This post is part of a series sponsored by TSIB.
It is important to understand how insurance cost savings in a Controlled Insurance Program (CIP), also known as a “wrap-up,” works and who bears the risk/reward. There are different types of CIPs, differentiated by the coverages included as well as the companies that purchase them (owners or contractors). However, the savings potential differs due to one key factor; Does the wrap-up in question provide two-line or single-line coverage?
Two-line summary
A two-line summary typically includes workers’ compensation (WC) and general liability (GL). With this type, insurance cost savings are achieved in two ways:
- The direct cost of wrap-up insurance compared to the cost of traditional insurance. Traditional insurance is the cost that contractors must pay to include their own insurance in the project. Wrap-up insurance is usually cheaper than traditional insurance.
- The loss financing required for large retention programs can be recovered and viewed as an avoided cost that impacts the project’s bottom line when losses are managed effectively.
Because wrap-up deductibles are typically $250,000 or more, loss-sensitive programs are a commonly used risk financing tool in the market. These plans include a fixed premium cost and a deductible that must be paid for each claim. All loss-sensitive options have a loss amount so maximum costs can be budgeted. The Final sponsor pays the fixed costs and elects to pre-finance or insure the costs of losses within the program deductible.
If the program is placed as OCIP (Owner Controlled Insurance Program), the project owner and its broker have ultimate responsibility for program design and administration, including:
- Selection of the carrier
- Boundaries
- Deductible
- Price negotiation
- Terms and Conditions
- Enrollment of contractors
- Management of claims
- Premium payments
- Obligation to provide collateral
The owner will recognize everyone Savings measures or overflow at the end of the program. In the case of an OCIP, the project owner will see the benefit of cost savings in the premium and potential avoidance of loss financing costs if the losses are well managed.
When placed as CCIP (Contractor Controlled Insurance Program), the general contractor retains the financial risk/benefit. It is possible that the general contractor and the project owner share in the financial outcome of the loss financing component as both play a role in safety, loss mitigation and loss settlement.
One-line summary – usually just GL
GL-Only coverage is the most common one-line summary and is typically used on projects where this is the case unique risks and with sponsors no interest in the financial risk-reward outcome of a loss-sensitive program. This is due to the fact that GL-only wrap-ups are generally contracted with the (non-approved) Excess and Surplus Line airlines and have very low deductibles; in many cases as little as $50,000.
A notable exception to this is all wrap-ups performed in New York (NY), where GL deductibles are rarely less than $3 million per claim. They are not feasible for projects with a construction volume of less than $500 million because NY wrap-ups have very high minimum premiums and equally high security requirements compared to other states.
For wrap-ups outside of New York, the loss financing cost avoidance observed with two-line wrap-ups does not apply to single-line wrap-ups because there are no loss financing or collateral obligations associated with small retention programs.
Therefore, the only potential savings with a single-line wrap-up would be a direct comparison of the insurance costs between the single-line wrap-up and the cost of traditional GL insurance brought to the project by the subcontractors. As with two-line wrap-ups, the insurance program sponsor (owner or general contractor) is the company that benefits from the cost savings, if any.
As a highly specialized insurance services company, TSIB focuses on the construction industry and settlement brokerage. TSIB has the skills, staff, market reputation and experience to evaluate all wrap-up options and ultimately implement the insurance solution that best suits the needs of our customers and project stakeholders. Grab it to TSIB to find out more!
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2024-06-17 04:55:22
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