Traditional insurance structures for construction projects rely on the general contractor placing their liability insurance program, with all the subcontractors doing the same. In the event of a loss, it’s often up to the carriers and courts to determine which policy will respond. This can leave quite a bit of uncertainty regarding how and if a claim is going to get paid. This uncertainty can be minimized by owner or contractor-controlled insurance programs for general liability – often referred to as GL OCIPs or GL CCIPs. Besides being less expensive than the traditional structure and improving the development margin on average .1%‒.25% of hard costs, there are some big liability pitfalls avoided. Those include:
Subcontractor Coverage Lapse or Eroding – Most owners will prepare a contract with the general contractor. Somewhere in that contract there will be a clause that states all coverage required by the general contractors are required in all levels of subcontractors. This means if the general contractor carriers $2 million of liability limits, the roofer they hire is required to carry $2 million of liability. In theory, this is all evidenced by pieces of paper called insurance certificates. In reality, there have been instances where the coverage has lapsed with no replacement, or the limit has been used up by other insurance claims and not available for recovery in the project. OCIPs address this issue by having all subcontractors become part of the shared limit, thus the owner takes control of the renewal and is alerted and aware of any claims eroding the limit.
Anti-Indemnity – Do you know if your states of operation allow for intermediate indemnity or broad indemnity? Does your state prohibit additional insureds? Some states might not know themselves based on court rulings. Anti-indemnity statues vary by state, and of course, loss specifics. Anti-indemnity dictates how and if a general contractor can pass down negligence to the subcontractors responsible. Loss payment depends on certainty of coverage existing and being available, which can be unclear when anti-indemnity is involved. OCIPs remove the back and forth between contractor and subcontractor programs and who’s responsible. Because there is only one program responding the challenges with jurisdictional, differences are minimized.
Statute of Repose – The statue of repose indicates how many years after construction is completed you still have the ability to file a claim. For example, if rot from an improper window installation surfaces four years after the building is constructed, a ten-year statue of repose would allow for a claim for damage to be filed. These claims are referred to as construction defect. The challenge with filing a claim four years after the project is trying to hunt down the contractors that were on the job and (cross your fingers) that there’s insurance available to respond to the claim. OCIPs address this issue by including additional years of coverage after completion for the statue of repose, typically ten years.
Eliminate uncertainty, gain efficiency and improve margins. The advantage goes to the developer when placing a general liability owner-controlled insurance program.
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