Ultimately every manager is judged by his/her results. How are those results delivered? Mostly as the product of a lot of systems. However, most managers do not understand, at a sufficient level of detail, how the underlying systems or processes in their businesses affect the overall delivery of their products and/or services. This is a huge opportunity area for most businesses. Such a profound impact is delivered by our somewhat invisible systems. Do you have a good picture of how your core business systems are performing? Most mid-market companies do not. Here are a few insights for you to ponder about the overall health of your company and its systems:
- Understanding performance requires a clear understanding of the underlying systems.
- An organization's systems adapt or die.
- An organization behaves like a system, regardless of whether it is being managed as a system.
- If you pit a good performer against a bad system, the system will win almost every time.
Building your organization's management model is much like putting a puzzle together. When completed it should give you a pretty good picture of how you manage your business. Without this kind of visibility, how do you know which piece may be missing? The management model needs to be balanced and it needs to address the fundamental elements of the management process needed to deliver predictable excellence.
Ultimately, the job of management is to deliver predictable success. As managers, we generally rely on systems to give us predictability, right? Then, how about a visible schematic of the key systems that comprise your management model? Ideally, we are working vigorously as business leaders to constantly improve our delivery system, be it services or products. That is our calling as business leaders. So, consider the following schematic to help you get your head around all the systems that go into creating a high performance organization.
To accomplish this important process we use two management concepts to create a diagnostic tool. We start with the Balanced Scorecard to identify the four key performance areas for predictable success: People, Systems, Customer and Finance. We plot this along the X axis. These four perspectives help us to look at what needs to happen to optimize performance in these four areas. That means (1) people are trained and motivated, (2) systems are documented and constantly being evaluated and improved, (3) customer needs and expectations are being met or exceeded, and (4) financial goals are being met. Then down the Y axis we plot the five functions of management (Drucker): Planning, Organizing, Communication & Motivating, Measuring, and Developing People. This grid creates 20 cells in which it is profitable to identify the elements of your management system that combine to create your overall corporate system of management.
This is the eighth article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 9, Part 10, and Part 11.
Particular Challenges Of Owner Controlled Insurance Program Claims
Under a typical general liability policy, if a claim presented against an "insured” is partially covered by the policy, the insurance carrier issues a reservation of rights. The reservation of rights letter identifies those claims, causes of action, or damages that are not covered by the policy. The insurance carrier also notifies the insured whether it will defend and whether it will allow the insured to use its choice of counsel in doing so. Significantly, however, where the insurance company does not agree to indemnify the insured for all claims and damages, the insured retains the right to pursue other responsible parties to recover those sums. In the liability Owner Controlled Insurance Program, there are two consequences of reserving rights to deny uncovered claims.
First, in underwriting an Owner Controlled Insurance Program, the insurance company hopes to enjoy cost savings by using a limited number of attorneys to defend the enrolled contractors against claims by the sponsor or by a third party. If the carrier reserves its rights to, however, it is possible, and indeed likely, that the enrolled subcontractor will seek recovery from other enrolled subcontractors under indemnity contracts. The indemnity claims a conflict preventing the retention of a single defense counsel. Second, each enrolled contractor has a right to pursue indemnity claims against other enrolled contractors for covered and uncovered claims.
Therefore, in a complex liability claim presented against the general contractor and/or several subcontractors, the insurance company must recognize early the potential for conflict between the enrolled contractors and the likely value of the uncovered claims.
This is the seventh article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 8, Part 9, Part 10, and Part 11.
Liability Defenses Unique To Owner Controlled Insurance Programs
Waiver of Subrogation/Insurance Clauses
In the construction contract, there will be contractual language relating to the procurement of insurance and the operation of the Owner Controlled Insurance Program. In the context of property damage claims for damage occurring to the project itself, those contracts may articulate defenses available to the enrolled contractors. Two of the most important would be the waiver of subrogation clause and the identification of builders risk insurance.
