Construction insurance wrap-up programs: big savings, but not for everybody.

• Author: Decampli-Stewart, Mary L.

The Metropolitan Washington Airports Authority (Authority) began its $1.6 billion Capital Development Program in 1988 to rehabiliate Washington National Airport and expand the facilities at Washington Dulles International Airport. The capital development program was expected to span six to 10 years and include about 150 specific projects at the airports using well over 1,000 contractors. By September of 1991, the Authority had begun 129 projects and enrolle more than 1,000 contractors.

To insure the construction exposures of this myriad of projects, the Authority's Risk Management Branch researched a number of options before recommeding the use of a wrap-up insurance program as the most efficient method. In 1988, the Authority designed an Owner Controlled Wrap-up Insurance Program (OCWIP) to provide both the primary and umbrella insurance for its airport construction, and the Board of Directors and approved its adoption.

Wrap-up insurance programs are not approriate for every construction project. Insurance brokers believe the hard construction costs must generate, on an average, a premium volume of at least $1 million to attract insurance companies that are qualified to handle this type of program. A construction project must be large enough, as well, to justify and full-time attention and administrative effort required to make the program work. a construction program of less than $50 million would probably nto be a good candidate for wrap-up insurance. An owner-controlled program of any type, however, can provide a lower net cost, more comprehensive coverage and the ability to reduce on-the-job accidents through a strong safety program. The safety features identified in this article can be used in any construction program.

What Is a Wrap-up?

Wrap-ups are not new. They were first used during and after World War II under the War Projects Rating Plan, and later by the National Defendse Projects Rating Plan, which still requires contractors to obtain certain types of insurance coverage. Quasifederal agencies began using wrap-ups in 1966 for the construction of the John F. Kennedy Center for the Performing Arts. Today the concept has become common-place, and it is easy to identify a variety of organizations using this approach to insure large construction projects.

Traditionally, contractors hired by a business or government purchase their own insurance coverage for all the job-site activities. The prime contractor is asked to provide an indemnification clause, minimum insurance requirements and additional insured status or an Owner's & Contractor Protective (OCP) policy. The cost associated with these coverages is then included in their bids and is actually paid by the owner.

There are several problems associated with the approach outlined above:

1) courts have limited, and even erased, the value of indemnification language;

2) indemnification is only as good as the indemnitor's financial strength and, given the current economic condition of most contractors, their individual strength is diminishing;

3) it is difficult to obtain and evaluate every contractor's insurance certificates;

4) it is hard to remove the coverage "gaps" not provided in the contractor's policies; and

5) often small businesses cannot meet the minimum insurance limits required by the owner.

An alternative is for the owner to cover all parties related to the construction through a war-up program. In this approach, the owner purchases all of the on-site insurance to cover every enrolled contractor in one policy, called project insurance. Project insurance can have higher limits, broader coverages, and better control over the safety and claims administration for a lower premium. The wrap-up approach removes the contractor's obligation to purchase adequate and appropriate insurance, and all parties benefit throughout the construction project.

The Authority's Wrap-up Program

For the Metropolitan Washington Airports Authority, the decision to implement a wrap-up program was the easiest part of the process. The decision to create

Exhibit 1 METROPOLITAN WASHINGTON AIRPORTS AUTHORITY WRAP-UP INSURANCE PROGRAM SUMMARY OF WORKERS' COMPENSATION INCURRED RETROSPECTIVELY RATED PREMIUMS Work Comp Standard Audit and Policy Premium Paid and Retro Retro Period Deposit Reserved Premium Return 2/1/89-90 1,637,266 225,331 * 329,941 1,307,325 2/1/90-91 2,496,000 424,730 ** 675,576 1,821,424 2/1/91-92 915,750 118,394 *** TBD TBD * Valued as of: 8/31/90 ** Valued as of: 8/31/91 *** Valued as of:9/30/91 TBD: To Be Determined a wrap-up was based on three main reasons: to maintain control, to reduce the cost to an affordable price and to sustain good public relations. Control was the most important element, with projects involving hundreds of nonaviation employees working beside a Boeing 747 or a contractor boring a utility trench under an active taxiway. Maintaining control over the safety aspects of the construction allows the Authority to institute and enforce standards in all areas of the airport. The following description outline some of the program advantages.

Control. a wrap-up program can accomplish several objectives.

* Standardize the contractor's insurance policies. Wrap-ups eliminate conflicting insurance provisions, remove overlapping policies and close coverage "gaps." They also provide the flexibility to write special coverages to meet specific needs. In the case of the Authority, the necessary aviation exposures were added to the construction liability policies.

* Obtain substantially higher liability limits. Contractors usually purchase $2-$5 million in general liability coverage. These limits would not adequately pay for most types of...