QUICK NOTE:…OWNERS AND CONTRACTORS PROTECTIVE LIABILITY INSURANCE (OCP COVERAGE)

Recently, I negotiated a contract that included Owners and Contractors Protective Liability insurance, otherwise known as “OCP” coverage, which is a project-specific policy.   Thus, the policy limits are project-specific.  Obtaining this OCP coverage includes discussion with a sophisticated insurance broker because the objective is always to ensure that there is insurance to cover a foreseeable or contractually assumed risk.

Many times, OCP coverage is procured by the contractor (listed as the designated contractor in the policy) for the owner, meaning the owner is the only insured on the policy.  The contractor purchases this insurance for the owner, as an insured, to cover the contractor’s indemnification obligation to the owner.  In a number of instances that I have dealt with OCP coverage it was largely because there was a concern with the additional insured endorsement of the contractor and/or its per occurrence limits.

OCP coverage applies to insure the owner from bodily injury and property damage claims (1) that arise out of the contractor’s operations performed for the owner at the project (e.g., vicarious liability) and (2) the owner’s actions or omissions in connection with its general supervision of the contractor’s operations.  (See ISO CG 00 09 10 01)  It applies to ongoing operations of the contractor as there is an exclusion in the policy for completed work.  (See id.).   It is not for completed operations.

The “Other Insurance” provision, different than in a CGL policy, provides that the OCP coverage is primary and “it will not seek contribution from any other insurance available to [the insured] unless the other insurance is provided by a contractor other than the designated contractor [contractor procuring policy or listed in the declaration]….” (See ISO CG 00 09 10 01).

It is always good practice, whether you are a contractor or an owner, to consult with your construction lawyer and insurance broker if you are considering OCP coverage as an extra layer of coverage.  For more information on OCP coverage, this article is insightful.   When it comes to insurance, the objective is to cover risks, whether foreseeable and/or assumed, so that there is the appropriate protection with respect to the project.

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.

 

MAKE SURE ADDITIONAL INSURED COVERAGE IS FOR COMPLETED OPERATIONS


UnknownCommercial general liability (“CGL”) insurance and additional insured coverage play an integral role in construction defect disputes. Specifically, general contractors want to ensure that they are an additional insured under their subcontractors CGL policies. (Subcontractors that engage other subcontractors to perform a portion of their scope likewise want to be an additional insured under their subcontractors’ CGL policies.) However, just being an additional insured is not enough. The key is that a general contractor should be an additional insured for ongoing operations and, importantly, completed operations since construction defects typically arise out of completed operations.

 

The recent Fifth Circuit decision in Carl E. Woodward, L.L.C. v. Acceptance Indemnity Insurance Co., 2014 WL 902575 (5th Cir. 2014), discusses additional insured coverage and the importance of additional insured coverage for completed operations. This case deals with the construction of a condominium in Mississippi. The general contractor hired a concrete subcontractor that performed work from January 2006 to October 2006 with the entire project being completed in August 2007. The general contractor was an additional insured under the concrete subcontractor’s CGL policy. Subsequent to completion, a construction defect dispute arose in arbitration that involved the concrete subcontractor’s scope of work. The concrete issues appeared to be that the subcontractor failed to properly slope concrete floors including balconies preventing water to drain and that it failed to install a step in the balcony slab at the balcony exterior walls and doors damaging exterior walls of condominium units.

 

The general contractor demanded that the concrete subcontractor’s CGL carrier indemnify and defend it in the dispute since it was an additional insured under the subcontractor’s policy (and the CGL carrier was responsible for indemnifying / defending it due to the negligence of the primary insured-concrete subcontractor). The concrete subcontractor’s CGL carrier refused to defend the general contractor because the additional insured endorsement stated that additional insured coverage was “only with respect to liability arising out of your [primary insured subcontractor’s] ongoing operations performed for that insured.” The endorsement also provided a specific exclusion to additional insured coverage–the additional insured coverage did NOT apply to property damage occurring after all work to be performed by or on behalf of the additional insured has been completed. Basically, there was NO additional insured coverage for completed operations.

 

The general contractor and its insurer filed suit against the concrete subcontractor’s CGL carrier. The argument was that the CGL carrier failed to indemnify and contribute to defense costs in connection with the arbitration. After trial, the district judge entered a judgment in favor of the contractor for approximately $1 Million. The Fifth Circuit reversed this judgment because the dispute arose out of completed operations for which there was no additional insured coverage owed to the general contractor.

 

 

images-1A. What does the additional insured coverage “only with respect to liability arising out of your [primary insured subcontractor’s] ongoing operations performed for that insured” mean

 

The Fifth Circuit (relying on Mississippi law) held that under the additional insured language for ongoing operations, liability simply needs to arise out of ongoing operations–liability needs to be causally connected to the the subcontractor’s ongoing operations. But, what exactly does this mean? To determine what this specifically means, the Fifth Circuit examined the case of Noble v. Wellington Assoc., 2013 WL 6067991 (Miss.Ct.App. 2013), that involved post-completion foundation cracks in a house attributable to the site subcontractor’s compaction (before the house was even constructed). In Noble, the court maintained:

 

Noble [additional insured] was only an additional insured for liability caused by Harris’s [site subcontractor] active [ongoing] work on the site and…did not cover property damage manifesting itself after Harris stopped working on the site…. [I]f Harris’s performance caused the damage for which Noble was liable, the cause was Harris’s completed work, not its ongoing operations. ” Carl E. Woodward, supra, at *6.

