Transportation Infrastructure

Traditionally, project owners, contractors, and subcontractors have purchased insurance independently to protect themselves from financial losses. In contrast, with wrap-up insurance, the project owner can cover all the parties involved in the project. During the last decade, wrap-up insurance has been used increasingly on large construction projects because of the potential for cost savings. Wrap-up insurance covered about 300 construction projects nationwide in 1998. This report discusses the advantages and the disadvantages of wrap-up insurance over traditional insurance and the factors that can affect the broader use of wrap-up insurance.

GAO noted that: (1) owners of transportation projects, such as transit agencies and state departments of transportation, experience a number of advantages and disadvantages when they use wrap-up insurance; (2) major advantages include savings from buying insurance in bulk, eliminating duplication in coverage, handling claims more efficiently, reducing potential litigation, and enhancing workplace safety; (3) according to insurance industry officials, wrap-up insurance can save project owners up to 50 percent on the cost of traditional insurance, or from 1 to 3 percent of a project's construction cost, depending on its size; (4) the potential disadvantages of wrap-up insurance include requiring project owners to invest more time and resources in administration; (5) project owners must hire additional personnel or pay to contract out the management of the wrap-up insurance; (6) in addition, project owners could also have to pay large premiums at the beginning of the project; (7) however, transportation officials said these costs were reasonable; (8) a number of factors can affect the broader use of wrap-up insurance; (9) perhaps the most significant barriers are state systems for workers' compensation that, in some states, effectively prevent wrap-up insurance by greatly reducing its potential cost savings; (10) another limitation is that a project must be sufficiently large, or contain at least a sufficient amount of labor costs, to make wrap-up insurance financially viable; and (11) some contractors dislike wrap-up insurance because it reduces a contractor's profits from insurance rebates.