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Wraps: “Everything Is Negotiable”

There is no such thing as a standard wrap policy: “Everything is negotiable and has the potential to be manuscripted. It’s whether the insured is willing to pay the price.”

That was the advice from Bob Pedersen, AVP, of Chicago’s Brown & Riding Insurance Services, Inc., a wholesale broker specializing in construction. His talk to this month’s Construction Practice Group teleconference was arranged by Don Aberbook, risk manager/in-house counsel at Moody Insurance Agency.

Brown & Riding can provide an estimate of insurance costs as far as a year in advance with no more than geotechnical reports based on soil samples, Pedersen told the group.

“Traditionally most owners see their liability as contingent to the contractors and mostly for premises liability, but is there more?” he asked. Consider these questions:

  • What about completed operations through the statute?
  • What happens if the contractor goes out of business?
  • What if the GC’s limits have been exhausted from other claims?
  • What happens if you sell the property as the owner?

Extended completed operations tail coverage is important, he added. Carriers traditionally will endorse the policy to extend it through the completed operations statute in a specific state or 10 years, whichever time period is shorter.

He advises purchasing tail coverage for several reasons:

  • Dedicated limits for the owner and general contractor on the one specific project.
  • Reduced litigation between the general contractor and owner, since they are on the same policy.
  • Broader coverage.
  • Some potential cost savings, as credits can be removed from the general contractor’s bid.

He also listed the advantages of wrap-ups:

  • Cost savings: Lower costs to the property owner as bulk purchase of insurance lowers total cost. Contractors will be bidding on projects without the possible inflation of their insurance premiums.
  • Bid credits from contractors: Subcontractors will not include the cost of insurance in their bids because the coverage is already being provided for them by the wrap-up policy. All of the contractors have to enroll into the wrap for a specific fee that typically is based on the rate of their current policies as well as the percentage of work they are doing. The insured usually hires a third party wrap-up administration firm for a designated fee to handle all of the enrolling process as well as multiple other services to the insureds.
  • Improved control: Wraps provide improved control of the insurance on the project and remove possible uncertainty when it comes to relying on the insurance coverage of various subcontractors. It is a significant worry whether subcontractors carry the appropriate coverages under their insurance, whether subcontractors insurance will continually be renewed through the state statute, and whether the subcontractor will even be in business by the time a claim arises.
  • Extended products/completed operations coverage: There are varying thoughts on whether the standard ISO policy provides an extended period of time for the completed operations. Most wrap-up policies remove the possible discrepancy by placing an extended completed operations endorsement on the policy. It states that the completed operations period is extended up to the applicable statute in the specific state where the policy is written.
  • Repair work coverage: When placed correctly, the wrap-up policy will extend this to give premises coverage for any repair work the insured needs to do after the policy has expired. This would be something that one would think would typically be covered under an insured’s practice policy but it is standard these days for a carrier to put a wrap-up or project-specific exclusion on policies. This could prevent the insured from having coverage while back on the job site.
  • Dedicated limits: On wraps a dedicated set of limits applies to one project.
  • Reinstating aggregate limit: Wrap-up policies often reinstate the general aggregate limit on an annual basis during the ongoing operations phase of the project. This is more common for commercial than residential placements.
  • Better safety and loss control procedures. Owner control of the insurance broker and insurance underwriter makes it possible to require more stringent safety and loss control procedures of the GC and subcontractors
  • Reduction in time required for contractors to obtain insurance certificates.
  • Improved risk control and claim handling.
  • Peace of mind to the owner. This is the owner’s investment. It should be up to the owner to ensure that it is appropriately protected in every aspect of construction, including the insurance.

A future blog will talk about ways to make administration of wraps easier.



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