Owner Controlled Insurance Program Liability Claims Challenges, Part 6

September 27, 2011

This is the sixth article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 7, Part 8, Part 9, Part 10, and Part 11. Owner Controlled Insurance Programs From The Perspective Of Liability Claims (continued) C. Voluntary Payments by the Insured, and Right and Duty To Defend There are two "conditions” to the policy which are particularly relevant to the typical Owner Controlled Insurance Program claims. When property damage claims occur at an Owner Controlled Insurance Program location, there is an added incentive for prompt remedial action on the part of enrolled contractors, as well as the owner. Assuming there is a retention or retrospective premium applicable to the policy, the owner has an immediate concern to rectify problems as soon as they occur. Furthermore, assuming that it is an "operations” type loss, it is typical that the contractors are mobilized performing work at the time the loss occurs. Therefore, there is a built-in incentive to use the contractors that caused the loss to repair the damage. Take, for example, the situation where there is an accident causing property damage that relates to work performed by a subcontractor. The owner takes control of the loss and hires contractors to remediate the problem. The owner then seeks reimbursement from the Owner Controlled Insurance Program for costs incurred, ostensibly as a claimant against the responsible subcontractor, and separately as an insured facing liability to the third party. Presenting a claim against the enrolled contractors, while simultaneously using them to repair damage, can create some challenges for the claims department. It can also create friction between the interpretation of the policy as a stand-alone insurance contract and the expectation of the sponsor or owner with regard to reimbursement of costs relating to damage caused by subcontractors. The liability policy provides that the company has a duty to defend any "insured” in any "suit” seeking covered damages. As to the enrolled subcontractor, therefore, the insurance company has the right to defend that subcontractor and assert liability defenses on that subcontractor's behalf to defeat liability to the claimant/sponsor of the program. The separation of insureds provision requires the carrier to defend the rights of each insured separately. In contrast to the defense, the carrier's duty to indemnify that enrolled subcontractor occurs only when liability for damages is assessed against it, at least under California law. Certain Underwriters at Lloyds of London vs. Superior Court (2001) 24 Cal.4th 945. Assertion of these defenses will, however, create friction.² In addition to pursuing the enrolled contractors, Owner Controlled Insurance Program sponsors/owners also may pursue the insurance company directly, on the theory that what was settled and paid for was a claim by a third party against the owner/sponsor. As a direct claim by the owner/sponsor, in addition to the coverage issues raised above, the following are the critical coverage issues under a liability policy:

Did the owner settle a "claim” and not a "suit” such that the claim by the third party triggered a defense by the insurance company;
As far as indemnity, was the owner/sponsor's liability to the third party ever finally determined;
To the extent that the owner/sponsor, an insured, agreed to pay any sums or make repairs, it may constitute a violation of the "voluntary payments” condition of the policy.

In one unpublished decision in California, arising out of claimed construction deficiencies at a hotel/casino in Las Vegas, Nevada, the court found that the general contractor was not entitled to indemnity under the Owner Controlled Insurance Program for amounts incurred to make repairs at the request of the owner. ² Other jurisdictions may require the insurer to be more proactive and require the carrier to try and effect settlement of a claim where liability is clear.

Harry Griffith

The late Harry Griffith had over 25 years of experience in insurance coverage, trial and appellate work. He was a partner of Branson, Brinkop, Griffith & Strong, LLP, and supervised the coverage group within the firm, which consisted of eight coverage attorneys. Mr. Griffith published numerous opinions in the area of insurance coverage. Mr. Griffith was a named California Super Lawyer both for 2009 and 2010.

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Owner Controlled Insurance Program Liability Claims Challenges, Part 8

Harry Griffith

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.|

Owner Controlled Insurance Program Liability Claims Challenges, Part 7

Harry Griffith

In the construction contract, there will be contractual language relating to the procurement of insurance and the operation of the Owner Controlled Insurance Program. In the context of property damage claims for damage occurring to the project itself, those contracts may articulate defenses available to the enrolled contractors. Two of the most important would be the waiver of subrogation clause and the identification of builders risk insurance.|