CONSTRUCTION PROJECT CONTROLLED INSURANCE PROGRAM (CIP)

Transcription

1 CONSTRUCTION PROJECT CONTROLLED INSURANCE PROGRAM (CIP) Owers, developers, costructio maagers ad geeral cotractors face a host of isurace ucertaities with every project. While o silver bullets ca elimiate every ucertaity, a cotrolled isurace program (CIP) ca improve coverage without blowig budgets by cosolidatig ito oe program isurace coverages for all project cotractors ad subcotractors. Also kow as a wrap-up, a CIP ca be sposored by a project ower or developer, a costructio maager or geeral cotractor. These programs have historically icluded Workers Compesatio, Employers Liability, Geeral Liability ad Excess Liability. May CIPs today are commoly desiged to iclude oly Geeral ad Excess Liability. Other projectspecific coverages, such as Builders Risk, Evirometal Liability ad Professioal Liability, ca easily be added to a CIP. Without a CIP, each cotractor workig o a project provides its ow isurace ad builds the cost for isurace ito its bid. With a CIP, the sposor egotiates ad purchases the coverage for all eligible cotractors workig o the project. I exchage, the sposor requests a off-set, or isurace credit, from all parties icluded i the CIP coverage. The credit is equal to the covetioal cost of the coverages the separate parties would have bee required to buy i the traditioal marketplace. For those cotractors with a loss-sesitive program, the isurace credit should iclude expected loss values. ADVANTAGES Opportuity to reduce the cost of project risks Project-specific coverage coverage certaity Exteded Completed Operatios coverage to statute of repose Improved claim hadlig ad loss cotrol Improved disadvataged busiess eterprise (DBE) participatio CHALLENGES Iteral ad exteral resistace Additioal admiistrative burde Achievig ad verifyig savigs

2 PROSPECTIVE CIP PROJECTS MULTIPLE PROJECTS CIPs ca be utilized o a variety of projects accordig to fiacial, regulatory ad market appetite. A CIP ca also be desiged for a series of smaller projects. Such a program is called a rollig CIP. Rollig CIPs are ofte sought by owers with several capital expasio projects ad by geeral cotractors who wat to iclude a variety of projects. LARGE PROJECTS Sigle projects with costructio values i excess of $200 millio may be large eough to beefit from ecoomies of scale. However, prevailig Workers Compesatio rates, type of costructio, project duratio ad payroll cotet (i.e., power plats vs. office buildigs) also impact the effectiveess or appropriateess of usig a CIP. MAINTENANCE PROGRAMS CIPs are ot limited to builders. I large facilities (e.g., oil ad gas facilities, petrochemical ad power plats), where the operatios face may risks comparable to those at costructio sites, a CIP ca ofte improve coverage ad geerate potetial savigs. HOW DO CIPS WORK? I the stadard isurace paradigm, cotractors purchase isurace for all of their work ad spread those costs amog the projects they work o. Depedig o their size, loss history, states of operatio ad risk appetite, may of these cotractors purchase guarateed cost or low deductible isurace programs. These approaches ted to be expesive but offer the least volatility ad risk. The cotractor s isurace costs typically rage from 1% to 3.0% of the hard costructio costs of a project. The isurace costs are loaded ito their bid. CIP sposors gai coverage ad cost advatages by limitig the scope of coverage to the risks associated with a specific project or set of projects ad by assumig a high retetio or deductible usually $250,000, $500,000 or $1,000,000 per occurrece. Programs are typically desiged with a peroccurrece deductible ad maximum stop loss. The sposor will pay a premium for the fixed costs of isurace ad the losses arisig out of worker ijuries ad damages to third parties. Depedig o program desig, the sposor ca gai sigificat cash flow by providig collateral (usually a letter of credit or cash) ad oly payig losses as they occur. Settig up a CIP requires work; parties must agree i cocept ad i detail. Balacig program costs agaist isurace credits is ot easy. I some scearios, the sposor may lose out. The guidace of a experieced broker ca help evaluate the cost implicatios of a CIP. 2

