Article dated May 2006 / Revised June 2011
The Wrap-Up Advantage
We are often asked the question, “What is the better form of liability protection for a construction project, Wrap-Up liability coverage, or relying on each contractor’s Commercial General Liability (CGL) policy?”
Almost all experts agree that a Wrap-Up liability policy is the preferred method. The benefits of a Wrap-Up liability policy are as follows.
- Uniform limit for all insureds. Contractors carry limits ranging from $1 million and up, whereas a Wrap-Up policy provides one common limit which is usually much higher.
- A specific limit dedicated to the project. Under a CGL policy, contractors’ limits may be eroded by payment of claims on other projects.
- Uniform coverage for all insureds. CGL policies vary and coverage can be restricted by excessive endorsement use.
- The policy is in force for the entire project, including the completed operations period. If an owner or general contractor relies on the various subcontractors’ CGL policies, there will be multiple renewal dates, creating additional costs for the owner or general contractor to follow up with the subcontractors for new insurance certificates after their renewal dates. The occasional policy may not be renewed or may even be cancelled prior to the renewal date without notice being given to the owner or general contractor.
- Ease of the owner in identifying the insurance cost for the project. Costs are known in advance – this is important for “cost plus” projects.
- Ease in dealing with claims which involve multiple parties. With various CGL policies, there will be multiple adjusters. This could result in finger-pointing as to blame, and strained relationships causing disruptions to the project.
- A Wrap-Up policy has a uniform deductible. Where a project is insured through multiple CGL policies, a further disadvantage is that when liability is split, each contractor is responsible for their deductible amount. These separate deductibles combined can exceed the Wrap-Up policy deductible.
- Potential premium savings. We say “potential” when in fact we know from experience that, in most cases, a Wrap-Up liability policy will pay for itself.
Why will a Wrap-Up liability policy pay for itself? If the Wrap-Up purchaser takes a firm position with the project’s subcontractors, premium savings can be substantial. In theory, once a subcontractor sees in the tender specs that the owner or general contractor will provide a Wrap-Up for the project, they should deduct from their bid the cost of their CGL insurance other than the cost of “Wrap-Up Difference in Conditions” coverage (“Wrap-Up D.I.C.”). This is not always done, and as a result, cost savings are not being realized. We find that in parts of the country where Wrap-Ups are more prevalent, contractors generally pass on these cost savings because failure to do so may result in their bid being too high. Cost savings using a Wrap-Up can be substantiated by requiring contractors and subcontractors to bid with and without the cost of their insurance.A knowledgeable Wrap-Up purchaser, taking a firm position, invariably prevails and achieves substantial premium savings for the project.
The following are other characteristics common to Wrap-Up policies:
- Almost all Wrap-Up policies exclude damage to the project, except during the completed operations period. It should be added that most projects insured by a Wrap-Up policy also have a Builders Risk policy in force which would cover damage to the project.
- Wrap-Up policies are subject to minimum premiums (typically $5,000 or more); therefore, they are not cost effective for smaller projects. Generally, projects over $3 million are better suited. However, some general contractors have access to reporting Wrap-Up programs with lower minimum premiums, such as offered by ENCON.
- Wrap-Up forms vary in that there is no standard industry form. Other than the exclusion for damage to the project, coverage should be equal to or better than the IBC 2100. Certain features to look for are “no exclusion for damage” to an existing structure if the work is a renovation project and a clause stating the Wrap-Up policy is primary. Generally, policy forms specifically created as Wrap-Up forms are better than a CGL policy endorsed to be a Wrap-Up. The ENCON form is broader than most and a copy of our Wrap-Up wording highlight sheet is located on our website.
While Wrap-Up policies are definitely the way to go on construction projects, under the Canadian Construction Documents Committee (CCDC) contract requirements, all contractors must also carry a CGL policy with a minimum $5 million limit. In addition, contractors’ CGL policies should contain a “Wrap-Up D.I.C.,” which provides coverage for losses excluded by a Wrap-Up policy such as damage to project or losses excluded by a warranty violation such as a welding warranty. For this coverage, the general contractor typically pays a rate up to 25 per cent of their current CGL rate (subcontractors’ Wrap-Up D.I.C. rates are also up to 25 per cent of their regular CGL rate). A CGL with a Wrap-Up Exclusion should not be accepted. Furthermore, when an owner or general contractor is selecting their subcontractors, it is preferable that these subcontractors carry a high limit CGL as opposed to a combination of low limit CGL andumbrella. Many umbrella policies exclude projects insured under a Wrap-Up to one extent or another, and coverage provided for completed operations can vary.
For answers to any further questions you have on Wrap-Up liability insurance, please contact our underwriters who have extensive expertise in this area.
This publication has been prepared for general information use. It should not be relied upon as legal advice or legal opinion with respect to any specific factual circumstances.