Single Insurance Policies that Insure All Parties on a Specific Construction Project Offer Benefits and Risks

Parties can also prevent coverage gaps by clearly defining the project site in the wrap-up, and it is probably best to define it more broadly if possible. For instance, to ensure that coverage extends to damage that occurs near or adjacent to the project site but not on the project site, policies should cover claims “arising out of” the site and not be limited to claims occurring “at” the site. Also, contractors should understand the time period of coverage and should make sure it extends to damages or losses that occur after project completion. Although many wrap-up policies cover damage to “completed operations” or damages that arise after transfer of title, ideally, coverage should exist up to the statute of limitations for a defect claim—something that differs in each state. The time period of coverage likely can be increased through negotiation at the procurement stage.

Furthermore, subcontractors being part of wrap-up policies can mean sacrificing some control over how claims are handled. One such issue is how construction-defect claims are defended when multiple parties share a single insurer. Owners and contractors often favor wrap-up insurance policies because they can streamline and reduce the costs of litigation arising from defect and injury claims. However, wrap-up insurance providers have no control over which parties to a project a plaintiff sues. In many cases, injured plaintiffs bring lawsuits against multiple subcontractors and the general contractor. Under the traditional model of insurance, when each party has its own insurance policy and carrier, each party’s insurance carrier, assuming it tenders defense, will retain an attorney to defend that party in a suit.

In the event of such a claim, if the insurer retains a lawyer to represent multiple parties (insured contractors) being sued by a single claimant, and two or more of those multiple parties have a potential conflict of interest between them, the lawyer must advise the clients of the potential conflict of interest and obtain informed written consent from the parties to continue the representation. Carriers who are attuned to the issue that potential conflicts among contractors can arise will understand and respect the ethical boundaries of the lawyers they hire. Others, however, may be tempted to reduce costs by hiring fewer lawyers and therefore potentially putting insureds at a disadvantage. Multiple subcontractors and contractors who are insured under the same policy for a project could have potential conflicts with one another because they need to assert a meritorious defense that may or may not implicate another party on the project. In addition, these conflicts can arise because of claims for indemnity or contribution.

Nevertheless, if policy limits are sufficient, an insurance carrier may want parties to waive potential conflicts of interest and allow a single lawyer or firm to defend everyone. Additionally, some wrap-up carriers have inserted “joint defense” provisions and arbitration clauses into their liability insurance policies. The language on joint defense typically provides that by accepting the insurance, the contractor/insured prospectively agrees to waive conflicts of interest that could occur in the future as to other contractors on the same job site, agree to waive rights to bring claims for contribution against other parties on the job and agree to be represented by a single lawyer. How courts will treat these provisions is still relatively unknown. Although lowering litigation costs is a reasonable and understandable goal for insurance carriers, insureds should know they are entitled to a conflict-free legal defense in the event of a lawsuit. To ensure this is the case, insureds might want to consider consulting with an independent attorney (an attorney other than the one the insurance company has appointed to defend the suit) about the issue of whether to waive a potential conflict of interest.

If you are considering whether to use wrap-up insurance, talking with other contractors or subcontractors who have participated in these policies is a great way to learn more about them. Additionally, specific questions about the risks involved are best answered by attorneys who practice in the area of insurance coverage.