There are hundreds of ways for contractors and subcontractors to lose money in wrap-up insurance programs. Protecting profits requires a great attention to detail and extreme vigilance.
Also known as Contractor Controlled Insurance Programs (CCIPs ) or Owner Controlled Insurance Programs (OCIPS), wrap-ups enable the project sponsor to purchase insurance for the majority of the entities on the job.
Companies back out their cost of workers' compensation, general liability and excess/umbrella insurance coverage from their bids. Once engaged in the project, the contractors' cost of insurance is deducted from their invoices against the project.
The bidding process offers the first of many opportunities for costly mistakes. Contractors inadvertently overstate their insurance costs or fail to include all the credits available to them because bid deduction worksheets are confusing and do not typically provide space to deduct discounts, deductibles and self-insured retentions (SIRs) to arrive at the lowest net cost of insurance.
Moving payroll from a traditional workers' compensation policy into a wrap-up can affect the premiums of the traditional policy. On the surface, it seems like moving payroll from the traditional compensation policy would automatically reduce the traditional policy's premium. However some policies have flat-rate or minimum rates, so the premium remains the same even though less payroll is involved. There are also retrospective rated and self-insured workers' compensation programs based on payroll dollar volume. Moving payroll out of this type of program can actually trigger an increase in the net premium cost.
To complicate the lives of contractors even further, separate audits are done for each wrap-up project the contractor has enrolled in. Add this to traditional insurance audits, and it's an administrative conundrum with a high probability of errors. From failing to compare original bid deductions to final audit results through proper allocation of payrolls, contractors can lose thousands of dollars. Without an experienced and forensic approach to this non-traditional process, they can kiss any profits goodbye.
Typically wrap-up administrators negotiate lower premiums than individual contractors could get on their own. As an example, let's assume a project built by an owner using a traditional bid process with all subs carrying their own insurance would have a total insurance premium of $10 million. The wrap-up administrator goes to the insurance company and says, "I need a policy for a project to cover all contractors and that would normally be $10 million in premium, but I only want to pay $2 million and I am willing to pay my own claims to a predetermined maximum."
The insurance company gives them a $2 million premium with the stipulation that the administrator pays all claims. The spread between the traditional premiums contractors pay on their own and the $2 million gives the wrap-up administrator an $8 million incentive to prevent or reduce the frequency, cost and duration of claims.
Stringent safety programs are the hallmarks of wrap-up projects and another cost driver for contractors. Some projects' safety guidelines exceed OSHA standards, creating conflict between contractors and wrap-up safety managers. There are more drug tests, safety training and meetings, time and costs, which should be considered when bidding the job.
There are also unusually high fines and penalties ($500-$5,000) for relatively minor violations. General liability claim deductibles can be as high as $25,000. A contractor with a small margin of profit in a job can lose all its profit on one fine. Therefore, contractors should request and study copies of the wrap-up plan documents and negotiate unreasonable terms before submitting a bid.
Most projects have mandatory return-to-work programs, and these are usually good, there are times you just don't want that injured worker back on your job. Non-compliance can result in fines as high as $5,000.
Don't believe these mistakes and problems won't happen to you. There is a consistent misalignment of objectives with a high rate of errors favoring the wrap up.
My insurance agency routinely reviews claim reserves, bid deductions and audits. Last month, we recovered $42,700 in premium when we found multiple mistakes on audits and erroneous data on an experience modifier. A wrap-up contractor needs to understand that while the wrap-up administrator pays the claim, the cost of that claim is filed against the contractor's experience modification rating, which causes the premium on traditional insurance to go up later on.
Protect your profits by counting the costs and involving your insurance agents throughout the process, so you can make informed decisions and adequate bids. If your agent isn't comfortable consulting on wrap-ups, find one who is or a wrap-up expert. You don't necessarily need to transfer your policy, but you need that expertise to protect your profits.
Duke Mills who owns a workers' compensation insurance agency in central Florida has spent the last decade helping contractors navigate wrap-up programs. He consolidated his experience into the Contractor’s Survival Guide to Wrap-Ups, available at www.wrapupexperts.com. For more information contact [email protected].