With the wrap-up market remaining buyer-friendly, many middle-market construction firms are likely to encounter wrap-up participation as a contractual requirement on many projects on which they are bidding, perhaps for the first time.

Anti-indemnity statutes that prohibit subcontractors from naming general contractors and project owners as additional insureds on their liability insurance policies also are driving increased use of wrap-up insurance programs nationwide, industry experts say.

But middle-market contractors that participate in wrap-ups should be careful that they provide completed operations coverage through the statute of repose in the state where a project is being built, because most insurers exclude coverage for work completed under a wrap-up, experts say.

In some cases, they also may want to ensure that their own operating and practice policies will sit excess of a wrap-up, experts say, especially if a large number of contractors are participating in the program.

Wrap-ups generally come in two forms: owner-controlled insurance programs, which are sponsored by project owners; or contractor-controlled insurance programs, sponsored by a general contractor. In some cases, there could be a developer-controlled program if developers are awarding all of the contracts involved in a construction project.

“The critical thing about sponsoring one is you have to be in the position to control all of the contracts. Otherwise, you can't force participation and you can't enforce the rules,” said Mike Hastings, project risk practice leader in Marsh Inc.'s U.S. construction practice in Atlanta.

While wrap-up insurance programs historically combine two lines of coverage — liability and workers compensation — anti-indemnity statutes that limit additional insured provisions in construction contracts, along with recent litigation trends involving action over claims filed by workers compensation claimants in states like New York, is prompting many project owners and general contractors to sponsor liability-only wrap-up programs, construction insurance experts say.

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In recent years, there also has been growth in the number of “rolling wrap-ups” where either a project owner or general contractor sponsors a controlled insurance program involving multiple projects being completed over several years, the experts note.

Contractors that participate in projects covered by wrap-up insurance programs are asked to exclude the costs of either liability and/or workers compensation insurance from project bids. In turn, either the owner or the general contractor provides those lines of insurance in exchange for a premium calculated based on the participating contractor's allocation of risk. In most cases, the cost of coverage is less than the contractors would pay if they had purchased the coverage on their own, experts say.

In fact, wrap-ups are an attractive way for smaller and mid-market contractors, including many women-owned and minority-owned construction firms, to obtain more affordable workers compensation coverage so they can compete more effectively for business, according to Jack Probolus, marketing manager for wrap-ups at Liberty Mutual Holding Co. in Boston.

“Now with medical inflation coming up, we're seeing some significant rate increases in workers compensation insurance,” he said. Wrap-ups give project owners and general contractors “the ability to provide a low comp rate for contractors.”

“In a soft market or a hard market, the wrap-up is always going to save money,” said Ken Caldwell, executive vice president of Alliant Construction Services Group in Los Angeles. But now that the insurance market is firming somewhat, “for those entities that can lock in a rate right now, for maybe three years in a market that appears to be increasing in cost, that would yield even more savings.”

However, on the flip side, a subcontractor could face even higher insurance costs if a significant amount of its work is done under a wrap-up, according to Brian Cooper, San Francisco-based managing director in Arthur J. Gallagher & Co.'s construction services division.

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“The insurance market will view you as a smaller contractor. Size matters on the rating plans,” he explained.

“When you look at the non-wrap-up work, there's not a lot of exposure left. That can create challenges to find coverage,” said John Watras, vice president of middle-market construction at Zurich North America Commercial in Edina, Minn.

Similarly, if a lot of contractors enrolled in a wrap-up program file claims, it could erode the overall limits, said Tim Walsh, executive vice president and managing national director in the national wrap-up group of Aon Risk Solutions.

For example, the cost of defending construction defect claims in a residential project general liability wrap-up can easily erode the limits, he said.

Another potential gap in coverage under wrap-up programs that could hurt the middle-market contractor is whether completed operations coverage extends through the statutes of repose in the states where projects are being built, according to Lori Robinett, Dallas-based vice president in the national construction practice at Willis North America Inc.

“From a CCIP perspective, they don't always offer up the full completed operations tail,” she said. “That's probably the biggest thing that middle-market contractors need to watch out for.”

Unfortunately, “some operational insurers won't cover anything that was covered by a wrap-up,” which makes it unlikely that the contractor's operations policy will respond should a claim or suit be filed after the wrap-up coverage expires, Ms. Robinett said.

“There are some difference-in-conditions policies that contractors can get” for an additional premium, she said. Alternatively, middle-market contractors can negotiate with their insurers to have their practice policies sit on top of a wrap-up program as added protection, Ms. Robinett said.

Contractors participating in wrap-ups also may find there is no coverage for work performed off-site.

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“Typically, off-site exposures are not covered by a wrap-up. So if you have a fabricator, the workers compensation and general liability at their facility is not necessarily covered under the wrap-up, so they need to make sure it's covered under their own insurance program,” Mr. Cooper said.

To avoid any gaps in coverage, Mike McKinley, Chicago-based vice president of controlled insurance programs at XL Construction Group, a unit of XL Group P.L.C., advises that middle-market contractors carefully examine their operating or practice policies — the insurance they buy to cover their day-to-day operations.

In addition, contractors should “request all the details and review everything you can from the OCIP or CCIP sponsor to get comfortable with what is provided in that program.”

Most importantly, contractors should begin this process early, Mr. McKinley said.

“The most frequent situation I run into is a mid-market contractor who doesn't read through the CCIP until after they've been awarded a contract. That sends everyone into panic mode,” he said.