The $1.16 trillion construction industry in the United States isexperiencing steady upward growth since its recovery from thehousing market crash nearly 10 years ago, and one trend that hasemerged is the return of Wrap-Up insurance policies.

Typically, owners, builders, contractors, subcontractors andmaterial suppliers each carry their own separate coverage for everyconstruction project.

With Wrap-Up insurance programs, all construction participantsare covered under a single policy for the project.

Although Wrap-Up policies originally had a limited marketplace,their popularity reached its peak by the time the housing marketcrashed in 2008. Large construction companies crumbled or haltedwork. In general, home builders were not building, and as a result,the subcontractors weren't working.

It's about the relationships

Traditional risk-transfer strategies rely on contractual andinsurance relationships among the owner, general contractor andsubcontractors. Owners seek to have the general contractor and all subcontractorsindemnify and name the owner as an additional insured on the GLpolicy. The owner must rely on the ability of the generalcontractor to buy and maintain the correct insurance for theduration of the exposure, even after the owner and generalcontractor have no further business relationship. By comparison,Wrap-Up program policies are usually retained by the owner ordeveloper. A Wrap-Up program traditionally provides coveragethrough the statute of repose, that is, is a statutethat cuts off certain legal rights if they are not acted on by aspecified deadline.

As the economy gains steady momentum, the Wrap-Up insurancemarket is coming back in full force. The insurance industry usesWrap-Up policies to help the construction industry smooth out anyissues with a loss. Many times when an issue comes to light,general contractors tend blame subcontractors with no one partyclaiming full responsibility. This drives up legal expenses to thepoint at which legal costs have the potential to be greater thanthe actual loss or indemnity. Wrap-Up policies eliminate thisback-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, asthere is no need to allocate blame for any third-party injury toproperty damage because all participants are on the same policy.This allows for a consolidated claims-handling process between theowner and the claimant, leading to speedy and early resolution.Additionally, as a claim arises on a covered project, only oneadjustor or lawyer is needed to defend all insureds.Cross-complaints are unnecessary in these cases.

The same insurance obligations are owed to all listedinsureds on the policy, and the carrier will pay claimsregardless of whether the first-named insured has a claim madeagainst it or not. However, the first-named insured is responsiblefor payment of all premiums to the carrier. Equally, thefirst-named insured is accountable for ensuring that all terms andconditions of the policy are met by every insured named.

This is very different from the traditional method ofconstruction insurance in which every party is responsible for itsown coverage and payments.

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

Under traditional policies, the owner or developer doesn't havecontrol over the insurance purchased by the various contractors orlimits set. Moreover, the bulk of individual subcontractor policiesexclude coverage for multi-family unit construction. In cases likethis, the owner has significant exposure to losses not coveredunder General Contractor's insurance. In addition, if the generalcontractor has a large Self-Insured Retention — as many largegeneral contractors do — there is no immediate insuranceprotection for the owner.

Standard construction insurance programsusually result in complicated and expensive claims handlingprocedures. If several insurance policies cover the same risk, theneed to allocate responsibility between the participants rises. Allof this must be determined prior to achieving a resolution with theclaimant.

Delays often cause the claimant to seek legal counsel andfurther drive up the costs of a claim. This is the single largestcontributing factor to the construction defect epidemic that hashistorically existed in California, New York and numerous otherstates.

Consider a Rolling Wrap-Up

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

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

Related: Why do construction wrap-up policiesexist?

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