What it means
On a big building project there can be dozens of contractors and subcontractors, each with their own liability and workers' compensation policies. If something goes wrong, the insurers may argue over who is responsible and which policy should pay.
Wrap-up insurance avoids this by putting the whole project under one programme, usually with one set of policies and limits. There are two main forms.
An owner controlled insurance programme is arranged by the project owner, and a contractor controlled insurance programme is arranged by the main contractor. In both, enrolled contractors are covered for work on the project, and their bids exclude the cost of insurance that the programme will provide.
The attractions are control and efficiency. A single programme can offer higher limits, consistent terms and one claims team, and it can include safety management across the site.
Because the owner buys in bulk and can influence safety, premiums may be lower than the sum of many separate policies. Finance teams should still look closely at the details.
Wrap-up programmes often cover only work on the specific project and usually exclude professional liability and contractors' own equipment, so contractors still need their own insurance for those risks. The programme also requires administration, such as enrolling contractors and reporting payroll, which has a cost.
The nuance is that the programme usually covers liability and workers' compensation for the project period and a number of years afterwards for completed work. Rules on whether wrap-up insurance is allowed or how it works vary between jurisdictions, so local advice is needed.
Safety performance is a major driver of the cost. Insurers price wrap-up programmes on expected claims, so a site with strong safety management, regular inspections and fast reporting of incidents tends to get a better rate.
Many owners therefore appoint a safety manager at the start and review claims data every month, which keeps costs lower and the site safer.
In practice
Real-world examples.
Example
A hospital developer arranges an owner controlled programme for a $60 million new wing. All contractors enrol and remove insurance costs from their bids, while the owner buys cover with higher limits. The owner's higher limits also protect it against large claims after completion.
Example
A main contractor on a housing estate runs a programme for itself and its subcontractors. A water leak damages several units and one insurer handles the claim rather than several arguing over responsibility. Claims handling is quicker, and the owner avoids paying legal costs for disputes between insurers.
Example
A city authority builds a transport hub and uses a programme with a strong safety component. A broker reviews injury statistics every quarter and the site manager acts on the findings. This early warning helps managers fix hazards before they cause an injury.
Formula
Calculation
Net saving = contractors' insurance costs removed from bids - wrap-up premium - administration cost
Suppose a project costs $20,000,000 and the wrap-up premium is quoted at 1.5% of construction cost, which is $300,000. Contractors had included $420,000 in their bids for their own insurance, and the owner expects administration costs of $40,000. Net saving = 420,000 - 300,000 - 40,000 = $80,000.Case study
Seen in the real world.
Harlow & Dene Developments is an illustrative, fictional developer building an apartment tower with a budget of $45,000,000. In previous projects, claims had dragged on for years as insurers of different contractors argued over responsibility for water damage.
The CFO obtained quotes for an owner controlled wrap-up programme at a premium of 1.6% of construction cost, which is $720,000. Bidders estimated that their own insurance costs in their prices totalled $900,000, so the programme allowed the cost to be removed from bids.
After allowing $50,000 for administration, the net saving was 900,000 - 720,000 - 50,000 = $130,000. The CFO valued the single claims process and consistent limits even more highly. The illustrative lesson is that the programme saved time as well as money.
Watch out
Common mistakes.
- Assuming the programme covers every risk on the project, when professional liability and contractors' tools or equipment are often excluded.
- Forgetting the administration costs of enrolling contractors and reporting payroll and values.
- Not checking that contractor bids really removed their insurance costs, so the owner pays twice.
Questions
People also ask.
What is the difference between an owner and a contractor controlled programme?
The first is arranged by the project owner and the second by the main contractor, which changes who manages claims and safety. The choice usually depends on which party has the stronger buying power and risk management skills.
How long does cover last?
It usually runs for the construction period and then for several years afterwards for completed work, depending on the policy terms. Completed operations cover is often the most valuable long-term feature.
Who benefits most?
Large projects with many contractors benefit most, because the savings and claims coordination grow with the number of parties. Smaller projects may not justify the cost of setting up and administering a programme.
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