3 STANDARD CIP COVERAGE LIMITS WORKERS COMPENSATION Part I Statutory Beefits Part II Bodily Ijury Each Accidet $1,000,000 Disease Policy Limit $1,000,000 Disease Each Employee $1,000,000 GENERAL LIABILITY Each Occurrece $2,000,000 Geeral Aggregate $4,000,000 Products/Completed Operatios Aggregate Lesser of 10 years or statute of repose $4,000,000 Persoal/Advertisig Ijury $2,000,000 Damages to Premises Reted to Your Limit $100,000 $500,000 Medical Paymets Ay oe perso $10,000 EXCESS LIABILITY $100M or Higher The amout of CIP excess isurace will deped o the size ad complexity of the project. Most projects should carry at least $100,000,000 i coverage because the limits are shared with all erolled cotractors. Specialty CIPs such as Geeral Liability oly CIPs o smaller projects may feature lower limits. GENERAL LIABILITY ONLY CIPS Cost is ot always the chief objective i a CIP. I today s market, may project owers ad maagers face coverage restrictios, ad may sposors elect to purchase a CIP to improve coverage rather tha to achieve savigs. Maximum program costs may eve exceed covetioal costs of isurace. There has bee a cotiued icrease i the umber of cotractors sposorig CIPs for coverage purposes, as they have begu to recogize that covetioal subcotractor isurace is subject to erosio over time ad caot be relied o for protectio. Whe Workers Compesatio is t ecoomically viable, cosider a Geeral Liability oly CIP. Through a GL oly approach, the sposor will exercise cotrol over the scope ad extet of coverage, will have first amed isured rights vs. additioal isured status, ad will ot ru the risk of coverage erosio that could arise with traditioal policies issued aually. Geeral Liability oly CIPs are structured over a primary limit of $1,000,000 to $5,000,000 per occurrece. Retetios begi as low as $25,000 ad there is typically o collateral obligatio as log as the retetio does ot exceed $100,000. These programs are usually Excess & Surplus lies placemets, ad terms ca vary. 3

4 OWNER VS. CONTRACTOR CONTROLLED INSURANCE PROGRAMS Cotrolled isurace programs, or wrap-ups, are a method of isurig the costructio project risk of the ower, cotractor, ad subcotractors of every tier. While the most successful programs ievitably result from a joit effort of all project participats, there are practical cosideratios that should gover the ower s choice betwee a ower cotrolled isurace program (OCIP) or cotractor cotrolled isurace program (CCIP). ISSUE OCIP CONSIDERATION CCIP CONSIDERATION isurer selectio: Isurers will offer favorable rates, terms, ad coditios to parties/projects whe losses are cotrolled ad they ca expect a fair retur o shareholder equity. Program cotrol: coverage ad Limits: The party that egotiates with the isurer will have the most cotrol over coverage ad limits. ExcEss LiabiLity Pricig: May risk maagers believe that a sigle excess limit (e.g., $100,000,000 with aual reistatemet of limit) may safely be applied to cover multiple projects. Ower may egage more tha oe isurer i competitio for the program ad ca egotiate lies i additio to the OCIP (e.g., project professioal, project evirometal, builders risk). The burde is o the ower ad project team to covice uderwriters that losses will be cotrolled. A ower ows the isurace program throughout the life of coverage ad therefore is ot directly impacted by ay chage of cotractor. Ower should work i cocert with other project members to egotiate a program that protects all parties. Limits will be dedicated to the ower s project(s) ad will ot be eroded by the cotractor s losses o other projects. Cotractor whose coverage is broader tha the OCIP will typically iclude a DIC charge i its bid so it is importat to make sure everythig has bee addressed up frot. A policy coverig a sigle project will e tail sigificatly higher premiums (relative to costructio value) tha those charged whe a policy covers multiple projects. A ower with multiple projects may achieve ecoomies by purchasig higher limits ad spreadig the excess policy over all of them, with aual reistatemet of limits. Cotractor typically has a established relatioship ad track record with oe isurer that provides coverage for all of its projects. A cotractor with a prove ability to cotrol losses may have already egotiated favorable rates, terms, ad coditios. A ower should scrutiize the CCIP to determie if this is the case. A ower may direct a isurer competitio for a CCIP o its project. The cotractor ows the program ad cotrols all aspects of coverage through the exteded completed operatios coverage. If the ower removes the cotractor, the CCIP goes with the cotractor. Cotractor should work i cocert with ower to egotiate a program that protects all parties; however, the cotractor may ot be able to eroll parties that cotract directly with the ower. Limits may apply per project, or may be eroded by losses o other projects. Ower should thoroughly aalyze CCIP coverage to esure that it fulfills its eeds ad cotractual isurace requiremets. Ower ca request they be a Named Isured o the CCIP. Cotractor will typically buy a sigle excess policy to cover all projects i its CCIP, with aual reistatemet of limits. This provides a cost advatage, but also brigs with it the risk that the limits will be eroded or eve exhausted by losses o other projects. Ower may require a project-specific policy, which is available i the CIP marketplace. 4

