INTERACTION BETWEEN CGL INSURANCE, OCIP, AND SUBCONTRACTOR DEFAULT INSURANCE

Posted on November 14, 2015November 14, 2015 by Edward Garber

Here is a great opinion and insurance coverage dispute about the interaction between a CGL policy, and particularly one provided under an Owner’s Controlled Insurance Program, and a subcontractor default insurance policy / subguard policy.

In Pavarani Construction Co. v. Ace American Insurance Co., 2015 WL 6555434 (S.D.Fla. 2015), a general contractor constructed a high-rise condominium project. The general contractor and subcontractors were enrolled in the Owner’s Controlled Insurance Program (“OCIP”). This meant the general contractor and the subcontractors had the same CGL insurer. In addition, and outside of OCIP, the general contractor had subcontractor default insurance which is insurance a general contractor maintains to insure the risk of subcontractor default (and, really, catastrophic subcontractor default).

Post-construction, it was discovered that that the structural shell subcontractors the general contractor hired to (a) install the concrete masonry units and (b) the cast-in-place concrete, performed their work defectively. Specifically, reinforcing steel required to be installed within the concrete masonry units or cast-in-place concrete was omitted or improperly installed. These deficiencies resulted in excessive movement of building components. This movement caused stucco to debond, cracking in the walls, cracking of cast-in-place columns, beams, and shearwalls, and cracking in the mechanical penthouse enclosure on the roof that then resulted in water intrusion.

Upon discovering the deficiencies and/or resulting damage, the owner of the Project put the general contractor on notice. The general contractor notified its subcontractors. The general contractor (and subcontractors) sought indemnification under the CGL policy within OCIP. (Remember, with an OCIP policy, it is the same CGL insurer that covers all enrolled entities.) The CGL carrier, however, denied coverage. This resulted, applicable to the case, in the concrete masonry unit subcontractor defaulting on its subcontract because it was unable to perform repairs to its deficient work and cover the resulting damage without the CGL insurance proceeds. As a consequence, the general contractor submitted a claim to its subcontractor default insurance policy to recover money to fund the repairs that were in excess of $25 Million. The general contractor also worked out a deal with its subcontractor default insurance policy that it would pursue the CGL carrier for reimbursement.

The general contractor then sued the CGL insurer for indemnification by asserting a breach of contract claim and a declaratory relief claim against the insurer.

RESULTING DAMAGE

The insurer argued that there was no coverage because there is no coverage under the CGL policy for the general contractor repairing defective work. This is true, BUT “if the defective work causes damage to otherwise nondefective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the [mechanical] penthouse enclosure, and cracking in the critical concrete structural elements…[the general contractor] is entitled to coverage for the repair of that non-defective work.” Pavarani, supra, at *4. In other words, while repairing the defective work would NOT be covered, repairing damage resulting from the defective work WOULD be covered.

In discussing coverage for resulting damage, the court relied on a recent Eleventh Circuit Court of Appeals case, Carithers v. Mid-Continent Casualty Co., 782 F.3d 1240 (11^th Cir. 2015). This case is actually a very important case because it held “the complete replacement of defective subcontractor work may be covered when necessary to effective repair ongoing damage to otherwise non-defective work.” Pavarani, supra, at *4. (Please review the specifics of this case here). Basically, if replacement of potentially defective work is necessary to repair resulting damage, then such replacement of the defective work would be covered under the policy. For instance, if you had to remove (or rip-and-tear out) defective work in order to fix the resulting damage, then such removal would be covered.

Here, it was clear that the defective work caused resulting damage triggering the CGL policy’s obligation to indemnify the general contractor and applicable subcontractors.

“OTHER INSURANCE” PROVISION

The CGL policy contained an “Other Insurance” provision. This provision means that the policy will operate as excess (not primary) insurance over any other available insurance. This provision is in virtually every CGL policy and in many other types of insurance policies such as a subcontractor default insurance policy. The “Other Insurance” provision applies “when two or more insurance policies are on the same subject matter, risk and interest.” Pavarani, supra, at *5.

