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WorkComp Solutions President Writes Manual Decrying Wrap-Ups

10/06/08 (Featured By WorkCompCentral)

Although it's often touted as a cost-effective solution for contractors, wrap-up insurance often fails to deliver what it promises, instead causing an endless maze of coverage gaps, delayed and inaccurate audits and high deductibles, according to a Florida consultant who advises employers on reducing workers' comp costs.

In his newly released 37-page guide, "Contractor Survival Guide for Wrap-Ups," WorkComp Solutions President Duke Mills says that in wrap-up insurance, the sponsor purchases policies to cover the cost of a construction project and asks contractors to back the costs of general liability excess/umbrella and workers' compensation insurance on their bids.

On the other hand, insurance agents and administrators who market the insurance say they offer higher liability limits and that they reduce cross-contractor litigation. Wrap-up policies are also called commercial insurance programs, or CIPs.

Advocates say when used correctly, CIPs can transfer risk from the contractor and subcontractors on a project to the owner and offer better protection and higher coverage limits.

But after seeing contractors fall victim to what he calls the perils of wrap-up insurance, Mills says that although this type of insurance can deliver positive results in some cases, "when it goes wrong, it's a catastrophe."

"Frankly, wrap-ups create a financial Armageddon for many contractors," he said in a written statement.

But Mills cites a study the International Risk Management Institute (IRMI) performed in 2006 of 600 contractors and subcontractors to assess their satisfaction with CIPs. In the survey, 20% of subcontractors said they like the product, 50% said they only tolerate them and 30% said they hate them, according to the survey.

Also in the survey, 60% of general contractors said they like CIPs, 35% said they merely tolerate them and 5% said they hate them. The contractors who say they like them attributed their satisfaction to their ability to control a project's insurance and risk management. They said they didn't like owner-controlled programs as much because they think they're more qualified to manage risk on projects.

Despite the low satisfaction rating, Mills said about 50% of the largest 100 contractors in the nation are currently involved in wrap-ups. In Mills' home state of Florida, current wrap-up projects include the Florida Marlins Stadium in Miami and The Wizarding World of Harry Potter at Orlando Universal Studios.

In Mills' guide, he claims that construction companies that use wrap-ups face higher administration costs, confusing documentation and insurance costs deductions using inequitable worksheets. In addition, he said, the companies are required to maintain duplicate payroll records and are subjected to fines, penalties and deductibles, in addition to having to undergo audits for each wrap-up project.

Mills also claims that companies that use CIPs are often subjected to delayed and inaccurate audits affecting final payment and incorrect experience modifiers. Compounding the problem is the fact that there are some exclusions for wrap-up insurance after a project ends, and the responsibly may fall on the contractor after that date.

But these worst-case scenarios don't occur in every case, say Brian Cooper, managing director of Gallagher Construction Services in San Francisco, and Andrew Canning, executive vice president of DBH Resources in El Segundo, Calif. Gallagher Construction Services sells wrap-up insurance, and DBH is a wrap-up administrator.

While both Cooper and Canning say wrap-ups can cause problems if they are administered poorly, they can be effective when they are used for large projects.

"There are lots of bad wrap-ups, and there are lots of good ones," Cooper said. "When they're done right for the right type of project and with the right players involved, they can be a good thing."

For large projects, he said, wrap-ups remove the insurance risk from the contractor and place it on the owner, Cooper said. When wrap-ups are done right, he said, they ensure that contractors and subcontractors have better insurance. In addition, it offers better protection, as it has broader and higher limits.

Both men agree that wrap-ups work best when they are done for large projects. They can cause problems when they are used for "smaller" projects of less than $25 million to $30 million, Canning said.

However, Cooper said CIPs are not recommended for residential projects like condominiums. Wrap-ups got a bad name when owners were forced to get this type of insurance for contractors who were difficult to insure. Subsequently, they bought low limits of coverage, and administrators did a poor job of explaining the impact of the insurance.

"It left owners and purchasers and contractors high and dry when it came to purchasing," he said.

There was also a problem when administrators claimed that project owners would save money by using wrap-ups by extracting insurance credits from contractors that would offset the costs, Cooper said. Instead, administrators overstated the credits, and owners never realized the savings.

Canning said problems also arise when administrators don't have enough workers' compensation experience.

"But it really comes down to making sure the right administration company is selected prior to doing the wrap-up," he said, adding that contractors are advised to talk to the broker beforehand to find out the impact of using CIPs.

Cooper agrees. Wrap-up insurance works well when the company has a good safety culture and administration, he said.

Mills, however, stands by his convictions.

Because much of Gallagher's and DBH's business relies on wrap-up sales, "it doesn't surprise me that they think I'm screaming fire in a movie theater," he said. "It's been my experience that there hasn't been the kind of transparency (with wrap-ups) that you'd expect," adding that problems frequently occur because of undisclosed costs.

"Contractors aren't getting the right counsel from their own insurance agents," he said.

But he does concur with Cooper and Canning that wrap-up insurance can work for large projects and in cases where a contractor can cover the extra costs.

For subcontractors who decide to use this type of insurance, he advises them to make sure their deductions are correct first because the forms often don't let subcontractors figure out the true cost of insurance.

"Verify the deductions are right," he advises. "Ask for a copy of the administrator's insurer's wrap-up policy to see what's covered. Especially check the fine and penalty section.

To order Mills' "Contractor Survival Guide for Wrap-Ups," which sells for $995, click here

By Marci Wormser, WorkCompCentral Reporter