The Denver housing market has been hot, raising concerns about affordability and availability for those buying a home. Those issues also are a problem for residential construction companies in need of insurance.
Because of Colorado’s construction-defect laws, finding traditional insurance coverage for an apartment, condominium or townhouse project can be expensive.
That, in turn, has constricted Denver multi-family development, hurting efforts to make more affordable, entry-level homes available. The law also has driven up the cost of contractors’ general liability insurance, making it difficult to find insurers that will cover the cost of construction defects.
According to a city of Denver market study, the risk of litigation for condo construction defects adds $15,000 to the construction costs of each unit.
All of this helps to explain why contractors increasingly have teamed up to buy “wrap” policies, all-encompassing bundles of coverage that include workers’ compensation and general liability insurance policies.
The benefits of wraps are hard to overstate. Not only do they help to manage a project’s insurance costs, they also potentially reduce litigation among the insureds. Although they’ve been around for decades, wraps have become more popular in recent years, thanks to the ever-rising costs of materials and construction-defect litigation.
A subcontractor’s insurance premiums can range from 2-8 percent of the cost of a job. A general contractor typically faces insurance costs of about 1 percent of a project’s total value. Extrapolating a bit, insurance could cost as much as $6 million for a $100 million project. Every project is different but thanks to economies of scale, a wrap can cost far less.
For project developers, wraps bring peace of mind that adequate levels of coverage are set for everyone. Owner-developers also can rest easy that their wrap policy closes any residential exclusion gaps in a contractors’ insurance policy. The cost of a wrap also can be divided among any or all of the contractors on a job.
Better yet, wraps include comprehensive risk management strategies for everyone on the job site to follow. They also provide a coordinated legal defense, meaning the participants agree to be represented by a single counsel in the event of third-party claims.
Insurers that offer wrap programs also can provide pollution liability coverage.
Because they’re so complex, wraps can be structured incorrectly, leaving contractors at risk. Issues have cropped up with inadequate coverage limits, enrollment and wraps that expire too soon.
It’s important for wrap sponsors – either the developer or general contractor – to also ensure that every subcontractor hired has shown a proven commitment to safety. The lowest bidder, after all, may not be the cheapest if they have a poor safety record.
It’s also crucial that everyone involved in a project enrolls in the wrap, no matter how small their role might be.
Finally, Colorado’s construction defect laws give plaintiffs six years to file a lawsuit and another two to depose witnesses. Your wrap policy, in other words, can’t stop working when work on the site comes to a stop. Be sure your wrap covers you through the statute of repose, the deadline by which any suits can be filed.
Stephanie Anderson is CCIG’s Construction Practice leader. Reach her at StephanieA@thinkccig.com or 720-330-7923.