California wrap-up rules

The law

Three sections of the Civil Code

California added three sections to the Civil Code in 2008, all of them effective for work entered into or bid after 1 January 2009, and all of them aimed at the same complaint. Subcontractors were being enrolled in wrap-up programs without being told what the program covered, having a credit taken out of their bid without being told how it was calculated, and then being asked to indemnify the builder for losses the program was already paying.

The three sections do not make wrap-ups harder to buy. They make them harder to run badly.

Section 2782.95

What has to be in the contract documents

On a private residential project, the party buying the wrap-up has to state in the contract documents the total amount of any premium credit or compensation it wants from participants, or the method by which that figure is calculated. It is not enough to say that a credit will be taken.

Beyond the credit, the contract documents have to address the program itself, to the extent it is known at the time. The statute lists the points:

• The limits of the policy.
• The scope of the coverage.
• The term of the policy, meaning how long it is intended to stay in effect.
• What triggers the deductible, or what counts as an occurrence for that purpose.
• The number of units covered, where the program covers more than one project.
• A good faith estimate of the limits still available under the program.

That last one is the point most sponsors miss. On a rolling program that has been running for three years, a subcontractor joining the fourth project is entitled to a good faith estimate of what is left in the tower. The statute gives the sponsor a presumption of good faith if the unit count matches the insurance application and the remaining limits figure came from the insurer or the broker, and that presumption can only be overcome by showing intentional misrepresentation. It is a workable standard, but it only protects a sponsor who actually asked the broker for the number.

A participant can also ask, in writing, for a copy of the policy, or for the binder or declaration if the policy has not been issued yet. What it gets is confidential. It can be shown to the participant’s own broker or attorney, who are bound by the same restriction, and otherwise only where the law requires it.

The teeth

A credit disclosed late does not bind the bid

Section 2782.95 has one consequence that gets a sponsor’s attention faster than the rest of it. If the premium credit or compensation was not disclosed before the participant submitted its bid, the participant is not legally bound by that bid.

The subcontractor is not simply released. It can be held to the bid if it is allowed to raise the number by the difference between whatever insurance cost it had built in, if any, and the credit actually being required. In practice that is a renegotiation at the worst possible moment, after the bid has been accepted and the schedule has been built around it.

The exception is narrow. If the sponsor never required the subcontractor to deduct anything for the wrap in the first place, the bid provision does not apply, because there was nothing to disclose.

Section 2782.9

What the contract cannot ask for

On a residential project covered by a wrap-up, a provision requiring an enrolled and participating subcontractor to indemnify, hold harmless or defend another party, for a claim arising out of the project that the program covers, is unenforceable. It does not matter how the clause is drafted or what the subcontractor agreed to. The section cannot be waived or modified by agreement, act or omission.

The logic is straightforward. The builder bought one program to cover everybody. Letting it also collect a contractual indemnity from an enrolled sub, for the same loss the program is paying, would be collecting twice and would quietly defeat the point of enrolling the sub at all.

What survives is equitable indemnity. If the program does not cover the claim or action, a party can still pursue equitable indemnity against another party for it. So the section carves the wrap-covered losses out of the indemnity fight and leaves everything else where it was.

This is also why the covered scope of the program matters more in California than almost anywhere else. The line between what the wrap covers and what it does not is the same line that decides whether an indemnity clause is enforceable.

Retentions

Charging participants for the retention

Wrap-up programs on residential work carry large self-insured retentions, and sponsors have always wanted the trade that caused the loss to carry some of that cost. The statute allows it, under four conditions, and all four have to hold.

1. Disclosed in the contract. The maximum amount the participant can be asked for, and the method of collection, have to be in the participant’s contract.
2. Reasonably limited. The contribution has to be limited so that each participant has some financial exposure for claims alleged to be caused by its own scope of work. Some, not all of it.
3. Collected only as incurred. The sponsor can only collect when and as the retention or deductible is actually incurred. No collecting it up front and holding it.
4. Proportionate. The amount has to bear a reasonable and proportionate relationship to the liability alleged against that participant’s scope, measured against the whole claim.

