September 29, 2011
Owner Controlled Insurance Program Liability Claims Challenges, Part 8
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.
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.
Post Construction Premises Claims
In numerous Owner Controlled Insurance Programs, the sponsors request products-completed operations coverage for a period of time after construction. Premises liability claims arising after construction of the project create a particular challenge to underwriters attempting to limit their risk to construction-related liability. A typical extension endorsement provides coverage for liability occurring after construction and arising out of the construction. Under California and most states’ laws, the term “arising out of” connotes a minimal causal connection between the liability and the construction activities. Acceptance Insurance Company vs. Syufy Enterprises (1999) 69 Cal.App.4th 321. An additional insured endorsement requiring that liability “arise out of” the subcontractor’s work needs only a minimal causal connection between the subcontractor’s work and the liability of the additional insured to trigger coverage.
In a premises liability claim, the claimant alleges that the ground is slippery, uneven, or otherwise defective. In fact, in order to establish liability against the landowner, the plaintiff must establish that the premise is defective in some fashion. Accordingly, it is very likely that a premises liability claim will at least implicate a products-completed operations tail under an Owner Controlled Insurance Program. In large projects where the owner is self-insured, such as large hotels or public entities, it is likely that the only insurance coverage will be the Owner Controlled Insurance Program. An insurer may not seek contribution from its insured nor may it seek contribution against a carrier with a self-insured retention. (Truck Insurance Exchange vs. Amoco Corporation (1995) 35 Cal.App.4th 814.) Accordingly, notwithstanding that there may be both a “condition” component of the loss as well as a “maintenance” component of the loss, there may be a more significant exposure to the Owner Controlled Insurance Program than the underwriters contemplated.