5 ISSUE OCIP CONSIDERATION CCIP CONSIDERATION risk/rewards of cip: A cotrolled isurace program is a high-deductible program, ad therefore favors the party that is able to assume ad maage risk. Program cash flow: Cash-flow beefits go to the party cotrollig the fuds. adjustmet of cotract PricE: Some or all of the fudig for a CIP comes from a reduced cotract price, achieved by removig cotractors traditioal isurace costs. Whether OCIP or CCIP, cotract price (e.g., GMP) should be adjusted to remove the effect of avoided isurace costs ( bid deductios ) ad CIP costs. Program admiistratio: The party that purchases the program is resposible for providig for admiistratio. Risk ad rewards are assumed by the ower, who ca achieve greatest beefit by givig participatig cotractors a fiacial stake through safety ad other icetives. Ower ca egotiate terms to spread fixed ad variable expeses up frot or over the life of the project. Ower provides collateral (typically LOC) for deductible losses. Program remais ope util all claims are settled. The sposor ca work with the isurer to develop a buy-out strategy usually 12 to 18 moths beyod costructio completio. Ower should provide for adjustmet of the GMP or lump sum price to reflect removed isurace costs (bid deductios). The price should be adjusted agai at the ed of the program to reflect actual avoided cotractor costs. Failure to do so will result i a uiteded costig error to ower or cotractor, depedig o whether the project fiishes o budget. Ower should work with cotractor to establish admiistrative procedures that complemet the cotractor s procedures i bid award, cotract admiistratio ad closeout. Risk ad rewards are assumed by the cotractor, who ca achieve greatest beefit by givig the ower a fiacial stake through a ope-book shared program or a fixed, guarateed price break. I some cases cotractors will desire to pass as much of the cost as possilbe (program risk) to the ower i their pricig. This icreases the opportuity for greater profit. Cotractor will typically stipulate paymet tied to a percetage of progress paymets or a pre-set schedule over the life of the project. Uless egotiated ito cotract, ower ca close its books with fial cotract paymet. Cotractor may charge a CCIP to the ower as a percetage of total cotract value, a specific dollar amout, or o a ope-book basis with shared savigs. Ower should make sure that allowable charges are uderstood ad moitored, ad that deductible losses are ot charged back to the job i additio to these amouts. Cotractor will typically have established procedures for program admiistratio. 5

6 ISSUE OCIP CONSIDERATION CCIP CONSIDERATION cotrol of site safety: Should a accidet occur, it is likely the ower s ame, project ad circumstaces will be all over the ews ad i prit. Studies have show that a ower who takes a active role i esurig that safety is maaged ca cut expected recordable accidets i half, with beefits that reach well beyod deductible losses i a isurace program. A team approach to safety should be employed whether a OCIP, CCIP or traditioal isurace program is istituted. The Cotractor is i the best positio to maage safety o the project site. The ower should however take a active iterest i costructio safety. For istace: Require site-specific safety program from GC/ CM Establish miimum safety requiremets that also mirror what the isurer will require Set safety as criteria i cotractor selectio Maitai proactive ivolvemet durig costructio Require cotract laguage to iclude eforcemet of safety program with cosequeces Implemet safety icetives Iclude a lie item for project safety i the costructio budget Regardless of a CCIP approach, the ower should still take a active iterest i costructio safety. For istace: Require site-specific safety program from GC/CM Set safety as criteria i cotractor selectio Maitai proactive ivolvemet durig costructio Require cotract laguage to iclude eforcemet of safety program with cosequeces Implemet safety icetives maagig cip claims: Regardless of who purchases the isurace program, the hadlig of claims ca affect the fiaces ad reputatios of all parties ivolved, icludig the ower, cotractors, ad ijured third parties ad workers. claims ExcEEdig PoLicy Limits: The oly liability itrisically created by a cotrolled isurace program is that of procurig isurace coverage as required by cotract, ad payig premiums ad deductible losses. cotiuity of coverage: Coverage that lapses ca create severe problems for the ower ad participatig cotractors. Ower maages claims to the beefit of ijured parties ad all project participats ad is i the best positio to maage public relatios. Ower should iclude cotractors i these discussios. They are cocered about their compaies reputatios, the well-beig of employees, ad experiece modificatio factor (EMR), which may affect pricig of their compayspecific isurace ad are affected by workers compesatio losses. Liability for claims exceedig policy limits remais with the egliget party. Ower should ot specify that coverage for work o a OCIP be excluded o cotractors corporate programs, as this removes that source of recovery ad may imply a limitatio of liability. The ower is resposible for payig all premiums ad deductible losses ad thereby cotrols the cotiuity of the isurace program. Cotractors should be provided ample otificatio i evet of cacellatio, oreewal or material chage. Cotractor maages claims, ad may do so i a maer to miimize ultimate payout at the expese of other issues such as public relatios. Cotractor may ot feel comfortable icludig other cotractors i the discussio o ope claims. Ower should be comfortable with the cotractor s approach to claim settlemet prior to agreeig to a CCIP. Liability for claims exceedig policy limits remais with the egliget party. The cotractor is resposible for payig premiums ad deductible losses. Ower may require ample otificatio i the evet of cacellatio, oreewal, or material chage. 6

