Buyers Beware: Take Care Who Wraps Up Your Construction Risks
By JANET ASCHKENASY, an independent financial journalist with more than 20 years of experience covering risk management, employee benefits, and insurance.
Careful who's writing your construction wrap-up program these days.
More and more excess and surplus lines companies may be willing to write certain kinds of wrap-up policies, but their paper may not be as good as what is available in the admitted marketplace, warns Chris Smith, vice president and managing director for account and wrap up operations at Turner Surety and Insurance Brokerage of Woodcliffe Lake, N.J.
As the name suggests, such programs "wrap up" all the workers' compensation and general liability insurance for all onsite contractors and owners of the project site. Thus, general contractors need not worry about whose insurance applies or how it is shared. The wrap-up policy can be purchased by the project owner or general contractor under so called owner- controlled or contractor-controlled programs.
Pricing for such products has become more attractive of late. In an August, 2012 report, Marsh stated that the market for wrap-ups is competitive, "due to a U.S. construction economy that remains near a 12-year low, and a resultant lack of major projects. While rates for renewal of rolling programs or additional projects for established clients remain relatively flat with favorable loss experience, rates for first-time wrap-ups are increasing modestly." Added incentives are offered for more favorable risks, said the report.
Clearly, these programs can simplify matters substantially if a loss is attributed to more than one contractor involved with a project, offering a single safety net instead of multiple insurance policies. Consistent insurance throughout means one owner or contractor need not litigate against another owner's or contractor's insurers.
The Central Synagogue
Kevin King, vice president for claims and legal services at Turner Construction Company, a TSIB sister company, began using wrap-ups partly due to a 1998 fire claim involving the historic Central Synagogue in New York.
"It was one of multiple examples of why there had to be a better way to manage the risk," said King. Before purchasing his contractor-controlled program, Turner Construction had to be concerned about the stance of insurance carriers for subcontractors doing the trade work, such as plumbing, HVAC, electrical and more. Sometimes these subcontractors would buy insurance from carriers that were reluctant to cover claims or were not financially stable, "like Reliance National and Kemper" back in the late 1990s and early 2000s, said King.
The Central Synagogue fire was "a perfect example" of what could go wrong with the multiple policy scenario, he said. At trial, Turner was found to be partially liable for the synagogue fire, which was ignited by a roofing subcontractor and caused some $30 million in damage to the 130-year-old synagogue structure. King spent 10 years in litigation before he was able to extract $18 million from his subcontractors' CGL policies.
In contrast, by using a contractor-controlled insurance program, King is able to enjoy a longstanding relationship with his underwriters, whose claims and legal program is part of the program, and if there is a liability claim, "it's one voice speaking for all the contractors, and one player at the table negotiating for all the claimants."
But not all wrap-up underwriters are created equal, said Smith.
At the height of the residential construction boom (between 2003 and 2007), it was difficult for subcontractors to procure coverage under any general liability policy since claims against builders were rampant, he said.
"People were looking to find any issue and file a claim," said Smith. As a result, the E&S market became one of the only vehicles for residential builders to buy liability insurance.
To add to the confusion, buyers nowadays are often seeking general-liability only wrap-ups.
What's happened, observes Kathi Creedon of Wrap Strategies in Auburn, Calif., is that standard market wrap-up underwriters preferred to write programs that included both workers' comp and general liability coverage given the substantial premiums received for the compensation portion. "GL-only wrap-up programs, written by E&S market, became the only solution for builders and developers during the residential construction boom because of the residential coverage exclusions in most of the contractors' general liability policies," said Creedon.
Today, E&S markets are willing to provide general liability-only coverage on residential projects, as well as commercial risks. And, the E&S market is writing these risks with all kinds of concessions -- including extraordinarily low deductibles, said Smith.
In the admitted market, a GL-only wrap-up may carry deductibles as high as $250,000 or more, he said.
E&S carriers, however, are offering wrap-up deductibles for a tenth of that amount or less. As tempting as that sounds, in some cases, the specialty lines underwriters may not understand the risk well enough and may make changes that are inconsistent with the industry's generally accepted Insurance Services Offices contract language, Smith said.
Out for Shortcuts
Shortcuts are a warning sign: If you're getting a one-page application the E&S carrier is able to turn around in a day -- whereas it takes more like two weeks for admitted carriers to compete such submissions -- you might want to think again before signing on the dotted line.
"Will these companies still be around if there is a problem?" said Smith.
Particularly since in most states, there is a fairly lengthy "statute of repose" where a loss occurrence can be tied to a particular construction date. In most states, that statute of repose is from six to 10 years.
"If someone notices defects in the wall eight years from now" on a property built today, you want to know the carrier will be there for you, said Smith.
Confounding the issue is that many insurance options available to project owners and general contractors, including GL-only, combine program wrap-ups, owner and general contractor only wrap-ups, along with the traditional methods of risk transfer. All too often, those needing to insure construction risks are being offered only one single product in a vacuum, said Creedon.
"Buyers need to understand the full range of their risk transfer options and the advantages and pitfalls of each alternative," Creedon said.
Of course, one should not make the mistake of lumping all surplus lines companies together in terms of their stability and discipline.
"I can't speak on behalf of the rest of the E&S carriers, but [we have] a pretty experienced staff around the country with a lot of our underwriters writing wrap-ups for a number of years," said Kevin Woo, assistant vice president and product line manager for construction liability with Lexington Insurance Co. in Boston.
Woo said that Lexington has historically written both GL-only commercial and residential wrap-up programs. "Residential wrap-ups tend to be written pretty cheaply right now, so we're being prudent at what we look at and when we do provide such coverage. We would do so on specific terms and conditions -- most often on a self-insured retention basis."
That makes the insured responsible for the self-insured retention dollar amount prior to the policy kicking in, whereas with a deductible the insurance carrier will bill the insured for the deductible amount after paying the entire claim.
"We're a strong company with policyholder surplus that will be around" for the long haul, said Woo, noting that this is clearly an important factor given the long-tail nature of construction liability risk.
October 16, 2012
Copyright 2012© LRP Publications