"It's A Wrap!" Insuring Construction Projects Through OCIPs and CCIPs, Part I, Insurance Policyholder Advocate
Part 1:The Nature of a Wrap Up Program
The traditional mechanism to insure construction projects is to have the construction participants – such as the general contractor, the subcontractors, and the design professionals – furnish their own corporate or practice insurance to protect against project risks. Typically, each participant would include the cost of its insurance, plus a mark-up, in its bid. The breadth of that insurance would be left to each participant to arrange, though generally subject to certain contractual requirements as to the type and amounts of the various coverages. This traditional approach is not without limitations and risks.
Consequently, large construction or infrastructure projects, typically in excess of $100 million, are more and more frequently insured under a Controlled Insurance Program ("CIP"), colloquially referred to as a "wrap up" program. Under a CIP, one of the participants in the project controls the procurement of insurance for all or the majority of the construction participants. If the controlling entity is the project owner, the coverage is referred to as an owner-controlled insurance program or "OCIP."If the controlling entity is the general contractor, the coverage is referred to as a contractor-controlled insurance program or "CCIP."(The project could be insured in a hybrid manner or "Co-CIP".)
Whether the wrap up program is carried out through an OCIP or a CCIP, a unified insurance program is wrapped around the entire project, protecting – as insureds – the project owner or developer, the general contractor, and the subcontractors. Coverage is sometimes extended to construction managers, private inspectors, or key material suppliers, depending on the nature of the project. The program usually includes commercial general liability, business auto liability, and workers compensation coverages. Professional liability (errors and omissions) coverage can also be procured on a wrap up basis, insuring the architects, engineers, and other design professionals on the project. Like the traditional approach, wrap up programs are usually structured with both primary and excess layers.
Whether a project is insured in the traditional manner or with a wrap up program, the owner or developer will typically end up footing the cost of the project insurance. Where a wrap up is in place, the participants often either submit bids that exclude the cost of insurance, or include the cost of insurance in their bids subject to a later deductive change. A wrap up "administrator," frequently the insurance broker, administers the program, which may include educating the participants as to how the wrap up program works, ensuring proper enrollment of the participants into the program, and determining payment adjustments to properly account for the cost of insurance.
There is no standard wrap up policy that can be taken off the shelf and used for every project. While coverage under a wrap up program may borrow from commonly used insurance forms or provisions (such as ISO's CG 00 01), the coverage terms and conditions can be as varied as the nature and requirements of the project and its participants, as well as the risk appetite of the wrap up insurer and the entity sponsoring the wrap up.
The wrap up sponsor – whether the owner under an OCIP or the general contractor under a CCIP – has an incentive to obtain the best coverage (that is financially feasible) for the project and its participants, since the sponsor will be insured under that policy and may very well find itself the beneficiary of the coverage it procured. Despite this incentive, participants frequently review the wrap up policy language or binder to ensure that it affords sufficient protection for their particular needs, since different participants may face different risks based on their respective roles on the project. For example, the project risks faced by a grading contractor may differ significantly from the risks faced by a crane operator.
A participant concerned about gaps between its individual risk profile on the project and the wrap up coverage could seek to include certain insurance requirements during the contracting phase. In addition, that concerned participant could, for a premium, seek to have its corporate or individual insurance policy endorsed to provide excess and difference-in-conditions (DIC) coverage for the wrapped project. If obtained, this would have the effect of (a) adding the policy limits of the participant's individual policy on top of the wrap up policy's limits, and (b) providing primary "gap filler" coverage for risks covered by the individual policy but not covered by the wrap up policy. If this avenue is pursued, the policy should specify that this excess/DIC endorsement governs any coverage exclusion in the individual policy for projects insured under a wrap up program.
Having addressed the nature of a wrap up program, Part 2 will address the pros and cons of using a wrap up program. Part 3 will address several key issues that can arise under a wrap up program.
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