Wrap-Ups - Insurance Community Center

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OCIP / CCIP
“Wrap Up” Construction Projects
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Disclaimer
Insurance forms and endorsements vary based on insurance
company; changes in edition dates; regulations; court decisions;
and state jurisdiction. This instructional materials provided by
Insight is intended as a general guideline and any interpretations
provided by Insight do not modify or revise insurance policy
language. The authors of these materials, Insight Insurance
Consultants is a division of Insight Consulting and Management
Inc. In providing these materials, Insight assumes neither liability
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Copyright 2010 – 2011 All Rights Reserved
www.insurancecommunitycenter.com
Laurie: 714.803.5830 [email protected]
Marjorie: 714.206.9583
[email protected]
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Your Instructor Today
Robert J. Marshburn, CRM, CIC, ARM, CRIS, CISC
Founder and Principal
R. J. Marshburn & Associates
www.CertifiedRiskManagers.com
Senior Educational Consultant to
Insurance Community Center/University
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Overview of Wraps
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Polling Question #1
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CIP
Consolidated Insurance Program
• Wraps put insurance coverages and all
eligible insureds together under a single
policy for specific project(s) and
location(s)
• Typically written for a specific job
• When written for multiple jobs (for the
Owner or Contractor) it is called a
“rolling wrap” (ROCIP)
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CIP
• Original use developed for very large
municipal works jobs as a method to
control Workers’ Compensation costs
and utilize proper loss control
• At its genesis, the job sizes eligible for
Wraps exceeded $250 million. Over the
past decade, the job size for eligibility
has reduced dramatically
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CIP
• Later, CIPs included General Liability
• In today’s construction environment,
CIPS are used to provide Workers’
Compensation and Commercial General
Liability for municipal works, large
private works, smaller commercial
projects and, most recently, residential
construction
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CIP
• One of the main reasons for this change
has been the difficulties in placing
traditional insurance, particularly
Commercial General Liability coverages,
for contractors involved in residential
construction, especially condos
• Commercial and residential wrap
policies are quite different
– Rolling wraps add to the confusion
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CIP
Wrap Policies are NOT
standardized—each one
MUST be carefully
reviewed for coverage!
• Insurance Contract language
and coverage used may create
serious gaps and limitations
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Important Terms
• Owner Controlled Insurance Program
(OCIP)
• Contractor Controlled Insurance
Program (CCIP)
• Project Manager
– The party charged with overall
responsibility for the job completion
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Important Terms
• CIP Manager
– The party responsible for the design and
administration of the CIP
– Reports to the Project Manager
• SIR – Self Insured Retention
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Typical Participants
• Project Owner / Developer
• GC
• Most Wraps will include:
– Subs and Sub-subs
• Size of job
• Type of work
• Below SIR threshold
• Some Wraps may include Suppliers most do NOT
•
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Typically Included Coverages
• Workers’ Compensation
– States regulate OCIPS/CCIPS
– Not allowed in all states, particularly
monopolistic
• Commercial General Liability
– Off-site exposures excluded
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Typically Included Coverages
• Umbrella / Excess Liability
– Off-site exposures excluded
• Builder’s Risk
– Direct property loss and consequential loss
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Coverages Typically NOT Included
Contractor’s Equipment Floater
Business Auto Coverage
Aviation Liability
Professional Liability
Design professional liability or engineering can be
included in GL
Surety Bonds
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CIP Benefits - Loss and Litigation
Control
Single defense – “one for all”
Less opportunity for cross-litigation between co-contractors
One central authority provides greater administrative control
Improved quality of work, especially water intrusion
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CIP Benefits - Loss and Litigation
Control
One loss control program
means better coordination of
safety programs and more
effective implementation
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One study of pure loss ratios
on commercial wrap projects
averaged 21% - 35%
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CIP Benefits - Loss and Litigation
Control
• Bridges, tunnels, dams construction may
yield a higher savings margin
• One of the more difficult areas to
predict are the cost savings of reduced
on the job injuries
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CIP Benefits - Loss and Litigation
Control
