This article will only deal with the comprehensive general liability (CGL) policy under an OCIP program and Umbrella excess policies and focus on some provisions that every contractor and subcontractor in the program should be familiar with so as to avoid the pitfalls of limited coverage or no coverage at all for events that occur on the project and result in uncovered claims.
The Burning Limits OCIP CGL Policy
Before we can discuss coverage under an OCIP policy, we first have to define what it is. OCIP stands for Owner Controlled Insurance Program and it is a consolidated insurance program typically providing worker’s compensation and general liability coverage to all enrolled contractors and subcontractors for operations occurring at a specific project site. The concept is that such a program prevents gaps in coverage such as lapsed policies and inadequate limits of the various individual subcontractors on the project and reduces or eliminates cross litigation while the same time streamlining claims processes for injured workers.
Of course, because it is an owner provided program, the owner expects a reduction in the contract price at least equal to the savings accruing to the contractor and its subcontractors by not having to pay premiums for insurance of their own on the project. On big projects these savings can amount to hundreds or even millions of dollars.
Policies that include the cost of defending against a particular claim or an action and deduct that cost from the policy’s limit of liability are commonly referred to as “Burning Limits” policies. For example, if you have a $2 million policy with burning limits and the insurance carrier takes on the defense of the insured, every dollar it pays for attorneys fees and litigation costs will reduce the amount available to pay the claim or judgment.
If the policy limit applies to any and all occurrences or claims on the project, then the danger is that other litigation claims and expenses as well as losses themselves might have reduced the limits of the policy even before the most recent claim came forward.
In many instances, the coverage manual the contractor or subcontractor receives from the owner will not disclose whether or not the WRAP policy is a burning limits policy but it will refer you to the policy itself for further information. It is very important that you determine whether or not you are dealing with a burning limits policy when taking part in an OCIP program.
Commercial Umbrella Policy
Usually, paired with an OCIP policy, there is a commercial umbrella policy that provides excess coverage when the underlying OCIP policy is exhausted. If you are not a named insured under the umbrella policy, you should examine the policy carefully to determine whether or not you are included in the definitions or attached endorsements as a named insured.
The other thing that should be examined closely is sometimes referred to as a retained limits or a deductible. Normally in the context of an OCIP program, the deductible under the umbrella coverage is the amount of the OCIP limit.
However, this should give no comfort to anyone because the probability exists that the umbrella coverage will not recognize litigation expenses, including attorneys fees, as being included in the deductible. So, if you have an obligation to meet a deductible of $2 million and it has to be composed of actual loss payments, but your OCIP policy limits were exhausted by $1 million in claim expense and a $1 million loss., Then you still have a $1 million deductible obligation before the umbrella coverage will kick in.
This effectively leaves the contractor on an OCIP policy bare of insurance coverage and defense costs against a claim to the tune of $1 million. To make matters even worse, it is not uncommon for that particular contractor to have its own liability policy with an exclusion of coverage for OCIP projects.
To avoid this kind of a situation wherein you enter into a contract with an owner or a general contractor believing that the project is fully insured by the owner and finding out that you are at the mercy of a burning limits policy and a restrictive retained limits provision in the umbrella policy, it is very important to not only rely on the insurance manual which is handed out to all contractors but to demand and examine the owner supplied policies themselves including all endorsements.
The best way to get that accomplished is to have your insurance agent do the review or, even better, have your attorney examine the policies and explain the legal consequences of the material provisions of the policies, including your policy, to you.
Luckily, in 2008, the state legislature passed Section 2782.95 of the Civil Code governing wrap up insurance policies and OCIP’s on residential improvement projects which required the following disclosures to be made by the entity providing the insurance:
1. The policy limits.
2. The scope of policy coverage.
3. The policy term.
4. The basis upon which the deductible or occurrence is triggered by the insurance carrier.
5. If the policy covers more than one work of improvement, the number of units, if any, indicated on the application for the insurance policy.
6. A good faith estimate of the amount of available limits remaining under the policy as of a date indicated in the disclosure obtained from the insurer.
7. Disclosures made pursuant to paragraphs (5) and (6) are recognized to be based upon information at a given moment in time and may not accurately reflect the actual number of units covered by the policy nor the amount of insurance available, if any, when a later claim is made. These disclosures are presumptively made in good faith if the disclosure pursuant to paragraph (5) is the same as that contained in the application to the wrap-up insurer and the disclosure pursuant to paragraph (6) was obtained from the wrap-up insurer or broker. The presumptions stated above shall be overcome only by a showing that the insurer, broker, builder, or general contractor intentionally misrepresented the facts identified in paragraphs (5) or (6).This section also provides that on written request of any participant to the program, a copy of the policy itself shall be provided if available that shows the coverage described above.
It also provides that if the owner, builder or general contractor do not disclose the total amount or method of calculation of the premium credit or compensation to be charged to the participant prior to the participant’s bid then the participant will not be legally bound to the bid unless he has the right to increase it. But this does not apply if the owner, builder or contractor did not require the subcontractor to offset the original bid amount with a deduction for the wrapup insurance policy or program.
If you are doing work under an OCIP program or advising a contractor who will be doing work under an OCIP program it is highly recommended and advisable that not only the OCIP CGL policy but also the umbrella policy and the contractor’s own CGL policy be examined and analyzed for coverage which is complementary and inclusive so as to avoid gaps in coverage and expenditures of large amounts of money if a claim or claims arise.
Finally, even those this article dealt with burning limits and umbrella policies under OCIP programs, take no comfort that it does not apply to you because you are not involved in these kinds of residential projects. OCIP is found everywhere and you must be vigilant and have all owner provided policies examined to make sure you are getting the insurance protection you paid or gave credit for.