Brad Tennant, President of Tennant Special Risk, explains how the marketplace responded to the California residential market crisis. “The GL only, smaller, residential wrap-up started in California and other states which had developed a reputation as ‘construction defect’ states. Traditional residential contracting writers pulled out of those construction defect states as Plaintiff Attorneys were able to apply class-action provisos to the states’ construction defect laws. As a result, plaintiffs were able to name every contractor that worked on a project to their suit and apply what some have termed ‘green mail’ to elicit settlements from contractors”.

The wrap-up was a logical response. The market was limited at the beginning. “Five or six years ago, Clarendon and Aspen were about the only two markets for GL-only, residential wrap-ups”, according to Marc Adler, senior vice president with Colemont Insurance Brokers in Arizona. “Today more than a dozen national carriers plus a handful of regional carriers are responding. This is opening up the possibilities and solving some of the problems that have emerged.”

What happens to the subcontractor who returns to a project to handle warranty work after the project is complete and the wrap-up coverage is over?

Adler says that “Markets have finally begun to address this. Many wraps include extended premises coverage to allow the ability to return to do warranty work. Whether it is a sub, or a sub’s sub, as long as they are enrolled they are an insured and if the policy is endorsed for the extended premises coverage they are fine.”

But CRC Insurance Services Broker Ben Ramundt cautions, “Repair work is typically excluded initially and we have to negotiate the coverage back into the program. The length of time the carriers allow for repairs depends on the developer's warranty/purchase agreement, but it is usually limited to one or two years. If the sub returns to fix or repair their original work that was covered under the wrap, then the work is usually excluded by the non-wrap carrier. If the sub goes to the wrap project after the project is over to do a new specific job for a unit owner or developer after or unrelated to the original project, it is most likely covered. The goal of the wrap is to get every single sub and sub’s sub scheduled on the wrap. Then if the repair work was negotiated into the wrap program, the sub’s sub also has coverage.”

Are there any alternatives to the $1,000,000/$2,000,000/$2,000,000 limits?

In addition to more markets becoming available, some of these markets are willing to write higher limits. The aggregates apply to the entire project and no markets are willing to provide individual aggregates for each contractor. However, the project aggregate limits are increasing. While it is still very possible for the wrap to exhaust the limits and leave individual contractors bare, the higher limits provide more confidence for all wrap-up members. ACE, Arch, Glencoe and Lexington are companies that have told Insurance Marketplace of their willingness to write limits of $5,000,000/$5,000,000/$5,000,000.

Even the excess market is starting to expand. David Brinkerhoff at Westrope says “The markets will vary based on the type of project, wood frame versus superior grade, and the project size and location. The London markets will also play in the excess which provides more capacity for the very large projects.” Insurance Marketplace has been told that CV Starr, ACE, AIG/Lexington, Axis, Endurance, AWAC, Catlin, RSUI, and Everest are among the open markets.

Are the California winds blowing to the east?

Tennant says “Condominiums have become hugely popular across the country and account for a large percentage of the new construction and extensive conversion and repair work available to GCs and subs. This will worsen the problem that GCs, sub-contractors, and yes, insurance agents and brokers now face as they try to provide coverage for completed operations for clients that have worked on projects of the type now limited by their present or future coverage.“

If construction defect placement problems follow condominium construction, then the GL residential wrap-up solution may be slowly moving to the east. According to Richard B. Usher, principal managing member of Arizona retail broker Hill & Usher, “This type of wrap-up is especially useful for urban, high density projects, such as condominiums.”

The construction defect issue is not going away. The coverage crisis it created has moved north and slightly east of California. As condominium and home development building continues to spread, it is wise to consider how the wind is blowing. Knowing the marketplace and being aware of available coverage options is the only way to stay ahead and protect your contracting customers from onerous exclusions and low limits.