7 ISSUE OCIP CONSIDERATION CCIP CONSIDERATION coverage of multiple cotracts: A ower with a extremely large project that will be coducted i phases, or multiple projects, will likely egage the services of differet geeral cotractors. A OCIP may be writte to cover multiple phases or projects with differet geeral cotractors. A ower with such projects plaed should beefit more from a OCIP. It is ulikely that all cotractors with whom the ower cotracts will have a CCIP or that the quality of coverage will be uiform uder these separate CCIPs from project to project. CIP INSURERS As of 2012, the stadard primary CIP market cosists of: ACE Chartis ARCH The Hartford Liberty Mutual Old Republic Travelers Zurich While all of these markets ca be effective doig major projects, each has its ow particular appetites. Several markets favor cotractor-cotrolled isurace programs (CCIPs). These iclude Zurich ad Travelers. Zurich will play a role o ower-drive projects, but prefers to look at cotractor-cotrolled programs, ad Travelers will oly support its ow isureds whe it uderwrites CCIPs. Chartis has recetly aouced that they will be much more aggressive i uderwritig CCIP programs as well. Note these markets do routiely look at their uderwritig appetites ad will cosider a ower-cotrolled isurace program (OCIP) that fits their uderwritig criteria. Hartford re-etered the CIP market through a limited distributio etwork of select brokers. Old Republic iitially offered oly guarateed cost programs but trasitioed to offerig large deductible programs i Back i 2009, Arch created a uderwritig uit that was to focus primarily o OCIPs. Before that time, Arch was a heavy player i the CCIP market. ACE ad Liberty Mutual cotiue to have a broad appetite for OCIP ad CCIP busiess. WILLIS: THE LEADER Willis is oe of the largest costructio brokers ad is a leadig producer i the CIP marketplace. Willis dedicated Natioal CIP Practice team of 35 professioals delivers idustry-leadig service i: Program desig, marketig ad placemet Accout maagemet Quality cotrol ad traiig Data maagemet capabilities through our WrapTrac Ceter Techology solutios 7

8 WILLIS CIP EXPERIENCE INCLUDES MORE THAN 500 CURRENT OR COMPLETED PROJECTS Sports ad Etertaimet (stadiums/areas) Health Care Office ad Techology (high-rise/campus) Trasportatio (airports ad rail) ad Ifrastructure Residetial (sigle family/multifamily/codo) Gamig ad Hospitality Educatio Facilities Eergy (pipelies/power plats) Maufacturig ad Petrochemical (ew/maiteace) WRAPTRAC CENTER CENTRALIZED DATA MANAGEMENT 10,000 cotracts maaged 7,000 cotractors Cotractor isurace credit ad payroll bechmarkig Maximizig efficiecies ad accuracy Higher quality of work This coduit of experiece ad our Oe Flag approach esures that Willis cliets have easy access to comprehesive expertise ad resources, icludig superior market stregth. CONTACT David DeLaRue, ARM, AIC, CPCU david.delarue@willis.com Lori Robiett, CIC lori.robiett@willis.com 8