Wrap policies: The new game in CD

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A wrap policy covers everybody's work—that of the general contractor, all subcontractors, and the owner (though there is the notable exception of workers’ compensation, which is not covered by a wrap policy). In contrast, a general liability policy purchased by a general contractor excludes his own work but includes any work performed on his behalf by a subcontractor.

Wraps came about as a result of the litigation environment related to CD in California in the late 1980s and early 1990s. Condos and townhouses were built so fast that people were pulled off the street and made subcontractors to engage in tasks such as roofing. The work was shoddy, causing what became an epidemic of class-action lawsuits. No builder was excluded. The awards were huge.

The insurance industry responded by excluding from coverage the work performed by subcontractors on multifamily homes. But when many subcontractors couldn't get any insurance—not even on their own—they were no longer able to work on condos and town homes. That is how wrap policies came into being.

Wraps are project-specific policies that last the entire length of the project plus the statute of limitations or repose for CD. Because one insurer covers all members of the development team, claims can be managed and processed efficiently. If there is litigation, wraps also reduce the cost of complexity and eliminate battling among the various parties' carriers. Outside professionals administer wraps. They sign up subcontractors and conduct meetings with them. In order to ensure quality work, third-party reviews are mandated.

With wraps, policyholders are also asked to have higher self-insured retentions. Although most don’t go higher than $500,000, one broker told us she had a client with a $5 million self-insured retention on a huge master wrap-up.

Wraps are somewhat more expensive than general liability policies. Legal defense costs are included in the limit. While they have been effective in decreasing the frequency of claims, wraps do tend to increase the severity of claims because, under wraps, what formerly were multiple claims are instead bundled into one monster claim.