Ensure Proper Coverage by Working Under Owner- and Contractor-Controlled Insurance Policies

Wrap policies provide a uniform program to manage project risks and cover all contractors under the same policy.
By Mark D. Shifton
July 5, 2022

Ensuring appropriate insurance coverage for large construction projects is an important and complicated process. While insurance will never be able to prevent potentially ruinous events such as catastrophic construction accidents or the discovery of latent construction defects long after substantial completion, the right insurance coverage can mitigate those risks, ensuring construction claims can be managed without leading to astronomical defense costs. In the real world, in a construction project involving numerous subcontractors working under a general contractor, ensuring adequate insurance can be a nightmare. To adequately protect the project—as well as its own interests—requires the general contractor to keep on top of possibly dozens of subcontractors, ensuring those subcontractors have the right type of insurance with adequate limits.

Many owners and general contractors, however, have realized the benefits of operating under Owner-Controlled Insurance Policies (OCIP) or Contractor-Controlled Insurance Policies (CCIP), often colloquially referred to as “wrap” policies. Rather than a piecemeal approach to protecting all stakeholders in a construction project, a wrap policy provides a uniform program to manage the risks of a construction project and covers all contractors under the same policy.

Under the typical model of a construction project, an owner contractually requires a general contractor to defend, hold harmless and indemnify the owner against all claims related to the project (such as claims brought by injured construction workers, or long-duration construction defects that become apparent well after substantial completion). While the owner usually has its own insurance coverage in place (often to cover risks unique to the owner, such as builders’ risk policies to mitigate damage to the project during construction, or to protect against construction delays), the owner usually requires the general contractor’s insurance coverage to the owner as an additional insured on the general contractor’s insurance policy. The general contractor, in turn, requires its subcontractors to procure their own insurance policies, often naming the owner and general contractor as additional insureds, and agreeing to defend and indemnify them against any claims.

The result is dozens—possibly hundreds, for very large projects—of different entities insured for the same project, but by possibly dozens of different insurers. Many times, the insurance coverage procured by some subcontractors is not what was contractually required; often a subcontractor inadvertently purchases a policy with significant exclusions that ultimately render that coverage illusory, effectively defeating the entire effort. When a claim is made (or goes to litigation), the various insurance carriers will often spend a great deal of time and resources in attempting to determine which parties should properly bear the exposure, and then will seek to shift their risks upon those parties, often via coverage litigation.

In contrast, under the OCIP/CCIP model, all contractors are insured on a single policy, administered under a unified program. Rather than requiring its subcontractors to procure their own insurance policies (and spending time and energy attempting to verify those subcontractors have adequate coverage), the various subcontractors are enrolled in a single program, where coverage is uniform. When a claim arises, a single insurance carrier or third-party administrator is charged with investigating and resolving that claim. If the claim proceeds to litigation, all named parties participating in the OCIP/CCIP are defended by the same counsel, and there are no risk transfer issues to resolve (thus eliminating the risk that collateral coverage litigation will eclipse the litigation of the claim itself).

While this is far from an exhaustive list, the benefits of operating under an OCIP/CCIP include the following.

  • Ensuring adequate limits of coverage for the project, the right type of coverages (CGL, professional liability, builders’ risk) and sufficient completed-operations coverage to cover long-duration defect claims.
  • Allowing for one centralized risk management program to help standardize safety procedures and ensure compliance.
  • Eliminating the logistical hassles of ensuring subcontractor compliance with insurance requirements.
  • Eliminating complicated risk transfer issues by ensuring all contractors are covered by a single policy.
  • Centralizing claims management under a single system, thereby reducing claims expenses and workers’ compensation costs.

From a claims management/defense perspective, the existence of an OCIP/CCIP may help prevent litigation from getting out of control. With a construction project under the typical model, claimants’ attorneys may have the incentive to unnecessarily complicate the litigation by naming as many parties to a lawsuit as possible. Indeed, in many jurisdictions where owners may be strictly vicariously liable for construction accidents, subsidiary and parent entities of the owner may be brought into the litigation out of uncertainty over the identification of the “true” owner. In many cases, claimants and their attorneys are incentivized to bring in as many parties as possible, under the belief that the more parties are involved, the more insurance carriers will be involved, and the easier it will be to settle a claim. This incentive, however, is often minimized in the context of a project covered by an OCIP/CCIP. In such a project, as all parties are covered under the same policy, the claimant has a significantly reduced incentive to overcomplicate the litigation by naming unnecessary parties. This can lead to decreased defense costs, as litigated cases become easier to manage and settle.

It is important to note that the existence of an OCIP/CCIP in and of itself will not give a subcontractor the benefit of that policy. Any parties wishing to be covered by the OCIP/CCIP must be affirmatively enrolled in the program. While the enrollment of a subcontractor into an OCIP/CCIP is generally governed by the contract documents, an owner or general contractor may allow a subcontractor to opt out of the program (if it provides its own insurance). While doing so may reduce certain costs associated with that subcontractor, the fact that it is no longer enrolled in the program exposes that subcontractor to the ordinary contract and insurance risks seen in the typical model. Should a claim proceed to litigation, an unenrolled subcontractor might find itself on the outside looking in, as its insurance carrier appoints its own defense counsel to litigate the claim alongside defense counsel for all contractors enrolled in the OCIP/CCIP.

by Mark D. Shifton
Mark D. Shifton is a Partner in the Princeton, New Jersey and New York City offices of the litigation law firm of Gfeller Laurie LLP. Mark represents owners/developers, contractors, and design professionals in construction and professional liability disputes. He also represents a variety of clients, including those in the construction and trucking industry, in catastrophic accident claims. He may be reached at: [email protected].

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