Third Party Procurement
Frequently Asked Questions
Q = Question; A = Answer
Q. What is “wrap-up” insurance and when is it appropriate to use?
A. The customary approach for insuring against risks associated with work under third-party contracts is to require contractors to purchase and maintain insurance coverages that the grantee specifies within the terms and conditions of the third-party contracts. There are situations, however, when it may be advisable for the grantee to consider purchasing some type of “wrap up” program for their larger construction projects (those over $10M). These programs are also known as “owner controlled insurance programs (OICP).” A wrap-up program is one in which the grantee procures an insurance program covering all contractors and subcontractors who will be working on a large construction project. Typical insurance coverage would provide for: workers compensation, general liability, and “all risks course of construction” (sometimes referred to as “builder’s risk”). This policy is usually purchased through the services of an insurance broker. As construction contracts are awarded over the term of the policy period, the names of the contractors and all subcontractors are added to the policy as named insureds. Among the advantages of this approach are:
- The grantee knows for sure that its contractors have adequate coverage.
- For Workers Compensation insurance there will be premium discounts because of the size of the policy, and when the grantee informs the construction contractors in its IFB that the grantee is providing insurance, the contractors are able to request credits from their insurance companies and are in a position to pass along the savings to the grantee in the form of lower bid prices.
- Newer and smaller construction contractors, especially some Disadvantaged Business Enterprises (DBE’s), may have a difficult time getting insurance. A wrap-up program may improve the competitive environment by allowing more contractors to compete for the work.
- The cost of settling claims is greatly reduced because the injured party does not have to prove which contractor is at fault, only that a loss has occurred.
However, grantees must be cautious about contractors with poor safety records and high insurance costs. Care must be taken to consider the contractor’s past performance with respect to safety matters as part of their pre-award determination of the contractor’s “responsibility.” For additional information, see the Best Practices Procurement Manual, Section 6.6 - Insurance. (Reviewed: June 2010)
Q. Could you tell me the source of the wrap-up insurance information you have at your website?
A. The primary source of information in our discussion about wrap-up insurance in the Best Practices Procurement Manual (BPPM), Section 6.6 - Insurance, was Mr. Harry Hower, Manager of Insurance at Metropolitan Atlanta Rapid Transit Authority (MARTA). His phone number is (404) 848-4504. Mr. Hower has implemented wrap-up insurance programs at MARTA for large construction programs and he believes that MARTA has benefited from these types of policies. (Reviewed: June 2010)
Q. We have a contractor bidding for a project in a competitive bid situation. The project is set up as a fixed price contract agreement - the lowest responsible, responsive bidder will be selected. There are two components to the job - the construction work, which we have estimated at $10 million, and the worker's comp / general liability / owner's protective insurance package estimated at $500,000. When we put out the solicitation for bid, can we identify the work covered by the $10 million estimate as the "Base Bid" and the insurance coverage as "Add Alternate #1"? The Agency is considering using an Owner Controlled Insurance Program (OCIP) on the project and the contract award will be either (1) the lowest Base Bid or (2) the lowest Base Bid + the Add Alternate #1 amount depending upon whether the Agency decides to purchase the insurance directly through an OCIP or through the contractor. The amount being compared for each contractor is therefore the lower of (a) the total of the Base Bid + the Add Alternate #1 versus (b) the total of the Base Bid + the cost to purchase the insurance through the OCIP. The lower of (a) versus (b) is then compared for each bid submitted, and the contract is awarded on the basis of the lowest overall cost to the Agency.
A. We see no impediment to your proposal to ask bidders for base and option item bid prices as outlined in your question. It is rather common for owners to solicit bids for base items and optional items that are exercised based on the bid prices received and the owner's available funds, etc. We would see your proposal as initially the same process. We would advise telling the bidders about the OCIP alternative and how you intend to evaluate the bids. We would also emphasize in the IFB that bidders must bid on both the base and option items in order to be responsive.
The GAO has published a report entitled "Transportation Infrastructure: Advantages and Disadvantages of Wrap-Up Insurance for Large Construction Projects (PDF)" (GAO/RCED-99-155 dated June 1999). This study of OCIP should be very helpful to anyone considering a wrap-up insurance policy. It would appear from this GAO report that several FTA grantees may have used the bidding method you are proposing. (Reviewed: June 2010)
Q. Can you only use a wrap up policy for construction risks? I would like to use a wrap up policy for a special events sports tournament that would include coverage for the venue as well as all vendors and contractors associated with this event.
A. FTA insurance requirements for its grantees, including the use of wrap up insurance policies for large construction projects, are discussed in the FTA Best Practices Procurement Manual, Section 6.6 - Insurance, which is available online.
As to whether the use of a wrap up policy may be beneficial for the event you describe, we lack the technical expertise to advise you. You will have to consult an insurance expert for an answer to your question. (Posted: September, 2010)