Essentials: Wrap-Ups and Agent E&O Exposures

Insurance agents who write insurance coverage for subcontractors in the construction field need to be familiar with consolidated insurance programs (CIP). These type of programs are often labeled as “wrap-up” programs.

There are two types of CIPs that the agent must be generally familiar with. The first is an owner-controlled consolidated insurance plan (OCCIP). The second is a contractor-controlled consolidated insurance plan (CCCIP). These types of “wrap-up” programs bring together within one policy diverse entities working on a single construction project. Typical OCCIPs provide workers’ compensation/employer’s liability, general liability and builder’s risk coverage.

This article will focus on the general liability coverage which is provided by the OCCIP and whether it is as broad as is needed to replace the subcontractor’s existing liability policies for that project.

The most significant potential disadvantage of a wrap-up program is the potential gap in insurance coverage for client subcontractors. This is especially true because an increasing number of insurers are routinely using a wrap-up exclusion.

Typically, a project owner or general contractor will adopt a wrap-up program. A wrap-up can be used to control elements of risk on the project site through coordination among the property owner or developer, the construction manager (if utilized), the general contractor, and subcontractors. In some design build projects a wrap-up program may include architects and engineers. This is often seen when the entire project from its design plans up through final construction are administered by one entity.

It has been my experience that wrap-ups do not save subcontractors on insurance costs. The only concrete way to ensure adequate insurance coverage for the client subcontractor is when the insurance agent disregards the presence of the wrap-up program coverage and writes the subcontractor’s coverage as if no wrap up existed. This approach foregoes the theoretical cost savings of an OCCIP in favor of practical risk management through standard liability insurance already covering the client.

When a wrap-up insurance program is adopted, the owner/developer and/or general contractor will require the contract participants to factor into their bids a reduction in price under the theory that the contracting participants are covered by the wrap-up insurance policy. Therefore, the contract participants are told to eliminate from their bid allocated insurance costs. In theory, the owner/developer and/or general contractor acquires the wrap-up through discount purchasing and also avoids contractor markups on insurance costs in the bidding process. However, insurance agents need to be cautious in meeting the risk protection needs of their client subcontractors when those clients will be participating in a wrap-up program.

Although a client subcontractor may try to not enroll in an OCCIP and instead rely on its own liability insurance for the project, most OCCIPs have mandatory enrollment requirements. That means that the agent is likely to be faced with a coordination of benefits question.

The agent’s goal to analyze the wrap-up plan to determine if the coverage afforded is sufficient to replace the client subcontractors’ existing coverage for that project is key. In reviewing the wrap-up the agent must determine the scope of subcontractor participation. In some wrap-up programs coverage may only include subcontractors with contract values over a specified amount. The client subcontractor may not be aware of this. Subcontractors that furnish both materials and installation through their own subcontractors may not qualify for coverage under the wrap-up because these subcontractors may be designated as material suppliers, which typically are not covered.

OCCIPs do not provide coverage for claims for off-site work. Therefore, it is important to understand your client’s business. Does your client have a fabrication shop or infrastructure work on an adjacent site? Wrap-up coverage typically does not attach to the subcontractor’s offsite operations, including offsite work and transportation. Wrap-up coverage does not provide coverage for post-completion onsite work as well, which may include warranty work. The offsite work that is incidental to the project is typically covered by the subcontractor’s existing policies but will not be covered by most OCCIP programs. Therefore, the client subcontractor’s existing general liability coverage must remain to some extent for that project.

If the agent attempts to parse the exposure in order to maximize any cost savings that have already been factored into the client subcontractor’s bid, there is a real risk that there could be a gap of coverage. This could result in an errors and omissions claim for the agent if an uncovered exposure results in a claim. It is difficult for the agent to draw these fine lines in trying to secure the right scope of coverage for the client subcontractor in order to maximize insurance cost savings from participation in the OCCIP while simultaneously attempting to cover exposures without permitting gaps in necessary coverages.

