Because the cost of construction has climbed significantly in the last decade, insurers offer multiple products with varying degrees of protection.
One such product is wrap-up liability insurance, which includes main players in a project.
"Nothing would get done safely without insurance," said Neil Carfra, partner at the Victoria, B.C. law firm Carfra Lawton LLP.
"Insurance is the grease that makes things work."
Instead of having each party at a construction project purchase separate liability policies, the owner or contractor can purchase a single, project-specific policy that covers the owner, contractor, consultants and trades that are directly involved in the project.
"All parties are covered under the same policy," said Michelle Morin, an Edmonton-based insurance dealer with Great American Insurance Company.
"There’s no dispute about which policy answers in the event of a claim. There’s no question who covers it, no finger-pointing."
Coverage is for third-party bodily injury or property damage arising out of the work, Morin said.
Wrap-up insurance is a way of allocating risk among all parties involved in construction of a project, added Carfra, a construction law specialist.
All players know they have some protection, he said.
It is crucial that the project itself is not covered for damages caused by items such as faulty materials, workmanship or design exclusion.
To protect the actual project, builders’ risk (also known as course of construction) insurance is required.
Builders’ risk insurance is a specialized type of insurance used by contractors to protect against liability for direct physical loss or damage to a structure or project they’re building.
In addition to wrap-up and builders’ risk, insurance applicable to the construction industry also includes commercial general liability insurance (CGL), property insurance and professional liability insurance.
Normally engineers, architects and the white-collar construction contingents opt for professional liability insurance, or errors and omissions insurance, to protect them from claims such as faulty design.
That’s because professional errors, if related to the architect’s, engineer’s or designer’s expertise, are not covered under wrap-up policies, Carfra said.
If a project doesn’t carry wrap-up, the general contractor’s CGL insurance typically covers the project and the general contractor usually adds the owner to his policy, said Morin.
If a general contractor or owner does purchase wrap-up, and also has CGL, the wrap-up liability won’t diminish the CGL policy, she added.
While wrap-up insurance has been around for a long time, it’s increasingly being used for large construction projects, for civil work and by government agencies.
"Some brokers really believe it’s the way to go," Morin said.
It’s standard practice to purchase wrap-up for big projects, Carfra added.
Smaller sub-contractors, such as a drywaller, may carry only $2 million in liability insurance.
If the drywaller is a subcontractor on a large project, where there’s potential for third-party damage, adding them to a $10 million wrap-up liability policy makes sense, Morin said.
Due to the cost, wrap-up isn’t commonly used for single-family, residential construction projects.
However, one exception might be a large residential project being built by one company, Carfra said.
One layer of protection offered by wrap-up is that it offers either 12 to 24 months (the maximum) of protection following substantial completion.
Usually after the 12 or 24-month period, the owner will have purchased some form of property insurance.
For example, if a claim arises 10 years after substantial completion, a wrap-up claim with two years of post-completion coverage would cover one-fifth (two years) of the claim with the remaining four-fifths (eight years) covered by the additional owner’s policy, Carfra said.
A classic case would be the leaky condo, where a decade after construction, the owners sue everyone involved in the construction of the building.
In cases such as leaky condos, the other insurers expect the wrap-up insurer to pick up its share, Carfra said.
In his practice, about one-quarter of his cases involve wrap-up insurance.
"My job is to persuade the wrap-up insurer that my client is covered," Carfra said.
Keeping in mind that no two projects are the same, Morin said a wrap-up policy would cost about $5,000 for a $5 million project that takes one year to build, with 24 months of warranty protection after substantial completion.
However, parties have to keep in mind that factors such as excavation work or pile-driving can influence cost.
Typically, the owner or general contractor pay for the wrap-up policy.
Finding coverage isn’t difficult in today’s competitive insurance market.
"There’s lots of capacity," Morin said.
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