In recent years, more owners have requested that our law firm’s contractor clients purchase an owners and contractors protective liability policy (OCP policy), a type of insurance policy with which many contractors are unfamiliar. As OCP policies gain popularity with owners, contractors must understand who and what are covered under the policies, the potential benefits of the policies to owners and contractors, and a potential pitfall that contractors should avoid when negotiating a contract that requires the purchase of an OCP policy.
What Is an OCP Policy?
An OCP policy is specific to a construction project, which is identified in the policy. It insures only the owner against claims for personal and property damage arising from the work of a contractor, who is also designated by name in the policy. Ironically, the contractor typically pays the premium for the OCP policy but receives no liability protection or coverage under the policy.
The OCP policy provides limited coverage and protects the owner when bodily injury or property damage arises from the following scenarios: (1) operations performed for the owner by the contractor at the specified project (e.g. vicarious liability) or (2) the owner’s acts or omissions in connection with the general supervision of the contractor’s operations.
The owner would be covered only under the first scenario (operations coverage) if the liability of the owner is alleged to arise from the actions of the contractor. Put another way, the owner is only covered under the OCP policy if the allegations are that the owner is liable because of the contractor’s negligence. In regard to the second scenario, (owner acts/omissions), the OCP policy does not define “general supervision,” but some courts have defined it quite broadly, to the benefit of the owner.
The limited nature of this coverage is highlighted by the fact that an OCP policy specifically excludes coverage to the owner arising from the acts or omissions of the owner (or the owner’s employees), unless those acts or omissions arise from the “general supervision” of the contractor’s operations.
An OCP policy provides coverage only for claims that occur while the contractor is still performing operations. This differs from a CGL policy, which not only provides coverage for claims arising from ongoing operations but also covers claims that arise after the project is completed (referred to as completed operations coverage).
Benefits of an OCP Policy
Given the limited coverage available to an owner under an OCP policy, why would an owner want a contractor to purchase an OCP policy?
First, the OCP policy is project-specific and provides dedicated coverage limits exclusively for the owner. Although an owner will almost always require a contractor to name the owner as an additional insured under the contractor’s CGL policy, the owner—as an additional insured—is required to share the limits of contractor’s CGL policy with other insureds, including the contractor. Sharing of limits cannot occur under the OCP policy. The policy limits exist to protect the owner and only the owner.
Second, an OCP policy can reduce disputes between insurance companies concerning which policy should be the first policy to respond to a claim (i.e. which policy will be considered primary). For example, when an owner is a named insured under its own CGL policy and an additional insured under the contractor’s CGL policy, the two insurance companies have to determine which of their respective policies is primary. This often leads to disputes because each carrier argues that the other’s policy should be considered primary. An OCP policy minimizes these disputes because an OCP carrier agrees that its insurance policy provides primary coverage to the owner and that it will not seek contribution from the owner’s own insurance policy or from the CGL policy of the contractor that purchased the OCP policy.
Third, some owners view an OCP policy as part of a “belt and suspenders” approach to risk management, with additional insured status being the belt and an OCP policy being the suspenders. Although an owner typically requires a contractor to name the owner as an additional insured under the contractor’s CGL policy—and can even try to dictate, through contract, the type of additional insurance coverage the contractor provides—the contractor cannot always obtain the required coverage. Additionally, as contractors know, insurance carriers have become increasingly reluctant to quickly provide coverage to additional insureds. The OCP policy, under which the owner is a named insured, provides another policy for the owner to obtain coverage before the owner has to seek coverage under its own CGL policy.
The obvious question is whether the contractor who has paid for the OCP policy that protects only the owner benefits from the policy. The answer is “yes” because losses paid by the OCP carrier are paid outside of the contractor’s insurance program. For example, a claim is brought against an owner who obtains coverage under an OCP policy, and the OCP carrier pays on behalf of the owner to settle the claim. As a result, the contractor’s own CGL policy does not have to provide coverage to the owner as an additional insured, and the claim will not result in a premium increase for the contractor. This benefit can be even more important to a contractor who has a large deductible or self-insured retainer.
Avoiding the Indemnification Pitfall
This benefit to the contractor can quickly disappear if the contractor is not careful in negotiating his or her construction contract with the owners. Contractors must understand the unintended consequences that arise when the owner requires the contractor to purchase the OCP policy and to indemnify the owner for personal injury and property damage arising from the contractor’s negligence in performing its work. In practice, if an accident occurs during construction—an employee of a subcontractor is injured, for example—the employee will sue both the contractor and the owner. The owner will respond by seeking coverage under the OCP policy. The contractor, in turn, tenders to its own CGL carrier, expecting that the OCP carrier will defend the owner and that the contractor’s CGL carrier will defend the contractor.
What occurs is the attorney appointed by the OCP carrier to defend the owner asserts a claim against the contractor for contractual indemnification and demands that the contractor, under its CGL policy, defend and indemnify the owner pursuant to the indemnification provision in the construction contract. Under these circumstances, not only does the contractor have to pay for an entirely separate OCP policy for the owner, but once coverage under the OCP policy is triggered, the OCP carrier circles back and tenders the claim on the contractor’s CGL policy through the construction contract’s indemnification provision. Simply put, the contractor pays for the OCP policy and then faces increased CGL premiums because of the costs associated with responding to the contractual indemnification obligation.
What’s the bottom line? Contractors (and owners) must understand the interplay between an OCP policy and a contractual indemnification provision. To the extent that an owner is demanding that a contractor purchase an OCP policy, the contractor should attempt to negotiate the elimination of any contractual indemnification provision that requires the contractor to defend and indemnify the owner for claims for personal injury and property damage that are covered by the OCP policy.