This is the eleventh and final article in an 11-part series on Owner Controlled Insurance Programs. Preceding articles in this series can be found herePart 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, and Part 10.

Presentation Of Liability Claims Under An Owner Controlled Insurance Program.

The preceding portions of this series outline the analysis of liability claims under an Owner Controlled Insurance Program, but principally from the perspective of the insurance carrier. There are ways that insureds and claimants can present claims under an Owner Controlled Insurance Program that will speed the resolution process and avoid gridlock.

The claimant that has incurred a loss should remember "point of view” in the presentation of a claim. Since an owner controlled insurance program is, in effect, a liability policy insuring each and every contractor, the tendering party should bear in mind that the insurance company must set up a claim file to protect the rights of its "insured.” To the extent that privileged materials are obtained which could benefit that "insured” in subsequent litigation with any third party, the insurance carrier has to protect those rights and privileges against disclosure to third persons. In Soltani-Rastegar vs. Superior Court (1989) 208 Cal.App.3d 424, the court recognized that the statements made to the insurance carrier by an insured are privileged and within the work-product and "attorney-client privilege” of that insured.

Therefore, if the tendering party recognizes that the insurer must maintain those rights and protect those privileges, it can assist the process by clarifying against whom the claim is being presented. Since each insured must be treated separately, it may receive multiple positions from the same insurance company with regard to coverage under the policy. For example, the sponsor of the program may get a denial of coverage as to their claim that they made repairs to a work site as a result of an onsite accident. It could then receive an acceptance of liability on behalf of a subcontractor.

Given the difference in coverage limitations that apply to different enrollees of an Owner Controlled Insurance Program, a detailed factual record is critical for the insurer to understand the liability and coverage. Only where there is liability of an "insured/enrolled contractor,” the claim against that enrolled contractor is covered by the policy, will there be any indemnity paid. Therefore, the insurance carrier will need to be able to address the following questions:

1. What happened?
2. Who was present at the time of the incident?
3. For operations losses, what work was supposed to be done by the responsible subcontractor, and what was deficient, incomplete, or negligently performed?
4. Who was injured as a result of the work by an enrolled contractor? Whose employee, what contractor's work, etc.?
5. What was the response to the incident?
   1. Who organized the response?
   2. Who investigated the loss?
   3. Who decided what work or response was to be made to the incident?
   4. What alternatives were considered?
   5. Was a notice of liability given to the responsible subcontractor, and was there any response to that notice?
   6. Was the builders risk carrier notified—for an operations loss?
6. Document all direct and indirect costs which are the subject of a liability claim.
   1. Work orders for the repair of damage caused by the incident.
   2. Bills/invoices for outside contractors used, including detailed description of the work performed.
   3. Estimates obtained, if any, or explanation as to why a course of conduct was engaged in.
   4. Notes concerning progress of the repairs.
7. Complete documentation of the loss elements that could be presented to a court to establish liability against an enrolled contractor.

In addition to the basic factual record and documentation surrounding the damages, the party compiling the package should bear in mind the coverage limitations contained within the policy as outlined above. Understanding the basics of Commercial General Liability coverage and the carrier's duty to defend or indemnify will assist greatly in setting up the correct claim file or files, and evaluating the claim from a perspective that will maximize the recovery from the standpoint of the sponsor or tendering party.

This is the tenth 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 8, Part 9, and Part 11.

Particular Challenges Of Owner Controlled Insurance Program Claims (continued)

Contractors Partially Enrolled
In residential construction, wrap-up policies that cover all of the builders' projects under construction are becoming increasingly popular. These are sometimes referred to as "rolling wraps,” since they "roll” from one project to the next. Individual contractors and subcontractors enrolled in the home builders' wrap-up plan for work pursuant to a specific subcontract or project. The difficulty can occur when a rolling wrap is created while projects are ongoing.

Imagine, for example, a multi-phased development project that takes several years to complete. The project begins at a time when the builder has a traditional risk management structure, including the requirement for additional insured endorsements and indemnity agreements running in its favor from each of the contractors performing work. Midway through the project, the builder changes its liability program to a "rolling wrap,” which then insures all of the contractors on the job site. The change in programs does not pose particular difficulties with regard to operations claims; however, completed operations are a different matter.

In the typical construction defect claim, a group of homeowners will band together to file a single lawsuit against the developer. The homes in litigation can be from all phases of the development. Therefore, there can be homes at issue in the litigation that were developed under the traditional insurance program and claims completed under the rolling wrap. This presents ethical and administrative problems that need to be addressed early in the resolution process.

Under a rolling wrap-up, the builder as well as all of the contractors are "insureds” under the program. Most states follow the rule that the carrier may not satisfy a loss and sue its insured in subrogation to recover (e.g., Affilitated FM Insurance Co. vs. Patriot Fire Protection, Inc. (2004) 120 WN App. 1039, 2004, Wash.App.Lexis 340.) Thus, the homes insured under the wrap, the carrier could not satisfy the loss on behalf of the builder and then pursue recovery from the contractors insured under the same policy.