With regard to the waiver of subrogation, the clause would typically find that the owner, as part of procuring the Owner Controlled Insurance Program, would waive its right to subrogation on behalf of the builders risk carrier against the enrolled contractor. Under this scenario, the builders risk carrier could not satisfy a loss on behalf of the contractor for damage occurring during construction, then turn around and sue the subcontractor causing the damage. (See, e.g., Affiliated FM Insurance Co. vs. Patriot Fire Protection, Inc. (2004) 120 WN App. 1039 (Washington).) In that case, Patriot Fire Protection, Inc., installed a fire sprinkler system at the Owner Controlled Insurance Program insured premises. As part of the Owner Controlled Insurance Program, the builders risk policy issued through Affiliated FM Insurance contained a waiver of subrogation clause. In the subcontract agreement, there was a waiver of subrogation granted in favor of the subcontractors by the owner. The court found in this instance that the builders risk carrier had no rights against the enrolled contractors.
A second contractual defense would exist where the owner promises to obtain builders risk coverage in favor of the enrolled contractors with a set deductible. Under that scenario, the enrolled contractor may be able to assert that the owner's claims against it are limited to amounts which are not covered by the builders risk policy. Such amounts would include the deductible (which is an uninsured loss) stated in the contract would be the amount, which is not covered by the builders risk policy.
While there are no cases that directly address the second point, the issue arises frequently. The enrolled contractors believe that there is builders risk coverage available and that there will be a set amount deductible. Lack of adequate builders risk coverage creates a number of interlocking questions which will have to be clarified through subsequent case law including:
- If the owner changes the builders risk program to a higher deductible and/or more narrow coverage, what are its rights against the enrolled contractors who understood that broader coverage was being provided?
- Does a waiver of subrogation condition apply to limit the owners' claims against enrolled contractors for losses not covered by the builders risk policy or which are within the deductible of the builders risk policy?
- If the owner chooses not to present a builders risk claim, may it still pursue a liability claim against the enrolled subcontractor; and what is the effect of the waiver of subrogation clause in that event?
This is the sixth article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 7, Part 8, Part 9, Part 10, and Part 11.
Owner Controlled Insurance Programs From The Perspective Of Liability Claims (continued)
C. Voluntary Payments by the Insured, and Right and Duty To Defend
There are two "conditions” to the policy which are particularly relevant to the typical Owner Controlled Insurance Program claims. When property damage claims occur at an Owner Controlled Insurance Program location, there is an added incentive for prompt remedial action on the part of enrolled contractors, as well as the owner. Assuming there is a retention or retrospective premium applicable to the policy, the owner has an immediate concern to rectify problems as soon as they occur. Furthermore, assuming that it is an "operations” type loss, it is typical that the contractors are mobilized performing work at the time the loss occurs. Therefore, there is a built-in incentive to use the contractors that caused the loss to repair the damage.
Take, for example, the situation where there is an accident causing property damage that relates to work performed by a subcontractor. The owner takes control of the loss and hires contractors to remediate the problem. The owner then seeks reimbursement from the Owner Controlled Insurance Program for costs incurred, ostensibly as a claimant against the responsible subcontractor, and separately as an insured facing liability to the third party.
Presenting a claim against the enrolled contractors, while simultaneously using them to repair damage, can create some challenges for the claims department. It can also create friction between the interpretation of the policy as a stand-alone insurance contract and the expectation of the sponsor or owner with regard to reimbursement of costs relating to damage caused by subcontractors.
