Construction job sites entail particular liabilities for property owners and contractors alike. To effectively manage this liability, many job sites now include an Owner Controlled Insurance Program (OCIP) or a Contractor Controlled Insurance Program (CCIP). These programs are becoming more and more popular as a way to insure construction projects. Generally speaking, these programs can be a cost efficient and effective way of insuring a project, but there are some important pitfalls to address for contractors.
The Difference Between a WRAP, OCIP and CCIPs
A general contractor sponsors a CCIP, a construction project owner is responsible for sponsoring an OCIP. These programs and generally referred to in the insurance industry as wrap-up or wrap policies.
The general purpose of the policies to provide a single policy that covers both the general contractor and all the sub-contractors for the project. These policies are sold as being a good choice for cost control, reducing litigation, uniform coverage and ensuring adequate coverage particularly for large projects.
For example, most general and subcontractors may carry one or two million general liability policies. However, if those contractors are hired to work on a twenty million dollar project, those contractors could end up under insured. For example a framer with a two million dollar policy could potentially be liability for far more than the policy limit if a significant framing defect was alleged on a multi-story twenty million dollar building. To address this issue, a wrap policy can be written with a twenty plus million dollar limit that would cover the framer along with all the other contractor for defects up to twenty million.
Important Insurance Issues Regarding Wrap Policies
Importantly, almost all general liability policies sold to contractors include an exclusion which states that if a wrap policy is available for a project the contractors/sub-contractors policy will not apply.
This means that if a wrap policy is available for a project, the contractor MUST SIGN UP for the OCIP or CCIP. Failure to sign up will result in zero coverage. Needless to say, ending up with zero coverage on a large scale project may spell disaster for a contractor. Even if the contractor did nothing wrong, if a lawsuit is filed it may cost tens or hundreds of thousands of dollars in legal fees to get out. In our practice at The Green Law Group, we see two related and significant issues for contractors regarding this exclusion that can generally be easily avoided.
Failure to follow the formalities to sign up for the wrap
The first involves the failure of the contractors to read and understand all the requirements under the subcontract and/or wrap policy to properly sign up for the policy. These requirements usually involve the contractor providing claim and insurance information to the wrap administrator including proof of auto insurance. Failure to provide requested information in a timely manner can lead to a contractor not being included in the wrap. It is therefore vitally important that the contractor understand their obligations under the terms of the prime and/or sub-contract and obtain written confirmation that they are covered before starting any work.
Failure of the owner or general contractor to fully fund the wrap
The second, involves the funding of the policy. This issue usually occurs in OCIP policies when the owner either has a conflict with the general contractor or financial problems and stops paying the policy premiums. However, this can also occur if the general contractor has financial problems as well. This puts the other contractors in a precarious situation, because the wrap carrier will declare no coverage after payments have been stopped. But at the same time, the contractor's usual carrier will also claim no coverage because the wrap policy was technically available. This situation can be fought in the courts, but at great expense and with no assurance how it will ultimately play out.
The answer to this problem lies within the negotiations of the original prime or sub-contract. The contract needs to explicitly state that the prime and sub-contractors obligations to work on the project terminate if the wrap policy is unpaid. Additionally, the contracts need to be closely examined regarding the funding and administration of the wrap policies.
Originally published February 2, 2021
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