Chapter 15g Construction Wrap

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 15G Construction Wrap

Lyndon F. Bittle

I. Construction Wrap

A. Purposes and General Structure

"Construction wrap" or "wrap-up" policies are becoming more common in large construction projects. A wrap-up generally takes one of two forms: an Owner Controlled Insurance Program (OCIP) when it is sponsored by the project owner/ developer or a Contractor Controlled Insurance Program (CCIP) when sponsored by the general contractor, a construction manager, or a design-build firm. The basic concept is simple:

Under an OCIP, the owner of a large construction project purchases and provides for consolidated "on-site" public liability and workers' compensation insurance coverage during the construction period. The owner is the "insured" and policy coverage is extended to all who work "on-site" under a contract with the owner.¹

This explanation also applies to CCIPs if "general contractor" is substituted for "owner." As for the purpose:

The purpose underlying an OCIP [or a CCIP, as the case may be] is to "make the insurance programs used primarily for construction projects more equitable, uniform and efficient. OCIPs [and CCIPs] eliminate the costs of overlapping coverage and delays caused by coverage or other disputes between the parties involved on a project and, at the same time, protect all the contracting parties by bringing the risk of loss from the project within the insurance coverage of the OCIP [or CCIP].²

A wrap-up differs from the traditional approach to insurance coverage for a construction program in that the traditional approach requires the project owner, the general contractor, and each subcontractor to provide their own worker's compensation and general liability coverage. General contractors and subcontractors include the cost of insurance coverage in their bids and thus pass the cost on to the owner. With a wrap-up, on the other hand, one party (the owner or the general contractor) procures all insurance on behalf of itself and other parties involved in the construction project. When a wrap-up program is being instituted, contractor bids should not include the cost of insurance.

A wrap-up will typically include the following types of insurance: builder's risk, workers' compensation and employer liability, commercial general liability, and umbrella or excess liability. Other types of coverage that may be provided in a wrap-up program include professional liability (E&O) coverage and environmental liability coverage.

1. Cost Savings?

Ideally, a wrap-up program provides cost savings for all of the parties involved in a construction project because it allows the program sponsor (the owner or general contractor), as the purchaser of multiple polices, to negotiate lower premiums. Furthermore, the program administrator will have to deal with only one insurer, meaning that the time and expense of figuring out multiple policies and their various reporting and payment requirements are eliminated. Also gone, ideally, are differing coverage limits for otherwise "equal" contractors and differing insurer-imposed safety requirements.

Even though the use of a wrap-up program can lead to cost savings by eliminating overlapping coverage and by streamlining policy procurement and claims handling, wrap-ups give rise to certain expenses of their own, even if perfectly administered. These can include costs associated with taxes, escrow funds, collateral requirements, and administrative fees. Wrap-ups also require a relatively large initial outlay of cash. Perhaps most importantly, realization of the potential cost savings of a wrap-up program requires that the program's administrator exercise great vigilance and attention to detail in order to properly coordinate the program's many moving parts. This can include not only careful coordination of policies and their coverages, but also coordination among contractors to ensure that they are aware of and follow necessary safety and claims-handling protocols. The wrap-up's promise of cost savings may be undermined by the difficulty of effectively coordinating the disparate parts of the program, the difficulty of foreseeing the many potential conflicts of the specific language of the constituent policies and parts of the program, and by the tensions inherent in a program that aims to cover so many parties whose interests may be in competition or direct conflict.

2. Improved Safety or Risk Management?

Another potential advantage of a wrap-up is the ability it provides to coordinate site safety and risk management. The named insured in a wrap-up program will be responsible for overseeing and coordinating safety protocols on site and would, therefore, presumably be liable for violations of safety rules. When accidents happen, however, insurers may argue otherwise. For example, in Aguirre v. Turner Construction Co.,³ a subcontractor's employee fell from scaffolding during the renovation of Chicago's Soldier Field. The case is of interest not only for its legal holdings but also because of the description it gives of a wrap-up safety program and the problems that can arise. The Soldier Field project was carried out under a CCIP controlled and overseen by a construction manager, TBMK. The injured employee sued TBMK, alleging liability under section 414 of The Restatement (Second) of Torts, which states:

One who entrusts work to an independent contractor, but who retains the control of any part of the work, is subject to liability for physical harm to others for whose safety the employer owes a duty to exercise reasonable care, which is caused by his failure to exercise his control with reasonable care.⁴

This theory thus permits direct liability against a general contractor who retains sufficient control over a subcontractor.

The contract between TBMK and the subcontractor stated that the subcontractor would be "solely responsible for the safety of [its] employees," but other evidence indicated the construction manager's intent to oversee safety. Such evidence included TBMK's promulgation of a 125-page safety program document explaining the rules that all subcontractors were required to follow, its hiring of a safety coordinator, and its holding of monthly safety meetings which all subcontractors were required to attend.⁵ TBMK personnel walked the site daily to monitor compliance with the safety program and had at times stopped subcontractors' work because of failure to comply with safety requirements.⁶ In addition, subcontractors were required to prepare their own site-specific safety programs. The district court granted summary judgment to the defendants, concluding that although TBMK had exercised authority over worksite safety, it owed no duty of care to the subcontractor because it "did not have control of the incidental details of [the subcontractor's] work or its workers' safety."⁷

The Seventh Circuit concluded that under Illinois law, the question whether TBMK retained a level of control sufficient to give rise to a duty to exercise reasonable care was a question of law.⁸ The court concluded that the contractual assignment of oversight of employee safety to the subcontractor did not control because TBMK's extensive safety oversight and requirements affected the means and methods by which the subcontractor sought to ensure the safety of its own employees.⁹ Therefore, TBMK did have a duty of reasonable care and liability would be a question for the jury.¹⁰

Whether the use of a wrap-up improves risk management is open to question. On the one hand, a wrap-up can facilitate implementation of a unified and coordinated safety program that can improve safety on site. The program sponsor, who pays the premiums, will have a strong interest in ensuring site safety because the sponsor may be exposed to premium increases if losses exceed estimates. Such exposure may lead the program sponsor to take measures it otherwise might not in order to ensure safety. Conversely, when the cost of insurance premiums and the risk of loss are shifted away from subcontractors to the general contractor in a CCIP, or away from general and subcontractors in an OCIP, those parties may have less incentive to ensure safety than they might if they were purchasing their own insurance.

3. Workers' Compensation Issues

One area of uncertainty for those involved with wraps-up is the scope and effect of workers' compensation coverage. If, for example, a subcontractor's employee is injured on site, can that employee sue the owner or general contractor, or are those entities entitled to the protection of the workers'...