• Dividend and cost-sharing plans predict
expected losses and IBNR
– Final adjustment several months after the close of
the project
• The project owner can lose even more
monetary advantage if having to pay
substantial portions of the WC premium up
front
• The time value of money is diluted with a long
adjustment time
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CIP Benefits to Project Owner
• Lower construction costs
• Reduced cost of multiple policies for
contractor and subs
• Reduced cost of losses
• Proper loss control reduces application
of deductibles or retentions
• Exposures limited to location or project;
not collective for all work
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CIP Benefits to Project Owner
• Better buying power with insurance
companies to
– Negotiate lower premiums
– Negotiate fewer exclusions and more
favorable policy wording
• Periodic payment of premiums provides
for better cash flow
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CIP Benefits to Project Owner
• Elimination of multiple managerial /
administrative supervisors
• Better coordination of loss control,
safety and security, record keeping
• Coverage availability in the insurance
market - especially residential
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CIP Benefits to Project Owner
• May provide insurance otherwise
unavailable
• On large Wraps, usually written as profit
sharing plans
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CIP Benefits to GC
• Same benefits as above as a CCIP
• Potentially higher limits of insurance
• Potentially broader coverage for a
specific contract
• Contractor’s own insurance program is
protected from losses
• Reduced employee injury due to loss
control and safety measures
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Disadvantages of Using a Wrap
• Payroll auditing procedures create
additional work and costs to Owner
• Participation disrupts GC’s insurance
programs
• Diminishes bargaining power with own
insurance company over rates and
coverages
• Can create gaps in coverage when
project is over
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Disadvantages to Sub Contractors
• Complicated insurance procedures and
specialized wording
• No one is protecting Sub’s interests in
the project
• Separate Payroll and auditing
procedures create additional work and
administrative costs
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Disadvantages to Sub Contractors
• Participation disrupts Sub’s insurance
program
• Shrinks payroll and receipts with own
insurance company
• Can increase rates and result in less
coverage
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Disadvantages to Sub Contractors
• Minimum & deposit or flat rate
premiums
• Experience Modification can be affected
if reports are not made separately and
timely
• Injury to Sub’s employee will still affect
their own loss ratio
• Sub has no control over claim –
payments, response or problems
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Disadvantages to Sub Contractors
• Sub’s broker does work with no
compensation
• Loss of control
• Charge back premium for Workers’
Compensation costs may be at a higher
amount if Sub has a low Ex. Mod
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Administration
• Causes increased paperwork and
expense
• Sub’s broker does work relating to wrap
quote, analysis, coverage, insurance,
and administration—all with no
compensation
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Polling Question #2 & #3
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Administration
• Fee based service
• Precise description in all CIP documents,
including off-site locations used for jobrelated activities (directly & exclusively
related to work to be performed at the
project)
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Administration
• Contract and bid documents
– CIP must be fully designed before the bid
requests are distributed
• If the Project is controlled by the Project
Owner is the GC allowed a copy of the
CIP contract? (AB 2738 in California)
• Are Subs allowed a copy of the CIP
contract? (AB 2738 requires as of
1.1.2009)
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Owner, Developer, GC, &
Administrator Exposures
• Procedural & Substantive
– Devising, controlling, placing, and
administering wrap & insurance coverages
• Responsibility for uninsured events
– Uninsurable losses
– Insurance policy exclusions
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Owner, Developer, GC, &
Administrator Exposures
• Responsibility for safety and claims
reporting
• Compulsory participation usually
required unless proof of acceptable
Insurance provided by Sub
• Enrollment issues—best to provide
Broad Named Insured language for “all
eligible participants” to avoid
unenrolled Contractor exposure
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Owner, Developer, GC, &
Administrator Exposures
• Denial of representation
• Fraud - “illusory coverage”
– Excess coverage, not primary
– Inadequate completed ops time period
– Inadequate limits for project(s)
– Coverage exclusions
– Company specific forms
– There is NO Standard Wrap Policy!
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Owner, Developer, GC, &
Administrator Exposures
• Wraps have little or no case law or
statutory clarity in some states
• Will courts expose GL coverage to
uncovered ‘wrap’ damages for
construction defect?