The CGL insurer argued that based on this “Other Insurance” provision, the general contractor’s subcontractor default insurance should operate as the primary insurance with it serving as any excess insurance. The court correctly dismissed this argument since a CGL policy and subcontractor default insurance policy insure completely different business risks. Besides, the subcontractor default insurance policy insures the general contractor for a subcontractor default and does not insure a subcontractor for its default.

Furthermore, the court held:

Courts disregard ‘Other Insurance’ provisions where, as here, there is a contractual right of indemnification between the parties insured by the relevant policy. Here, AWS [concrete masonry subcontractor] contracted to indemnify Plaintiff [general contractor] for damages resulting from its work and Defendant [CGL insurer] insured AWS [per OCIP] for claims of property damage. Therefore, Defendant cannot utilize the ‘Other Insurance’ provision to shift the loss.

Pavarani, supra, at *5 (internal citation omitted).

ATTORNEY’S FEES

Florida Statute s. 627.428 authorizes attorney’s fees against an insurer in an insurance coverage case. Since the general contractor (insured) prevailed, it was entitled to its reasonable attorney’s fees.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

WRAP-UP INSURANCE ON LARGE CONSTRUCTION PROJECTS: OCIP OR CCIP

Posted on January 17, 2015January 17, 2015 by Edward Garber

Wrap-up insurance is commonplace on large, complex construction projects. There are two types of wrap-up insurance programs routinely utilized: (1) Owner’s Controlled Insurance Program (“OCIP”) or (2) Contractor’s Controlled Insurance Program (“CCIP”). Under either wrap-up program, the objective is that most (if not all) of the construction participants (such as the contractor and subcontractors) are wrapped-up or covered under one insurance coverage program.

When a construction project has wrap-up insurance, whether OCIP or CCIP, there will be an insurance manual that will explain certain aspects to the construction participants such as (a) what type of insurance is included in the wrap-up program, (b) how premiums are to be determined for the wrap-up program including the required close-out audit, (c) who is responsible for any deductibles for claims, (d) the type of insurance the participant still needs to procure and/or the type of insurance not covered under the program (and, if not in the manual, it should be outlined in the contract), and (e) how to submit and handle claims under the wrap-up program. The manual will also identify the administrator of the wrap-up program.

In my experience, wrap-up coverage includes builder’s risk coverage, worker’s compensation coverage, commercial general liability (CGL) coverage, and umbrella coverage. Insurance not routinely included in a wrap-up program is pollution liability, errors & omissions / professional liability, automobile liability, equipment coverage such as boiler and machinery insurance, and coverage for a contractor’s off-site operations. This will be applicable insurance the contractor and subcontractors will still need to procure as may be required by the wrap-up program or underlying contracts.

The advantage of a wrap-up program is ideally to streamline risk management issues including additional insured status, (higher) limits of liability and excess (umbrella) liability coverage, products completed operations (applicable to CGL coverage so that products completed operations ideally runs through the applicable statute of repose for construction defects), waiver of subrogation concerns, and the claims process since major construction participants will be covered under the same global insurance policies (as opposed to many different carriers). Another advantage is that there ideally is a cost benefit since the program should reduce overall insurance costs by all of the enrolled participants which corresponds to a reduction in overall construction costs.

