Author, Daniel Frazee, Executive Vice President, Rancho Mesa Insurance Services, Inc.
Subcontractors in California regularly enroll in OCIP/CCIP or wrap programs. These programs are insurance policies that cover many of the participants in a construction project, including the owner/developer, general contractor and subcontractors. As many contractors learn the hard way, they do not control the program or the coverage terms, leaving the possibility of significant gaps that can impact the contractor in the future.
Prior to enrolling in a wrap insurance program, consider developing a list of key questions to regularly ask the plan sponsor. Before you begin that process, subcontractors need to know what information the plan sponsor is obligated to share about the project. And, that obligation varies greatly, depending on whether the project is public, private, or residential. Additionally, the statutory disclosure requirements are inconsistent in how they appear in the contract and bid documents. The following are a summary of those disclosures.
Residential Project Contract Documents
For residential projects, the contract documents must disclose, if and to the extent known, (Civil Code section 2782.95(a)):
- Policy limits
- Scope of policy coverage
- Policy term
- The basis upon which the deductible or occurrence is triggered by the insurance carrier
- Number of units, if the policy covers more than one work improvement indicated on the application for the insurance policy
- A good faith estimate of the amount of available limits remaining under the policy as of a date indicated in the disclosure obtained from the insurer.
Public and Commercial Project Contract Documents
For public and commercial projects, subcontractors are entitled to even less information, under (Civil Code section 2782.96):
- The policy limits
- Known exclusions
- The length of time the policy is intended to remain in effect.
In both cases above, the information that the plan sponsor is required to provide is far less than subcontractors need to truly make an informed decision on the coverage terms. Knowing now that enrollees have the right to ask for these insurance requirements before bidding the job, we will prioritize three important questions to begin the framework for your due diligence.
What are the Limits of Coverage?
Work inside OCIP/CCIP or wrap programs is commonly excluded on all contractor’s general liability policies. As a result, coverage is found almost entirely within the policy limits in place for the wrap program. That leaves key questions for your team to explore before stepping foot on a jobsite. What are the total costs of construction relative to policy limits? Are there any other projects being covered under the Wrap policy? Are the limits of insurance reinstated after a large loss? Do defense costs reduce the policy limits? While there are certainly more questions inside this vertical, knowing these initial answers and being familiar with what impact they may have on your business are a solid first step in your process.
What is Covered and What is Excluded?
Wrap programs, as many subcontractors know, can provide coverage for both general liability and workers' compensation. In the last few years, Wrap policies have focused more on general liability. Many can also include builder’s risk, professional and/or pollution liability. Each project, and therefore each wrap policy, is very unique. Be prepared to negotiate the removal of certain exclusions that often relate to some, but not all, subcontractors:
- Subsidence (earth movement)
- Professional Liability (also referred to as errors & omissions - typically a separate policy)
- Pollution Liability (typically a separate policy)
- Offsite work
What Deductible or Self-Insured Retention (SIR) is Required?
There are limited protections for wrap participants regarding the amount of self-insured retentions and/or deductibles, particularly with public or commercial projects. Subcontractors must identify, for example, the size of the deductible and whether that contribution is shared or individual. Deductibles within wrap policies can be as high as $25,000 - $50,000 per claim, which can represent significant impacts to a subcontractor’s balance sheet when unprepared.
Whenever you are considering a project that requires you to enroll within a OCIP/CCIP or wrap program, your due diligence in understanding the full scope of the insurance being offered is of the utmost importance. Discuss this in detail with your broker or reach out to one of us in our constructions group to help you navigate your way through the process.