Are you building a home and needing liability insurance? We have a policy called “Owners and contractors protective liability coverage (OCP).
Owners and contractors protective (OCP) liability coverage
A stand-alone policy that covers the named insured’s liability for bodily injury (BI) and property damage (PD) caused, in whole or in part, by an independent contractor’s work for the insured. The contractor purchases the policy to provide coverage for vicarious liability the client (project owner) incurs as a result of the contractor’s acts or omissions on the project. The OCP policy also responds to liability arising out of the insured’s own acts or omissions in connection with its general supervision of the contractor’s operations.
OCP Liability Form
The complete title of this general liability form is Owners and Contractors Protective Liability Coverage Form—Coverage for Operations of Designated Contractors (CG 00 09 12 07), which is a lengthy and descriptive title. As suggested by the title, the policy is intended to protect certain owners and contractors, but only for operations performed for the named insured by the contractor listed as the “Designated Contractor” on the Declarations Page.
Protective Liability Coverage
One of the distinguishing features of the OCP liability policy is that it is a protective liability policy. A protective liability policy is arranged a bit differently than most liability insurance—the policy is usually purchased by a contractor for the sole benefit of another person or organization. An example will help illustrate. A construction agreement between a project owner and the project’s general contractor might require the general contractor to purchase an OCP policy for the owner, listing the owner as the policy’s named insured. Although the general contractor in this example will pay the entire premium for the OCP policy, only the owner, with the status of a named insured, receives any protection from this policy; the general contractor is provided no liability insurance protection and thus receives no benefit from the purchase of the policy.
Limited Coverage
While the nature of a protective policy may seem like the best of all possible worlds to a project owner, it is crucial to recognize that the OCP policy provides substantially less protection to the owner then would a commercial general liability (CGL) policy.
In our previous example, the project owner is protected by the OCP policy in only two circumstances: if the owner is held vicariously liable for acts or omissions of the general contractor or if the project owner is held directly liable for its acts or omissions in the general supervision of the operations of the general contractor. In fact, the policy expressly excludes coverage for the project owner’s liability arising out of the owner’s (or the owner’s employees) acts or omissions if not arising out of “general supervision” of the general contractor’s operations.
This alone should strongly indicate to a project owner that relying solely on an OCP policy for liability protection is not recommended. Even the most cursory consideration of the potential direct liability that project owners may face reveals the exposure is far greater than that of general supervision of construction. Thus, it is axiomatic that the project owner needs a full-blown CGL policy, even before taking into account numerous other limitations found in the OCP when compared to a CGL policy.
Purpose and Use of OCP
Given the limited coverage offered, it might seem the OCP is past its prime and of little practical use. However, the OCP is not designed to be a substitute for a CGL; it is most effective when written in conjunction with a CGL. Most commonly, an OCP policy is usually an alternative to adding the owner or contractor as an additional insured on the CGL policy of the general contractor or subcontractor.
What follows are some the benefits and drawbacks of the OCP policy compared to the more common additional insured endorsements. To make the explanation more concrete, let’s apply each situation to a hypothetical general contractor called Great Big General Contractor, Inc. (GBGC), and its subcontractor, Not So Big Subcontractor, Inc. (NSBS).
Benefits of the OCP
Limits. As an additional insured, you have to share the limits with all other insureds (including the named insured) for the same occurrence and also must share the aggregate limit for multiple occurrences. If you don’t yearn to share (at least your insurance), then the OCP policy is an option. The OCP policy limits (the OCP policy has an each occurrence and an aggregate limit) are dedicated exclusively to the named insured. In our hypothetical, when GBGC requires NSBS to purchase an OCP with GBGC as the named insured (NSBS would be the contractor “designated” on the OCP Declarations), the OCP policy limits available to GBGC can be exhausted only by payment of claims on behalf of GBGC—there is no sharing involved!
Other Insurance. The battle lines are drawn when the coverage for the additional insured is to be “primary and noncontributory.” In our hypothetical, if GBGC was an additional insured on the CGL policy of NSBS, GBGC would likely expect that the liability coverage available to GBGC as an additional insured would be primary coverage to GBGC (the NSBS CGL insurer would respond first) and the CGL insurer for NSBS would not seek contribution from GBGC’s own CGL insurer.
Of course, this doesn’t always work as planned. The OCP policy’s Other Insurance condition helps resolve this persistent problem by stating:
The insurance afforded by this Coverage Part is primary insurance and we will not seek contribution from any other insurance available to you unless the other insurance is provided by a contractor other than the designated “contractor” for the same operation and job location designated in the Declarations. [Emphasis added.]
Simply put, the OCP insurer will pay on behalf of GBGC first and will not seek contribution from GBGC’s own liability insurance.
Policy Cancellation. From time to time, a general contractor tenders a claim to the CGL insurer of its subcontractor, seeking coverage as an additional insured and, to its surprise, finds the subcontractor’s CGL policy has been canceled. If in our example, GBGC tendered a claim as an additional insured to the CGL insurer of NSBS and found the policy was canceled, GBGC could refer back the certificate of insurance. However, GBGC would find that NSBS’s insurer stated it would endeavor to provide GBGC notice of cancellation, but if it didn’t, its agent or insurer of NSBS is not liable. By contrast, the OCP policy is issued to and should be delivered to the named insured (GBGC).
Possibly more importantly, the OCP policy cannot be canceled without giving advance written notice to the first named insured (GBGC) as well as the designated “contractor” (NSBS). Reliance on a certificate of insurance and the “endeavor” wording for cancellation notice is not a concern with the OCP policy.
Losses. While the OCP does not benefit the “designated contractor” in that no liability insurance protection is provided to the “designated contractor” (who in our hypothetical is NSBS), there is a very clear “noncoverage” benefit to the contractor purchasing OCP coverage for another. Losses paid by the OCP insurer are usually outside of the contractor’s liability insurance program and therefore there is usually little or no effect on the contractor’s own insurance costs. If the insurer of the OCP policy purchased by NSBS for GBGC pays a $1 million liability loss on behalf of GBGC, that loss will usually not be factored into future premiums of NSBS.
This benefit is even greater to the contractor purchasing the OCP if the contractor has a loss-sensitive program, such as large deductible program. If NSBS has included GBGC as an additional insured on NSBS’s CGL policy, and NSBS’s CGL is written with $250,000 each-occurrence liability deductible, the same claim paid on behalf of GBGC as an additional insured would likely cost NSBS $250,000, the amount of the deductible. When considering its deductible, the OCP policy looks much more attractive to NSBS.