There are, however, perceived disadvantages to wrap-up programs too. There is an administrative burden in having to deal with these programs which is why there is often a third party administrator engaged to handle the administrative process associated with ensuring that major construction participants are properly enrolled in the program, insurance costs that are routinely included in bids / proposals are backed-out to avoid duplication in insurance costs, claims are properly and timely handled, and enrolled participants are audited during the close-out of their contracts to determine their final, allocated premium. Also, as mentioned above, the wrap-up program does not relieve the enrolled participant from obtaining other required insurance coverage not included in the program but required of the participant through the wrap-up program’s manual or contract. And, there is the concern that even if there is an insurable construction defect claim, the claim is still going to flow downstream irrespective of the fact that there is a wrap-up program designed to cover that type of claim. (For example, with OCIP, there is concern that such a claim will be formally asserted against the contractor and then subcontractors instead of perhaps tendering the claim to the OCIP administrator so that the carrier can make a determination as to the claim since the contractor and subcontractors would have the same insurance through OCIP. Thus, any duty to defend obligation would be owed to all from the same OCIP carrier which will hopefully reduce protracted litigation.) See, e.g., Southeast Wisconsin Professional Baseball Park District v. Mitsubishi Heavy Industries America, Inc., 304 Wis.2d 637 (Wis. Ct. App. 2007) (finding that in a multi-party litigation regarding deficiencies with a retractable roof, the OCIP carrier owed duty to defend obligation to all of the parties).

HELPFUL PROVISIONS IN FLORIDA’S LOCAL GOVERNMENT PROMPT PAYMENT ACT

Posted on November 10, 2014November 10, 2014 by Edward Garber

Florida’s Local Government Prompt Payment Act (Florida Statute s. 218.735) contains helpful provisions to contractors and subcontractors working on local government projects (or projects that are neither owned by a state agency nor private entity that would be governed under different prompt payment acts). These provisions pertain to the generation of the punchlist and the release of retainage.

A. Punchlist

The contract between the general contractor and local governmental entity needs to provide for the generation of a single punchlist. The contract needs to specify the process required to generate the punchlist including the responsibilities of both the local governmental entity and contractor. For projects with estimated construction costs less than $10 Million, the punchlist needs to be generated within 30 days after substantial completion. For projects with estimated construction costs of $10 Million or more, the punchlist needs to be generated within 30 days after substantial completion; although, this may be extended by contract to up to 60 days after substantial completion.

If the punchlist is not provided to the contractor by the required date (through no fault of the contractor), the contract time for completion needs to be extended by the number of days the punchlist is delayed. Moreover, the contractor can submit its payment application for the retainage balance and payment of any undisputed amount must be paid.

If a dispute exists as to any item on the punchlist, the local governmental entity may only withhold up to 150% of the cost to complete such items. Once the contractor completes the items on the list, it can submit its payment request for retainage.

Importantly…and I repeat, importantly…warranty items or items not identified on the (single) punchlist may not impact the local governmental entity’s final payment of retainage! Also, if the local governmental entity is utilizing an Owner Controlled Insurance Program (known as “OCIP”), the local governmental entity cannot withhold retainage or delay final payment pending a final audit to determine the insurance premium.

B. Retainage

The local governmental entity is entitled to withhold 10% retainage on progress payments until the project is 50% complete. After the project is 50% complete, the local governmental entity must reduce the retainage on future progress payments to 5%. The contractor may also submit a payment application to the local governmental entity for ½ of the retainage (5%) that the governmental entity was withholding until 50% completion (which must be paid unless there is a good faith dispute for withholding some or all of this retainage).

As it relates to subcontractors, the contractor can still withhold retainage greater than 5%; however, the “contractor shall notify the subcontractor, in writing, of its determination to withhold more than 5 percent of the progress payment and the reasons for making that determination, and the contractor may not request the reqlease of such retained funds from the local governmental entity.” Fla.Stat. s. 218.735(8)(c).

(This retainage reduction does not apply to municipalities with a population of 25,000 or fewer or counties having a population of 100,000 or fewer, meaning these local governmental entities can withhold 10% retainage until final completion.)

Florida’s Local Government Prompt Payment Act gives the general contractor the argument that only a single punchlist needs to be generated versus a never-ending punch list that the local governmental entity continues to add to so that there is no end in sight to the punchlist completion. It further allows the contractor to submit its payment application for its final contract balance of retainage if the punchlist is not timely generated through no fault of the contractor. Additionally, Florida’s Local Government Prompt Payment Act not only authorizes a reduction in retainage to 5% at 50% completion, but allows the contractor to bill for half of the withheld retainage that the local government was withholding through 50% completion.