Summer 2024 Issue

How Wrap-up Insurance Can Protect a Construction Project’s Bottom Line

By: James Pfeiffer
With wrap-ups, the project owner purchases the construction insurance directly rather than relying on the individual contractors performing the work. lamontak590623 via iStock/Getty Images Plus

Wrap-ups can help control costs, provide superior policy terms and conditions, and keep projects on schedule.

Like nearly everything else, insurance keeps getting more expensive. As contractors encounter these increased costs, they are being passed on to developers as line items in construction agreements, adding to the overall cost of building projects. At the same time, this arrangement provides developers with little control over the quality of the insurance coverage.

In other words, developers are paying higher building costs in exchange for a greater potential of encountering uncovered claims that can impact the balance sheet. That’s not a great trade-off.

Why does this happen? Construction agreements typically require the contractors performing the work to carry specific insurance coverages. The contractors comply with these requirements by purchasing the specified insurance or by using the coverages they already have in force to insure their overall operations.  

The problem with this arrangement for the developer or owner is a lack of control over what is purchased. Policies for general liability, excess liability, workers’ compensation and builder’s risk are among the easily recognizable insurance types likely to be included in construction agreements. These are not “off the shelf” products. A general liability policy purchased by one contractor can differ greatly from the policy bought by another contractor. There will be differences in policy limits, the exclusions present on the policy and the deductibles. There may be different carriers with separate claims adjusters and different price points. None of which the developer has input on unless they are reviewing each and every policy.

Because of this arrangement, it is also frequently unclear how much coverage a project actually has. The construction agreements in place with the builders on any project will have a list of insurance requirements, and contractors do their best to comply with them.

However, the policies they carry do not provide coverage on an unlimited basis; there’s a point at which an insurance policy will stop paying. The same contractor policy could be providing coverage for several different projects at the same time, and claims paid on behalf of one project could leave other projects without sufficient limits should more claims arise. That puts the owner at risk of having to finance losses themselves via their own insurance programs or their balance sheet. 

Often construction claims involve more than one contractor. Once the contractors’ insurance companies get involved, finger-pointing can lead to expensive litigation. Meanwhile, the project gets behind schedule, and these litigated matters remain open for several years.

Wrap-up Benefits

It is possible for developers to take control with an insurance product known as a wrap-up. Wrap-ups are controlled insurance programs for construction projects that allow the project owner to purchase the construction insurance directly rather than relying on the individual contractors performing the work. There are several advantages to doing this:

  • With a wrap-up, contractors will exclude the price of their own insurances from their contract prices. This results in direct savings for the project owner.
  • Contractors can only purchase coverage for themselves, so their buying power is limited. On the other hand, buying the insurance for the entire project as the project owner wields immense purchasing power with the carriers, opening the door to better pricing and superior policy terms and conditions.
  • A wrap-up provides dedicated policy limits for the project or set of projects for which it was placed. Unrelated claims don’t impact the policy and erode policy limits, giving peace of mind to the owner that protection for the work is always there.
  • Wrap-ups are designed to accommodate the risk of the project owner and all enrolled contractors with a single carrier. Having a single carrier handling the general liability losses for all parties involved in the project puts the responsibility on the carrier to resolve claims quickly, helping to keep the project on schedule.

Potential Challenges

While wrap-ups are a sound risk management tool, they are by no means a panacea. Not all projects and clients are the best fit. It is important to work with a broker or consultant who thoroughly understands wrap-ups to avoid or minimize the following pitfalls:

Wrap-ups have a reputation for being administratively burdensome. Contractor enrollments, insurance cost verifications, certificates of insurance, payroll and other document collection necessary to the smooth operation of a wrap-up program take time and resources. The brokerage and wrap-up administrator can make the process a breeze or a nightmare depending on their expert management or mismanagement; project owners should vet administrators thoroughly for their experience.

The upfront cost of deploying a wrap-up must be considered. When placing a wrap-up, the owner must pay the premium and post any necessary collateral themselves at the start of the project. Remember, however, that the owner pays the insurance premiums when there isn’t a wrap-up as well; they are just buried in the building costs brought by the individual contractors. Experienced wrap-up brokers will be able to secure various premium and financing options, allowing an owner to choose the one that best addresses their individual circumstances.

Claims handling is an important aspect of managing a wrap-up. These programs generally have large deductibles (typically between $100,000 and $500,000 per occurrence depending on project size) that the owner is responsible for funding. The cost of losses can quickly get out of control if claims are not effectively managed, thus eroding the savings hoped for by the owner. A quality wrap-up broker will have a claims team to advocate with the carriers on the owner’s behalf to help achieve the best results for the owner and the injured party.

Wrap-ups in Action

Wrap-ups can return millions to the project budget while simultaneously ensuring consistent and high-quality protection, just by taking control of the insurance.

For example, one recent project in Las Vegas utilizing a wrap-up and valued at approximately $1 billion includes hotel, convention and retail space. It is on track to achieve savings of approximately 1.5% of construction costs.  

Similarly, in the Northeast, a new hospital tower with an attached parking garage valued at $450 million is still under construction, but it is on track to return nearly 2% of construction costs to the project bottom line by using a wrap-up.

The savings for these two projects could be eroded by future claims of course, but if the construction, claims and wrap-up administration are managed well, the savings expectations should be met easily.

James Pfeiffer is director, wrap-ups for TSIB.

Steps for Placing a Wrap-up

Placing a wrap-up involves three steps:

  1. Consultation: To begin, consult with an insurance broker. They can explain how wrap-ups work and perform an analysis of any projects being considered for a wrap-up. This helps determine the financial feasibility of deploying a wrap-up on construction projects. Based on TSIB’s experience placing these programs since 2006, typical savings range from 1% to 4% of construction costs, depending on size/length of the project, scope of work, loss experience on the project, and other factors.
  2. Quotation: Once it’s determined that a wrap-up is right for the project, the broker collects data and builds a market submission to solicit quotes from insurance companies in the marketplace. This process can take anywhere from 45 to 90 days.
  3. Program placement: The broker will filter through the options, review them with the project owner and make recommendations so the owner can reach a final decision. The last step is to bind the insurance and begin enrolling projects in the new wrap-up insurance program.