TITLE:  ï¿½Wrap-Up Insurance for the Capitol Visitor Center, B-290162, October 22, 2002
BNUMBER:  B-290162
DATE:  October 22, 2002
**********************************************************************
 Wrap-Up Insurance for the Capitol Visitor Center, B-290162, October 22, 2002

    
B-290162
    
    
    
October 22, 2002
    
Mr. Alan M. Hantman
Architect of the Capitol

   Subject:  Wrap-Up Insurance for the Capitol Visitor Center
    
Dear Mr. Hantman:
    
This responds to your letter requesting our opinion on questions related
to the purchase of wrap-up insurance for the Capitol Visitor Center (CVC).
[1]  In general terms, wrap-up insurance consolidates all major insurance
coverages for various entities into one insurance policy.  Specifically,
you asked whether your office is authorized to use appropriated funds to
procure wrap-up insurance that would cover (1) the government's risks and
(2) the risks of contractors, designers, and consultants in constructing
the CVC.  Because you did not submit for consideration any particular
insurance policy or a justification based on a cost-benefit analysis, we
can only answer your questions in general terms. 
    
The general rule is that the federal government self-insures its own risk
of loss.  21 Comp. Gen. 928, 929 (1942); B-237654, Feb. 21, 1991.  The
rationale underlying the rule is that the magnitude of the government's
resources makes it more economical and advantageous for the government to
carry its own risks than to have them assumed by private insurers.  19
Comp. Gen. 211, 214 (1939).  For the reasons stated below, if you
determine that purchasing wrap-up insurance is reasonably necessary or
incident to the accomplishment of the construction of the CVC and
demonstrate that the rule's rationale does not apply to your situation, we
would not object to the use of appropriated funds to purchase wrap-up
insurance covering both the government's risks and the contractors' risks
for the CVC project.  To meet this burden, you could demonstrate that the
use of wrap-up insurance would result in a savings or that a benefit, not
otherwise obtainable, would be gained through the use of wrap-up
insurance. 
    
BACKGROUND
    
Insurance is a major cost component in construction contracts.[2] 
Construction insurance has experienced large rate increases over the past
two decades partly due to general market forces and the adversarial nature
of the construction industry.[3]  The terrorist attacks of September 11th
compound the problem.[4]  In traditional insurance programs, project
owners, contractors, and subcontractors independently purchase their own
insurance to protect themselves from financial loss.  There are
alternative insurance programs that offer potential savings to owners of
large construction projects.  One such alternative is commonly known in
the insurance and construction industries as wrap-up insurance. 
    
Wrap-up insurance, in contrast to traditional insurance, is when the
project owner purchases one policy and *wraps-up* the multiple insurance
coverages for various entities into the one policy.[5]  The objective of
wrap-up insurance is usually to reduce project costs.  While project costs
may be reduced, the owner of the wrap-up policy incurs risks and
management costs previously borne by the contractor. 
    
GSA reports that coverage normally provided under wrap-up insurance
includes workers' compensation, commercial general liability, excess
indemnity (umbrella), and builder's risk property insurance.[6]  Coverage
sometimes provided under wrap-up insurance includes asbestos abatement,
environmental and professional (errors and omissions coverage)
liability.[7]  Coverage not normally provided under wrap-up insurance
includes automobile insurance, construction equipment, tools and personal
property, and on-site offices and temporary facilities.[8]  Your
submission does not describe what coverages you anticipate including in
your wrap-up insurance program. 
    
There are advantages and disadvantages to having one wrap-up insurance
program administered by a single insurance carrier.  Major advantages
include savings from buying insurance in volume, eliminating duplication
in coverage, handling claims more efficiently, reducing potential
litigation, and enhancing workplace safety.[9]  Disadvantages include
requiring project owners to invest more time and resources in
administration and possibly paying large premiums at the beginning of the
project.[10]  Each project must be analyzed for its suitability, and that
will depend on potential risks (real and perceived) and the ability to
control losses.  Size is an important prerequisite and dominant factor in
determining a project's suitability for wrap-up insurance.[11]  For
example, a project must be sufficiently large, or at least contain
significant labor costs, to make wrap-up insurance financially
viable.[12]  Your submission states that the CVC team is in the process of
preparing a cost/benefit analysis and providing the advantages and
disadvantages of using wrap-up insurance.
    
DISCUSSION
    
It is important to recognize that the government's general practice of
self-insuring its own risks of loss is one of policy and not mandated by
statute.  55 Comp. Gen. 1321 (1976).  The government has long maintained
this policy on the theory that the magnitude of the government's resources
makes it more economical and advantageous for the government to carry its
own risks than to have them assumed by private insurers.  19 Comp. Gen.
211, 214 (1939).  By self-insuring, the government saves those items of
cost and profit that would be included in the premiums charged by private
insurers.  B-168106, July 3, 1974; 21 Comp. Gen. 928, 929 (1942). 
    
