Wrap-Ups: Not Just for the Big Guns
Construction Insurance Option: Liability Only Wrap-Ups
Wrap-ups, owner controlled insurance programs and consolidated insurance programs all conjure up images of massive projects in excess of hundreds of millions of dollars. The industry often views these as complex deals that provide excellent risk management and risk financing solutions to the sponsor. While that may be true, did you know wrap-ups are being used for smaller projects as well?
A liability only wrap-up is a product that forward-thinking owners or contractors are using to minimize their risk. It originated in the early 2000s when trade contractors could not secure proper coverage for residential projects, typically, townhomes and condominiums in troublesome construction defect states. Their policies contained either multi-family or residential exclusions leaving the risk with the owner or general. A liability only wrap-up solves the coverage issues for all parties involved, which is the main reason for purchasing this protection.
The liability only wrap-up provides the sponsor (owner or general) security in knowing that they don’t need to worry about proper additional insured forms, primary and non-contributory wording and exclusionary wording in a contractor’s or subcontractor’s policy. This eliminated concern that a downstream contractor’s insurance carrier will deny a properly tendered claim.
These programs can be written on projects as low as $15 million in hard costs and done on a rolling basis – wherein the sponsor adds and deletes projects. Contractors contribute to the projects in the same manner as traditional wrap-ups – through an elimination of their insurance costs in bids. The wrap-up provides a unified defense for all parties to a claim. This is especially important when defending construction defect claims, which are some of the most costly claims from a defense perspective. Equally important, the liability only wrap-up can include a specialized safety program. Administrative burdens are relieved through the use of experienced brokers or independent third party administrators.
Creative sponsors are using these programs to insulate their traditional insurance programs from troublesome claims in difficult states (e.g. an Illinois general contractor undertaking a single project in Arizona). The programs are written to include extended completed operations for the duration of a state’s statute of repose or limitation, which is usually no more than 10 years. In this case, the sponsor knows its risk, minimizes it through the wrap-up and maximizes its future risk management needs by crafting a solution to handle claims that may arise long after the project is completed.
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