Mega Mailbag

Posted March 27th, 2013 by Steven Petonic and filed in 2013, Issue 1: Spring Newsletter

Why is it necessary for contractors to provide their own certificate of insurance if they are enrolled into a wrap-up? – Linda, Atlanta, GA

First, it should be noted that being enrolled in a wrap-up does not mean that all of a contractor’s potential exposures are covered.  The exposures not covered by a wrap-up may include automobile liability, pollution liability, professional liability, or property and almost always includes Workers’ Compensation and General Liability exposures away from the project site because the wrap-up coverage is specific to the defined site.  The contractor must provide evidence that these exposures are covered through their own risk transfer methods. Also, presenting a certificate of insurance identifying these coverages provides the wrap-up sponsor evidence of the contractors insurability, peace of mind that coverage exists should the contractor incur a claim outside the project site and/or wrap-up coverages, and additional protection by means of required endorsements such as Additional Insured status or Waiver of Subrogation language.

What happens if, in an attempt to lower their insurance credit, a contractor underestimate their payroll? - Matthew, Chicago, IL

Matthew, excellent question!  From time to time, we do see contractors underestimating their payroll estimates in attempt to lower their initial insurance credit deduct. With our historical data from previous projects, we are able to predict an accurate payroll estimate based on their type of work, workers’ compensation classification, and the state that they will be working.  Once we can predict an accurate payroll estimate, we will revise their insurance calculation and request for signature to ensure that a fair and accurate credit is agreed upon. If it is a deduct program (and not in New York), it is important for the contractor to provide an accurate payroll estimate, so they are not responsible for a large additional wrap-up deduct at the end of their work.

How to Handle Delays on Your Wrap-Up

The sun is now shining and flowers are blooming, but this wasn’t the case a few months ago. This year, many of us experienced a rather overextended winter season. Snow delays not only left thousands of employees home from work, but also caused major holdups at construction sites around the country.  Despite this, bad weather is not the only reason construction projects can get delayed. Builders permit issues, accidents and injuries, changes of work scope by the owner, and subcontractor delivery issues can also affect the construction schedule and greatly impact your wrap-up program. Delays can cause the construction of the project to last far beyond the term of the wrap-up policy. In such instances, the sponsor will have to decide whether to extend the wrap-up program or let it expire even though the project may be incomplete. Unfortunately, each option has its disadvantages.

Leaving the Wrap-Up Program Unadjusted

First, let’s examine what happens when a wrap-up policy is not extended to cover the entire term of the project.

Before the wrap-up expires, most of the trade contractors, with the exception of excluded contractors, are provided insurance coverage for their work at the project through the wrap-up.  Once the wrap-up has expired, and this coverage is no longer available, contractors will have to supply their own insurance coverage.  Not only will the transition from wrap-up coverage to traditional coverage cause onerous administrative issues for all parties, but it also has the potential to create significant financial problems for the sponsor and possibly the trade contractors. 

The sponsor should already have proof of coverage from all trade contractors (enrolled and excluded) on file.  Typically, enrolled contractors only provide proof of off-site coverage because all onsite activities are covered by the wrap-up.  Even though the sponsor is able to obtain pertinent information about coverages (limits, insurer, etc.) from the off-site certificate, the offsite coverage provided excludes any activities that are covered by the wrap-up program.

Here is a sample description: (“THE COVERAGES AND LIMITS NOTED ABOVE ARE PRIMARY AT ALL TIMES WITH THE EXCEPTION OF WORKERS’ COMPENSATION AND GENERAL LIABILITY. WORKERS’ COMPENSATION AND GENERAL LIABILITY COVERAGE ARE PRIMARY FOR OFF-SITE OPERATIONS ONLY AS ON-SITE COVERAGE IS PROVIDED BY THE CCIP/OCIP”). 

At this point, the sponsor becomes responsible for gathering a new certificate of insurance providing coverage for all onsite activities from previously enrolled contractors. Gathering this proof of coverage is not always an easy task.  When contractors enroll into the wrap-up, their policies are often endorsed with a wrap-up exclusion.  This endorsement excludes all work performed at the wrap-up project site from the contractor’s own policies.  Consequently, the contractors do not get charged a premium for this work. Where there is no premium, there is also no coverage.  In essence, these previously enrolled contractors are working on a project site which no longer provides insurance coverage, and coverage for onsite activities from their own policies is specifically excluded. 

Of course, the contractor’s carrier may agree to add onsite coverage back to the policies, but this coverage will not be free.  Accordingly, each contractor will expect reimbursement for costs associated with reacquiring their own insurance.  Depending on how the carrier decides to charge the contractor and, in turn, how the contractor decides to charge the sponsor, the overall price for these coverages will most likely far exceed what the sponsor would have incurred by extending the wrap-up program.

Keep in mind, even IF the contractor can obtain coverage and the sponsor can agree to a reasonable reimbursement, more often than not there will still be coverage issues, specifically pertaining to completed operations exposures.  The wrap-up policy states that completed operations coverage does not commence until the project is complete. The time between the end of the wrap-up program and the actual project completion falls in a very “gray area.” If a completed operations claim is filed, is it due to the work done throughout the wrap-up term or in the “gray area”?  In other words, where will the coverage come from? 

Extending the Wrap-Up Program

If you decide against the first option, the next alternative is to extend the term of the wrap-up so that it coincides with the completion of the project.  Although this solution will provide consistency in coverage, there are some drawbacks that must be addressed.

The primary wrap-up insurance carrier will usually agree to an extension as long as the program has performed well in regards to claims experience.  Since the primary policies are rated on exposure (either payroll or construction value), the carrier will most often receive an additional premium without any extra charges for the extension.  Some carriers may elect to charge a flat administration fee, but all in all the impact will be minimal.  The excess policies are a different story.  Most of these polices are flat rated based on the original exposure estimate, so the carrier will not receive an additional premium if the construction value and/or payroll exceeds the original estimates.  Instead, the carrier will usually charge a pro-rated premium for the extension based on the term.  For instance, if the original policy term was for 36 months, and the sponsor is requesting a 6 month extension, the excess carrier will require an additional premium equal to 1/6th (or 6/36) of the original premium. 

In addition to financial considerations, the remaining policy limits should be evaluated before making the decision to extend the wrap-up term.  Poor loss experience over the term of the project will erode the program limits, leaving a limited amount for the extension.  It should be noted that even if limits are reinstated annually during the regular policy term, they will NOT likely reinstate for the extension.  However, if the claim performance has been poor enough to cause concern over the adequacy of limits, then it is likely that the carriers will deny giving the extension.

The ability to extend the term of the wrap-up may be further complicated by the insurance market conditions.  When the availability of coverage declines, it becomes more difficult to entice the wrap-up’s primary and excess carriers to extend coverage.  The decrease in availability causes an increase in price.  Thus, if the markets are convinced to extend, it will likely be at a higher rate than what was applied to the original program.

Recommendations:

Understanding a project’s construction schedule is essential when developing a wrap-up insurance program.  It is imperative that you estimate the construction schedule as accurately as possible so that an extension is not needed down the road. CR Solutions always advises our clients to consider delays when selecting a policy period for your wrap-up:

“You never want to underestimate the construction schedule or policy period when buying a wrap-up. It is much easier to negotiate extensions on the primary program (since they are adjustable on CV or Payroll). The excess carriers rarely negotiate beyond a pro-rata premium. If the program has poor claims experience or the market condition has hardened, this will only exacerbate the situation and make the extension very expensive or possibly unattainable.”   - Paul Linssen, President, CR Solutions