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 insureds have known for years.
These are the most common types of alternate insurance available: (a) general liability policies that include high deductibles or self-insured retentions (SIRs); (b) "wrap" policies; and (c) risk retention groups.
High deductible/SIR policies are simply your "traditional" general liability policies in which the insurance carrier makes the insured, pay a substantial portion of the costs of the lawsuit. Generally, with a deductible the insured is required to make a payment toward the settlement of the lawsuit. With an SIR, the insured is required to pay for the defense and/or settlement of the case, up to the limits of the SIR, before the insurance carrier begins making any payments. Additionally, the same "work product" exclusions are still in place and could limit the amount that the insurance carrier has to pay. It is still an open question as to whether SIR contributions paid toward the defense of un-covered claims can be credited to the insured for purposes of satisfying its SIR contribution.
"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 to $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 provide coverage only for a certain number of years after completion. Some may be as short as three or five years. Recall that the Statute of Repose in Arizona is nine 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; if there are gaps in the "wrap" policy you may not have any insurance whatsoever.
These are but a few of the issues to address when looking at purchasing insurance or when involved in coverage litigation.
This article was published in the May 2007 Arizona Association of Defense Counsel newsletter.