Our Office has consistently applied the general rule and held that
appropriated moneys are not available for the payment of insurance
premiums to cover loss or damage to government-owned property or the
liability of government employees in the absence of specific statutory
authority.  B-237654, Feb. 21, 1991; 21 Comp. Gen. 928, 929 (1942). 
Nevertheless, because the rule is not mandated by statute but rather has
evolved administratively from policy considerations, we have not objected
in those limited cases when the underlying policy considerations do not
apply to the particular circumstances before us.  Specifically, we have
not raised objections to an agency's decision to purchase insurance when
the economy sought to be obtained under the rule would be defeated, when
sound business practice indicates that a savings can be effected, or when
services or benefits not otherwise available can be obtained by purchasing
insurance.  See B-151876, Apr. 24, 1964; B-244473.2, May 13, 1993.  For
example, we did not object when the Federal Home Loan Bank (FHLB) Board's
proposal to purchase insurance covering the risk of loss to a new
building.  Under the circumstances presented, FHLB would not realize the
economies sought under the general rule because the general funds of the
Treasury would not be available to replace or repair the structure for the
benefit of the FHLB Board.  55 Comp. Gen. 1321 (1976).  Also, we did not
disagree with the Civil Aeronautics Administration's proposal to purchase
airplane hull insurance.  In that case, the Administration did not have in
its employ, and was unable at the time to recruit, the qualified personnel
needed to appraise damage and arrange for repairs in connection with the
War Training Service; hence, purchase of commercial insurance coverage
that would provide such services provided a benefit not otherwise
obtainable.           B-35379, July 17, 1943.  
    
Generally, an agency requesting a non-statutory exception has the burden
of demonstrating that the policy considerations underlying the general
rule do not apply.  Stated differently, you would need to determine that
the use of wrap-up insurance would produce a savings for the government or
provide benefits not obtained from self-insurance and traditional
insurance programs.  See also B-151876, Apr. 24, 1964; B-244473.2, May 13,
1993.  
    
To meet the burden, a cost-benefit analysis should address whether wrap-up
insurance is justified with regard to cost.  This would include a
comparison between traditional and wrap-up insurance programs as well as a
comparison between having the government self-insure versus the government
purchasing insurance.  With regard to comparing traditional and wrap-up
insurance programs, factors include size of the project, estimated labor
costs, participation of multiple contractors and subcontractors, premium
rates, job duration, location, and general business considerations.[13] 
Assuming your cost-benefit analysis concludes that use of a wrap-up
insurance program would result in savings to the government, the next step
is a cost and risk comparison between the government insuring the
project's risks through its resources versus having a private insurance
carrier insure the risks.  This comparison should assist in determining if
the use of wrap-up insurance would produce a savings for the government
and provide benefits not obtained by using traditional insurance programs.
    
Although not meant to be exclusive, with regard to a comparison between
having the government self-insure versus the government purchasing
insurance, factors would at a minimum include the savings obtained,
increased safety program, meeting time frames of scheduled dates, risk of
insurance gaps, and risk after completion.  The savings obtained could
include (1) the potential for reduced litigation costs due to the wrap-up
insurance policy feature of one primary insurance carrier, (2) any refunds
of the insurance premium to the government for reduced losses on the
project, and (3) the cost difference between traditional and wrap-up
insurance programs.  A policy feature of wrap-up insurance is centralizing
loss control through a safety program planned, implemented and monitored
by the owner of the insurance policy.[14]  Two more policy features of
wrap-up insurance that help reduce loss and meet scheduled time frames is
providing consistent coverage to all parties and having centralized claims
management.[15]  Because a traditional insurance program has multiple
insurance carriers with different coverages, there is a greater risk for
disputes in coverage and liability, which increase the cost and time to
complete the project.  Under wrap-up insurance, the adversarial
relationship and the shifting of blame between contractors are virtually
eliminated because the policy owner's insurance carrier is responsible for
all claims.
    
There are also risks associated with wrap-up insurance.  One risk is an
insurance gap.[16]  The magnitude of this risk depends on the coverage you
decide to include in the wrap-up policy and the ability of contractors to
place the remainder of their insurance needs outside of the project.[17] 
For example, automobile insurance is usually not included in wrap-up
insurance policies.  There could be a question concerning coverage of
accidents relating to vehicle loading or unloading which could be further
complicated if the contractor(s) could not obtain just auto liability
coverage.[18]  Another risk with wrap-up insurance is the uncertainty of
liability after completion of the project.  For example, retrospective
premium adjustments will no doubt extend beyond the construction closeout
date for the project and future claims could be troublesome if occurring
after coverage for the project has expired.[19]  The above potential risks
would need to be weighed against any potential savings and benefits not
obtained with traditional insurance programs.
    
