the broker, who then performed the marketing services and currently performs some of the administrative tasks. The Authority has 12 people from the insurance broker available to service its account. A broker will create a timetable to structure the series of activities. The work pla for the Authority's design and a marketing phase is shown in Exhibit 4.

The next step is to gather all the construction details related to the project, such a length of project, location of work, type of construction, number of contractors, and lists of the architects, engineers, project management team, etc. Much of the information needed on the construction project can be obtained from financial and engineering plans. This information will be converted into underwriting submissions that will explain the owner's exposures to the insurance carriers. The insurance broker, in consultation with the owner, will market the project and develop a program.

A wrap-up can cover a variety of on-site exposures, and it is important to select the coverage desired early in the planning process. The usual coverages include: general and excess liability, workers' compensation, builder's risk (property insurance), project errors and omissions, excess automobile liability and specialty coverages, such as asbestos, environmental liability and underground storage tank removal. A program can be designed to cover special hazards; for example, the Authority has purchased the following additional coverages.

1) Blanket pollution abatement liability policy. The Authority was one of the first in the country to obtain the insurance policy to comply with the Environmental Protection Agency regulations for underground storage tanks. The policy covers the Authority, all enrolled abatement contractors, tenants and third parties during the removal and cleanup of more than 60 underground storage tanks used on the airports by various owners.

2) Airside automobile liability. Extra protection was needed to support the contractor's vehicle activity while working around the aircraft operations. The Authority negotiated additional coverage through the wrap-up general liability insurer to provide coverage in excess of every contractor's own automobile liability insurance for a minimal increase in premium.

Noneligible contractors must be defined. Certain types of work cannot be covered under a wrap-up program. Material dealers, suppliers, vendors, haulers and other service agencies connected with the project are required to carry their own insurance at the contractor's expense. Also, all contractors and subcontractors must carry and maintain, at their own expense, insurance in connection with operations away from the job site; i.e., general liability, workers' compensation, employer's liability, professional liability and automobile liability.

Insurance and Safety Management

Since a wrap-up program requires a number of complex assignments, various responsible parties are designated to handle specific tasks: the project management team, risk management staff, insurance brokers and insurance carriers. The tasks may vary, but the following are important assignments.

* Insurance brokers. Most of the underwriting and enrolling of the contractors remains with the brokers. They can computerize routine information and produce reports that are useful to the contracting officers, safety and claims personnel, the project managers and the risk management staff. They assist in the development of the project insurance manual; attend all preconstruction meetings; enroll new contractors/subcontractors; issue policies and certificates; monitor payroll reporting; re-evaluate the insurance limits; oversee claims administration; monitor and analyze the reserves; verify payroll/premium audits; and check ratio adjustments.

* Risk management staff. The insurance brokers cannot perform all the work. Particular informatin and coordination must remain within the organization. Some of the risk management assignments include: creating annual project goals; reviewing all requests for proposals, contracts, leases and agreements; defining basic coverage guidelines for each type of contract and the amount of insurance limits required for each job; approving the contractors' insurance certificates; periodically reviewing project blueprints to provide recommendations; identifying problem areas to the designers, architects, planners and engineers before and during construction; performing periodic site inspections; coordinating and develping the loss control program; and producing regular reports to update and inform management of the wrap-up program status, problems, and completed goals. With the volume of information and number of actors involved, regular communication is vital.

* Safety management. The long-range goal is to have all parties involved in the construction recognize the importance of a structured safety program. Some of the elements in an effective, comprehensive safety program are qualified safety personnel, a construction safety manual, an employee handbook, training for contractors and employees, informational materials such as orientation and operational safety videos, contractors' safety committee meetings, incentives and performance awards. Some type of on-site first aid facility is required as part of the Occupational Safety and Health Act. The contractors use the first aid facilities for minor injuries, eyewash/ examination, drug testing and return-to-work medical reviews. It is essential to perform regular safety inspections as construction activities can change on a daily basis. Safety personnel should file reports to indicate safety problems or violations that have been observed and offer recommendations to correct the hazard.

Effectiveness of the Wrap-up

The purpose of the Authority's program is to provide adequate insurance coverage by controlling claim costs and assuring that all eligible contractors are uniformly afforded a broadly structured insurance program, high limit protection and prompt claim service. At the time, it must demonstrate that the savings to the owner outweigh the administrative burden that has been transferred to the owner. The Authority's OCWIP works because the organization has been committed to the program.

After one year of operation, the Authority's wrap-up program had provided savings of more than $1 million on the workers' compensation premium--a figure high enough to justify the administrative expense for three years. The following factors demonstrate that the OCWIP is achieving its objectives:

* since is inception in February 1989, the OCWIP has covered more than 232 active projects and approximately 1,002 contractors, including 210 local disadvantaged business enterprises;

* the Authority has recouped more than $2.1 million in workers' compensation premiums in the first two program years as as result of less-than-expected losses;

* the program to date has reported 2,650,640 employee hours (the total number of hours worked on all projects) with only five lost-time injuries;

* the construction safety record after 31 months of operation has a loss-time injury rate of 0.9, well under the 6.4 national average; and

* the program is projected to save the Authority at least $15 million in premium reductions over the six to 10 years of the project.

Because of the OCWIP's success, construction projects contracted by the tenants now are included in the program, such as a $1.5 million food kitchen facility and other build-out renovations for various airlines. In each case the tenant will reimburse the Authority the estimated cost of its premium in the OCWIP.

Mary L. DeCampli-Stewart, ARM, has been the risk manager for the Authority since 1987, after having served as risk manager with the County of Henrico, Virginia, and as a police officer, safety and training officer, and the first risk manager for the City of Alexandria, Virginia. An instructor for Howard University, she was formerly national vice-president of the Public Risk and Insurance Management Association (PRIMA) and on Business Insurance's 1991 Risk Manager of the Year Honor Roll.
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Author:Decampli-Stewart, Mary L.
Publication:Government Finance Review
Date:Feb 1, 1992
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