The agent needs to know that the client subcontractor’s participation in a typical OCCIP arrangement will not eliminate contractual indemnity owed by the client to the property owner/developer and general contractor. This indemnity obligation is a covered “insured contract” under a CGL policy. If an OCCIP exclusion is used, this indemnity obligation becomes an uncovered exposure. In many instances the construction contracts on smaller projects still contain requirements for individualized liability coverage and the subcontractor is required to name the owner/developer and general contractors. In this situation, the agent must make sure there is no OCCIP exclusion on the subcontractors policy.

In typical OCCIP situations the scope of insurance coverage is summarized in a “OCCIP Manual.” This manual should be acquired by the insurance agent in those situations where the agent is going to permit OCCIP exclusions in the otherwise existing client subcontractor’s separate insurance program. In those situations where the client subcontractor does not qualify for OCCIP participation, notify the client subcontractor’s current insurer so that any OCCIP exclusion is rendered inoperable for that particular OCCIP controlled project.

The insurance agent should review the OCCIP coverage to determine whether it is as broad as the contractor’s existing policies. As an example, not all OCCIP programs have umbrella liability coverage for enrolled contractors.
In the typical contractor setting, individual contractors and tiers and subcontractors provide the general contractor with certificates of insurance in accordance with the contract insurance coverage requirements. However, actual coverage may be inadequate because the limits of the existing policies may have been depleted by claims that have been paid out regarding the subject project.

An OCCIP policy provides a “composite” aggregate that combines both operations losses and completed operations losses under one aggregate limit. Under this type of approach an OCCIP’s policy limit may be exhausted by a single bodily injury claim during the construction operations phase. If this were to occur there would be no policy limits left available for other claims. Typically, what occurs is that an employee, who could not bring suit against his own employer due to worker’s compensation exclusivity, will bring a suit against the project owner or general contractor for injuries sustained while working on the project. These type of claims become transferred back to the subcontractor due to the indemnity requirements of the construction contract and the “insured contract” coverage in the commercial general liability policy. This will not have the same effect in an OCCIP because there is only one policy for all of the contractors and it is the only policy that is available for accident settlements.

Brain injuries, wrongful deaths, paralysis, all common general types of serious accidents on work sites jeopardize coverage availability. Thus, the question must be asked as to whether a residential OCCIP has “adequate limits.” The characteristics of each project may call for different OCCIP limits based upon type of construction, size of project, length of construction phases, the extent of construction (from demolition, conversion, seismic retrofitting, only exterior work), the number of projects that may be folded into the OCCIP, and the number of contractors named under the policy. The the greater the number of named insureds, the greater the potential for claims to erode the aggregate.

The marketplace is increasingly becoming populated with insurance companys offering wrap-up policies that have low aggregate limits, with some as low as $1 million. Allowing the client subcontractor’s individual policy to be excess to the available OCCIP coverage solves this problem.

Although OCCIPs typically include completed operations coverage for losses, there is typically a specified time period limitation, i.e., two- to five-year tail after project completion. Therefore the contractor’s exposure is likely to continue for a longer period of time. Thus, whenever possible, a contractor should endorse its own general liability policy to include any exposures beyond the OCCIP period.

At a minimum, the agent should remove from the client subcontractor policy any wrap-up exclusion endorsement from their client’s CGL policy. It is best to get confirmation from the insurance company’s underwriting department that the client subcontractor’s individual coverage will be excess whenever the client is involved with an OCCIP project. This is required so that the CGL policy will apply as excess insurance coverage over the OCCIP provided policy.

Plitt is a licensed insurance agent and an attorney with the Phoenix law firm of Kunz Plitt Hyland Demlong & Kleifield practicing in the field of insurance law. Phone: 602-331-4600. His column, Essentials, appears from time to time on www.ClaimsJournal.com and www.InsuranceJournal.com.