Owner Controlled Insurance Program Liability Claims Challenges, Part 3

There is a distinction in the policies, discussed in more detail in this article, 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.”|

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. Since the policy covers the contractors, who are entitled to be "defended” against covered claims, the investigation must be conducted on behalf of the "insured,” and all privileges maintained. Accordingly, a liability investigation would be conducted on the part of the contractor, not the owner; absent an agreement to the contrary, the owner is not entitled to any reports on the investigation. In some cases, there is a claim for damage to a portion of the building under construction. In that case, the owner will want that damage repaired and will point to the Owner Controlled Insurance Program, as carrier for the contractors, to do so. It may ask the carrier for the status of the investigation, including the results of any testing that has occurred. However, no liability insurer wants to be accused of waiving its insured's privileges by sharing the reports of investigation with the plaintiff, who is in that case the owner of the project. Therefore, the carrier must be very careful to guard those privileges while promptly handling the claim and in making sure the owner of the project understands this relationship at the outset. Do the Owner Controlled Insurance Program Coverages Work Together? The broker and underwriter need to address the unintended consequences of insuring all parties on the project, while assuring that the endorsements to the liability policy are consistent with the underwriting intent. By way of example, the typical Owner Controlled Insurance Program may contain builders risk, workers compensation, and general liability/umbrella coverage. Here are a few examples of overlapping coverage:
  1. The workers compensation claim by an employee of a subcontractor and a "third party” liability claim by that same employee against the general contractor or another subcontractor (overlapping workers compensation and general liability);
  2. A builders risk claim by the owner for damage to the structure caused during construction and a liability claim against the subcontractor who caused the damage in the first instance (overlapping builders risk and general liability); and
  3. An alleged poor design causes a "loss of use” claim because an affected business is shut down after construction; for example, due to a redirected street. This claim may generate an eminent domain lawsuit (overlapping design E&O and general liability).
The decisions concerning the basic scope of coverage and the overlap with other policies, to the extent they can be anticipated by underwriters, need to be addressed in the policy contracts.

Harry Griffith

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Harry Griffith

The late Harry Griffith had over 25 years of experience in insurance coverage, trial and appellate work. He was a partner of Branson, Brinkop, Griffith & Strong, LLP, and supervised the coverage group within the firm, which consisted of eight coverage attorneys. Mr. Griffith published numerous opinions in the area of insurance coverage. Mr. Griffith was a named California Super Lawyer both for 2009 and 2010.


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