March 27, 2008

Is your insurance giving you a bad wrap?

  • Subcontractors need to be aware of the pitfalls when using owner controlled insurance programs.
    McDonald Insurance Group


    The flurry of litigation over construction defects on multifamily housing has spawned a new insurance product called owner controlled insurance programs, or OCIPs.

    Enrolling in an OCIP policy can be an easy way to get insurance protection on a risky project. However, the OCIP doesn’t always offer adequate insurance protection.

    OCIP polices enable all subs, the general and the owner/developer to be covered under one insurance policy. This policy can be a good solution because it simplifies and reduces litigation on claims, coordinates safety plans, and avoids having all contractors individually purchase a policy that covers them for this higher-risk class of project. However, some OCIPs present substantial risk to subcontractors.

    Here are some points to keep in mind in making the decision to work on a project covered by an OCIP. You will be required to enroll in the OCIP. Enrollment basically involves you, as the sub, agreeing to do two things: to be covered under the OCIP and to have the general or owner (whichever is providing the OCIP) deduct from your subcontract amount the “premium savings” expected from your liability insurance because you’re not including the project’s contract amount and payrolls on your own insurance policy.

    Use your broker to help fill out the enrollment form and ask him or her to communicate to the OCIP administrator that your insurance premium basis payrolls are capped (in Washington), which affects the calculation of your premium savings.

    OCIPs can also cover workers’ compensation and builder’s risk (property damage), but we will focus on OCIPs most common in Washington, those that cover the general liability insurance of the subcontractor.

    Lets talk about the pitfalls, again from the sub’s perspective.

    1. Have your insurance broker check that the OCIP insurance company has an A+ rating by A.M. Best, meaning the company is financially strong. It is important that you make sure the OCIP is adequate because your insurance policy probably excludes projects covered under an OCIP and you will probably be holding the general and/or owner harmless for claims.

    2. Check that the OCIP has high enough insurance limits to protect the interests of you and all other contractors because the insurance must cover all contractor claims on the project. If one of the other subs were to use up the entire policy limits, that would leave nothing to protect your interests later on.

    The combination of the OCIP’s general liability policy limit and its excess liability limit is the total policy limit for all contractors on the project. Determining adequacy of the limits can be very tough. I suggest you discuss this with your attorney. The limits are dictated by the lender and developer’s risk appetites, litigation exposure, and size and type of project. Many times they are dictated by cost, regardless of risk.

    3. Find out if the OCIP covers more than one project, further diluting the limits.

    4. Beware that sometimes the OCIP will have a reduced policy limit for the very important completed operations coverage, which covers construction defects once the job is completed. Also keep in mind that it is the sub’s responsibility to make sure his or her subs are also properly enrolled in the OCIP.

    If the OCIP says that the sub will carry coverage for occurrences once the OCIP limits are exhausted, and the sub doesn’t have any coverage, the sub can be in breach of contract and responsible for all liability, even the owner’s.

    5. Most OCIPs have language that states not only does the sub hold the owner and general harmless, but also that the owner and general will be able to select the attorneys to represent ALL parties if there is a dispute!

    Here are several coverages that aren’t always included in the OCIP that subs should consider adding as a condition of enrolling in the OCIP:

    • Coverage for the full period of time you could be sued.

    • Stop gap coverage for your subcontractor’s employees suing you, rather than their employer, for injuries on the job site.

    • Cross suits for claims by one sub against another on the job.

    • Coverage for work done on the OCIP site once the project has been accepted, such as warranty repairs and remodels.

    • Claims for off-site work, such as in your fabrication shop or infrastructure work on an adjacent site. If you have off-site work for the project, check the definition of off-site work in the OCIP and your own policy. This work typically is not excluded by your own insurance as it is not on the OCIP site, but make sure of it.

    • Exclusions for pollution and mold liability, subsidence (resulting damage from earth settlement), professional services liability (if you offer any design, inspection or consulting services), cranes and other coverages.

    • In some contracts, the sub could be assessed large deductibles — $50,000-$100,000 — that the owner or general who bought the OCIP was originally responsible for. The owner or general can assess this deductible against you, the sub, sometimes regardless of fault! Try to change the contract to reduce the size of the deductible chargeable to you and that you only pay the deductible if the damage or injury was your fault. You can also purchase insurance for this deductible assessment.

    • Claims for economic loss can be excluded under the OCIP. These are claims where there is no property damage but a financial impact related to the property, such as a delay in opening or reduction in revenues to the owner.

    • Contractual liability insurance coverage can be excluded. This is coverage for things such as the sub’s liability to another by means of contractual language in which the sub holds another harmless. This can sometimes even be for things the sub may not have any fault in, but which the sub is liable for due to the way the contract was drafted.

    A sub can try to not enroll in the OCIP and instead rely on its own liability insurance for the project, but most OCIPs have mandatory enrollment requirements.

    When a sub enrolls in an OCIP, its own insurance typically no longer insures the project (due to the typical exclusion for work done on projects covered with an OCIP). As a back up, there are wrap gap insurance policies that subs can buy for liability coverage for work done on OCIPs, but they’re not cheap.

    To get more information on what is covered and is not covered under the OCIP, have your broker request and review not only a copy of the OCIP manual, but also the OCIP policy with the exclusions and a copy of the OCIP Voluntary Disclaimer form.

    If your own policy doesn’t have an exclusion for work done on OCIPs (which is rare), and you don’t wish to have your own insurance company cover the project, you can have you broker exclude the OCIP project from your own policy. This will remove from your own insurance policy the premium charges for the premiums derived form including the OCIP project payroll and contract amount.

    Ask your broker to add an OCIP exclusion to your policy to avoid you being charged by your own insurance company as well as the OCIP administrator.

    Also, when your broker is sending the OCIP administrator a certificate of insurance naming them as additional insured, ask that the wrap exclusions be attached. You are then clearly stating you don’t insure them for accidents on the OCIP project with your insurance.

    Although the OCIP has benefits in some respects, it can create some significant uninsured risks to subcontractors. It is best that you, your attorney and insurance broker closely look at the OCIP for adequate protection and make sure the subcontract related to the OCIP is fairly drafted.

    Jeff Stewart is an insurance and bond broker with McDonald Insurance Group. He holds a Chartered Property Casualty Underwriter designation and was president of the Surety Association of Washington in 1994. He has more than 25 years of experience as a broker and underwriter.

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