Having touched on many wrap-up topics over the years, it is now time to tackle an issue that has numerous moving pieces and presents many a challenge even to the best wrap-up professional. The wrap-up termination—with all its twists and turns—is not the time to take your eye off the ball.
Think about it; you have stayed with the project for maybe 3 to 5 years, and now the end is in sight. Now what? This article examines some critical steps in the termination process and what you need to watch for.
First things first, let us get our definitions in line. Many folks use "termination" and "closeout" interchangeably. While a few may accuse me of dealing with semantics, I do believe there is a line to be drawn between the two. A closeout refers to the point in time in a "wrap-up" insurance program when all claims have been settled (or a buyout has been negotiated by the insured), and final audits have been paid and accounted for. Some noninsurance people refer to this as a "closeout" of the construction accounting books.
On the other hand, a wrap-up termination, which is the focus of this article, deals with the end of the wrap-up policies, after which time all on-site contractors will be responsible to use their own insurance coverage for as long as they are on the site (except for extended completed operations—more on that later). Policies will no longer be in effect for the wrap-up designated location, so all parties involved in the program will need to look elsewhere for coverage. Just to reiterate, while the policies may be canceled, the financial aspect of the program continues, including claim payments from previous losses, losses incurred but not reported, premium payments arising from the final audit, and, of course, collateral obligations.
So, please note, when you are speaking with the wrap-up sponsor's project team, be careful when you use these terms to make sure everyone understands what is actually meant.
If you queried 10 people and asked, "When is the best time to terminate the wrap-up," you would likely get 10 different answers. Perhaps this is due to the fact that the only place in the policy where we address anything close to defining a termination point is the trigger for the extended completed operations coverage. That trigger generally commences at the time the project is put to its intended use (much more on this later).
There is no mandate that advises when to terminate the wrap-up. Rather than being driven by policy terms, it has been customary to conclude upon substantial completion/intended use (perhaps with a temporary certificate of occupancy or perhaps a permanent certificate of occupancy) or simply wait until the punch list work is completed. At times, we encourage wrap-up sponsors to hold off owner-controlled insurance program (OCIP) terminations as long as possible to avoid the contractor policy wrap exclusions that may apply on warranty and punch list work. Having noted these concerns, it's also important to recognize that the longer the wrap-up is kept open, the greater the potential for new claims. In short, when to terminate a wrap-up is more a matter of preference than a dictate of policy terms and conditions.
No matter what method is utilized to determine wrap-up termination, it is strongly recommended that you confer closely with the client and their project team as to where they are in the construction time line. It is very helpful, for example, to review the requisition reports with the project team to get the best understanding of percentage completion and what the next 30–60 day "look ahead" reveals.
It is customary for a wrap-up insurance addendum to replace the standard insurance requirements of the construction contract. As it relates to our subject at hand, there is a contract clause that addresses the issue of an "owner's election to modify or discontinue the wrap-up." The sponsor cannot arbitrarily decide on a Friday to terminate the wrap-up on Monday when it is contrary to the contract document. Here is typical wording that dictates the terms of the wrap-up termination.
Owner may, for any reason, modify the OCIP Coverages, discontinue the OCIP, or request that Contractor or any of its subcontractors withdraw from the OCIP upon thirty (30) days' written notice. Upon such notice, Contractor and/or one or more of its subcontractors, as specified by Owner in such notice, shall obtain all (or a portion thereof as specified by Owner) of the insurance coverage previously provided by the OCIP. The reasonable cost of obtaining such insurance shall be reimbursable to Contractor by Owner. The form, content, limits of liability, cost, and the insurer issuing such replacement insurance shall be subject to Owner's approval.
No need to get into a breach of contract dispute at this juncture of the project. Let the contract terms dictate. This is another reason that the 30–60 day look ahead is critical when determining a point in time to discontinue the wrap-up, especially in light of the notification requirement.
Entire articles have been devoted to this subject alone, but in our discussion here, it will suffice to point out the highlights as respects the thought process for program termination. As mentioned, once the wrap-up terminates, all insurance policies are canceled as of that date. This presents a significant problem as respects completed operations claims that arise after the program termination and, more specifically, after the project is put to its intended use. If there were a completed operations loss at that point, there would be no wrap-up policy in place to cover that claim. It should be noted that, in many states, statutes of repose govern the time period after work concludes when suits may be commenced.
Accordingly, wrap-up insurers will provide an "extended completed operations" endorsement. It is important to note that the terms of this endorsement are included in the general liability wrap-up policy. There is no separate or subsequent wrap-up policy issued postconstruction to cover a completed operations claim. Therefore, it is important to understand the implications of this endorsement and how it impacts the wrap-up after termination.
