Construction projects are inherently fraught with risk. That’s why having the right insurance in place is critical for all parties involved.
For contractors, however, adequate coverage typically comes at a high price and with abundant red tape when dealing with insurers. One potential solution is a contractor-controlled insurance program (CCIP).
What is it?
CCIPs are a type of “wrap-up” policy that’s managed by the general contractor and covers most parties to a construction project. However, design professionals, such as architects and engineers, usually aren’t covered.
Typically, CCIPs include general liability, workers’ compensation and excess liability coverage. There may also be an option to add other coverage, such as builder’s risk, professional liability or pollution liability. Insurance for commercial vehicles and equipment generally isn’t included.
What are the advantages?
Ordinarily, the general contractor and each subcontractor on a project buy their own policies. Then, each subcontractor names the general contractor and owner as “additional insureds,” and each subcontract contains complex indemnity provisions. Multiple insurers and policies may lead to coverage gaps. In turn, claims can lead to costly disputes and delays as the parties sort out their respective responsibilities.
By wrapping up coverage under a single policy, a CCIP can help parties avoid coverage gaps and minimize disputes and litigation over who’s at fault or responsible for damages if incidents occur. And the general contractor may be able to negotiate broader coverage, higher limits and lower premiums than the subcontractors could on their own.
Plus, by eliminating the need for subcontractors to secure their own insurance coverage, a CCIP can expand the pool of potential bidders. This can be an important advantage given today’s shortage of skilled labor.
When work gets underway, the general contractor wields great control over all aspects of risk management on a project, including insurance of course. Because CCIPs are highly loss-sensitive, most general contractors are strongly motivated to minimize claims through a comprehensive, centralized and well-enforced safety program. If a claim does arise, having only one administrator tends to accelerate the claims process and reduce the cost thereof.
And the disadvantages?
As you might expect, there are risks and costs for the general contractor setting up the CCIP. Although the program can eventually streamline insurance administration, the initial burden of finding and negotiating coverage can be daunting. In fact, given the complexity of CCIPs, many contractors find them suitable only for larger projects.
Managing subcontractor enrollment can also be an arduous task, and the subcontractors who sign up may present risks all their own. Because subcontractors aren’t operating under their own insurance policies, there’s less incentive for them to limit their losses. Also, because CCIPs are essentially “no-fault” policies — that is, coverage is provided regardless of who’s at fault — subcontractors may be more likely to submit false claims.
There’s also financial risk. In the unlikely event that claims exceed a CCIP’s coverage limits, the general contractor might be financially responsible for the difference.
Who can help?
If you’re looking to enhance project risk management, reduce insurance costs and streamline claims, consider a CCIP. Just bear in mind that we’ve given examples of only a few of the potential disadvantages; there may be others. Contact our construction team for help weighing all the pros and cons.
© 2024