• Disclosure, disclaimer, and
indemnification from CIP
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CIP Contract Provisions
• Typical Binding Contract Provisions
• Contract stipulations (cooperation
clauses) that all contractors and subs
will cooperate with CIP requirements
• Compliance with safety standards,
including materials, equipment and
methods of construction
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CIP Contract Provisions
• Compliance with loss control
• Compliance with minimum safety
standards
• Reporting necessary payroll, loss and
other information
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CIP Contract Provisions
• Indemnification of owner and project
manager for injuries to employees
• Does not eliminate tort liability from
owner/manager
• Sends coverage back to CGL via actionover
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CIP Contract Provisions
• Indemnification for other losses of CIP
participants
• Additional Insured status
– Parties to be provided that status
– 2013 ISO forms are Only to the extent
allowed by law, and
– Only to the extent required by written
Contract or agreement
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CIP Contract Provisions
• Participants in CIP usually relinquish any
claim to dividends, retro refunds, profit
sharing or any other form of refund,
credit or audit reduction
• All such monies to remain with project
controller (AB2738 in California does not
allow profit from Wrap Insurance
program)
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Typical Binding Contract
Provisions
• Party responsible for all uninsured
property losses (AB2738 not allow for
residential wraps)
– Often placed on the Subs
– Negligent acts by Sub or Sub-sub
– Intentional acts
– Regardless of cause
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Necessary To Purchase Builder’s Risk
Coverage
• Why necessary?
– No PD liability with Wrap covering all
contractors
• Limit
• Deductible
• Waiver of subrogation to be included for
all Builder’s Risk policy loss payments,
which will be paid to project manager
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Polling Question #4
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Indemnification Agreement
• Requirements for one party to pay costs
for another party’s liability
• Parties affected by the Indemnity
language
– Owner / Developer
– Architect / Engineer
– GC / Subs / Sub-Subs
– Suppliers
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Indemnification Agreement
• Broad indemnity?
– For whom?
– Regardless of fault?
– How broad?
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Indemnification Agreement
• Can be for all tort liability except sole or
willful (varies by state)
• Statutory law can differ between
commercial projects and residential
projects (dramatically so in California)
• Does the contract specify costs to be
paid?
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Indemnification Agreement
• Does the contract specify a maximum
dollar amount?
• Does the contract specify a time limit?
• How long does indemnification last?
• Can it extend beyond the contract term?
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Indemnification Agreement
• Is the Insurance language compliant
with state statutory and case law
• The contract will contain language,
typically toward the back of the
agreement, that will indicate the state
that will have jurisdiction over the
contract
• Attorney specializing in wraps needs to
provide opinion
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Parties Typically Providing
Indemnification
GC pays for
Project Owner
/ Developer
Subcontractor
pays for
Project Owner
/ Developer
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GC
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Indemnity
• For sub’s own work, or others, i.e.
Builder & other subs?
• Active or passive or both
– Active—what you did that caused the harm
– Passive—What you did not do, but should
have, that caused the harm
• Active and passive only of Sub, or
• Active and/or Passive of GC, Owner, and
other Subs?
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Basic Indemnity Concepts and Types
of Indemnity Agreements
• Broad
– The Sub agrees to indemnify the GC for all
liability, including that caused solely by GC.
• Intermediate
– The Sub agrees to indemnify the GC for all
liability, except those caused solely by GC.
• Limited
– The Sub agrees to indemnify the GC only
for acts of the Sub
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Examples
Limited Form
of Indemnity
Intermediate Form
of Indemnity
Indemnitor pays for
the indemnitee
defense and
damages arising out
of acts of the
Indemnitor ONLY
Indemnitor pays for the
indemnitee defense and
damages arising out
anyone’s acts, EXCEPT
those acts that are the
sole negligence of the
indemnitee
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Broad Form
of Indemnity
Indemnitor pays for the
indemnitee defense and
damages arising out of
anyone’s acts, INCLUDING
those acts that are the sole
negligence of the
indemnitee
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General Indemnity clause
Does not specifically
address how much of
the Builder’s
negligence is
indemnified
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At most, only passive,
not active liability, is
indemnified
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California Indemnity Types
• Type I—Indemnification for the Owner
or GC’s Liability for any tort liability,
Active or Passive, whether or not caused
by the Sub or within his scope of work.
