Construction Wrap-Up Policies: Analysis of Selected Coverage Issues

Construction Wrap-Up Policies: Analysis of Selected Coverage Issues

To reduce project costs and avoid litigation many owners, developers, general contractors and construction managers have obtained wrap-up insurance programs. In this Analysis, Ruth Kochenderfer and James P. Bobotek discuss the programs' mechanics, advantages/disadvantages and coverage issues that may arise. These issues include determining the insured, deductibles & self-insured retentions, onsite versus offsite coverage, priority of coverage and additional insured & indemnity disputes. The authors write:

II. Wrap-Up Mechanics: What Is a Wrap-Up Program?

     A construction wrap-up program provides insurance for either a single construction project or several designated projects (i.e., a "rolling wrap-up"). The program usually encompasses several types of insurance policies, including, most often, general liability, workers' compensation, and excess liability. A wrap-up program may also include builder's risk and other types of insurance. There are two primary types of wrap-up programs: owner-controlled insurance programs ("OCIP") and contractor-controlled insurance programs ("CCIP"). As the names imply, a project owner or developer sponsors an OCIP, and a contractor or construction manager sponsors a CCIP. OCIPs and CCIPs are both designed to offer similar types of insurance, but differ in terms of who ultimately controls the program. The entity that controls the program generally pays the premiums and may also be responsible for the satisfaction of any deductible or self-insured retention ("SIR").


III. Some Advantages and Disadvantages of a Wrap-up Program

     An owner or contractor weighs the following advantages and disadvantages when deciding whether to procure a wrap-up program for a construction project.

A. Advantages

1. Consolidated Coverage

     In a traditional construction project, there may be more than 50 contractors working on a project site with 50 different insurance programs issued by a host of insurers. If a claim occurs, multiple insurers must be notified and those multiple insurers may dispute which, if any, should respond to the claim. A paramount benefit of a wrap-up program stems from the coordination of insurance coverage for the entire project under one program. This allows the owner or general contractor to select the insurer of the owner's or contractor's choice and also ensures that every entity working on the project has insurance in place. If a project-related claim takes place, notice only needs to be sent to the wrap-up insurer.


E. Additional Insured and Indemnity Issues

1. Contractual Indemnity

     An issue not resolved by the use of wrap-up programs is the interplay between coverage that may be available under the program and indemnity provisions set forth in the owner's, contractor's, and subcontractors' construction contracts. Frequently, indemnification clauses in construction contracts (whether those between the owner and general contractor, or the general contractor and subcontractors) are broader than the insurance coverage provided by a wrap-up program. A contractor or subcontractor may well find that its contractual indemnity obligations make it liable for losses not included within the wrap-up liability coverage, such as pollution liability, professional errors or omissions associated with preparing shop drawings and other design-related submittals, or the contractor's or subcontractors' employment practices.

     Contractors and subcontractors must also consider whether their contracts would make them liable for business interruption or other consequential losses to which the wrap-up program sponsor may be exposed, and if so, whether the wrap-up's builder's risk or liability coverage would respond to such losses. If a contractor's duty to defend and indemnify the owner or general contractor under the applicable indemnity provision is broader than the wrap-up coverage, the prudent contractor should maintain any broader coverage that it already has in place and/or purchase additional "difference in conditions" coverage to ensure that it has sufficient insurance coverage for its indemnity risks

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