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Looking Back on 10 Years of OCIPs: Is the Claim Still Covered?
Owner-controlled insurance programs (OCIPs) came into prominence almost 10 years ago, along with another single project policy known as contractor-controlled insurance programs. They were sold on the basis that owner-contractor sponsors would recognize significant project insurance savings (typically 1 percent to 3 percent of construction costs); prevent problems with a particular contractor’s low insurability or available coverage; and gain the advantage of a consolidated health, safety and loss management program administered by a single claims manager. Also called “wrap-up” insurance, these programs began with large projects (valued at $100 million or more) and migrated down to smaller projects over the years.
But, these programs also carried a host of potential pitfalls for contractors lowering insurance premiums by agreeing to higher deductibles and self-insured retentions (e.g., $250,000 per occurrence); establishing lower aggregate limits of insurance per project regardless of the number of claims that may be asserted over the life of the work; and charging defense costs against the policy balance. Worst of all, these programs cut off coverage for completed operations at a shorter period (usually three or five years) than the statutes of limitations or of repose, so a contractor may face a claim after the OCIP policy’s commercial general liability (CGL) coverage has expired.
Faced with an increased premium for a completed operations coverage period that coincides with a particular state’s limitations period or a lower premium for a much shorter, fixed period, many owners opt for the shorter period.
Confronted with the prospect of staring down a claim not covered by the OCIP, contractors may look to their corporate CGL policies only to discover they contain exclusions for projects governed by an OCIP. Despite an OCIP and a paid corporate CGL policy, the contractor could be exposed to a catastrophic loss with no insurance.
The contractor and its insurance advisers should have examined the OCIP beforehand, identified the shortfall, proposed “tail” coverage under its corporate CGL policy for the remaining period of exposure, and claimed a refund from the owner for the cost of the tail.
Some types of coverage may be outside the OCIP altogether. Auto liability, offsite work and professional design services usually are not covered. A contractor should maintain its own auto policy, potentially with a special endorsement to cover offsite work, as well as a completely different policy to address professional liability claims relating to architectural or engineering design services, especially for design-build projects.
OCIP Deductibles and Other Limits
Beyond the types of available coverage and the coverage periods, contractors need to understand the OCIP’s deductible or self-insured retentions, as well as the exposure for all or part of that amount for each claim covered by the OCIP policy. If the owner is responsible for payment of the deductible to the carrier, do the contract documents allow the owner to allocate the amount to one or more of the OCIP participants?
Can a contractor, therefore, be liable for paying part of a deductible when the underlying claim has nothing to do with that contractor’s work?
Finally, a contractor needs to understand the OCIP’s aggregate limit (or the maximum amount the carrier is obligated to pay on the project), whether the OCIP is exposed to claims on more than one project (so-called “rolling” OCIPs), and the interplay, if any, between the OCIP’s limits and any umbrella/excess policies. If the OCIP is hit with a large claim that wipes out the policy limit, does the owner’s umbrella/excess policy kick in, or is the contractor, under the “other insurance” provisions of its contract, responsible for having CGL coverage that would protect it and the owner (as an additional insured) from such losses?
In an ideal world, an OCIP would be issued in an amount sufficient to cover all potential claims and to encompass all limitation periods, and the contractor’s corporate CGL policy would be structured to complement the OCIP’s coverage. In reality, however, contractors must examine wrap-up policies with a critical eye, or else they become corporate shrouds.
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Saturday, February 4, 2012