By Philip Glick, CPCU, RPLU
senior vice president, Conner Strong & Buckelew
Any developer who has built a project in NYC in the last decade knows how astronomically high liability insurance premiums are to cover their projects.
As a result of the legal impact of Labor Codes 240 and 241, previously known as “Scaffolding Acts”, liability premiums are four to five times greater for projects in NYC compared to similar projects just across the river in New Jersey, and also in Connecticut, Pennsylvania, and other states.
Given the impact of these laws, several project-specific insurance options may be worthwhile as a way to reduce insurance costs.
On larger projects, typically involving total construction values at $150 million or greater, many owners utilize Controlled Insurance Programs (CIPs) also known as “Wrap Ups”. These programs provide the insurance for all parties involved including the owner/developer, general contractor, and all subcontractors on the job in a combined set of coverages for the project. These include general and umbrella liability and workers’ compensation policies.
In contrast, on smaller projects, insurance is typically provided on a multi-tier approach where the general contractor purchases its own general and umbrella liability under its so called annual practice policies. Each subcontractor on the job also covers their work under their own individual practice general and excess liability and workers’ compensation policies.
These contractors typically will be required to cover the owner as an additional insured on their policies. The owner in turn buys its own coverage that covers it for any claims that may not be covered under the various contractors’ policies.
Examples would be for claims due to alleged site conditions, the owner’s responsibility for safety oversight, or for very large claims that may exceed the contractors’ limits, or claims that may be excluded under the contractors’ policies.
This traditional approach can be very costly stacking up in the levels of coverage and costs incurred. It can also leave the owner exposed for claims occurring after the work is done – when the contractor may no longer be covering the owner as an additional insured for possible late developing construction defect claims. Worse yet, a contractor may be out of business in the future!
As an option to just adding liability coverage to its existing general and umbrella liability policies, an owner/developer can purchase separate “Owner’s Interest” Primary General Liability and Excess Liability policies for each project. These separate Owner’s Interest Liability policies can be written for construction terms of up to three years with all premiums and coverage terms and conditions, fixed or locked in for the entire construction period.
The cost of this separate Owner’s Interest Liability coverage will vary based on the project hard construction costs, the size and nature of each project, the limits of excess liability insurance purchased, and size of the deductible. Typically a deductible of $10,000 or $25,000 each occurrence will apply.
In addition to liability coverage during construction, this Owner’s Interest liability coverage can provide coverage for Extended Completed Operations (ECO) for potential construction defect claims arising as long as 6 to 10 years after project completion. This Extended Completed Operations coverage will match the contractor’s obligation to the owner in its construction agreement to continue to include ongoing completed operations coverage for the project in its future renewals of its general liability and excess liability policies.
In the last several years, a second way has been developed to insure projects that may not be large enough to cover using Wrap-Ups. It can also be used as a simpler alternative for larger projects that could be covered under Wrap-Ups, but where the owner or general contractor may not want to take on the added complexity involved in such a Controlled Insurance Program.
Project-specific liability policies can be written to cover both the owner and general contractor for general and umbrella liability claims arising from an insured project. All subcontractors would still be required to purchase their own separate policies. This project approach can lock in very broad coverage for both parties. Premiums and broad coverage terms and conditions can be locked in on a non-cancellable basis for the entire duration of a project even as long as 2 to 3 years. This contrasts with traditional coverage where the general contractor’s liability policies must be renewed every year with premiums, coverage conditions, and exclusions that can change.
Equally valuable, a project-specific policy coverage for potential future construction defect claims (also called completed operations) can be included for as much as a 6 to 10 year non-cancellable period after the construction work is completed.
In addition to potential substantial coverage advantages, in many cases the total premium costs for a project-specific general and umbrella liability policy can be substantially less than the combined costs of the contractor’s annual practice policies plus separate owner’s contingent general and umbrella liability coverages.
This premium advantage can reflect the favorable risk characteristics of a particular type of project – such as rental apartment construction versus condominium projects. The contractor’s annual practice policy premium rate for the job will reflect its average insurance premium rate based on all the work they do – versus the risk that applies to the specific project policy being quoted. Here both the owner and contractor may be able to take advantage by “cherry picking” a specific project for stand-alone coverage. In addition, we have seen coverage limitations on a general contractor’s traditional practice liability policy that may exclude coverage for a specific type of project they would like to build. A project-specific liability policy can enable them to do this type of work.
One possible offsetting negative is that under a project-specific policy, the owner and general contractor share the total liability limits provided. However, part of the premium savings can be used to purchase additional limits of umbrella / excess liability coverage for the project to offset this potential disadvantage. In addition, some contractors’ practice liability policies may not in fact provide separate per project limits of liability. A project-specific policy could provide substantial additional protection since it provides dedicated limits of coverage for the specific project insured.
In summary, under the right circumstances, a project-specific liability program may provide a better way to insure both for the project owner and general contractor.
Conner Strong & Buckelew is one of America’s largest insurance brokerage, employee benefits and risk management consulting firms. The company is an industry leader in providing high-risk businesses with comprehensive solutions to prevent losses, manage claims and drive growth.
