In the construction industry, owner-controlled insurance programs (OCIPs) and contractor-controlled insurance programs (CCIP), also referred to as “wrap-ups,” commonly are used to provide insurance coverage for the owner, general contractor and subcontractors on a project. Part I previously covered the basics and implementation of wrap-ups.
PROTECTING INTERESTS IN A WRAP-UP PROGRAM
Regardless of whether an owner is implementing an OCIP, a general contractor instituting a CCIP or a subcontractor enrolled in an OCIP/CCIP, it is important to be aware of the limitations that wrap-up coverage affords. A party can better protect its interests by being adequately informed. Because these insurance programs are fairly sophisticated, it is advisable to retain the assistance of an insurance broker that specializes in the purchase and implementation of wrap-up insurance programs.
1. Have the broker read and understand the insurance requirements for the project. This includes the insurance specifications for the project as a whole, as well as those that individuals are required to maintain. The project contract will list the insurance specifications for the project participants. Participation in an OCIP/CCIP may not satisfy all of the contractual insurance requirements (e.g., offsite liability). It is important to know what types and amounts of insurance coverage is required to maintain on a project (both with or without an OCIP/CCIP being implemented on that project) and ensure compliance with those requirements. A broker experienced in construction insurance placements should be able to identify the insurance requirements for a project and ensure that involvement in the wrap-up program for that project, whether as a sponsor or participant, complies with contractual insurance obligations.
2. Have the broker read and understand the OCIP/CCIP manual and insurance policies. This will allow the broker to assess and advise clients as to the different types of coverages that are and are not afforded under the wrap-up. By comparing the coverage provided under the OCIP/CCIP with the insurance specifications set forth in the construction contract, the broker and client can determine whether additional insurance is needed outside of the wrap-up program. Notably, a wrap-up may not provide coverage for all types of claims. Often, builder’s risk coverage is not included in an OCIP or a CCIP. Also, wrap-ups typically do not provide coverage for activities occurring off the construction site, even though they may be related to the project.
3. Does the wrap-up program have sufficient policy limits? The construction contract will specify the amount of insurance that is required to be maintained on the project. Typically, the party procuring the wrap-up policies (either the owner or the general contractor) will attempt to obtain the highest policy limits that are financially feasible. Since wrap-up limits are shared by all enrolled participants on a project, consult with the broker to assess whether those limits are sufficient to adequately protect interests. If not, individual coverage that applies excess of the wrap-up program’s policy limits may be needed.
Corporate policies may contain wrap-up exclusions that exclude coverage for claims related to or arising from a project subject to an OCIP/CCIP, except to the extent that specifically identified projects are endorsed with excess of wrap-up coverage. If you decide that you want your corporate policy limits to apply excess of the wrap-up policy limits on a particular project, then have the policy endorsed accordingly.
4. When does coverage under the wrap-up program begin? Once a contractor or subcontractor begins work on a project prior to being enrolled in the OCIP/CCIP, then they likely are not covered under the OCIP/CCIP for claims arising out of work performed prior to being fully enrolled in the wrap-up program. In this event, it is important to make sure they are coverage under their individual corporate policies during the pre-enrollment period. This may require a modification to the standard wrap-up exclusion discussed above. Specifically, those exclusions are interpreted as barring coverage for any claims related to a project for which a wrap-up program has been implemented even if those claims relate to work performed prior to the inception of the wrap-up and/or enrollment therein. In consultation with a broker, determine the necessary modifications that must be made to the wrap-up exclusion in the corporate liability policies in order to prevent a situation where claims related to work on a project are not covered by either corporate policies or the OCIP/CCIP.
5. Do individual corporate policies provide coverage for project-related offsite activities? Depending on the wrap-up program’s policy provisions, any project-related work or activities occurring off the construction site may not be covered under the OCIP/CCIP. If this is the case, then, based on the anticipated level of offsite project-related activities, it might be prudent to obtain offsite coverage under corporate liability policies through a modification of the wrap-up exclusion endorsement.
6. Is the wrap-up being implemented mid-stream? If so, is there protection for completed operations claims arising from work performed prior to implementation of the OCIP/CCIP? Although OCIPs/CCIPs generally are implemented prior to the commencement of the construction project, a wrap-up implemented mid-stream (after the start of the project), while complicated, nevertheless may be feasible. If involved in a mid-stream wrap-up, be cognizant of the possibility that work performed prior to the implementation of the wrap-up could give rise to a claim after the completion of the project.
Typically, wrap-up programs will provide completed operations coverage for project-related claims that arise from work performed after the implementation of the OCIP/CCIP – but not before. At the same time, individual corporate policies may exclude claims for any work performed in connection with a project on which a wrap-up has been implemented – regardless of whether that work was performed prior to or after the implementation of the OCIP/CCIP.
In order to ensure adequate completed operations coverage for project-related work performed prior to the implementation of an OCIP/CCIP that is commenced mid-stream, the broker should confirm that the corporate program will provide coverage for completed operations claims arising from work performed prior to the implementation of the project’s wrap-up program.
A wrap-up program has a number of potential benefits; however, these policies may not provide complete or iron-clad coverage for enrolled participants. Whether a sponsor or a participant in an OCIP/CCIP, protect interests by working with an insurance broker or risk management consultant to conduct appropriate due diligence regarding:
• the insurance requirements of the construction project;
• the scope and limits of coverage under the wrap-up program; and
• the scope and limits of coverage under the corporate liability policies.
Once properly advised as to the parameters of what is covered, contractors and subcontractors can better assess what, if any, additional coverage they may need depending on the type of project-related work and activities in which they will be engaged.
While wrap-up insurance programs are being utilized with increased frequency, the interplay between the wrap-up program’s insurance policies, the individual corporate insurance policies of the enrolled participants and the project contract’s insurance specifications, may give rise to complexities. This article provides tips on how to avoid potential pitfalls, but when encountering a coverage dispute in connection with a wrap-up program, consult and retain experienced insurance coverage counsel to represent the company.