Partial wrap insurance also creates an ethical dilemma for the wrap carrier and counsel retained. One of the basic premises underlying a wrap or Owner Controlled Insurance Program is to eliminate the infighting and be able to retain one lawyer to represent all parties under the Owner Controlled Insurance Program. Thus, a homeowner who sued the builder would have one source of recovery. If the builder's attorney now filed a third-party complaint against the subcontractors relating to homes which are not part of the Wrap, it potentially undermines the effectiveness of the wrap-up. The target subcontractors would then seek coverage from all of their carriers potentially providing coverage for the homes in litigation, including the wrap-up. Hiring separate lawyers for each of the subcontractors is costly, and the avoidance of same is one of the reasons to consider a wrap-up program. However, the carrier is faced with two contrary goals. On the one hand it wants to minimize the amount of legal expense it has to incur by paying multiple lawyers to fight each other; on the other hand, it wants to seek recovery against the subcontractors for the ones that are not enrolled in the wrap-up.

The solution that most carriers are adopting requires the cooperation of the plaintiff's bar, which is never a certain thing. Prior to filing cross-complaints against the subcontractors, the builder tries to sever or resolve the wrap-up homes first. While it is possible that this claims handling could be viewed as settling out only the covered portions of the loss, and therefore depriving the insured of a defense, our prediction is that, if handled properly, it will in fact be a partial satisfaction of the enrolled contractors' liability and therefore acceptable. (See, for example, Hartford Casualty Insurance Co. vs. Dodd (D.MD 1976) 416 F.Supp. 1216.) We compare that with Brown vs. United States Fidelity and Guaranty Co. (2d Cir.1963) 314 F.2d 675, 681-682, which recognized that the insurer who exhausted its policy limits by settling two of the four claims may have acted in bad faith if there was "over eager” settlement of those claims. Most rolling wrap policies are triggered by either a project designation or a close of escrow date. Thus, under a correctly written wrap, there will be no coverage and no duty to defend or indemnify for homes that are not a part of the wrap. Therefore, if it is feasible to do so, it should be possible to settle only the wrap homes.

Of course, if the carrier is unable to settle the wrap homes only, it will have to set up multiple claim files. For each contractor that is involved in non-wrap homes as well as wrap homes, the carrier will likely have a claim file open for each.

This problem presents itself only in those wraps that will cover some but not all of the homes in a given project. Where the enrollment in the wrap is commensurate with the beginning of the project, then all of the contractors should be "enrolled contractors” and this problem would not present itself. For design purposes to avoid this problem, however, the issue is enrollment, in combination with the project.

This is the ninth 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 8, Part 10, and Part 11.

Particular Challenges Of Owner Controlled Insurance Program Claims (continued)

Contractual Disputes and Mechanics Liens
Liability insurance is designed to cover damage caused by the defective work or negligence of an insured contractor; it does not become involved when the only dispute concerns completion of work and payment for work. In Owner Controlled Insurance Programs, the distinction between a liability insurance claim and a contractual claim often becomes blurred or obliterated when the claimed basis for nonpayment is defective work that may be partially covered by insurance. The scenario is usually presented by a suit to enforce a mechanics lien by the subcontractor, which is answered by the claim that, as a result of defective and/or incomplete work, the contractor's lien is offset to some degree. There are a number of specific issues to consider.

First, assume that the property owner chooses to answer the complaint and raise, as an affirmative defense, that the contractor is not entitled to the full amount of the lien because of defective work. The assertion of an affirmative defense is not recognized as a claim for damage against the insured contractor, which the insurance company would have to defend. The owner, who is likely the sponsor of the insurance program, may not want to trigger coverage, because in many programs the sponsor is responsible for a sizable retention. In many instances the contractor's liability for the deductible is set by contract at a much smaller amount. Thus, because of the way an owner chooses to proceed, the insured contractor may be left with no assistance with the legal expense or payment of damage.

Second, if there is an answer only, there is no separate pleading seeking damage such as a third-party complaint, which would make the presentation of evidence logical (first, claim for money under the contract; second, offsets for construction defects; third, defense to construction defect claims). Therefore, dividing the responsibilities between liability defense counsel and the insured's mechanics lien attorney is more expensive and critical. In many instances, it is in the insured's interest to allow the insurance company to participate in defeating construction defect claims, given their experience in litigating and trying such claims.

Third, however, the insurance company may ultimately be liable for some portion of the award, if it chooses not to defend. In the only California case to address the problem directly, Construction Protective Services, v. TIG Specialty (2001) 29 Cal.4th 189, the Supreme Court acknowledged that an affirmative defense is not by itself a claim for damages, but can share attributes with a cross-complaint that is such a claim for damage. The court acknowledges that an affirmative defense could result in an offset, for damages that are within the scope of coverage, to which the insurance company might be obligated to provide coverage. The holding of the case is suspect, since it was based on a limited factual record and the court could not rule on the ultimate issue as to whether the policy as issued would be obligated to defend. However, insurance companies and insureds should not discount the possible implication of liability insurance in a mechanics lien claim.

