Part 3: Coverage Issues under a Wrap Up Program
Part 1 explained the nature of a unified wrap up insurance program for a construction project, and contrasted it with the more traditional approach to insuring project risks. Part 2 addressed the pros and cons of using a wrap up program. Several key coverage issues under a wrap up program are addressed below.
1. Who is covered under the wrap up program?
Generally speaking, the greater the number of enrolled participants, the more successful the wrap up program is likely to be. The owner/developer, the general contractor, and most subcontractors will be covered under the wrap up program. Certain subcontractors may not be covered, and they may need to furnish appropriate individual coverage suitable to their roles in the project. For example, wrap up coverage may be limited to operations at the project site and thus may exclude subcontractors or suppliers conducting off-site manufacturing or assembling of building components. Claims arising from goods or materials in transit may be excluded, preventing haulers from being covered. Some wrap up policies exclude coverage for crane operators and hoisters.
In addition to participants who may be excluded from wrap up coverage by the policy itself, owners and general contractors may elect not to enroll certain subcontractors based on such considerations as the subcontractor's type of work, contract value, or duration of work. In that event, the subcontractor will have to ensure they have adequate individual coverage. For example, hazardous material suppliers and handlers may not be enrolled because their services would be excluded by a pollution exclusion; unless the wrap up program also includes pollution liability coverage, they may have to arrange their own coverage.
2. To what extent is there coverage for "completed operations" claims?
"Completed operations" coverage – for claims of damage occurring within a specified length of time after a contractor's work has been completed – is an important consideration under a participant's individual general liability policy. It is no less important where that participant's work is covered by a wrap up policy instead. The wrap up policy, or the project's contractual insurance requirements, should be reviewed to assess the sufficiency of "completed operations" coverage. Where feasible, the wrap up policy should provide "completed operations" coverage for construction defect claims that is as long as the statutory period of repose in the state where the project is located. (E.g., Cal. Code of Civil Procedure §337.15 [requiring certain latent defect claims to be filed within ten years from substantial completion of the project].) Otherwise, enrolled participants may not be insured for claims involving damage occurring within the statutory period but after the "completed operations" period.
3. Does the contractor's individual policy cover work on the wrapped project?
Many individual liability policies expressly exclude coverage for any project covered by wrap up insurance. In that event, the construction participant would look solely to the wrap up policy for coverage for project related claims. While that may be sufficient for many claims, it might not be sufficient if the wrap up policy's coverage is not as broad as the participant's individual liability policy with regard to that participant's role on the project.
Where a construction participant's individual policy excludes coverage for claims arising out of the wrapped project, and there is a concern about the scope of the wrap up coverage, the participant may consider seeking to have its individual policy endorsed to be excess and difference-in-conditions (DIC) to the wrap up coverage. This typically means that (a) the wrap up program will be primary as to all risks it covers, and (b) the participant's individual policy will provide excess coverage on all risks insured under the wrap up program, and primary coverage as to risks not insured under the wrap up program. While this endorsement is usually associated with a premium, this approach has the benefit of increasing the available limits on claims covered by the wrap up program, and ensuring that the participant has a scope of coverage at least as broad as its own individual policy.
4. How is payment of the deductible handled in the event of a covered claim?
Wrap up policies, like individual liability policies, typically require satisfaction of a deductible or retention. In theory, giving participants some skin in the game by requiring that they share the cost of responding to a claim promotes better construction and safety practices and thereby lowers the cost of insurance.
But how is the deductible handled under the wrap up policy? Assume, for example, that a neighboring business owner is damaged by construction activities on the project site, and the neighbor sues the owner, the general contractor, and a subcontractor. They give notice to the wrap up insurer, which points out that the policy has a $25,000 deductible. This raises several questions:
- What types of outlays will count toward satisfying the deductible? Defense costs? Repair costs? Costs incurred before the insurer is given notice of the claim?
- Who is obligated to pay the deductible? If the deductible is a shared obligation, in what proportion?
- Can costs incurred by the owner, general contractor, and subcontractor be aggregated to satisfy the deductible?
It may be helpful for the participants, especially the owner and general contractor, to consider and discuss these issues on the front end, before a claim arises.
5. Who will defend the enrolled participants if they are sued?
If a claim is made against multiple construction participants, a dispute can arise as to how they will be defended under the wrap up policy. If, for example, a roofing subcontractor's employee is injured on the worksite, he may choose to sue the owner, general contractor, and another subcontractor and have the judicial system determine which entities caused or contributed to his injuries. (The workers compensation exclusivity rule would bar him from suing his employer, the roofing subcontractor, for civil damages.) Before the deductible or retention is satisfied, these participants will need to retain defense counsel, and they will continue to need defense counsel after the deductible or retention is satisfied. This raises several questions:
- Who will represent the three entities before the deductible or retention is satisfied? Will one defense firm represent all three entities? If so, who will select that firm?
- Once the deductible or retention is satisfied, and the wrap up insurer is bound to pay for defense counsel, can the insurer replace existing defense counsel with one of its panel defense firms?
- When is the insurer required to provide independent counsel to one or more of the insured defendants?
These logistical issues are sometimes resolved by agreement among the participants and the wrap up insurer after the claim is brought. But it can only help if these issues are considered up front.
In sum, for the right projects, wrap up programs present a viable alternative to the traditional approach of having every construction participant bring its own coverage to the party. Wrap up programs can reduce the cost of insurance, provide coverage more suitable for the nature and risks of the project, improve safety and risk management, and help avoid disputes among the participants. Early consideration of several key issues that can arise with a wrap up program can help ensure the successful management of risks on a wrapped project.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.