Owner Contractor Protective Policy – What is it?
Owner Contractor Protective Policies offer insurance coverage for contractors that either build on or work near an insured’s premises. Essentially, the contractor remains covered under the contractor’s own policy for injuries to workers and others, and the owner customer also receives coverage for damages arising from negligence of the contractor. Owner contractor protective policies are considered primary policies in most instances which means that if claims reach a level where more than one policy applies, the policy with the earliest inception date or policy period applies first.
Owner contractor protective policies can be purchased by a construction project owner that hires others to perform work on the owner’s project. The contractor should be sought out and responsible for securing the owner contractor coverage for those entities that it subcontracts or otherwise hires to perform construction work for the owner. Typically , larger general contractors either purchase owner contractor protection insurance from their own insurance carrier or negotiate coverage/requirements as part of their contract with the owner. Remember, the general contractor is ultimately responsible for providing owner contractor coverage.
In order for an owner contractor protective policy to be effective it must designate each of the contractors as additional insureds under the policy. If the policy does not make express reference to additional insured status, the owner contractor policy does not provide coverage to the insured. Most policies provide named insured coverage and additional insured coverage for the insured’s agents and employees. The policies usually respond to cover liability from the negligent acts of the contractors or subcontractors. Many insurance policies do not provide coverage for the sole negligence of the owner customer; however, some do provide that coverage. It is best to understand what the policy covers so as not to overpay for the policy.
The Major Advantages for Owners
As a result of frequent and rather costly litigation between project owners and their general contractors, general contractors now recognize the importance of the Owner Contractor Protective Policy ("OCP policy") as a method of minimizing risks relating to uninsured claims, lawsuits and other damages due to construction defects, property damage or other liabilities. The two key benefits of such a policy to the owner are:
A lower premium and cost of acquisition – OCP policy premiums can be as much as two-thirds less than a property bundled policy, which generally must be obtained by the owner.
An increase in coverage options and availability – Policies are customarily issued on an occurrence basis, which means that the policy covers all losses occurring over the policy period, regardless of when a claim is made. The policies may include varying coverage limits, endorsements and other options.
A reduction in legal expense – Because the availability of OCP policies means that owners do not need to seek recovery from their general contractor for any liability incurred, they do not usually have to engage outside counsel for the complex drafting, filing and litigation of a complaint.
Common Policy Covers
Depending on the specific scope of coverage, an OCIP’s liability coverage grants the owner protection from liability to third parties, in one or both capacities. For example, in the general liability context, the policy will typically include coverage requirements for any work done by subcontractors as well as coverage for the site, in addition to vicarious liability coverage for the owner. In the primary and excess umbrella context, the coverage would be similar but with some additional coverage aspects unique to umbrellas.
Safety programs, and enforcement of the safety rules, are typically included in every OCIP. An OCIP is a construct of the owner who retains the construction manager or general contractor. It is the owner’s responsibility to create and institute the program. As part of a typical safety program on an OCIP, each subcontractor must institute and enforce rules relating to OSHA regulations, smoking on the jobsite, no weapons, non-harassment, etc. Many OCIPs also require each subcontractor to retain a qualified Health and Safety officer, who will manage the safety program.
Indemnification is typically included when the OCIP is purchased on a wrap basis. A wrap OCIP is purchased where the owner assumes responsibility for all aspects of the project, including financial responsibility for the cost of the policy. In particular, wrap OCIPs are typically used on large projects. In order to reduce to the overall cost of the OCIP, an owner may seek indemnification from its contractors for a disproportionate sharing of the policy cost. An owner in a wrap OCIP would typically seek indemnification from each of its subcontractors.
How Owner Contractor Policies Differ From Other Coverages
Owner contractor protective policies are very different from other types of construction-related insurance such as general liability policies or builder’s risk policies. With the former, the named insured is the owner and the additional insured is either a general contractor retained by the owner or any subcontractors of the general contractor. The insurance is placed by the owner whether or not a lender is involved. The property is owned by the owner. No particular contract exists between the owner and the contractor or subcontractors. In fact, in some cases the property owner is simply requiring a general contractor to provide it with an owner contractor protective policy, but the owner may not have a contract with the general contractor or any subcontractors. In many cases, the general contractor does not even need the protection for itself. Some general contractors have trying to get out of the additional insured protection for the subcontractors.
On the other hand, a general liability policy identifies a subcontractor as an additional insured if it is part and parcel of the contract between the general contractor and the subcontractor. The insurance is placed by the general contractor. The property is often owned by a lender. A general contractor is named in the general liability policy but most certainly would also be named as the contractor under a builder’s risk policy. The named insured under the builder’s risk policy is the lender. The subcontractor is often named as an additional insured under a builder’s risk policy, but only for very narrow coverage in terms of the scope and time period for additional insurance.
Selecting the Correct Policy for Your Project
When it comes to choosing an appropriate owner contractor protective policy, there are several project-specific factors an owner must address. First, what is the statutory minimum limit for a commercial general liability policy for the type of project? For instance, if the project has an estimated cost of greater than $10,000.00, then the statutory minimum limit is at least $300,000.00 for bodily injury and property damage and $150,000.00 for products and completed operations (which also must include coverage for damage from defective materials and completed work). If the project has an estimated cost over $50,000.00, then the statutory minimum limits for the general liability policy must be $500,000.00.