Only Exceptions: 1—Sole or 2—Willful
Liability, including fraud
• Effective 1.1.2013, Type I is no longer
allowed in Construction Contracts!
(SB474)
•
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California Indemnity Types
• Type II—Indemnification for Passive, but
not Active, Liability of the Owner or GC
regardless of how caused, i.e. by the
indemnifying Sub (or others), i.e.
whether or not at fault
• Type III—Indemnification only for
Passive liabilities caused by the
indemnifying Sub, but not liability
caused by others
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California’s AB2738 Wrap Law
• KEY PROVISIONS—Civil Code Sections
2782.9 to 2782. 96
• Applies after 1-1-2009
• NO Indemnity or Insurance is allowed
from any Contractor or Sub for a
Residential Wrap Up program
– The only coverage will be under the Wrap!
– Must Obtain Quality Coverage!
– Recourse for “equitable indemnity “
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California’s AB2738 Wrap Law
• For COMMERCIAL Construction
– Type 2 & 3 Indemnity still allowed
For Residential & Commercial—
• Allocation of Policy Costs, Deds & SIRs—
– NO profit can be made by Wrap sponsor
from Subs on
– the wrap policy
– deductibles or SIRs—
» allow reasonable allocation
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California’s AB2738 Wrap Law
• CIP disclosure requirements for—
– Coverage
– Limits
– Term
– Basis for deductible or SIR trigger
– Copy of policy or binder
– Premium (bid deducts) including upcharge
bid protection
– Confidentiality requirements for subs
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California’s AB2738 Wrap Law
• The CIP contract must be reviewed for
proper language
• Work with experienced Wrap Attorney
and TPA
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Polling Question #5
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Liability Standard
• Negligence or strict liability
• Developer = Strict (only need to prove
causation of damage, not negligence)
• Subs = Negligence (must prove breach
of prudent person standard resulting in
damage)
– When the Sub Indemnifies Developer, what
happens to the Sub’s liability standard?
– Must the sub be negligent to require
indemnification of the GC?
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Liability Indemnity Coverage
• Sub’s coverage for indemnity
agreements
– No Contractual Liability coverage under
own CGL due to Wrap exclusion
– CIP won’t cover Contractual Liability of the
Subs
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Bid Process
• Bids usually separate insurance costs
from costs, labor and profit
• Referred to as a “Credit” or “Bid
Deduct” on insurance
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Bid Process
• Determining the charge
• The CIP documents should specify
method
– Standard amount for all Subs, or
– Tiered cost by class, or
– Based on Sub’s own cost under their CGL or
– Another disclosed method
– If not, make provision for upcharge outside
California
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Bid Process
• Do bid specs reserve right to do as a CIP,
but quote as regular job?
– Used to avoid “padding” of bid
• Is there a copy of the coverages
available for the contractor (or Subs) to
review and retain for their records?
– If not, make provision for withdrawal
conditions with no penalty for
unacceptable coverage outside California
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Bid Process
• Is there a disclaimer and
indemnification relating to your
independent review and approval of
coverages and/or program
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Coverage Issues
Affect Owner, GC and Sub
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Coverage Issues
• There is no standard wrap policy,
although most use a standard ISO CGL
as its nucleus
– Caution! Some do not, and are completely
manuscripted
• The General Liability section can be
broader in coverage than standard
forms, particularly with commercial
projects
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Coverage Issues
• The General Liability section can be
more restrictive than standard forms,
sometimes for commercial, but
especially when writing for a residential
project
• The Workers’ Compensation portion
typically follows statutory benefits and
provides Employer’s Liability coverage
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Coverage Issues - Project Owner
• A structure that will be sold upon
completion creates potential problems
for the owner
• The CIP General Liability program is
intended to be the only coverage that
responds to present and future losses
brought by new owner, occupants, or
other third parties
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Coverage Issues - Project Owner
• Any damage to the property while it is
under construction is excluded from the
CGL
– Must be covered by a properly designed
Builder’s Risk policy, which may (should) be
included in the CIP coverage portfolio
– The agent/broker for the Project Owner
must review coverage requirements in the
construction agreement to verify proper
language has been included
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Coverage Issues – Builder’s Risk
• The agent/broker must also review the
