As the economy gains steady momentum, the Wrap-Up insurance market is coming back in full force. The insurance industry uses Wrap-Up policies to help the construction industry smooth out any issues with a loss. Many times when an issue comes to light, general contractors tend blame subcontractors with no one party claiming full responsibility. This drives up legal expenses to the point at which legal costs have the potential to be greater than the actual loss or indemnity. Wrap-Up policies eliminate this back-and-forth.

Wrap-Up policies allow for a more efficient claims process. (Photo: Shutterstock)

Consolidated claims process

Initiating Wrap-Up policies makes sense in many instances, as there is no need to allocate blame for any third-party injury to property damage because all participants are on the same policy. This allows for a consolidated claims-handling process between the owner and the claimant, leading to speedy and early resolution. Additionally, as a claim arises on a covered project, only one adjustor or lawyer is needed to defend all insureds. Cross-complaints are unnecessary in these cases.

The same insurance obligations are owed to all listed insureds on the policy, and the carrier will pay claims regardless of whether the first-named insured has a claim made against it or not. However, the first-named insured is responsible for payment of all premiums to the carrier. Equally, the first-named insured is accountable for ensuring that all terms and conditions of the policy are met by every insured named.

This is very different from the traditional method of construction insurance in which every party is responsible for its own coverage and payments.

Regardless of who may be at fault for any claims, the first-named insured has the obligation to pay any deductibles or self-insured retentions. Part of these payments may be transferable to other construction participants through a contract or an additional Program Insurance endorsement, but it depends on how the Wrap-Up insurance policy is created.

Under traditional policies, the owner or developer doesn't have control over the insurance purchased by the various contractors or limits set. Moreover, the bulk of individual subcontractor policies exclude coverage for multi-family unit construction. In cases like this, the owner has significant exposure to losses not covered under General Contractor's insurance. In addition, if the general contractor has a large Self-Insured Retention — as many large general contractors do — there is no immediate insurance protection for the owner.

Standard construction insurance programs usually result in complicated and expensive claims handling procedures. If several insurance policies cover the same risk, the need to allocate responsibility between the participants rises. All of this must be determined prior to achieving a resolution with the claimant.

Delays often cause the claimant to seek legal counsel and further drive up the costs of a claim. This is the single largest contributing factor to the construction defect epidemic that has historically existed in California, New York and numerous other states.

Consider a Rolling Wrap-Up

Depending on the needs of the developer, a Rolling Wrap-Up program may be advantageous. This is especially intriguing for local contractors that consistently use the same subcontractors, for example. Brokers and agents that know a trusted contractor's experience can have the contractor agree to the terms and conditions for all projects and underwrite it all at once.

The agreement on a Rolling Wrap-Up policy allows for every new project to be picked up for the two- to three-year duration of the program. These new types of policies can cover up to $100 million in construction costs and generally include five to six projects. There is no such thing as an off-the-shelf product when writing a Wrap-Up insurance policy in the construction space. These coverages vary and need to be crafted carefully. Wrap-Up policies will continue to grow as the construction market rises, as this coverage is connected closely to its path.

Related: Why do construction wrap-up policies exist?

Denis Brady is president of Burns & Wilcox Brokerage, a specialty insurance brokerage, and he is based in San Francisco. For more information visit: www.burnsandwilcoxbrokerage.com