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How wrap insurance differs from traditional insurance

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Many developers and contractors have recently obtained wrap-up, or "wrap," insurance because of the unavailability of traditional insurance. Because wrap policies typically place all of the insurable risk with a single carrier, it is important to understand how these policies differ from traditional insurance.

Haerr

Generally speaking, wrap insurance refers to a policy written to cover a specific project, which insures most of the entities working on the project. Many wrap policies exclude coverage for design or professional services. Completed operations coverage extends protection beyond completion of the work.

The policies may be an Owner Controlled Insurance Program (OCIP) or a Contractor Controlled Insurance Program (CCIP), depending on who controls the policy. Typically, the party purchasing the policy pays a large premium because it is obtaining coverage for all insureds. The premium is recovered by allocating the cost among the insureds.

One risk involved with a wrap policy is the possibility that the carrier may become financially insolvent when a claim is made years after the project is completed. Because the financial strength of carriers varies substantially, choosing the right carrier means the difference between having good insurance and none at all. Most risk managers rely on the carrier's A.M. Best rating when evaluating its financial strength.

Wrap policies may provide more or less coverage than a traditional policy. For example, a wrap policy may actually offer less coverage when compared to the aggregate limits of individual policies. Because the types of coverage, length of coverage and parties covered may vary, it may be difficult to easily compare the cost and extent of coverage between policies. An experienced broker or coverage lawyer can provide an informed comparison of the different coverage.

Another significant difference with wrap policies is policy administration. With traditional insurance, a policyholder typically purchases a policy and files it away until a claim is made. By contrast, most wrap policies impose administrative burdens. For example, policies may require a third party administrator to enroll contractors, issue credits, establish safety programs, perform final payment and premium audits and handle claims.

Most wrap policies contain mandatory provisions concerning notice of claims, deductibles or self-insured retentions (SIRs), waiver of subrogation and dispute procedures. Such provisions create the opportunity for disputes between insureds. Hence, special care must be given to the drafting of all contracts, from development through point of sale, to ensure the coverage conditions are properly coordinated.

A final risk to consider with wrap policies is that they are largely untested by the courts. Insurers writing these policies may have custom language, or manuscript, never before interpreted. Coverage questions will become critical when there is only one insurer available to answer significant claims, especially where the insurer has either denied coverage or reserved its rights. In these instances, experienced counsel will be required to navigate through the maze of coverage issues.


Haerr is a partner in Luce, Forward, Hamilton & Scripps LLP's San Diego office. He can be reached at (619) 699-2564 or rhaerr@luce.com.

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