The liability policy provides that the company has a duty to defend any "insured” in any "suit” seeking covered damages. As to the enrolled subcontractor, therefore, the insurance company has the right to defend that subcontractor and assert liability defenses on that subcontractor's behalf to defeat liability to the claimant/sponsor of the program. The separation of insureds provision requires the carrier to defend the rights of each insured separately. In contrast to the defense, the carrier's duty to indemnify that enrolled subcontractor occurs only when liability for damages is assessed against it, at least under California law. Certain Underwriters at Lloyds of London vs. Superior Court (2001) 24 Cal.4th 945. Assertion of these defenses will, however, create friction.2
Why And When The Supreme Court Will Likely Take The Case
Before we get into how the Supreme Court is likely to reconcile these contradictions between the lower courts, let's talk about the question of whether or not the court will even take the case on and the basis of their decision to do so.
The fact is that the Supreme Court has to be asked to rule on a case first. And if they are, 4 out of the 9 justices have to agree to take it.
When the court takes on a case, it's usually because the justices believe that the case particulars can create the foundation of a ruling over an issue that the justices have viewed historically as being inconsistent with constitutional law or that is confusing and something that they believe they should address or clarify.
So the justices pick and choose cases that they can best use to harvest rulings that help the country in this regard. Often, when they take on a case, it has little to do with the actual issue of the case. More, it has much to do with a bigger picture question or issue pertaining to constitutional law.
So what is the big, compelling question/issue that the Supreme Court might want to resolve using the Patient Protection and Affordable Care Act as the vehicle? I think it's the Commerce Clause.
This clause has been around for almost a hundred years and it has slowly grown to cover a lot of commercial activity throughout the country. The line between the autonomy of the states and the role of the federal government that was so carefully engineered by our founding fathers seems to have become more blurred over the last century and especially during the last decade.
Where do you draw the line? How far reaching should the Commerce Clause be? To the extreme, if the Commerce Clause continues to grow in influence and affect more and more businesses and everyday life, then what's the point in even having states? These are very compelling questions for the justices to address, in my opinion. And I can't imagine a greater platform and vehicle for a grand discussion and directive on this than the Patient Protection and Affordable Care Act.
A prospective ruling on this could be the ruling of the decade – not because of the mandate but because of how it affects states and their relationships with the federal government. So that's why I believe the Supreme Court will take it. But when will they get it? No one's sure.
The federal government will want to delay the time the case gets to the court as long as possible. The more it's delayed, the more aspects of the Patient Protection and Affordable Care Act are likely to be rolled out and become part of societal infrastructure — if a state has already received money and built an exchange with it, what do you do if the court throws out the Patient Protection and Affordable Care Act? My bet is the exchange (or pieces of it) stays in place.
And this is why the states want to see the case go to the court right away. From what I've read, there's a 50/50 chance that the court will issue a ruling before the next year's election.
This is the fifth article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 6, Part 7, Part 8, Part 9, Part 10, and Part 11.
Owner Controlled Insurance Programs From The Perspective Of Liability Claims (continued)
The first issue that the carrier and the policyholders must address is whether the loss resulted in "covered damage.” However, with an Owner Controlled Insurance Program, the analysis with regard to the particular insured is critical. There are numerous exclusions in the commercial general liability coverage form that apply differently, depending on whether the named insured enrolled contractor is an owner, general contractor, or subcontractor. The following exclusions illustrate why the policy may provide coverage or not, depending on which insured is seeking coverage:
Expected or Intended Injury Exclusion
This insurance does not apply to:
a) Expected or Intended Injury
"Bodily injury” or "property damage” expected or intended from the standpoint of the insured ...
Use of the phrase "the insured” refers to the insured seeking coverage. This phrase is contrasted to an exclusion that applies to an injury which is expected or intended from the standpoint of "an” or "any” insured, which would preclude coverage entirely under the policy if an insured or any insured intended the act. (See, e.g., National Union Fire Insurance Company vs. Lynette C. (1991) 228 Cal.App.3d 1073 — a wife who negligently failed to prevent molestation by her husband was covered; Fire Insurance Exchange vs. Altieri (1991) 235 Cal.App.3d 1352 — parents sued in connection with their son's arson of a school building.) The phrase "the insured” also is contrasted to exclusions that apply to "you,” which is the named insured. In the context of an Owner Controlled Insurance Program, where virtually every contractor is an insured, particular attention has to be paid to whether the claims of "supervision,” "vicarious liability,” or other non-direct liability could create coverage where the exclusions apply to "the insured.”
