Conference Examines "WRAP" Insurance
by Ned Barnett           

            The Ronald Reagan Presidential Library played host to West Coast Casualty’s annual Construction Liability and Insurance Conference.  This year, the program focused on “Addressing the Concerns of Contractors, Subcontractors, their Agents and Brokers.”

           A near standing-room-only audience listened to a stream of legal experts who examined various aspects evolving construction litigation issues, many surrounding “Wrap” insurance policies designed to share risk and protect individual firms from the “Last Man Standing” syndrome.

            The presentations made it clear that Wraps are far from an unmixed blessing – especially for subcontractors, many of whom saw it as a cure for more traditional problems that left them at risk to be the “Last Man Standing” when construction defect lawsuits arose.  Wraps have many pitfalls, almost all of them seemingly targeting subcontractors.  Their allies, oddly, are attorneys and insurance carriers – people who may have a stake in defending and supporting the subcontractors.  However, all presenters made it clear that the best defense starts at home – subcontractors who want to minimize risk need to know what they’re signing, what they’re agreeing to – and what the real risks really are.

            All in all, it was a challenging session – often technical, often troubling, but always informative.

            The presenters were remarkably engaging, though the topic itself is both technical and “dry.”  However, the remarkable natural beauty of Simi Valley and the remarkable and historical Reagan Library provided a welcome and refreshing break from the sessions, apparently helping attendees to hold their focus on the business-critical information presented.

From Myth To Reality:
How Developers and Subcontractors Can Work Together to 
Realize the Benefit of Wrap Insurance Programs
by Ned Barnett  

            Jason Weintraub, who serves as Vice President and General Counsel at DRI Services LLC – one of the largest residential and commercial roofing subcontractors on the west coast – “woke up” the audience by leading off with an examination of the “myths” surrounding Wrap insurance policies.  “Wrap program functionality,” he said, “as well as how to achieve benefits from such programs are theoretical, but in most cases also mythical,” was his eye-opening thesis.

The first Myth:  Wraps exist to save premium dollars and improve insurance coverage due to volume discounts and the increased purchasing powers of large builder; and, to reduce defense costs by providing a single, unified defense for builder and trades

However, the Reality is something different – Weintraub contends that Wraps make things worse for all parties.  Currently, he says, subcontractors representing the various trades have better coverage on their own than virtually all current Wrap policies. In addition, as currently constructed, Wrap programs provide more, rather than less, litigation between builders and subs, by pitting them one against the others.

The second prevalent Myth – Wraps provide better coverage.  However, the reality is quite different. Coverage gaps still exist, including gaps in the areas of Off-site General Liability, Workers Compensation (for most Wraps), Warranty Service, SB 800 (equivalent to Nevada ’s Right-to-Repair) Claims, Pollution and Mold, and Subsidence.

Another prevalent Wrap Myth Weintraub identified involves Unified Defense. Countering this, Weintraub cited four conflicting realities.

Reality #1:  Virtually all Wraps are severely under-funded.  The insurance industry recommends at least $30,000 to $60,000 per unit constructed (more coverage for more expensive homes), not including defense fees.  However, typically, assuming 20 percent litigation, the standard Wrap policy provides just $8,753 in coverage per unit constructed, INCLUDING defense fees

Reality #2:  In spite of the “we’re all in this together” myth, builders typically and successfully transfer risk of Wrap limits exhaustion to subcontractors.  Under most Wraps, subcontractors are required to indemnify the builder if the Wrap limits are “inapplicable, exhausted or unavailable”

Reality #3:  Subcontractors cannot insure ANY project covered by a Wrap policy!  The only commercially available General Liability (GL) insurance policies for subcontractors explicitly exclude Wrap policies.  In addition, this exclusion applies even if only SOME of the homes in a project are covered by the Wrap.

Reality #4:  Minimal Wrap coverage means more uncovered warranty claims.  Warranty provisions now commonly include SB 800 (right to repair act); but when repairs are made, that restarts the liability, which will now extend beyond the ten-year life of the warrant.  The impact here is clear: The builder goes back to the sub after litigation ends to seek reimbursement for uncovered warranty claims – particularly where the Wrap carrier is a captive insurance carrier in which builder has a financial incentive to deny claims.

Weintraub concluded by discussing how to make the Myth a Reality.  He made it clear that this is up to the subcontractors.  They should insist that builders use 100 percent of money charged to subs to purchase real insurance with minimal exclusions.  Builders should follow insurance industry recommendations for per-unit coverage limits (minimums), and they should specifically cover all eventualities, from jobsite injuries to mold and subsidence allegations.

“All parties win if Wraps achieve their true purpose,” Weintraub concluded. “However, to make that happen, subcontractors need to understand the risks and limitations of current Wrap policies.”

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