In short, mechanics liens claims present every complication of an Owner Controlled Insurance Program. The sponsor/ owner is the insurance company's adversary if there is a covered claim against an insured contractor. The insurance claims may not be procedurally separate from the contract claims, which makes assigning counsel and representation of the contractor more difficult. To successfully resolve such claims, communications and clear objectives between the enrolled contractor and the insurance company are critical, if there is to be a voluntary contribution to the settlement by the insurance company. The insurance company may also be able to use its direct business relationship with the owner to try to work out an acceptable solution for all three parties.

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.

Overview — Corporate Management System Model

Our firm specializes in business transition planning. Our purpose is to help client companies more effectively address the issues that often hamper successful business growth and development. As the old saying goes, you can’t expect new results from old processes. Research shows that most business failures are based on the business outgrowing its people and systems. Therefore, we strongly subscribe to the view that regular reviews of key systems are a practice not to be neglected.

Conclusion Being a business manager is an exciting journey and the truly prepared have the greatest opportunity to achieve what they set out to achieve. Like any journey of significance, preparation is everything. That is the core of leadership.

By the way, if you are interested in seeing the above model filled in with core best practice systems, contact me, and I will promptly attach one to an email and send it to you. Here’s to healthy systems!

1. 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?
2. 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?
3. 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?

1. The builders risk policy, to see the terms of the waiver of subrogation clause and/or the deductible clause and named insureds under the policy;
2. The construction contract and Owner Controlled Insurance Program manual to determine whether there was a mutual intent between the enrolled contractors and the owner concerning risk of loss occurring at the job site; and
3. The marketing and enrollment documentation, to the extent that the relationship between the owner and enrolled contractors concerning insurance and risk of loss were not spelled out in the contract or insurance policy.

1. Did the owner settle a "claim” and not a "suit” such that the claim by the third party triggered a defense by the insurance company;
2. As far as indemnity, was the owner/sponsor's liability to the third party ever finally determined;
3. To the extent that the owner/sponsor, an insured, agreed to pay any sums or make repairs, it may constitute a violation of the "voluntary payments” condition of the policy.

1. The MLR requirement will go away — but some of the states will miss it and might pass legislation to reinstate it on their own with perhaps even tighter restrictions. Will commissions on individual climb back up to the levels they were before the Patient Protection and Affordable Care Act was signed into law? Probably, but I wouldn't be surprised to see carriers take a little while to increase them.
2. The federal funding and rules for exchanges go away — but states are already developing them. Do they stop midstream and throw out what has already been built? Or do they stay the course and continue building them (keep in mind that Utah and Massachusetts already have exchanges up and running). It's hard for me to believe that exchange development for all states will be stopped wholesale if the Patient Protection and Affordable Care Act goes away entirely. My bet is that some states will continue to build their exchanges albeit with an emphasis on the individual market and less on small group.
3. Will healthcare delivery costs go up or down if the Patient Protection and Affordable Care Act goes away? Delivery costs are always trending up but if the law is overturned, the rate of increase is likely to slow due to providers not needing to cost shift as much as they are now due to higher populations of Medicaid patients and cuts to Medicare.
4. Agents and the industry can breathe a sigh of relief — maybe. For about a month or two. The Patient Protection and Affordable Care Act relieved a lot of pressure on the states to do something about escalating healthcare costs and the growing populations of uninsureds. If the Patient Protection and Affordable Care Act goes away, states will feel more compelled to act on their own. America's healthcare system has been broken for some time. That's why Congress acted and created the Patient Protection and Affordable Care Act. Unfortunately, the law is bending the healthcare cost curve up and is making things worse. But if the Patient Protection and Affordable Care Act goes away, we're still left with a broken system that is rapidly becoming a black hole in our economy. Healthcare eats up 16% of our GDP. In 40 years, at the current rate of growth, it will account for 40% of our GDP. How are we going to pay for it? The Patient Protection and Affordable Care Act's demise would lead to a short term sigh of relief for many but the problems that we've had before and after March, 2010 will continue to haunt lawmakers, business, agents and our industry until they are tackled in a meaningful way.

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 ...

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” ...

This insurance does not apply to: ... j. Damage to Property "Property Damage” 1) Property you own, rent or occupy; … 4) Personal property in the care, custody or control of the insured; 5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf or performing operations, if the "property damage” arises out of those operations; or 6) That particular part of any property that must be restored, repaired or replaced because "your work” was incorrectly performed on it. Paragraph 6 of this exclusion does not apply to "property damage” included in the "Products-Completed Operations Hazard.” k. Damage to Your Product "Property Damage” to "your product” arising out of it or any part of it. l. Damage to Your Work "Property Damage” to "your work” arising out of it or any part of it, and included in the "Products-Completed Operations Hazard.” This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.¹