By Donald S. Malecki, CPCU
For as long as owners and contractors protective liability coverage has been available, it does not seem that confusion over it should still abound. A day doesn't pass, however, when someone doesn't ask questions about its scope, or it is being litigated in some court of law.
Briefly, owners and contractors protective liability (OCP) coverage was designed (1) to protect an owner who could be drawn into a suit because a contractor, hired by the owner, causes a third party's injury or damage, or (2) to protect a general contractor in similar circumstances when a third party's injury or damage is caused by a subcontractor.
Background
If one were to trace the history of this coverage, he/she would note that OCP coverage was made available at the turn of the century after the introduction of liability insurance for contractors and property owners. Later, OCP coverage also could be obtained as part of other policies, such as the standard comprehensive general liability form that was developed and introduced in 1941.
Interestingly, the chances that liability would attach to the property owner because of the acts or omissions of an independent contractor were more remote then than they are today. An example of when an owner could be sued is when the work is inherently dangerous, such as in demolishing a building or structure.
The way coverage and rates were promulgated, insurers viewed OCP coverage for the owner to be purely vicarious. This means that the only way an owner could possibly be brought into a suit would be because of the contractor's sole fault. In other words, "but for" hiring the contractor, the owner would not be confronted with a lawsuit. In fact, the rates developed for an owner's exposure did not anticipate supervision of the work, unlike that of the contractor who normally did (and still does to some extent) supervise the work of a subcontractor.
Those who have been in the insurance business for a long time will likely remember that OCP coverage, when incorporated as part of the comprehensive general liability policy, was labeled as "independent contractor" coverage. It was automatically included on an "if any" basis, meaning that if an exposure arose during the policy period, the cost of the project would be figured into the final premium at the time of audit.
Current importance
Independent contractors coverage is still included in current CGL forms, because it is not excluded. The policy pays because of the insured's legal liability brought about by the direct liability of the insured or on its behalf by employees, agents, independent contractors, and others.
However, the OCP policy also is available separately. There is a big push on this coverage because some entities, particularly those that assume the liability of others and agree to provide coverage to supplement their contractual liability, do not like the idea of sharing their policy and limits. (Coverage comparable to the OCP policy also is available under standard Additional Insured Endorsement For Owners, Lessees or Contractors, CG 20 09.) A growing number of insurers also do not like some of the additional insured endorsements in use today and would rather sell an OCP policy instead.
In fact, the American Institute of Architects took a stand against additional insured status when it revised its general conditions form in 1997 by pushing a policy somewhat comparable to the OCP policy known as the Project Management Protective Liability (PMPL) policy. Currently, only one insurer is providing the PMPL policy and that is CNA Insurance Company.
OCP policy has some limited advantages
Those who push the OCP policy do so by saying that (1) it is a separate policy written in the name of the person or entity that is to be protected, (2) it offers separate limits unaffected by the liability policy of the OCP policy's purchaser, and (3) it applies on a primary basis. These actually are the only three advantages, and none applies until coverage has been established.
Generally, there are two coverages. The first protects the named insured for its pure vicarious liability; that is, where the named insured is not at fault but is brought into the case because of the other party's actions. The second coverage gives the named insured "sole" fault coverage based on its general supervision of the work.
The problem here is that general supervision is not defined and, based on the number of cases thus far rendered, would appear to be ambiguous. Insurers nonetheless continue to use that undefined term in their policies. The only exception is with respect to the PMPL policy, which does define that term.
Recall that, as was noted earlier, property owners have been viewed as not generally performing general supervision of work, unlike general contractors. If that were generally the case, property owners would be receiving only pure vicarious liability coverage and in many cases that would fall short of their needs.
The reason is that when the business relationship is one of property owner and contractor, property owners commonly are confronted with suits brought against them by employees of contractors who are injured on the property of the owners. When injuries are severe, workers compensation benefits are inadequate and opportunities abound for obtaining high judgment awards, property owners are going to get sued for being solely at fault for causing those injuries in what is commonly referred to as "third party over" actions.
The only sole fault coverage a property owner has under an OCP policy relates to general supervision, and the common allegation against property owners is failure to provide a safe place to work. The question that needs to be answered is whether that allegation of failure to provide a safe place to work equates with general supervision. If not, the property owner is likely to be involved in what is known in risk management as "passive retention" or surprise!
While the OCP policy creates more pitfalls for owners than for contractors, the latter also have found themselves without coverage. For example, a general contractor was held to be without coverage because it was its nonsupervisory acts of negligence that led to a third party's injuries. This case, which involved the above referenced additional insured endorsement, CG 20 09, that is comparable to the OCP policy, is Liberty Mutual Insurance Co. v. Capeletti Bros., Inc., 699 So.2d 736 (Dist.Ct.App.of Fl 1997.)
Both the OCP policy and its counterpart additional insured endorsement, CG 20 09, limit coverage to ongoing operations. Once the work is completed, coverage under the policy or endorsement ends. In addition, the OCP coverage is not available under an umbrella or excess liability policy. The additional insured endorsement, CG 20 09, is subject to umbrella coverage.
When, therefore, a project owner or contractor is offered an OCP policy in lieu of coverage as an additional insured, the advantages and disadvantages of these coverages need to be weighed carefully. It might turn out that some additional insured endorsement might be a better alternative, provided coverage that encompasses the additional insured's sole fault applies to completed operations, and on a primary basis.
Some standard endorsements are available to provide sole fault coverage and completed operations coverages, such as Additional Insured-Designated Person or Organization, CG 20 26, and Additional Insured, Owners, Lessors or Contractors, CG 20 10, November 1985 edition. Many insurers are accommodating by clarifying that the endorsement also applies on a primary basis, as it should.
It is not unusual for people to promise that they will obtain certain coverages for others and then forget to do so. This is known in insurance parlance as "failure to procure" and also is not insurable. The owner of property who was promised an OCP policy but did not get one sued for failure to procure in the case of Figueroa, et al. v. New York City Housing Authority, et al., 664 NYS 2d 802 (Sup.Ct.App.Div. 1997).
The party who was supposed to have obtained the OCP policy argued that the OCP policy would not have applied even if it had been procured because this policy was inapplicable to not only completed operations but also to the named insured's sole fault. The Achilles' heel in that argument, however, was that no policy was ever issued and therefore those arguments, as asserted, could not be proved.
Those recipients of OCP policies who have no other choice but to accept them can only hope that the promiser also forgets to get the policy issued, since it may be argued to be broader than it actually is.
The bottom line
The preceding discussion of the pros and cons of the OCP policy begs the question of whether it is worth it or not to offer or to accept the policy in lieu of additional insured status. The answer depends on many variables. Given the prevalence of third party over actions, and the common allegation against property owners of the failure to provide a safe place to work, the OCP policy is not a good offer to accept.
The property owner should be able to argue that general supervision is ambiguous and the policy therefore encompasses the allegation against it. But the idea of obtaining insurance is to avoid long and expensive disputes. The only other alternative for the property owner would be to obtain a good additional insured endorsement that would apply to allegations of the owner's sole fault.
The general contractor, on the other hand, has a better opportunity for coverage against a third party over action, because general contractors usually provide supervision. Of course, in the absence of general supervision, the general contractor is no better off than the property owner.
If either the property owner or the general contractor also desires coverage for completed operations, the OCP policy is out of question automatically. Or, if either wants to avoid the above problems that an OCP policy can present, additional insured status might be the best alternative. However, one, today, must prescribe the nature of the additional insured endorsement it desires or it will be no better off, in the final analysis, than if either was the recipient of an OCP policy. *
The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a committee member of the International Insurance Section of the Society of CPCU, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.