Multiple projects in one program

Three arrangements

What "multiple projects" can mean

Sponsors ask for one program across several projects for an obvious reason. Marketing a new wrap-up every time a job starts is slow, and a builder with a pipeline cannot run that process four times a year. But "several projects in one program" describes at least three different arrangements, and they behave very differently.

The scheduled version is the simplest, because everything is known when the program is marketed. The rolling version is the one most repeat builders actually want, and the one with the most to get wrong.

The main problem

The shared limit

If several projects sit under one program with one aggregate limit, every project is drawing on the same tower. A serious loss on the first job reduces what is available to the rest, and on a program with a long completed operations tail that erosion can keep happening for years after the project that caused it was finished and sold.

That is more than a theoretical problem on residential work. One defect action on one building, with twenty trades and experts on both sides, can consume a meaningful share of a shared aggregate in defense costs alone before any damages are paid. The remaining projects in the program then have less coverage than their lenders, their contracts or their buyers were told they had.

There are three ways to deal with it, and they cost different amounts.

1. Project-dedicated limits inside the rolling program. Each project gets its own tower. The cleanest answer and the most expensive, and on residential work usually worth it.
2. A reinstating aggregate. The limit refreshes, normally annually. Better than a single aggregate across a decade, and not the same as dedicated limits, because two large claims in one period still compete.
3. Accept the shared limit and size it accordingly. Reasonable where the projects are small, the exposure is short-tailed, and the tower is large relative to any plausible single loss. Less reasonable on for-sale residential.

Whichever is chosen, the number people care about is the one described on the California rules page as a statutory disclosure: on a California residential program covering more than one project, the contract documents have to address the number of units and a good faith estimate of the limits still available. A subcontractor joining the fourth project in a rolling program is entitled to know what is left.

Getting it right

Eligibility criteria

A rolling program works because the carrier has agreed in advance what kinds of project can be added without new underwriting. Those criteria are negotiated once, at placement, and they govern the program for its life. Typical dimensions:

• Maximum construction value per project, and sometimes a maximum for the program in any one period.
• Permitted scopes. New build, renovation, tenant improvement, or a specific exclusion of structural work or vertical additions.
• Construction type and height. Frequently a limit on wood frame above a certain number of stories.
• Tenure. Whether for-sale residential can go in at all, and on what terms, is normally the sharpest line in the criteria.
• Geography. States, and sometimes counties, where the program will respond.
• Schedule. A maximum duration per project, and sometimes a latest date by which a project must start.
• Notification. How and when a project is reported into the program, and what happens if somebody forgets.

That last point is the operational risk. A project that starts without being notified may not be in the program at all, and the discovery usually comes later. The notification process needs an owner inside the organization, and the eligibility criteria need to be in front of whoever is starting projects, not filed with the insurance documents.

Projects that fall outside the criteria are not disasters. They are placed separately, as their own wrap or on another structure. The problem is only when somebody assumes they are inside and nobody checks.

Timing

Several projects, several clocks

Each project has its own completion date, so each one has its own completed operations period. A program that adds projects over four years and carries a ten-year tail is still responding to claims fourteen years after it started.

Three questions follow from that.

Does the tail run per project or from the close of the program? Per project is the more common and the more logical. From the close of the program is more generous to the early projects and should be priced as such.

What happens if the program is not renewed? Projects already added should keep their completed operations coverage. That needs to be explicit, because a sponsor who moves to another carrier in year five and finds the first four years of projects are no longer covered has a problem with no remedy.

Who is tracking it? Fourteen years is longer than most project teams, and often longer than the relationship with the broker who placed it. Somebody needs a record of which projects are in the program, when each one completed, and when each tail expires. See the policy term page for what else that record should carry.

Questions

Common questions

Next

Where to go from here

The other three design decisions.

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