For most people, there is only one thing more excruciating than a discussion about insurance coverage: a blog post about it. So brace yourselves dear readers.
With all kidding aside, the importance for contractors and owners to understand the ins and outs of their insurance policies, and the risk transfer mechanisms that they are using, or are being subject to, cannot be overstated. Members of the construction industry should be generally familiar with the individual concepts of commercial general liability (“CGL”), additional insured status, and contractual indemnification, but few understand how they fit together and, worse, how their synergies can cause unintended and costly consequences. It gets even worse when a liability policy called an Owners and Contractors Protective Liability policy (“OCP Policy”) is thrown into the mix.
In recent years, we have seen owners increasingly requesting that our contractor clients purchase an OCP Policy. An OCP Policy is a policy that is specific to a construction project that insures the owner for personal and property damage arising out of the work of a designated contractor. It differs from the more commonly utilized additional insured concept in that the OCP Policy only covers the owner, instead of the contractor and owner together under the contractor’s CGL policy.
Owners like it because an OCP Policy can provide broader coverage than that provided under an additional insured endorsement, and provides them with coverage limits that they do not need to share among any other parties in the event of an insured claim. Contractors like it because an OCP Policy typically provide primary insurance coverage, which means in the event of an accident arising from the contractor’s work that leads to a claim against the owner, the OCP Policy’s limits will be tapped by the owner, rather than the contractor’s CGL policy providing coverage to the owner as an additional insured. (This is true even if the owner has also required a contractor to name the owner as an additional insured on the contractor’s CGL Policy).
The concern and unintended consequences of which contractors must be aware arises in cases where the owner, in addition to requiring the contractor to purchase the OCP Policy, also requires the contractor, pursuant to the construction contract, to indemnify the owner for personal injury and property damage arising from the negligence of the contractors in performing its work. In practice, if an accident occurs during construction – say an employee of a subcontractor is injured – the employee will sue both the contractor and owner. The owner will respond by tendering its defense and seeking indemnification from the insurance carrier that issued the OCP Policy. The contractor, in turn, tenders to its own CGL carrier, expecting that the OCP carrier will defend the owner, and its CGL carrier will defend it.
However, what we have seen occur is that the attorney appointed to defend the owner by the OCP carrier then asserts a claim for contractual indemnification against the contractor, and demands that the contractor defend and indemnify the owner pursuant to the indemnification provision in the construction contract. Although the contractor will typically have contractual liability coverage under its CGL policy for such an indemnification claim, the contractor’s efforts to insulate its own CGL policy from having to pay claims asserted against the owner by purchasing the OCP policy have been thwarted. Not only did the contractor have to pay for an entirely separate OCP policy for the owner, but once coverage under the OCP Policy is triggered, the OCP carrier circles back and dumps the claim back on the contractor’s CGL policy through the construction contract’s indemnification provision. Simply put, the contractor pays for the OCP Policy, and then faces increased CGL premiums because of the costs associated with responding to the contractual indemnification obligation.
The lesson to be learned? It is important for contractors (and owners) to understand the interplay between an OCP Policy, additional insured status, and a contractual indemnification provision. To the extent that an owner is demanding that a contractor purchase an OCP Policy, the contractor should attempt to negotiate the elimination of any contractual indemnification provision that requires the contractor to defend and indemnify the owner for personal injury and property damage – the very same claims covered by the OCP Policy. In doing so, the contractor can avoid the scenario discussed above.