Designed to cover all job-site related risks for owners, developers and their subcontractors, wrap-ups have been a popular product for commercial projects where construction costs are estimated to equal or exceed $100 million. Taking into consideration all trades involved in a project, payroll of at least $20 million is another benchmark measurement for needing a wrap-up.
According to Jamie Knoop, broker consultant for construction clients at the Newport Beach office of Marsh, convincing insurance companies to allow wrap-ups on residential projects was a tough sell initially. Then a 1995 decision by the California Supreme Court changed the way insurance limits are applied to construction defect claims. The new law made it difficult for subcontractors to get liability insurance, which caused insurance companies to at least consider doing residential wrap-ups.
"They resisted it. But when they realized that subcontractors were having problems getting any kind of liability insurance, then it made sense. Prior to wrap-ups for residential contractors, it was costly to identify all the subcontractors and their insurers when a claim was filed. There was also a tremendous amount of defense expense that goes along with that. With wrap-ups, there's one policy and one defense," Knoop notes.
For the most part, insurance companies are still reluctant to approve wrap-up programs on multi-family projects, mostly because the number of units involved does not pencil out to their benefit. Still, if a project is a mixed-use project involving some condominium construction, combined with either retail or commercial space or single-family residences, resistance by the insurance companies lessens.
Even better, the insurance companies like the idea of spreading the risk around more if a builder has projects going on in regions outside of California at the same time they are building in the state, especially if it is in areas where defect litigation is not as prevalent as in this state.
The benefit to developers and owners is obvious. By enrolling their contractors in the program, the contractors' bids on a project are lower, because they deduct the cost of paying their own insurance premiums.
In Orange County, Knoop's firm has done wrap-ups on a variety of commercial projects. Due to the size and value of the projects involved, very few insurance brokers are able to handle the administrative cost of doing wrap-ups for their clients. In the past five to eight years the market has been competitive and soft, especially in the area of workers' compensation insurance, with rates decreasing 20% to 30%, notes Knoop.
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