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Understanding how insurance cost savings work on a Controlled Insurance Program (CIP), also known as a Wrap-Up, and who retains the risk/reward is important. There are several varieties of CIPs which differ by the coverages included as well as entities that purchase them (owner vs contractor). However, the savings potential is differentiated by one major factor; is the Wrap-Up in question providing two-lines of coverage or a single-line?
A two-line Wrap-Up usually includes Workers’ Compensation (WC) and General Liability (GL). With this type, insurance cost savings are realized in 2 ways:
- The direct cost of the Wrap-Up insurance vs the cost of traditional insurance. Traditional insurance is defined as the cost of contractors bringing their own insurance to the project. Wrap-Up insurance is typically less expensive than traditional.
- The loss funding required for large deductible programs can be recouped and seen as an avoided cost that goes back to the bottom line of the project if losses are managed effectively.
As Wrap-Up deductibles are typically $250K and higher, loss sensitive programs are a commonly used risk financing vehicle in the market. These plans include a fixed premium expense and a deductible to be paid for each loss. All loss sensitive options will have a loss aggregate so a maximum cost can be budgeted. The Wrap-Up sponsor pays the fixed costs and chooses to pre-fund or collateralize the cost for losses within the program deductible.
If the program is placed as an OCIP (Owner Controlled Insurance Program), the project owner and their broker retain ultimate responsibility of the program design and administration including:
- Selection of the carrier
- Negotiation of pricing
- Terms and conditions
- Enrolling contractors
- Management of claims
- Premium payments
- Collateral obligation
The owner will recognize any cost savings or overrun at program close. In the case of an OCIP, the project owner will see the benefit of the cost savings in premium and the potential loss funding cost avoidance if losses are well managed.
If placed as a CCIP (Contractor Controlled Insurance Program), the general contractor will retain the financial risk/reward. It is possible for the general contractor and the project owner to share in the financial outcome of the loss funding component as they both have a role to play in safety, loss mitigation and claims management.
Single-Line Wrap-Up – Typically GL-Only
GL Only coverage is the most common single-line Wrap-Up and is typically used on projects that have unique risks and with sponsors not interested in the financial risk/reward outcome of a loss sensitive program. This is due to the fact that GL Only Wrap-Ups are generally written with the Excess and Surplus Lines carriers (non-admitted) and have very low deductibles; in many cases as low as $50,000.
A notable exception to this is any Wrap-Up placed in New York (NY) where the GL deductibles rarely get below $3,000,000 per occurrence. They are unfeasible on projects less than $500,000,000 in construction volume since NY Wrap-Ups have very high minimum premiums and equally high collateral requirements compared to other states.
For non-New York Wrap-Ups, the loss funding cost avoidance seen in two-line Wrap-Ups does not apply for single-line Wrap-Ups, as small deductible programs do not have loss funding or collateral obligations tied to them.
Therefore, the only savings potential on a single-line Wrap-Up would be the direct insurance cost comparison between the single-line Wrap-Up and the cost of the traditional GL insurance brought to the project by the subcontractors. As with two-line Wrap-Ups, the sponsor of the insurance program (owner or general contractor) is the entity that will enjoy the cost savings should there be any.
As a highly specialized insurance services firm, TSIB focuses on the construction industry and Wrap-Up placement. TSIB has the skills, personnel, market reputation, and experience to evaluate all Wrap-Up options and ultimately implement the insurance solution that best meets the needs of our client and project stakeholders. Reach out to TSIB to learn more!
TSIB’s Risk Consultants are currently servicing the following locations:
Texas: Austin, San Antonio, Houston, Dallas