Builder’s Risk policy, regardless of the
party required to provide the policy
• The Builder’s Risk coverage ends when
the project is completed according to
the terms of the Builder’s Risk policy
and so will be of no help for loss to the
project after construction is complete
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Coverage Issues – Builder’s Risk
• The agent/broker for the GC must
review coverage requirements in the
construction agreement to verify proper
language has been included
• The agent/broker for the Sub must
review coverage requirements in the
construction agreement to verify proper
language has been included
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Coverage Issues – Builder’s Risk
• The construction agreement should
state clearly that the Builder’s Risk
policy will be the sole source of remedy
for loss or damage to the project while
under construction
• The Project Owner will bear any loss not
covered as well as the deductible
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Coverage Issues – Builder’s Risk
• If the construction agreement attempts
to pro-rate the payment of deductible
among the GC and Subs, then the
contract does not contain a true
exculpatory agreement
• Note that in many jurisdictions a party
cannot waive rights against another
party when the loss is caused by
intentional acts
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Integration of CIP and
Contractor’s Insurance Program
• CG 21 54 01 96 – Designated Operations
Covered By A Consolidated Insurance
Program
– Standard ISO exclusion of work done under
a wrap
– The standard exclusion does NOT remove
coverage for all operations, but rather
those that are included in the wrap
coverage
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Integration of CIP and
Contractor’s Insurance Program
• The language used in the endorsement
is less than clear and could be subject to
differing interpretations
• Other company specific endorsements
can be less or more restrictive
• Manuscript Contingent endorsement on
CGL should exclude “insured losses”
only (not work) and apply on excess
policy basis
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Coordination of Liability
Coverages
• Can add off site locations to wrap policy
as covered location
• Any damage to the property while it is
under construction is excluded from the
CGL
– Solution?
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Completed Operations Coverage
under the Wrap Up
• Since there are no renewals, Wrap policy must
cover into the future
• How long?
– Check individual state statute as they all vary
– California 10 years is not enough for residential
• SB 800 definitions extend time (Residential
only)
– Escrow, not date of substantial completion
– Turn over of ownership to HOA from Developer
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Coordination of Liability
Coverages
• Contractual liability coverage
– Usually NO coverage on CIP
• Are some requirements met by Wrap?
By sub’s CGL? Or neither?
– Indemnity coverage from “insured
contract” coverage typically removed from
the CIP
– Coverage provided in the general’s or sub’s
policy, but not for Wrap due to exclusion
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Coordination of Liability
Coverages
• “Insured contract” definition in CGL
– “That part of any other contract or
agreement pertaining to your business
under which you assume the tort liability of
another party to pay for "bodily injury" or
"property damage" to a third person or
organization”
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Coordination of Liability
Coverages
• CG 24 26 07 04 Amendment of Insured
Contract Definition adds:
– “…provided the “bodily injury” or
“property damage” is caused, in whole or
in part, by you or those acting on your
behalf”.
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Off Site Coverage
• CIP will usually not include the coverage, nor the GC
or Sub’s General Liability (Wrap exclusion)
• Events away from, but connected to site
• Manufactured, partially assembled, or fabricated off
site, then installed on site i.e. windows, concrete,
mechanical, cabinets, walls, framing, plumbing, etc.
• Products, assembly, fabrication, etc.—any “work”
• Property in transit (suppliers, vendor, & dealers who
furnish materials)
• Add off site locations to wrap policy
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Coordination of Liability
Coverages
• Additional Coverage Limitations
• CG 22 94 & CG 22 95 remove exception
to “your work” exclusion; translation =
no coverage for GC for Subs work
• For GC everything is “your work” and
would be excluded
• On sub’s policy GC would be additional
insured for coverage, but is not due to
Wrap exclusion
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Additional Liability Coverage
Concerns
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Adequacy of Limits
• Number of subs / Size of project
• Number of projects and locations
• Duration of project and exposure to
injury or damage occurrences
• Is Sub’s liability capped according to prorata share of coverage or other method
• Is excess limits coverage provided under
sub’s CGL (Wrap Exclusion)
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Defense Costs
• Inside or outside the limit?