For example, in a claim that a contractor's employee intentionally damaged another contractor's work, the employee would be an insured, but the exclusion would bar coverage. His employer, assuming it was enrolled, would likely be a named insured; the exclusion would not apply to the employer, or any other enrolled contractor on the project.
Contractual Liability Exclusion
A second example is the contractual liability exclusion, which provides:
This insurance does not apply to: ...
b) Contractual Liability
"Bodily injury” or "property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: ...
(2) Assumed in a contract or agreement that is an "insured contract” ...
The typical construction project contains indemnity flowing uphill in favor of the owner and general contractor. The liability of the owner or general contractor is generally passed down to the lowest level subcontractor.
Under contractual liability coverage, the Owner Controlled Insurance Program assumes every enrolled contractor's indemnity obligations upward to the general contractor and owner. Contractual liability coverage allows owners/sponsors to settle claims with third parties and seek recovery from responsible subcontractors under the indemnity agreement. Thus, the insurance company must be mindful that any enrolled contractor may be both an insured as well as a claimant against the downhill subcontractors for any uncovered damages.
How The Florida Court Ruled
The Florida Court agreed with the states on both counts. Basically, the court said that the government cannot compel people to engage in an activity like buying health insurance. That authority is left to the states. And they agreed that this portion of the Patient Protection and Affordable Care Act was not severable and, therefore, the whole thing is unconstitutional.
The court's rationale here was interesting, I thought. The reality is that Congress passes a lot of laws that do not include a severability clause. And yet many of those laws remain in place after the court has ruled against certain provisions of them because severability is implied. The courts, not wanting to thwart the will of the people via their elected representatives know that throwing out every single law because of problems with certain sections would create a logjam in government and nothing would get done. So the courts prefer not to do this.
But judges don't automatically assume severability. They go back to and research any documentation they can get their hands on to determine whether or not lawmakers intended to include severability in the legislation. And that's just what the Florida judge did with the Patient Protection and Affordable Care Act.
So what did he find? He found that a prior draft of the Patient Protection and Affordable Care Act did include a severability clause which meant that for some reason, someone pulled it out when the final version was reported out of Congress — possible evidence that Congress did not mean for the Patient Protection and Affordable Care Act to include severability.
Additionally, the judge did more homework and then came across news clips of the President of the United States talking about the importance of the individual mandate and saying that without the mandate, everything else including the provisions that mandate carriers to provide guarantee issue coverage with no waiting period on preexisting conditions would collapse. We can't force carriers to do this unless everyone is covered, he said.
Congress pulled the severability clause from a prior draft of the law and the President was publicly quoted as saying that without the mandate, other aspects of the law won't work. So the judge concluded that legislators felt that you couldn't have one without the other. And that's why the Florida judge cited in his reasoning that the ruling that the individual mandate is an overreach and, therefore, the whole thing must go down with it.
With the judge ruling against the feds and striking down the Patient Protection and Affordable Care Act, the feds appealed to the District Court of Appeals.
This is the fourth article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, and Part 11.
Owner Controlled Insurance Programs From The Perspective Of Liability Claims
An Owner Controlled Insurance Program general liability policy is, in most respects, similar to the industry standard general liability policy. An Owner Controlled Insurance Program claim is analyzed by taking the same systematic approach that is used with other insurance claims. Companies and insureds alike should resist the temptation to treat the Owner Controlled Insurance Program differently and/or disregard the policy language. Only in taking consistent approaches will the insurance company make sure that the most appropriate legal and business decisions are made.
