Residential wrap-up insurance

The problem

Why residential ends up in a wrap

Ask a framer, a roofer or a plumber for a certificate on a for-sale condominium job and read what comes back. A large share of the general liability policies written for small and mid-size trades carry a residential exclusion, a condominium exclusion, a tract housing exclusion, or an exclusion for work on any structure converted to residential use within some number of years. The certificate will not say so. The policy will.

That is the gap. The subcontractor is insured, the paperwork is in order, the compliance file is clean, and there is no coverage for the work it is actually doing on your project. The first anyone finds out is when a claim is tendered eight years later and the carrier denies.

A wrap-up solves it directly. One program is bought for the project, the residential exclusion is negotiated out of that program, and every enrolled trade is covered on the same terms, with the same limits, for the same number of years. Nobody is relying on thirty separate policies lining up.

Availability

What the market will write

Residential wrap-up capacity is real but it is selective, and the appetite moves. What underwriters are looking at, in roughly the order they look at it:

None of these is disqualifying on its own. A wood frame for-sale condominium in California with a first-time sponsor is a hard risk and it still gets placed, usually with a larger retention and a tighter set of enrollment conditions. The combination matters more than any single item.

The one thing that genuinely changes the conversation is a documented quality assurance program. Third party envelope inspection, water testing, photographic documentation of flashing and waterproofing before cover-up. Underwriters price for the loss they expect to pay ten years from now, and evidence that somebody watched the work go in is the only thing on the submission that speaks to that directly.

The tail

The ten-year problem

Almost nothing goes wrong on a residential project during construction. The claims arrive years later, from an owners association that was formed after the developer handed over, with an expert report covering every building and every trade.

That is why the completed operations extension is the whole conversation on residential. The construction period coverage is comparatively cheap. The years after completion are what the premium is buying.

In California the outside limit for a latent defect action is ten years from substantial completion, which is why ten-year tails are the norm there. Other states run shorter, and the right number is the one that covers the applicable repose period in the state the project is in, not a round number copied from the last deal.

Two things about the tail catch sponsors out. The first is that it has to be bought at placement. Once the program has closed there is no facility for going back and adding years. The second is that if the project schedule slips, the construction term may need extending, and an extension bought under pressure late in the job is priced accordingly. The policy term page goes through both.

Price

What moves the number

Residential wrap-up pricing is usually expressed as a rate against hard construction value, sometimes against payroll for the workers’ compensation piece. The rate itself is the least interesting part. What moves it:

• Unit count and tenure. A for-sale unit with an eventual association behind it is priced differently from a rental unit the sponsor intends to hold.
• Length of the tail. Each additional year of completed operations is priced, and the later years are not free.
• Retention. A larger self-insured retention moves premium down and moves risk onto the sponsor’s balance sheet. On a California residential job, how participants contribute to that retention is itself regulated. See the California rules page.
• Limit structure. Dedicated project limits cost more than limits shared across a program of projects, and are worth more when a claim arrives.
• Defence costs. Inside the limit or outside it. On a defect claim with twenty trades and expert reports on both sides, defense can consume a meaningful part of the tower before anybody pays a dollar of damages.
• Loss history. Not just whether there were claims, but whether anything changed afterwards.

The figure people quote for when a wrap starts to pay for itself is somewhere around twenty-five million dollars in hard construction value. That is a reasonable rule of thumb and it is not a rule. Smaller residential projects get priced too, and a good proportion of them end up on a conventional structure instead because the arithmetic does not work. There is no minimum to ask.

Who sponsors it

Owner-controlled or contractor-controlled

On residential the sponsor question has a sharper edge than it does elsewhere, because the entity that sponsors the program is the entity that has to still be around, and still interested, when the claim arrives nine years later.

A developer that builds through single purpose entities and dissolves them after sell-out has a structural problem with an owner-controlled program. The named insured on the policy is a company that no longer exists. It is solvable, and it needs to be solved at placement rather than discovered later.

A contractor-controlled program moves the sponsorship to the general contractor, who is usually still trading. That has its own consequences for who controls the claim and who carries the retention. The OCIP versus CCIP comparison goes through the trade-offs in detail.

Running it

Enrollment, credits and what subs still need

Enrolling a trade in the wrap does not retire its own insurance. The enrolled subcontractor still needs a policy for everything outside the project: its work on other jobs, its vehicles, anything it does off the designated site, and any activity the wrap excludes. Enrollment covers the on-site work and nothing else.

On the money side, the point of the program is that the project does not pay twice. Subcontractors normally carry insurance cost inside their bids. If the wrap is providing that coverage, the cost has to come out, by bid deduction, by credit, or by pricing the work net of the program from the start. Whichever method is used, it has to be defined before bids are finalized, and in California it has to be disclosed before the bid under Civil Code 2782.95 or the bidder is not bound by its bid.

Administration is the part that gets underestimated. Somebody has to enroll the trades, collect and review certificates from every excluded party, report payroll or contract values, centralize the claims, allocate deductibles, complete the premium audits, and keep the completed operations coverage intact for a decade after the last worker leaves. That is a role, not a formality, and the program should be built knowing who is going to do it.

When not

When a wrap is the wrong answer

A wrap is one structure among several, and there are residential projects where it is not the right one.

• The project is small enough that the administration costs more than the coverage gap is worth. Below the point where the program pays for itself, the honest answer is a conventional structure with carefully written insurance requirements.
• The trades can actually buy the coverage. On some build-to-rent and apartment work, the residential exclusion problem is much milder, and the main argument for a wrap falls away.
• Nobody is going to administer it. A wrap-up that nobody runs is worse than no wrap-up, because everyone on the job believes they are covered.
• A project-specific policy would do. If the goal is dedicated limits for the owner and general contractor rather than solving a subcontractor coverage gap, project-specific liability is lighter and often sufficient.

We place all of these. There is no structure here that we need the answer to be.

Questions

Common questions

Next

Where to go from here

Residential is one project type among several, and a wrap is one structure among several.

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