Before collecting anything the sponsor has to give the participant written notice of the amount and the basis for it. And there is a cap on the whole exercise: the total collected from all participants cannot exceed the retention or deductible the sponsor itself owes on the claim. If the sponsor follows all of that and the participant still does not pay when due, the sponsor can recover its collection costs and legal fees to the extent the law otherwise allows.

None of this is difficult. It does require the contribution mechanism to be designed at the same time as the program, rather than improvised after the first claim.

Section 2782.96

Public works and non-residential projects

Section 2782.96 carries the disclosure duty across to public works under Labor Code 1720 and to non-residential projects put out for bid after 1 January 2009. It is shorter than the residential version and asks for less.

The bid documents have to clearly set out the total premium credit or compensation required from participants, or the method of calculating it. In the contract documents, to the extent known, the named insured has to disclose the policy limits, the known exclusions, and how long the policy is intended to stay in effect. On written request, once the policies are available, copies go to everyone covered, with a binder or declaration standing in until then. The same confidentiality restriction applies.

There is one carve-out. If the owner, builder or general contractor buys a separate policy that adds coverage on top of the wrap, and does not charge participants any credit or compensation for it, the disclosure requirements do not reach that separate policy.

Notice what is missing compared with the residential section. There is no good faith estimate of remaining limits, no deductible trigger disclosure, and no bid consequence. Public and non-residential sponsors have a lighter duty, which is consistent with the rest of California construction law treating residential as its own category.

Why the tail is long here

Ten years, and what that costs

The statutes above govern paperwork. The reason California residential wrap-ups are priced the way they are sits in a different part of the code.

California gives a claimant ten years from substantial completion to bring an action for a latent construction deficiency, under Code of Civil Procedure section 337.15. Patent deficiencies run on a shorter clock. On top of that, the Right to Repair Act in Title 7 of the Civil Code, which most people still call SB 800, sets functionality standards for new residential units and a pre-litigation process the builder has to go through, with its own set of time limits by building component.

The practical result is that a condominium finished in 2026 can still be the subject of a defect action in 2036, brought by an association that did not exist when the subcontractor signed its contract. A general liability policy that expired at completion is of no use at all in that situation.

So a California residential wrap-up is normally bought with a ten year completed operations extension, and that extension is where most of the premium goes. It has to be bought at the front of the program. Once the program has closed there is no mechanism for going back and adding years to it.

In practice

What this changes about how the program gets built

Put together, the three sections push a California wrap-up to be designed earlier than it otherwise would be. The credit calculation has to exist before the bid package goes out. The limits, term, scope and deductible trigger have to be known well enough to be written into contract documents. The retention contribution mechanism has to be drafted rather than improvised. And the indemnity language in the subcontract has to be written knowing that part of it will not be enforceable.

That is a different sequence from the one a lot of projects actually run, where the insurance gets sorted out after the trades are bought. On a California residential job that sequence costs money, because a credit disclosed late is a credit the subcontractor can reopen.

For the practical questions underneath all this, how long the program should run, where its boundary sits, whether it should cover more than one project, and who gets left out of it, the program design pages go through each decision in turn.

Questions

Common questions

Next

Where to go from here

California is where most of our wrap-up work sits, and residential is where the statutes bite hardest.

Who you would be working with

Cary W. White

Managing Director · ISU Insurance Services of San Francisco

Cary handles the wrap-up placements here. He has spent 38 years in construction insurance. The first ten were on the carrier side, underwriting builders’ risk and complex property exposures. The 28 since have been in retail brokerage, advising residential developers, general contractors and other construction clients on project-specific and annual programs.

He is also one of the original authors of the project liability application that much of the industry still uses to submit wrap-ups to carriers. In practice that means he knows what each question is actually asking for, and where a thin answer will cost you at quote.

cwhite@isusf.com · 415-613-5589