April 24, 2009 by Christopher J. Boggs, CPCU, ARM, ALCM
“Why would any agent make such a ridiculous recommendation?” Was my response when I read that an agent had recommended to a general contractor that he drop his commercial general liability (CGL) policy and instead write owners and contractors protective liability (OCP) coverage for each project and location. No reasonable and prudent agent would make this recommendation; but maybe that’s the answer right there.
An OCP is not equivalent to the CGL; its closest comparison is the coverage granted to only the additional insured when the CG 20 10 (Additional Insured – Owners, Lessees or Contractors) is attached to the commercial general liability policy. Even in this case the CGL with the CG 20 10 is broader in some areas.
Who Is Protected by the OCP?
The first OCP concept that must be fully understood is: the party that pays for the policy is NOT the policy’s named insured. Once grasped, the limited use and purpose of the OCP becomes evident.
Owners and contractors protective (OCP) liability forms are purchased by a general contractor or lower tier contractor for the sole purpose of protecting a person or entity holding a higher position in the construction hierarchy.
NO coverage is extended from the OCP to the lower tier contractor that paid for the protection. The lower tier contractor that purchases the coverage is listed in the policy as the covered “contractor” not the named insured. This relationship between buyer and coverage is equivalent to the upper tier contractor being named as an additional insured on the lower tier contractor’s CGL.
Coverage Provided by the OCP
Only two types of coverage are extended from the OCP liability policy: 1) vicarious liability; and 2) coverage for negligent supervision of the named “contractor.” No other protection is provided by this limited form.
Vicarious liability is one party’s liability for the actions of another party. Such liability can arise out of a relationship (parent/child, employer/employee, etc.), position or contract. The first party’s right, ability or duty to control the actions of another party can lead to it, the first party, being held vicariously liable. No entity can be held liable for the actions of another if they lack the opportunity or responsibility to control those actions.
Owners or general contractors hold a certain amount of control over the actions of lower tier contractors. This control leaves them vulnerable to being held vicariously liable for the actions of these lower-level entities. Such vulnerability creates the need for contractual risk transfer and some form of insurance protection (accomplished by being the named insured on an OCP or by being added as an additional insured to the CGL). The OCP policy, in general terms, states that the policy pays for “bodily injury” or “property damage” caused by an “occurrence” arising out of “operations performed for you by the “contractor” at the location specified in the Declarations .”
As is the customary use of the term, the “you” of the OCP is the named insured; but the “you” did not pay for the policy, as described above – the “contractor” did. Knowing each party’s role within the OCP points to the narrowness of the protection extended by the policy.
If the “contractor’s” operations cause injury to a third party or damage to a third party’s property, the OCP responds to protect the “you” of the policy, but only if that “you” is somehow held liable for the actions of the “contractor.” Notice the policy does not protect the “you” for its own actions; nor does it protect the “contractor” for its own injurious actions.
The OCP responds when, for example, the named insured (the property owner or higher tier contractor) is held liable because the named “contractor” (the purchaser of the policy) negligently knocks over a wall and kills three workers not related to the contractor. This is only one example of the extent of vicarious liability.
Conversely, the second provision does extend coverage for the named insured’s own actions, or in this case, improper actions. The OCP provides coverage for, “Your acts or omissions in connection with the general supervision of such operations .”
Owners and/or general contractors retain certain non-delegable duties. One, among others, is proper supervision of the work methods employed by sub-contractors on the job site. Another is a duty to maintain the site to keep it free of hazards or protect the public against hazards that cannot be avoided (putting a barrier around an open hole).
If the owner or general contractor fails to properly supervise the activities of the specifically-listed “contractor,” and “bodily injury” or “property damage” occurs as a result, the OCP responds. Coverage is not extended to protect against any and all charges of negligent supervision; the OCP covers the “you”
against liability arising out of negligent supervision of only the “contractor” named in the policy. While this is a benefit to the owner or general contractor, there is still no benefit for the “contractor” that purchased the policy.
This coverage provision is no broader than that provided by the owner’s or general contractor’s CGL. In fact, it is not as broad as the coverage extended from the owner’s or GC’s own commercial general liability policy since it is limited to a single contractor.
Major Gaps in the OCP
Beyond the limited protection detailed above, the OCP is lacking in many other areas when compared to the coverage provided by the commercial general liability policy. In addition to the fact that the OCP extends no coverage to the purchaser of the policy, the four coverage and limit gaps are:
- No “Products/Completed Operations” protection. The OCP provides only premises/operations coverage; once the work at the site is complete, protection ends. Exclusion “c” and the fact that there is no “products/completed operations” definition are proof.
- No Personal/Advertising Injury coverage. Since the OCP is intended to extend coverage only for the insured’s liability arising out of the “operations” of the “contractor,” there is no coverage for personal and advertising injury.
- Problems with Excess Coverage. The insured’s umbrella or excess policy will not sit on top of the OCP – because the buyer is not the named insured. If limits in addition to those provided are required, the “contractor” (buyer) would be required to purchase an excess OCP policy.
- Narrow Definition of “Insured Contract .” The OCP’s definition of “insured contract” does not include the “business contract” provision – “9.f” in the CGL. This missing provision is somewhat reasonable because the OCP is a known-parties, “closed” policy meaning that the policy only responds if the first party (the named insured) is held liable for the actions of a specific second party (the “contractor” that purchased the policy). These are the only two parties that matter, the policy is not intended to allow the named insured to pick up, via contract, the tort liability of another party.
Comparing the OCP with Additional Insured Status
An OCP policy is no more than extending additional insured status to the property owner or general contractor requesting the coverage. There is no coverage for the named insured’s own actions and no coverage extended to the entity that pays for the protection (defined in the policy as the “contractor”).
For its length, the OCP doesn’t provide as much protection as the upper tier contractor (the named insured) would enjoy if they were scheduled as an additional insured on the lower tier contractor’s CGL using the CG 20 10. As per the coverage gaps listed above, the OCP is a poor substitute for additional insured status. Only one of the four gaps is common to both the OCP and the CG 20 10, the lack of products/completed operations coverage. However, this gap can be fixed in the CGL by attachment of the CG 20 37; there is no such “fix” for the OCP.
Some insurance practitioners claim that it is better to provide an OCP liability policy to the entity requesting additional insured status to assure that there are adequate limits for a loss and that any loss involving the additional insured does not reduce the aggregate limits. The potential problem associated with aggregate limits is solved by attachment of the CG 25 03 (Designated Construction Project(s) General Aggregate Limit); and the idea that any loss might be increased by the involvement of the additional insured is fallacious. There is only one injury and it doesn’t matter how many parties are being charged, the injured party can only be paid once for his injuries (see the four-part Additional Insured series for a full discussion of this concept, it is outside the scope of this article).
Proper Use of an OCP
Some property owners or general contractors might desire the minor coverage extension provided by the OCP for their negligent supervision of the named “contractor.” Being able to access this protection negates the property owner’s or general contractor’s need to look to their own CGL for this protection. Beyond this, there is little difference between the OCP and additional insured status.
Owners and contractors protective liability is rarely seen or even requested for good reason. It’s a single-purpose form whose coverage can be mimicked by other, more common means. Rarely should an OCP be seen as a primary choice.
An OCP should never be used in place of a commercial general liability policy. Doing so would remove ALL coverage for the actions of the contractor or sub-contractor. OCP’s are intended to protect someone other than the entity that bought the coverage. To assure coverage for ongoing and completed operations, the entity must have a CGL policy.