A client recently asked for advice about insuring their development project with a wrap insurance policy. As we talked through the pros and cons, I was reminded of the intricacies of wrap insurance products. Undoubtedly, wrap insurance is a critical risk mitigation tool for many developers, owners, and general contractors of construction projects. These policies, which are designed to provide coverage to multiple parties performing work on a project, allow parties to control costs, more easily coordinate defense efforts in litigation, and reduce the infighting that complicates so many construction defect lawsuits.
But these policies also present unique and tricky coverage issues. The language in wrap policies is not uniform, and certain coverage provisions within the policies, such as the enrollment and notice requirements, can vary significantly. Because of these variations, it is absolutely critical to diligently review your policy. One of the most common coverage problems occurs when a party seeks coverage for a construction defect lawsuit under a CGL policy with a wrap exclusion. If a wrap policy was obtained for the project, insurers will often deny coverage based on that exclusion whether it is merited or not. But like the wrap policies themselves, the language and scope of wrap exclusions can vary greatly from insurer to insurer. Two cases dealing with these wrap exclusions illustrate that seemingly minor variations in language can make a huge difference in the scope of coverage.
In D.R. Horton Los Angeles Holding Co., Inc. v. American Safety Indemnity Co., 2012 U.S. Dist. LEXIS 1881 (Jan. 5. 2012), a wrap insurance policy was obtained by the plaintiff to cover the work it performed on the project. One of plaintiff’s subcontractors separately purchased a CGL policy and named plaintiff as an additional insured. When the plaintiff was later named as a defendant in a construction defect lawsuit related to the work of the subcontractor, plaintiff sought coverage under the CGL policy. The carrier denied coverage based on a wrap exclusion, and a coverage lawsuit ensued. On summary judgment, the Court ruled against the carrier, and held that the wrap exclusion, which stated, “This insurance does not apply to any work insured under a consolidated (Wrap up) Insurance Program” did not preclude coverage. Because the wrap policy covered the work of the plaintiff, and not the subcontractor under whose CGL policy the plaintiff sought coverage, the wrap exclusion did not apply to bar coverage.
Contrast that result with A.W. Interiors, Inc. v. The Travelers Indemnity Co., 2014 U.S. Dist. LEXIS 71065 (D. Col. May 23, 2014). There, a wrap policy was purchased to cover the work of the general contractor. The plaintiff subcontractor separately purchased a CGL policy. After a construction defect lawsuit was filed, coverage was denied by the CGL insurer based on the presence of a wrap exclusion. This time, the Court granted summary judgment for the carrier because the wrap exclusion barred coverage for “operations performed by you or on your behalf on or from all premises covered under a contractor controlled insurance program or owner controlled insurance program, ‘wrap up’ or other similar insurance program.” Because this exclusion focused on work performed at any premises for which a wrap policy was in effect, there was no coverage for the subcontractor under the CGL policy for work performed at that premises.
The lesson of these cases is that Insureds who do not understand their policies correctly can easily take themselves out of coverage or find themselves in coverage disputes. While larger general contractors or developers may be able to absorb the expense of defending a construction defect lawsuit, many smaller subcontractors may literally be forced out of business by a simple misstep. Wrap policies are important and useful risk mitigation tools, and can cohesively coordinate with CGL coverage. Nossaman attorneys can assist in critical policy review and help ensure adequate protection is in place.