– Whom does the single defense really cover
– Is there a severability of interest clause
(separation of insureds)
– Defense for each insured
– For what issues
– Is coverage provided under sub’s CGL
(Wrap Exclusion)
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Deductibles / SIRs
•
•
•
•
•
•
•
Who pays?
Is it allocated?
Is it specifically allocated?
Is that allowed by state statute?
Size of deductible / SIR
Standard amount for all Subs, or
Based on Sub’s own deductible under
their CGL, or
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Deductibles / SIRs
• Deductible per Occurrence, Claim, Unit,
or Component, or
• Tiered deductible by class
• If multiple deductibles are allowed
under the wrap; how many
– 50 subs times $10,000 equals $500,000
• Are deductibles assigned with out fault
or is a connection to the sub’s
negligence or scope of work required?
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Severability of Interest Clause
• A provision that each insured will be
treated as if separately covered under
the policy—defense and coverage
• Coverage included in standard CGL, but
often not on wraps
• Potential liability between different
entities named on a single policy—Is
there a Cross liability exclusion?
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Builder’s Risk
• This policy is the solution for damage to the
structure and non-attached materials and
supplies ONLY during construction
• Must subs and suppliers be named
individually—danger if omitted
–
–
–
–
Whose property is it? When?
What coverage applies
Is there a need for Installation Floater
If Builder’s Risk covers all, avoids “1st party
liability” issues
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Additional Liability Lines
• Automobile liability
– Limit sub coverage to on-site only and provide
excess over other valid and collectible insurance
• Aircraft Liability
– Non-owned is an exposure to be considered if
used to assist in construction
– Indemnification agreements from aircraft owner
– Additional Insured
– Non-owner aviation coverage, excess
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Additional Liability Lines
• Umbrella/Excess Policy issues
– Exclusions, terms, and conditions can vary
from underlying and leave gaps
– All of the issues above need to be
considered for the Excess Policy (ies)
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Excess Liability Endorsement
Language (Over the CIP Insurance)
• With respect to “bodily injury”, “property
damage”, “personal or advertising injury”,
arising out of either your ongoing operations
or operations included within the “productscompleted operations hazard” at the location
described in the Schedule of this
endorsement, the policy to which this
endorsement is attached shall apply as excess
insurance over any coverage available under a
consolidated (wrap-up) insurance program.
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Excess Liability Endorsement
Language (Over the CIP Insurance)
• This language would need to be
negotiated on the contractor’s insurance
program from the time of the wrap-up
forward.
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READ THE CIP CONTRACT AND ALL
DOCUMENTS!
• Review the contract requirements
– Who do they apply to?
– What do they apply to?
– When do they apply?
– How do they apply?
• Indemnification
• Insurance
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READ THE CIP CONTRACT AND ALL
DOCUMENTS!
• Does the insurance match the contract
requirements?
– The wrap coverages
– The insured’s own policies
• Synchronize as much as possible the
contract requirements with insurance
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READ THE CIP CONTRACT AND ALL
DOCUMENTS!
• Insured could be responsible for
substantial money out of their own
pocket
• Negotiate – Contractors, especially Subs,
do not know whether or not they have
any power until they try
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READ THE CIP CONTRACT AND
ALL DOCUMENTS!
• Have Risk Manager, Agent or Broker and
Legal Counsel with expertise in specific
area of Wrap ups, contracts, coverage,
and risk review and approve for your
specific circumstances.
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Attendance Check!!
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Summary
• Challenging coverage/risk area
• You can try your best and still get it
wrong
– Get a mentor
• Read everything
• Analyze everything
• Keep your fingers crossed (for at least
the time of the statute of repose)
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Upcoming Classes
Upcoming University/Paid CE FREE to University Members
Classes
$50.00/charge for non university members
7/24 and 25
Errors and Omissions
7/30
Personal Auto Policy Problems & Solutions
8/8
Insight on Product Liability and Products
Recall
Upcoming Community Classes FREE to University Members
$25.00/charge for non university members
8/6
PEO and What You Need to Know
Join the University TODAY. www.insurancecommunitycenter.com
Click Join University at the top of the bar
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