A second consideration is whether the site will ever be occupied, tenant occupied, vacant, or used in a manner which may make it desirable for the owner to have completed operations coverage. One option an owner has to cover this risk is to insure the property for its completed value and include coverage for products and completed operations. Another factor affecting the policy decision is whether the owner is going to manage the project himself. Although no bond is required , it is advisable that economic concerns are spelled out in the policy’s Declarations page to avoid adjusting problems upon completion of the project. Another category an owner might want to consider when selecting a policy is whether he has any projects or operations which involve coal. Do you require coverage for explosions and collapse? Is there a need for professional liability coverage for architects and engineers? One concern for many owners is whether they have a need for additional insureds on their policy. Depending on the industry, there may be trade associations and professional organizations which offer additional insured endorsements that may be applicable. One very important question that must be addressed when selecting a policy is what coverage exclusions are present. Does the policy have an exclusion for excess liability? What about contractual liability, underinsured, uninsured or auto exposure? Does the policy provide coverage for liability transferred through indemnity or hold harmless agreements? Does it include an exclusion for injuries to the employees of the contractor? Are all delegates of the owner included as additional insureds? Finally, what is the minimum coverage required to be purchased on a sub-contractor? When and under what conditions, if any, does the owner have to approve the sub-contractor’s coverage? What are the amounts to insure? Although there are not required limits of insurance for a subcontractor, many owners will mandate a minimum requirement.
Common Challenges and Resolutions
The low-cost insurance alternative for owners where the contractor also carries the insurance is a popular approach but it has its pitfalls.
One such pitfall is that the plans and specs may not contain the owner’s policy forms. Another is the contractor often has the ability to change the policy or the deductibles without the owner’s approval. A third is that the contractor’s insurance company may attempt to pay less than the policy limit in cash, rather than pay the policy limit in cash and provide replacement value coverage. Some solutions are: 1. Owner obtains a copy of the contractor’s policy if available at all. 2. Owner amends the contract to provide that the contractor cannot make any material changes to the owner’s protective policy without the owner’s consent. 3. Owner obtains a release to make the loss a total loss. 4. Owner does not replace any of the damaged equipment but purchases new equipment to replace the old. Then the insured gets cash plus the replacement equipment.
Legal Considerations and Regulations
Owner contractor protective policies—also known as OCIPs or CCIPs—are not governed by federal law but are fundamentally insurance plans. The legal implications of OCIPs are therefore covered by state insurance laws and regulations. Laws vary for OCIPs and are subject to change. Owners, contractors, subcontractors, and others in the construction industry need to have a working knowledge of the current laws governing OCIPs in their states and municipalities.
Application of state insurance laws to OCIPs
State insurance regulators have authority to regulate OCIPs, but they wield different degrees of power in different jurisdictions. Some state statutes specifically apply state insurance law to OCIPs; other statutes do not mention OCIPs at all. OCIP participants should appreciate the difference:
• States with laws specifically regulating OCIPs: At least 12 states have statutes that speak directly to OCIPs. These laws generally govern:
o Approval by the department of insurance
o Licensing of OCIP insurer
o Deposit of premiums with department of insurance
• States without statutes specifically regulating OCIPs: Each of the other 34 states will likely apply its general requirements for insurance companies to OCIPs. This includes state requirements for licensing, premium payment, and other regulations. Some states are particularly insurance-oriented, making it essential for insurers to have a local attorney review any OCIP before it is used. Other states have rather minimal regulations, and sometimes OCIPs are operated just like other types of popular group insurance coverage.
Federal insurance law and OCIPs
Although OCIPs are not generally regulated by federal law, the federal Employee Retirement Income Security Act (ERISA) does apply to OCIPs that provide health or retirement benefits to employees of a participating employer. The US Department of Labor, which administers ERISA, published its ERISA OCIP Advisory Letter in 1987. The letter states that OCIPs which provide health benefits are required to comply with ERISA. Funded health benefit plans (including those offered through an OCIP) and self-insured health benefit plans are within the letter’s scope. Self-insured plans need not comply with ERISA in some circumstances, but there are certain disclosures to be aware of under state and federal law.
Compliance with federal and state insurance laws
Owners who are anticipating using an OCIP should engage an attorney knowledgeable in the insurance laws and regulations applicable to their state and locality. There is no single nationwide answer to the question "Is my OCIP compliant with federal and state insurance law." Each OCIP will be unique, and compliance issues must be evaluated on a multiple levels. In addition, contractors must take care to accurately report payrolls and other information necessary to the correct calculation of premiums owed to the OCIP. When a participating contractor under-reports payrolls or other information, it exposes itself to the possibility of an audit deficiency. The contractor may be liable under the OCIP either if the deficiency is held to be a breach of contract or if there is a specific liability created under the housing and construction industry provisions of ERISA.
Emerging Trends in Construction Insurance
Trends in Construction Insurance
Future trends in construction insurance risk allocation will most likely be driven by owner contractor protective policies. Owners will begin to recognize that the policies are a significant portion of the risk allocation tool box. These policies have the effect of shifting risk from a permitted subcontractor to a general contractor. The policies also afford the possibility that an additional layer of coverage may be available to a general contractor without increasing project risk. No doubt, an owner may include an obligation for a general contractor to procure PCR policies and require access to these policies. Doing so seems to be merely a matter of adopting best practice. The more interesting question is whether the owner shifts pre-existing risk away from a subcontractor .
There are several existing technological tools that lend themselves to the process. For example, an industry standard database exists for PCR policies. In recent years, common policy terms and conditions have been accumulated and made available to everyone. Technology has made policy retrieval much easier than it was in the 1980s. Next up is the development of analytic tools to decipher complicated coverage language and to assess coverage under PCR policies. This will also allow for the development of automated quotes based on a common formulation customized for a particular project. Over time, owners may come to expect an owner contractor protective policy as a part of the risk allocation tool box. Owners may further require the general contractor to make policy procurement a part of the bidding process.