CONCLUSION
    
We are not aware of any statutory provision specifically prohibiting or
authorizing the purchase of wrap-up insurance for the CVC.  Although the
question of using appropriated funds to purchase *wrap-up insurance* is
one of first impression for this Office, we have previously discussed the
issues of allowing the government to purchase insurance commercially to
insure its own risks, see, e.g., B-151876, Apr. 24, 1964; 55 Comp. Gen.
1321, 1323 (1976); B-244473.2, May 13, 1993, and the government assuming
the contractor's risk of its property, see, e.g., 22 Comp. Gen. 892
(1943); 54 Comp. Gen. 824 (1975).  Assuming your Office determines that
purchasing wrap-up insurance is reasonably necessary or incident to the
accomplishment of the construction of the CVC and demonstrates that the
rule's rationale does not apply to your situation, we would not object to
the use of appropriated funds for purchasing wrap-up insurance covering
both the government's risks and the contractors' risks for the CVC
project.  The burden could be met by demonstrating that a savings would be
realized or a benefit, not otherwise obtainable, would be gained through
the use of wrap-up insurance.
    
You also asked about the policy implications of using wrap-up insurance
for the CVC because of your assertion that it could *skewer fair and open
competition.*  GAO has no basis to address the policy implications or the
advisability of using wrap-up insurance since the question involves
numerous policy and economic considerations that must be weighed first by
the AOC.  However, there are situations in which the procurement laws take
no notice of existing unequal competitive situations and do not attempt to
equalize financial disadvantages.  See, e.g., B-190142, Feb. 22, 1978.  If
these factors were to be given weight in the bid evaluation process so as
to equalize the competitive position of bidders, that process would be
fraught with speculation, confusion, and suspicion.  Id.  Finally, to the
extent that using wrap-up insurance would tend to increase
competition,[20] this would be broadly consistent with the overriding
mandate of the Competition in Contracting Act, 41 U.S.C. S: 253 et seq.
(2000), for full and open competition.  We might suggest contacting GSA
for their views on the matter given their experience in managing large
construction projects 
    
I hope the above is responsive to your needs.  If you should have any
additional questions, you can contact me at (202) 512-5400 or Jeffrey
Jacobson, Assistant General Counsel, at (202) 512-8261.
    
Sincerely yours,
    
    
        /signed/
    
Anthony H. Gamboa
General Counsel
    

   ------------------------

   [1] Due to postal irradiation procedures, our Office received your letter
on March 25, 2002.  GAO staff discussed your questions with your General
Counsel in March and provided summary advice as detailed herein.  Your
General Counsel later determined that there was still a need for a written
opinion but acknowledged that there was no longer a need for an expedited
one. 
[2] Wrap-Up Insurance Study, General Services Administration, Dec., 1997.
[3] Id. at 1.
[4] See, e.g., Terrorism Insurance, Rising Uninsured Exposure to Attacks
Heightens Potential Economic Vulnerabilities, GAO-02-472T, Feb. 27, 2002.
[5] GAO, Transportation Infrastructure, Advantages and Disadvantages of
Wrap-Up Insurance for Large Construction Projects, GAO/RCED-99-155, June,
1999.
[6] GSA, Construction Insurance Analysis, Slides and Data Sheets, December
1, 1999,  slide 6.
[7] Id. at slide 7.
[8] Id. at slide 8.
[9] GAO, Transportation Infrastructure, Advantages and Disadvantages of
Wrap-Up Insurance for Large Construction Projects, GAO/RCED-99-155, June,
1999.
[10] Id. at 2.
[11] Wrap-Up Insurance Study, General Services Administration, Dec., 1997,
at 37.
[12] Id.
[13] Wrap-Up Insurance Study, General Services Administration, Dec., 1997,
at 38.
[14] Wrap-Up Insurance Study, General Services Administration, Dec., 1997,
at 31-35.
[15] Id.
[16] Alfred K. Potter II, Senior Vice President, Gilbane, *Wrap-Up
Insurance*, Owner Controlled and Contractor Controlled Insurance Programs,
February, 2000.
[17] Id. at 4.
[18] Id.
[19] Id.
[20] Wrap-up programs enable smaller contractors, especially women and
minority owned businesses, to enjoy the higher liability limits and
significantly better coverage than would otherwise be available to them. 
See Wrap-Up Insurance Study, General Services Administration, Dec., 1997,
at 46.