There is a trend developing lately as respects multiple project wrap-ups. More and more, developers, public entities and general contractors are looking for insurance tools to make them more competitive and more profitable in today's aggressive business environment. With this new found popularity for rolling programs come misnomers, innuendos, and general misinformation as to the meaning, advantages, and pitfalls of such programs.
If we go back to our original premise of what a wrap-up is, we can better understand the issues of a rolling controlled program. While the single location wrap-up covers the interest of the owner, construction manager/general contractor, and subcontractors in one insurance program protecting the "project site," a rolling program does the same but over numerous locations. In addition, the single-site program has one set of insurance limits for that program. When we design a rolling program, we need to make sure that we have a dedicated limit for each construction site. This is easily accomplished by the use of the "per project" endorsement.
You can speak to 10 different insurance professionals and get 10 different answers as to their definition of a rolling program. This article attempts to address some of these key problem areas so that you have a better understanding of this approach and can better assess your own firm's ability to entertain a rolling controlled program.
Limits of Liability
As we mentioned, the standard insurance policy that is used for general liability coverage on most wrap-ups provides for a limit of liability for each occurrence and an aggregate limit (known as a general aggregate) that will limit the total claims the policy will pay. That is not a problem on a single site wrap-up; it only becomes an issue when we look at multiple sites. That is why I recommended the endorsement that provides the "general aggregate" limit be applied on a per project basis
Extended Completed Operations
Due to the fact that single site programs have a defined beginning and a defined end, it is simple to track the extended completed operations period. For those somewhat confused by this concept in general, let me shed some light. Keep in mind the single site wrap-up ends at a definitive moment in time; usually when the completed project is either put to its intended use or turned over to the owner.
For example, the building has been put to its intended use and a year later, a collapse occurs. The wrap-up insurance policies have expired, subcontractors originally on the site could be out of business. How do the owner and on-site contractors protect themselves? Wrap-ups provide a form of protection for this example through what is called "extended completed operations coverage." The insurance company for the wrap-up will pay for these occurrences 3, 5, or even 10 years after the project ends. This is extremely critical when dealing with residential construction and the defect/statute of limitations issue.
As you can imagine, tracking numerous projects can be difficult. In addition the "buyer" of the rolling policy needs to be cognizant of the limits issue again. Simply stated, the policy has, in addition to the limits stated previously, a single aggregate limit for all the extended completed operations claims that applies to all the years combined, not 1 year at a time.
Many people do not realize that the general aggregate limit applies on an annual basis. This is not the case with extended completed operations. This is a definite pitfall of the rolling approach. You can easily exhaust your separate extended completed operations aggregate from one project, leaving you with no more available coverage. It should be noted that some underwriters have been willing in the past to apply this limit on a per project basis as they do the general aggregate. This is totally at the discretion of the insurance company and is used very sparingly by the underwriter depending on type of wrap-up (residential versus commercial), state location, etc.
The issue of critical mass is more complicated when looking at a multiple site program. We often use as a benchmark for a single project $100 million in hard construction cost completed in a 24-36 month period. This is simply a guide that should only be considered with other important factors, i.e., type of project, duration of project and state location.
We look at rolling programs somewhat differently. Underwriters want to see at least $150 million-$250 million over a 24-36 month period. In addition, and in order to maintain the integrity of the program, a minimum threshold is usually established such as a minimum project size of $35 million.
There are also other variables that come into play when discussing critical mass. What does it really mean to have a 3-year rolling program? Do all projects commencing during the program period go into the wrap-up regardless of completion date? Should the program only cover those projects beginning and ending during the policy period? These are some of the more intriguing issues that need to be addressed when designing the program. Some underwriters are actually looking to write annual rolling programs.
Rolling programs come in different shapes and sizes. Some cover fewer projects but each project of a larger nature. Other rolling programs such as those we are seeing written for general contractors can include numerous projects of differing critical mass. This in turn can present an interesting dilemma to the contractor. Assuming not every project will go into the program, the contractor needs to be cognizant of the impact this will have on their remaining work. The rating structure of the general contractors "practice" policy may increase due to the lower volume of work running through that policy. Hopefully the rolling program will yield significant savings (and other benefits) so that it will become a moot point.
Impact of Losses
Often overlooked, but critical to an understanding of rolling programs, is the issue of program losses. Rolling wrap-ups are written on the basis that the sponsor of the program take some risk as respects losses. This is usually in the form of a deductible for each occurrence. However, the sponsor is financially protected in the event of numerous claims by the application of a "stop loss" figure which will cap the aggregated losses.
What is important to understand, particularly pertaining to real estate development and its use of differing LLCs in the program, is that each project does not stand on its own as respects the program losses. Hypothetically, all the deductible losses could go toward one project. But do not confuse this with the previous discussion on "per project limits." Yes, each project stands independently as respects the limits of the policy but not when it comes to program losses.
One aspect of rolling programs that tends to give pause to many is the higher then usual premium payments that need to be made. Developers and general contractors are accustomed to paying their own insurance annually. On a single project wrap-up, they hesitate momentarily when they see the "premium bill." With a multiple project wrap-up, the premium layout can be onerous and can impact the company's financial structure. The good news is that in the long run, the savings of the program should outweigh the cost.
As you can see, there are many variables to the rolling wrap-up. One needs to be careful of the pitfalls but also be aware of the upside of instituting these programs. They can be a very meaningful addition to the insurance portfolio yielding a lower cost of risk and, in turn, a more profitable enterprise.
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