The recent glut of construction defect litigation has forced many traditional insurance carriers to leave Arizona. As a result, many new types of insurance are surfacing. These types of insurance are a departure from what most of our clients have known for many years. In this insurance and litigious environment, savvy contractors need to understand insurance to ensure the long-term economic viability of their companies.
These are the most common types of alternate insurance available:
- General liability policies that include high deductibles or self-insured retentions (SIRs);
- “Wrap” policies;
- Risk retention groups
High deductible/ SIR policies are simply your “traditional” general liability policies in which the insurance carrier makes you, its insured, pay a substantial portion of the costs of the lawsuit. Generally, with a deductible you are required to make a payment toward the settlement of the lawsuit. With an SIR, you are required to pay for the defense and/ or settlement of the case, up to the limits of your SIR, before the insurance carrier begins making any payments. Additionally, the same “work product” exclusions that many of our clients are all too familiar with are still in place and could limit the amount that the insurance carrier has to pay.
“Wrap” policies are also known as Owner-Controlled Insurance Policies (OCIP) or Owner-Directed Insurance Policies (ODIP). Typically, these policies require that the subcontractor either make a payment or include a “bid credit” in its subcontract in order to receive insurance coverage under this program. In theory, “wrap” policies are designed to minimize litigation costs through a joint defense agreement should litigation arise and provide subcontractors with insurance in a difficult market in which to place insurance.
Risk retention groups (RRGs) allow artisans and specialists to form and fund their own insurance company. Many are similar to “wrap” policies except that the insureds are also the owners of the company and may, under certain circumstances, receive a return on their premium to the extent that losses are lower than expected.
Both “wraps’ and RRGs have similar issues to consider:
- Is there a “your work” exclusion similar to general liability policies?
- Some “wraps” contain very high deductibles or SIRs and may allow the general contractor to sue the subcontractors for reimbursement of the deductible or SIR.
- Some leading watchdog groups suggest a minimum limit of $30,000 - $60,000 for each residential unit. Although a limit of $25 million may seem large, it may not be depending on the number of houses that are going to be covered under the “wrap” policy.
- Many are “claims made” policies that expire, and only provide coverage, for a certain number of years after completion. Some may be as short as 3 or 5 years. Recall that the Statute of Repose in Arizona is 9 years long.
- Are there gaps in coverage such as off-site operations, warranty service, soils or Right to Repair claims?
- Many “traditional” general liability policies that you may have will likely have exclusions for work performed that is covered by a “wrap” policies, so if there are gaps in the “wrap” policy you may not have any insurance whatsoever.