Wrap-up insurance coverage, commonly known as controlled insurance programs (CIPs), is a type of insurance policy used in construction projects where the developer, general contractor, and all of the subcontractors became named insureds under a single general liability policy. Under this type of policy, one party usually procures insurance on behalf of other parties working on the project. There are two types of CIPs – owner-controlled insurance programs (OCIPs) and contractor-controlled insurance programs (CCIPs). Use of these policies has expanded over the last several years to include both residential and commercial projects.
The popularity of CIP policies can be attributed to the potential cost savings. There is strength in numbers with regards to purchasing these policies, since participants can work together to obtain a single policy at a better rate. The mass buying power of CIPs provide better pricing of coverage than can be obtained by owners paying contractors and subcontractors to provide coverage under separate conventional policies. CIPs create savings by eliminating overlapping and duplicating coverages.
For owners specifically, a wrap-up program can provide certainty of protection and a reduction of gaps in coverage. Owners can buy a single policy with dedicated limits that cannot be depleted by claims against contractors and subcontractors on other projects. The owner is also not exposed to the risk that one or more of the insurance carriers for its contractor and subcontractors becomes insolvent. For contractors, a CIP can provide broader coverage because it eliminates certain exclusions found in general liability policies.
Another benefit to CIPs is that they centralize administrative and claims processing functions to provide better efficiency. One insurance carrier covers the loss, so the cost of resolving cross-claims among separately insured parties can be avoided. A single administrator handles all claims and one legal counsel represents all of the parties. This centralization in turn reduces legal, expert, and litigation costs.
On the flip-side, there are also factors which can hinder the actual savings recognized through use of a wrap-up policy. One disadvantage of CIPs relates to the centralized administration. Although the wrap-up carrier can theoretically represent all the parties jointly, conflicts can arise if the carrier reserves its rights to deny liability for the outcome of the suit, or if the suit involves both covered and non-covered claims. As a protection, participants in a CIP should maintain separate policies to cover operations not covered by wrap-up insurance.
Also in relation to non-covered losses, the proper drafting of wrap-up plan documents is key. If the CIP is not described appropriately in the contract documents, contractors and subcontractors may make claims against the owner for non-covered losses or for misrepresentation. The documents should also be drafted to implement a fair and reasonable risk allocation between owners, general contractors, and subcontractors.
Although a CIP can provide broader coverage for owners than they would be able to obtain under a general liability policy, it carries risks as well. CIPs are a new form of policy and not yet well understood by many insurance brokers. Participants should use an experienced broker who has previously used wrap-up coverage on a significant number of construction projects. An insurance broker seasoned in this area will provide knowledge of the critical details of this type of coverage in order to maximize the advantages of a CIP.
Joseph Cleves is a Cincinnati attorney practicing at Dressman Benzinger LaVelle psc.