Most insurers use manuscript endorsements for the extended completed operations coverage. The first point to understand is that there is no additional coverage for any new construction that may take place on the project site after the policy terminates. However, under the Insurance Services Office, Inc. (ISO), commercial general liability form, Section V—Definitions: 16. "Products-completed operations hazard" ... "work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed."
We will come back to this point when we address "contractor warranty work."
The extension endorsement must be read very carefully because no two endorsements look exactly alike. However, there are some similarities. It is customary that the aggregate limit as stated in the endorsement remains the same for the term of the extension period. If you have a 10-year extension period, the aggregate does not reinstate annually. It is a single aggregate for the entire term. Also, the wording in the endorsement needs to track the type of wrap-up, that is, single project versus multi project.
Questions can present and are best anticipated in clear policy language. In other words, do all the projects (in a multi project wrap-up) need to first be competed for the trigger to take effect? Or, does each project in the program stand on its own as respects the trigger? The endorsement should be very clear and specific. If not properly endorsed, the aggregate may be fully exhausted before most of the projects have been competed. While it is true that potentially the excess could drop down, the excess policies must also follow form with the primary program. Needless to say, there is some homework that needs to be done up front in negotiations prior to binding.
In addition, the trigger itself needs to be clear as to its intent to step in and pay an extended competed operations claim. While, again, not all endorsements are alike, typical trigger wording states "when that portion of the project is put to its intended use or a temporary or permanent certificate of occupancy is issued."
Parties have litigated the interpretation of this language, but it is important to note that the trigger needs to correspond to the type of project that is being covered. How would it work for a single high-rise office project? For example, if the first two floors (of a 50-story building) were occupied and put to their intended use as offices, would the endorsement trigger an extended completed operations claim? Keep in mind that if construction was continuing on the upper floors, and the policy was still in effect, there is a question as to whether the extension provides coverage to all the floors. Would two completed operations aggregates exist—one for the extension and one for the ongoing construction? Clearly, the wording needs to be reviewed carefully to match the project's scope.
It is also important to note that some insurers place the following clause in their extension endorsements: "Failure to protect or maintain completed portions of the project by the owner or the contractor will invalidate coverage." How long does the contractor need to protect or maintain the completed work? Once the contractor's work is complete, and once the warranty period is over, is it realistic to believe that the contractor will always be able to maintain the completed portions? Or does this language mean that, while still on the project site, the contractor needs to "protect or maintain," and then the burden falls on the owner? The point to emphasize here is that it is important to ask—and answer—these questions. Do not be shy!
You cannot have a wrap-up termination discussion without talking about the particular "hot topic" of coverage for warranty work. This has been getting much attention in the contracting community as many wrap-up projects begin phasing out. This is part and parcel of a much wider issue, the contractor's wrap-up exclusion, which is beyond the scope of this discussion but may find its way into a future article. In short (and without getting into the technical differences between such endorsements), most contactors have such provisions on their policies. The problem arises when a wrap-up terminates and the contractor needs to return to the site to do repair/warranty work.
We know that the "premises-operations" exposure (i.e., a tool injuring a passing pedestrian) for the returning contactor will not be covered because the wrap-up policy has terminated. As for the contractor's own insurance, many wrap-up exclusionary endorsements are very broad in nature and may not intend to cover the contractor when they go back to the site in the given example. That leaves the contractor in a very precarious situation.
There is good news on both the contracting and the wrap-up side. As for the wrap-ups, insurers are beginning to address the issue by amending their policies to pick up the extended premises-operations exposure. But, as with any insurance endorsement, it should be read carefully because there are differences. Some of the endorsements address the issue of a contractor returning to do warranty work while the wrap-up is still in effect. There is a school of thought whereby, in the case of a contractor returning to the site while the wrap-up policies are still in effect, there should be coverage available under the wrap-up policy even without an endorsement. Some insurers may simply require "reenrollment" to trigger the coverage.
Eventually, wrap-up insurers may issue an endorsement similar to the completed operations extension. It can be called a "premises operations" extension. This would apply once the policy terminates just as completed operations does. It would also designate a specific number of years; 2 years should be sufficient to pick up the warranty work.
Lastly, there is the issue of completed operations work done during the warranty period. As already explained, the ISO form considers repair and warranty work on previous wrap-up construction at the site as part of the completed operations definition. Contractors need not worry about that coverage because they are still protected by the wrap-up for the completed operations extension term. The only concern therefore remains the premises-operations exposure.
In conclusion, there is much to think about in the "termination" process. Hopefully, this discussion has provided some insight into some of the issues to consider when dealing with termination of a wrap-up.
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