Financing a huge success with an insurance wrap-up.

• Author: Johnson, Julian A.

The following article is adapted from the October 1997 issue of Public Risk, the membership magazine of the Public Risk Management Association, and reprinted with permission.

On July 29, 1997, the city manager of San Diego presented a check for $1,400,000 from its insurance company to the mayor and city council. The sum represented the amount of money the city saved in insuring the construction of various sewage treatment facilities - a public works project costing more than one billion dollars and extending over six years.

By the time this project is complete, it is possible that the city will have saved $22 million in insurance costs. The plan that makes these cost savings possible has three phases, which are described in this article: 1) negotiating a wrap-up policy for the project, 2) selecting a loss-sensitive insurance policy, and 3) supervising a safety review process that minimized risks and work-site injuries.

New Law for Wrap-ups

In most major construction projects, the general contractors and all subcontractors carry their own insurance policies. But a wrap-up insurance program allows the owner of the construction project to consolidate and control all the project's insurance in one package. Wrap-ups save money in two ways. First, they eliminate redundant or overlapping coverage and avoid possible coverage gaps. Second, because of the size of the project and the amount of money involved, they give the project owner more leverage in negotiating the lowest price possible for the policies.

The claims and insurance manager for San Diego learned at a 1991 conference of the Public Risk Management Association (PRIMA) that employing wrap-up policies could save the city a great deal of money, but immediately hit a road block when he tried to pursue such a plan. Although wrap-ups have been utilized by private contractors for decades, the state of California prohibited public agencies from requiring contractors to procure surety bonds or contracts of an insurance company selected by the agency involved. To get past this hurdle, he joined with the risk managers of Los Angeles, San Francisco, and Fresno to lobby the state legislature and convince them of the benefits of wrap-up policies.

The result was a law, signed in October 1995, allowing public works projects costing $125 million or more to be insured by a public entity in a wrap-up insurance program. The provisions of the law enabled the City of San Diego to create a master wrap-up for...