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September 29, 2011 Harry Griffith	Leave a comment
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This is the seventh 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 6, Part 8, Part 9, Part 10, and Part 11.
Liability Defenses Unique To Owner Controlled Insurance Programs
Waiver of Subrogation/Insurance Clauses
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.
With regard to the waiver of subrogation, the clause would typically find that the owner, as part of procuring the Owner Controlled Insurance Program, would waive its right to subrogation on behalf of the builders risk carrier against the enrolled contractor. Under this scenario, the builders risk carrier could not satisfy a loss on behalf of the contractor for damage occurring during construction, then turn around and sue the subcontractor causing the damage. (See, e.g., Affiliated FM Insurance Co. vs. Patriot Fire Protection, Inc. (2004) 120 WN App. 1039 (Washington).) In that case, Patriot Fire Protection, Inc., installed a fire sprinkler system at the Owner Controlled Insurance Program insured premises. As part of the Owner Controlled Insurance Program, the builders risk policy issued through Affiliated FM Insurance contained a waiver of subrogation clause. In the subcontract agreement, there was a waiver of subrogation granted in favor of the subcontractors by the owner. The court found in this instance that the builders risk carrier had no rights against the enrolled contractors.
A second contractual defense would exist where the owner promises to obtain builders risk coverage in favor of the enrolled contractors with a set deductible. Under that scenario, the enrolled contractor may be able to assert that the owner’s claims against it are limited to amounts which are not covered by the builders risk policy. Such amounts would include the deductible (which is an uninsured loss) stated in the contract would be the amount, which is not covered by the builders risk policy.
While there are no cases that directly address the second point, the issue arises frequently. The enrolled contractors believe that there is builders risk coverage available and that there will be a set amount deductible. Lack of adequate builders risk coverage creates a number of interlocking questions which will have to be clarified through subsequent case law including:
If the owner changes the builders risk program to a higher deductible and/or more narrow coverage, what are its rights against the enrolled contractors who understood that broader coverage was being provided?
Does a waiver of subrogation condition apply to limit the owners’ claims against enrolled contractors for losses not covered by the builders risk policy or which are within the deductible of the builders risk policy?
If the owner chooses not to present a builders risk claim, may it still pursue a liability claim against the enrolled subcontractor; and what is the effect of the waiver of subrogation clause in that event?
To answer these questions under any particular fact setting, we suggest the following will have to be reviewed by the liability underwriters:
The builders risk policy, to see the terms of the waiver of subrogation clause and/or the deductible clause and named insureds under the policy;
The construction contract and Owner Controlled Insurance Program manual to determine whether there was a mutual intent between the enrolled contractors and the owner concerning risk of loss occurring at the job site; and
The marketing and enrollment documentation, to the extent that the relationship between the owner and enrolled contractors concerning insurance and risk of loss were not spelled out in the contract or insurance policy.
Owner’s Waiver By Using Owner Controlled Insurance Program Contractor For Repairs
One of the most problematic claim scenarios that occurs is that of emergency repairs. When there is a large loss that requires immediate repair, there may be insufficient time to document and present a formal insurance claim. The owner will be inclined to use the contractors already mobilized to repair the damage that they just caused.
In some instances, the owner issues a change order to the enrolled contractor for the increased work that they have performed. Assuming that is the case, what is the legal effect of the change order? Is it an acquiescence or agreement by the owner that the contractor was not at fault? Certainly, it would be a strange claim or lawsuit indeed that has the plaintiff (owner) paying the defendant (contractor) to perform work at the job site caused by the contractor’s negligence. In that event, the plaintiff’s damages would be the amount that they already paid the contractor for the work that was done.
A second problem can occur when the enrolled contractor performs the work as requested by the owner, but the owner then refuses payment. Let us assume that the condition is one that is otherwise covered by the policy and one for which the enrolled contractor is liable. Should the carrier assume that the costs incurred by the enrolled contractor are roughly equal to that which would be paid to an outside vendor and adjust the claim accordingly? Alternatively, should the liability carrier view the claim as one for partial payment by the owner? In this scenario, the subcontractor may enjoy a liability defense to the owner’s claim, since the owner acquiesced to any additional work being performed and agreed to pay for it. Simultaneously, there may be no coverage for the owner for this enrolled contractor’s claim because it is one for contractual damages due under the contract.
The topic of emergencies and emergency repairs must be discussed with the sponsor at the time of the policy issuance. If the parties intend that the contractor should mitigate the damages and repair the loss as quickly as possible while reserving all rights under the liability policy, and modifications to the “Voluntary Payments” conditions, the reporting conditions and the like can be designed into the program. Clearly, however, most carriers will not agree to pay uncovered claims and damages as part of the concession.3
3 For example, we think it unlikely that a carrier would agree that the discovery of defective work constitutes such an urgency, assuming such a condition would not otherwise be the liability of a subcontractor and/or be one for covered damages under the policy.