From a legal perspective, the insurance company will be questioned on its policy interpretation and claims handling. The insurer's obligation to the insured to defend and indemnify is measured by the policy as issued. Coverage under the policy is not based on side agreements, or understandings between the sponsor, the broker, and the underwriters. If there are unintended claims being paid, the underwriters need to be alerted and the policy language changed.
An insurance company can waive reliance on a restrictive policy and provide greater benefits than the contract provides. Waller v. Fire Insurance Exchange (1995) 11 Cal.4th 1. However, the company may not unilaterally narrow the coverage and provide less than that provided by the policy. The exception to this rule is, of course, if there is proof that the policy as issued failed to comply with the mutual intent of the parties, in which case the policy may be reformed. (See, e.g., Cal. Civ. Code Sec. 3399; Truck v. Wilshire Insurance (1970) 8 Cal.App.3d 553.) The following are some of the highlights of the commercial general liability form that are particularly applicable to construction claims involving Owner Controlled Insurance Programs.
The decisions to date, the ones to come and their meaning to agents and our industry
A lot of agents have been wondering what the outcome will be with the legal challenges against the Patient Protection and Affordable Care Act.
I will attempt to articulate what I think might happen. My discussion will be limited to certain aspects of the bill — primarily with regard to the individual mandate and the question over severability. So I will be excluding a fair amount.
Remember, the Patient Protection and Affordable Care Act is over 2,700 pages long and affects virtually every aspect of healthcare delivery and its related financing (the insurance component) including Medicare, Medicaid and private insurers. It even deals with student loans.
Also, my discussion will be limited primarily to one challenge to the law — the one that involved dozens of states suing the federal government in a Florida court. There are a number of other legal challenges against the federal government that might lead another observer to draw a different conclusion on how these challenges will ultimately pan out down the road. But given the clout and importance of the states, many observers including myself have been particularly interested in that one.
Before I address what I think might happen with the Supreme Court, I think it is important to understand the status of the States' lawsuit and how they got here. So I will be first explaining why the states sued the federal government, how the court ruled and the subsequent action by a district appeals court.
The Reason The States Sued The Feds
The primary reason over two dozen states and other parties (the plaintiffs) sued the federal government is because of the individual mandate. They simply do not think that the federal government has the authority to mandate citizens to buy health insurance.
The states believe that the decision about whether or not to compel someone to buy insurance is theirs to make and not the federal government's. By the way, this is why folks aren't challenging the likes of Massachusetts which has a similar mandate in place. Massachusetts has the authority as a state to do this.
In more technical terms, the states believe that the federal government via the Patient Protection and Affordable Care Act is stretching what's known as the "Commerce Clause" beyond what it was designed to do and is an overreach of power by the federal government.
This is the third article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, and Part 11.
Liability Owner Controlled Insurance Program From The Underwriting Perspective (continued)
Who Qualifies as Named Insureds?
Deciding who qualifies as an insured has a great impact on what risks are ultimately assumed. Does the policy apply to damage caused by contractors at the project; does it include material suppliers; does the program cover design liability, including reworking portions of the project that do not meet the intended strength and stability requirements? Deciding who is not an insured is also important. Any party that is not a part of the Owner Controlled Insurance Program is a source of recovery or offset to a loss covered by the Owner Controlled Insurance Program.
There is a distinction in the policies, discussed in more detail below, between a "named insured” and an "insured.” The rights of the contractor and the application of the policy may be very different if each contractor is a "named insured” or an "insured.”
Liability Insurance Protects the Contractor, Not the Owner Presenting a Claim
The purchaser of the Owner Controlled Insurance Program is the owner. However, the "insured” under a wrap-up policy that is entitled to defense and indemnity is the contractor. There is a natural tension between the owner who wishes to purchase complete protection for himself and the contractors, who are entitled to that protection. Under a liability policy, the carrier defends the insured (each contractor) against claims by others (i.e., the owner) for bodily injury or property damage. Thus, in providing liability coverage, the owner is assuring that the contractor can defend himself and that he has the financial ability to pay the claims.