I have run across a number of interesting situations involving owner controlled or contractor controlled insurance programs (“OCIP” or “CCIP”) that have developed into actual coverage disputes or potential disputes (can’t talk about the potential one!). For those who don’t know, an owner controlled or contractor controlled insurance policy or program is essentially a way for project or property owners or general contractors to address all the insurance needs of a project for all parties in one set of insurance policies covering only activity for that project or property. These are sometimes also called wrap-up policies. This allows sub-contractors or contractors to bid a project without having to add the cost of their own insurance to the bid.

In a recent case decided by a New York Intermediate Appellate Court, the plaintiffs sought insurance coverage from the carrier for an electrical contractor for an underlying claim brought against them in addition to the CCIP wrap up policy. The motion court held that the carrier had no duty to indemnify, but had to reimburse defense costs to the plaintiffs for the underlying action. On appeal, the court modified the the motion court’s order and held that the electrical contractor’s carrier had neither a duty to indemnify nor a duty to reimburse the plaintiffs for the expenses in defending the underlying claim.

This scenario appears to repeat periodically. Parties to an OCIP or CCIP attempt to obtain coverage from a third-party liability or other insurance policy and not from the OCIP or CCIP policy in the first instance or as a supplement to the OCIP policy to capture defense costs that perhaps might not be covered under the OCIP. The entire point of an OCIP or CCIP wrap-up policy is that all claims arising out of the project should be covered under that policy as the primary policy. Policy wording and exclusions matter and not all insurance policies written for contractors have sufficient language to make it clear that the OCIP or CCIP comes first. Sometimes there is a straight exclusion for any wrap-up policies and sometimes the project is specifically excluded on a schedule of excluded projects. Other times, the policy is ambiguous and there is an issue of which policy is primary and which policy is excess.

In the case discussed above, the plaintiffs, which included the project owner, were being provided coverage in the underlying action under the CCIP wrap-up policy. The electrical contractor’s policy had the appropriate exclusionary language for wrap-up policies that unambiguously precluded coverage for the plaintiffs according to the court. The court held that there was no duty to indemnify or to defend and therefore no reimbursement of defense costs was required when there was no coverage under the policy.

Two other facts from the case were interesting to me. First, the carrier’s assertion of the wrap-up exclusion in its proposed amended answer was considered by the court to be timely notice of disclaimer. Second, the broker provided a certificate of insurance that purportedly represented that the plaintiffs were covered under the electrical contractor’s policy. The court rejected the insurance certificate because there was no agency agreement between the carrier and the broker and the carrier could not be bound by representations by a broker with which it had no contractual relationship.

Losses incurred on construction projects are complicated and often significant. For years, insurance carriers, brokers and parties have addressed these risks with wrap-up policies. When a loss does arise, there is often a conflict between the wrap-up policy and one or more of the parties’ individual policies. Clear policy language helps to determine the priority of coverage or whether there is coverage at all.