 

 

The Fifth Circuit further examined the Colorado case, Weitz Co., LLC v. Mid-Century Ins., Co., 181 P.3d 309 (Colo.App. 2007), whereby an owner observed water intrusion damage five months after the subcontractor completed its work. In Weitz, the court maintained:

 

Because the contractor’s [additional insured] liability for the water intrusion damage arose out of the subcontractor’s completed operations–the work was completed five months before the intrusion–rather than its ongoing operations, there was no coverage under the additional-insured endorsement.” Carl E. Woodward, supra, at *7.

 

Additionally, the Fifth Circuit maintained that the additional insured endorsement (factoring in the specific exclusion that excluded property damage occurring after all work has been completed) only provided coverage for the concrete subcontractor’s ongoing (active) operations. In other words, it does not matter when the claim is actually filed as long as the liability does not arise out of completed operations.

 

Typically, and even as the Fifth Circuit noted, liability for construction defects arise out of completed operations. Even if liability arose out of the concrete subcontractor’s scope of work, the liability did not arise out of the subcontractor’s active / ongoing operations, but from the completed construction (when the owner received the completed building-substantial completion). Thus, once all work is completed, the liability and damage will arise from completed operations.

 

B. CGL is not a performance bond

 

CGL insurance is not a performance bond. I repeat, CGL insurance is not a performance bond. The reason for the repetition is because oftentimes arguments are made to essentially convert CGL insurance into a performance bond. The Fifth Circuit explained the difference between these two products that insure different risks:

 

Allowing coverage under this [additional insured] endorsement because of an allegation that the additional insured failed to follow plans and specifications, effectively converts a CGL policy into a performance bond.
***
[A] performance bond is a form of insurance that guarantees the completion of the general contractor’s work on the project. This Circuit has previously noted the significance of the difference between these two forms of insurance [CGL and performance bond]: A CGL policy generally protects the insured when his work damages someone else’s property. The ‘your work’ exclusion [in the policy] prevent a CGL policy from morphing into a performance bond covering an insured’s own work.” Carl E. Woodward, supra, at *7 (internal quotations and citations omitted).

 

C. Take-aways

 

  • Take a look at the CGL policy and additional insured endorsement. There is a good chance the additional insured endorsement only provides additional insured status for ONGOING OPERATIONS and NOT COMPLETED OPERATIONS! This is absolutely not what a GC wants. It wants additional insured status for both ongoing and completed operations so that it can seek indemnification and defense for issues that arise post-completion.

 

  • Construction defect disputes often arise after substantial completion and after the owner receives the project. It is the owner that asserts the claim against the general contractor and the general contractor seeks indemnification and defense as an additional insured under subcontractors’ policies. If the subcontractor’s CGL policy does not provide for additional insured coverage for completed operations, courts and insurers will likely apply the same logic taken by the Fifth Circuit in this case. This is why obtaining a copy of the endorsement and requiring additional insured status for completed operations is important.

 

  • Even though contracts typically require the subcontractor to include additional insured coverage for completed operations, what the contract requires and what the policy states are oftentimes two different things. So, what is the recourse if a subcontractor’s policy does not comply with this provision? Well, you could include that the subcontractor failing to provide additional insured coverage for completed operations constitutes a material breach of contract. But, even if the contractor learns the right additional insured coverage is not being provided during construction, the chances of it terminating the subcontractor (and delaying the job) and finding a new subcontractor are probably slim to none. So what other recourse is there if this is learned during construction? Perhaps, if learned during construction, the provision can state that the general contractor is entitled to keep the subcontractor’s retainage as a form of liquidated damages based on damages that are not readily ascertainable. The subcontractor probably will not agree to such a provision. And, oftentimes, like this case, the additional insured coverage is not learned until after-the-fact when it is too late. Then what? Well, the contract already has an indemnification provision that would make the subcontractor responsible. The problem is that this provision is not additional insured coverage. Therefore, obtaining copies of subcontractors’ additional insured endorsements on the front end to determine whether there is coverage for completed operations is important.

 

  • CGL insurance is not a performance bond. They are two different insurance-type products with different purposes. Both can play a role in construction defect disputes. It is important to understand and appreciate their differences.

 

  • Finally, parties oftentimes try to navigate complicated CGL issues by themselves. This is a mistake. Parties should retain the services of counsel to assist them to ensure insurance claims are maximized and, if there is a performance bond in place, rights are preserved.

 

For more on additional insured coverage, please see: http://www.floridaconstructionlegalupdates.com/understanding-your-rights-as-an-additional-insured/

 

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.