Insurance
Wrapping up Wrap Policies for Multi-Family Construction
by Blake Johnson
While general contractors and trade contractors are often
at odds with one another over various insurance issues, they
are on the same page when it comes to the coverage they have
for work performed on condominium or town house projects.
Almost every general liability policy issued to a contractor
contains some type of multifamily exclusion. For this and
other reasons, a Wrap policy is necessary on these types of
projects.
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In basic terms, a residential Wrap policy is nothing more
than a standard commercial general liability policy modified
to cover the developer, the general contractor and all subcontractors
involved at the project site. This policy is further modified
to provide up to three years of Premises/Operations coverage
(the time allowed to complete the project) and Completed Operations
coverage for all of these participants through the applicable
Statute of Repose in the state in which the project is being
built. This solves the insurance problem for the general contractor
and the trade contractors and allows the developer to pick
the construction team best suited for their project.
The driver is construction defect litigation and the ready-made
source of opportunity for the plaintiff attorneys created
by a large number of homes being attached to one another and
HOA's more than willing to talk to them or a Board of Directors
afraid not to. When and if a class-action suit is filed, the
Wrap policy is in a much better position to prevail. The reason
for this is that instead of the plaintiff attorney having
15-20 separate liability carriers with which to negotiate
settlements, there is only one, and they represent the project.
As an insurance product designed to cover the exposures inherent
in multifamily construction, the Wrap policy does a pretty
good job. There are, however, some very important limitations
of which to be aware. One of the biggest is how the costs
associated with defending a claim are handled. With most general
liability policies issued to contractors, these costs fall
outside their limits of liability. In other words, these costs
do not reduce the limits being provided. Under a Wrap policy,
these defense costs fall within the limits of liability and
do reduce them as these costs are incurred. This being the
case, a $1 million policy can be a scary thought on even the
smallest project. Below are other factors to consider when
contemplating getting involved in a Wrap:
Completed Operations Aggregate applies for the entire policy
period (Statute of Repose period) and covers all of the participants
Typically a Mold Exclusion
Typically an EIFS Exclusion
Typically a Professional Liability Exclusion
Typically a significant Self Insured Retention (SIR) or
Deductible
Premium is 100% fully earned after 12 months (no return
premium)
In most cases, it is the owner/developer who pays for this
policy. For this reason it is often referred to as an OCIP
or Owner Controlled Insurance Program. Make no mistake,
these policies are very expensive and can have a major impact
on a project's Performa. This creates the often heated discussion
between owner and contractor as to what are adequate limits
for the project.
Where an owner and contractor may initially agree on what
is adequate, the economics in terms of "cost per unit"
eventually enters into the equation. On larger projects
this is always a point of contention between the owner and
the contractors. On smaller projects where the perceived
risk is less given a smaller number of units, the owner
runs into minimum premiums that can make the cost prohibitive.
There is no question that adequate insurance coverage is
important on these types of projects. However, no amount
of coverage is enough on a poorly designed and/or constructed
project. Therefore, doing everything possible during the
design phase and construction phase to minimize the potential
for construction defect claims down the road is imperative.
Several Wrap carriers require the use of a third party inspection
service as well as a third party peer review of all design
documents. As a contractor looking to get involved in an
attached housing project, having all of these safeguards
in place is every bit as important as the limits and coverage
being provided.
Blake Johnson is the vice president
of Minard-Ames Insurance Group, located in Phoenix. He can
be reached at bjohnson@minardames.com
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