Guide to FHWA Funded Wrap-Up Projects

VI. Program Components

1. Property

   Property insurance provides cover for the completed project after cancellation of the Builders Risk coverage. The property covered is any permanent structure and equipment that is part of the project or necessary to the operation of the project (electronic toll booths). The policy provides replacement cost coverage (i.e., what it would cost to rebuild the structure at current prices for the same materials) and is written on an annual basis.

2. Business Interruption and Soft Costs

   Business interruption insurance providescoverage for loss of profits, fares, rents, continuing expenses and other consequential loss resulting from direct damage to the insured property. During the construction, "soft cost" coverage is used to insure loss of future fares or tolls or income where project damage delays completion. Cover may also address refinancing or other related costs and additional construction loan interest charges. When the project is completed, soft cost coverage ends and Business Interruption cover can be added as companion coverage to the Property Insurance. The Business Interruption covers insures loss of income or fares resulting from direct damage to the bridge or road. Depending on total value, deductibles have historically ranged from $5,000 to $50,000 with higher deductibles and sublimits applicable to the perils of flood, earthquake and coastal wind. Market conditions in early 2002 suggested that underwriters may demand minimum deductibles of $10,000, $25,000 or higher. In addition, terrorism buy-back coverage (where available) may contain more substantial deductibles.

3. Aviation

   Aviation Construction Liability offers the same or similar coverage as the Commercial General Liability policy. Coverage may be written in lieu of General Liability for construction taking place at airport facilities. The aviation alternative is considered a viable option for several reasons:

   Coverage: Many General Liability Policies contain aircraft products and completed operations exclusions in recognition that these exposures usually present significant hazards and potentially catastrophic losses. The construction of runways, towers, installation of lighting and similar activities, particularly on the secured airfield presents exposures not generally contemplated. General liability underwriters may require additional premium to address the coverages or secure reinsurance. The aviation marketplace views the coverage as commonplace and routinely offers airports contingent coverage for construction as part of the basic Airport Liability Policy.

4. Automobile Exposure

   Contractor vehicles are often operated on the airside. While the contractor may carry otherwise reasonable limits of liability, the exposure warrants greater limits. The Aviation policy can be extended to provide excess automobile liability coverage for all contractors operating vehicles on the airside during construction with little or no impact on premium. The aviation market can offer substantial limits of liability with more cost efficiency.

5. Watercraft

   Watercraft liability insurance covers losses arising out of the use or operation of watercraft. Most projects do not require coverage (although the basic general liability form provides coverage on a limited basis for non-owned watercraft under a specified size). Projects over or adjacent to water that utilize barges or transport vessels need to address the watercraft liability exposure. This can be done by contractually requiring the specific contractor to provide coverage, or where operations affect multiple contractors, this coverage can be written on a project basis Watercraft policies provide bodily injury and property damage coverage for losses arising out of the operation of the vessels, including coverages specific to marine insurance policies. Maritime employees do not fall under the state (or District) Workers' Compensation Statutes and the Workers' Compensation policy should be amended to include Jones Act (maritime) and or U.S.L.&H (United States Longshoremen's and Harborworkers' Act) extensions.

6. Trends

   While virtually all wrap-up programs incorporate the basic coverages of Workers' Compensation and General and Excess Liability, more and more programs are being expanded to address other risks. Among the innovations since 1997:

   1. Expanding the Workers' Compensation program to address longshoremen and maritime exposures for waterfront projects, bridges and tunnels.
   2. General Liability Wrap-ups - where projects are in jurisdictions that do not permit wrap-ups.
   3. Use of the Aviation insurance market for Airport Wrap-ups. A separate insurance company writes the Workers' Compensation.
   4. "Dirty" Wrap-ups - used where significant remediation is required. This approach provides Pollution and Professional Liability and has been used successfully not only for private sector projects but also by contractors working for DOE at Rocky Flats and Hanford.
   5. Use of "Buy-out" options to allow the owner to close the wrap-up program more quickly after project completion.
   6. Development of Companion Coverages designed to address financial and time (delay) losses.
   7. Adding an Owner's Protective Policy to provide separate E&O protection exclusively for the owner.
   8. Providing coverage for contractor defaults via insurance rather than the traditional surety bond.
7. Exposure Units and Rates

   The exposure unit is the measure of risk used to set the premium and the resultant rate is used to adjust fluctuations in exposure. Each type of policy has its own exposure basis:

