Wrap-Up Construction Insurance in a COVID-19 Environment, Part One
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In an environment defined by uncertainty, we are all being challenged to think differently about risk. If we’ve learned anything from this COVID-19 pandemic, it’s that risk is always just around the corner and we can always be more prepared for what may happen next. The positive aspect of the experience is that we’re taking a renewed look at our business and finding ways to help us see beyond that corner, anticipate the unknown risk and plan accordingly.
Construction has always been known as one of the most challenging industries when it comes to risk management and safety, with the worst case scenarios devastating life and property. With COVID-19, construction projects are under even more daily stress, from making sure workers are healthy to continuing to meet schedule completions. Through it all, two factors remain certain: construction projects will continue and insurance will still be placed. But the big question for owners, developers and general contractors is how to protect themselves in this environment of uncertainty. In this article, we answer questions about wrap-up insurance to clarify why it’s such a safe bet in today’s COVID-19 environment.
What is a Wrap-up Insurance Program?
Wrap-up insurance programs are one of the most popular risk management tools used in construction today. These programs are utilized on every kind of project, including — but not limited to — residential buildings, stadium projects, large road and highway civil projects, and large industrial and energy facilities. The wrap-up approach to these projects provides owners, developers, general contractors (GC) and subcontractors with an ideal combination: better insurance coverage with enhanced cost savings.
In simple terms, a wrap-up insurance program consolidates insurance, claims and loss control (safety) into a single insurance policy for the benefit of all parties, which include the owner, GC and all the subcontractors working on a project site. With one policy (or set of policies) and a single dedicated limit of insurance, a wrap-up insurance program can ensure all parties involved in the project have the right coverage for the duration of construction.
What Are the Benefits of Participating in a Wrap-up Insurance Program During This Pandemic?
Other than basic benefits, the most significant advantage to utilizing a wrap-up insurance program is certainty of coverage. The owner or GC buys the coverage and the coverage is put in place for the duration of the project with coverage extension through the statute of repose. The beauty of the wrap-up approach is that the owner or GC doesn’t have to worry about exclusions that may surface in contractor policies or if coverage just becomes unavailable down the road. Essentially, you cover yourself for everything you need today and any risk that may be lurking around the corner.
Instead of an owner or a GC taking on the risk of the unknown at the time of renewal, they can purchase a wrap-up policy and know the coverage is in place and guaranteed. Knowing the cost and coverage helps to avoid unpleasant surprises, a huge benefit in an uncertain economy and insurance market. Now is the best time to take a look at wrap-ups simply because it can quantify the risk for your project and help you be more confident in your financial projections and final returns.
Can Wrap-ups Really Help Lower Insurance Cost?
It’s all about managing risk. Do we think coverage is going to be more expansive and easier to get? Do we see an end to the hardening market and a possibility that coverage will get cheaper? Most likely, no. Risk managers need to take a longer term view and look to other alternatives. Wrap-up insurance is a solution.
In today’s environment, most projects above $25 million in total construction volume should see some savings over and above traditional insurance costs. Realize that project scope and project controls can really affect the bottom line. To get the best price, risk managers should be thinking of ways to build their projects with best-in-class controls. If this happens, you can expect to get the best price. Lastly, we would still advise everyone to look at all options on the table, measure all risks, and get pricing parameters so you can make the best decision for your risk.
How Are Brokers Communicating With Clients Given the Challenges of This Marketplace?
Brokers have to be much more upfront in their communication and transparent about coverage options. It is critical to inform the owners and GCs about the state of the market and the challenges that might arise as a result. After many years of a soft market, now is the time to make sure clients are aware of how market conditions may affect their business. Brokers also have to come to the table with specialized expertise and the merits of the available options, with wrap-ups being particularly beneficial for larger projects. The best approach is to start conversations early. It’s always best to deliver bad news early, rather than late.
How Will the Broker and the Wrap-up Account Management Team Provide Peace of Mind to an Owner Who Implements a Program During This Pandemic?
The broker sets the stage for the success of a wrap-up policy. They know going into the project what the cost and coverage will be and they need to be the ones to manage the expectations. This is where appropriate account management takes over — the daily, monthly, annual tracking of project activities and exposures, the comparison of these observations to expectations, and the identification of changes and enhancements where needed.
The broker’s wrap-up management team is the group that takes the reins of the program and carefully monitors the project’s success through quality control measures. This team carries out the day-to-day activities, including reviewing and approving all subcontractor insurance requirements, verifying insurance costs, reviewing off-site limits and monitoring payrolls. The wrap-up account manager serves as an essential intermediary for all on-site activities, and is responsible for building relationships with the on-site construction contacts, claims, carrier and safety personnel, all of whom can impact the results of the program. The quality and effectiveness of this activity can really make or break your program.
Can You Provide an Actual Example of How Account Management Made a Difference?
Imagine a $300 million project that is under a wrap-up and the owner expects financial savings of a half a percentage point ($1.5 million), based on payroll exposures of $57 million. Halfway through the project, they notice that payroll numbers appear to be trending much higher, towards $70 million. This type of increase could have significant implications for the overall cost of the wrap-up. There could be many reasons for this increase, including change orders, schedule changes that involved trades with high payroll, poor performing subcontractors, unforeseen trades not contemplated in the original estimates, etc. With the right account management team in place, there will be a process in place to avoid unforeseen surprises that could add cost or create delays for your project.
Make sure you return to our site next week for the second half of Chris Smith and Corida Murphy’s article, where they will look at what size of project makes sense for a wrap-up, how technology can help minimize losses and how COVID-19 will affect the different lines of coverage in a wrap-up.
Chris Smith is a senior vice president of construction for NFP. Cordia Murphy, CRIS, is a manager of wrap-up administrative services for NFP.