   Policy	Exposure Units	Adjustment Rate
   Workers' Compensation	On-site Payroll	Per $100 of payroll
   General Liability	On-Site Payroll or Total Construction Hard Costs	Per $1,000 of payroll Per $1,000 of hard cost
   Excess Liability	Flat - or Construction Hard Costs	Per $1,000 of hard cost
   Airport Construction Liability	Construction Hard Costs broken down to isolate airside project costs	Per $1,000 of hard cost with either separate or composite rates used
   Professional Liability	Fees	Per $1,000 of Professional Fees
   Pollution Liability	Number and type of remediation projects, contract values	Per $1,000 of contract values
   Builder's risk	Project Completed or in-place values	Per $100 of value

8. Limits

   The limit of liability or policy limit is the maximum amount available in the event of any one loss or (depending on the policy) for all losses during an annual period or the term of construction. Liability limits are a matter of judgment considering such variables as the size and location of the project as well as the number of participating contractors. Builder's risk policy amounts are based on the actual completed building value.

   Type of Policy	How Limits Apply	Recommended Limits
   Workers' Compensation	Not Applicable - claim payments are subject to the state benefit schedules	Not Applicable - Statutory coverage provided
   Employer's Liability	Bodily Injury - Accident: Each Employee Bodily Injury By Disease: Each Employee subject to an annual aggregate per policy	Not Less than $1,000,000. The Excess markets (which provide additional limits above the primary EL) may require $2M
   General Liability	Limit per occurrence (all contractors) Annual Aggregate (all Contractors) Products Liability/Completed Operations* is usually written with a Project Aggregate Limit	Not less than: $2 million Occurrence $4 million Aggregate $2 million Products/Completed Operations Aggregate
   Excess Liability	Provides additional limits excess of the primary Employers' Liability and General Liability policies. The limits apply on the same basis (follow-form) as the primary policies	Judgment based on size of project ranging from $25 million to $100 million with limits for airport projects reaching as high as $500 million
   Professional Liability	Each claim and in the aggregate for the project term (applies to all eligible professionals)	Not less than $20 million up to $50 million
   Pollution Liability	Each claim (may be written on occurrence basis) and in the aggregate for the project (or annual period)	Not less than $10 million depending on exposure
   Builder's risk	Total completed project value

   * That the materials used and the finished project are suitable for their intended purpose.

9. Retentions

   The retention or deductible is the amount of each loss (and all losses) paid by the insured. Insurance carriers and insureds use deductibles to control costs. Deductibles and the credit for using it varying among policies and carriers.

10. Range and Type of Deductibles
    1. Workers' Compensations and General Liability

       Basic wrap-ups (workers' compensation and general liability), when written on a loss sensitive program (preferred structure) usually are written with a minimum deductible (loss limit) of $100,000. Due to changing market conditions many carriers are increasing the minimum deductible to $250,000 each occurrence. Some projects with more significant exposures carry deductibles of $500,000 to $1,000,000. The higher the deductible, the lower the expenses charged to the program and the greater the opportunity for overall savings from good experience. The basic wrap-up usually contains an aggregate deductible (maximum of owner's responsibility for retained losses) based on a multiple of the carrier's estimate of overall project losses. For example, if project losses are projected at $3,000,000. The carrier might agree to cap losses at $4,500,000.

    2. Excess Liability

       Excess Liability policies do not have retentions; they use the underlying (primary wrap-up policies) policies in a manner similar to a deductible. The excess policy will pay losses that exceed the primary occurrence limit or where the primary policy aggregate is impaired or exhausted.

    3. Pollution and Professional Liability

       Pollution and Professional Liability deductibles or retentions are usually written to apply to each claim, occurrence or loss and contain no aggregate cap. Project Professional policies usually are written with deductibles ranging from $50,000 depending on project size and other factors. The owner, architect and the architect's' subconsultants should have a pre-agreement on who is responsible for deductible payments. Generally the lead architect bears the majority of the deductible and may allocate portions to responsible subconsultants. Pollution policies usually carry lower deductibles ranging from $5,000 to $50,000.

    4. Builder's Risk Deductibles

       Builder's risk deductibles, which apply on a per loss basis, have been as low as $5,000 and have ranged up to $25,000. Due to current market conditions, deductible minimums may increase to $50,000 and even $100,000. Earthquake, flood and coastal wind losses are subject to higher deductibles- depending on the carrier and market conditions. These deductibles may be a stated amount, such as $100,000 or a percentage of the loss.