When a contractor wins a bid for a job, the contract with the owner or general contractor will often require the contractor to provide liability insurance coverage for both the contractor and the owner or GC. The contractor usually accomplishes this by having his insurance company add the other party to his policy as an additional insured. An additional insured has certain rights under the policy, the most important of which are the right to insurance company provided defense and payment of losses. However, this approach may not satisfy all of the other party’s requirements. In this situation, the contractor may want to consider an alternative coverage approach.
An owners and contractors protective liability insurance policy covers an owner or contractor for liability arising out of the actions of a subcontractor. It is unique in that, while the subcontractor arranges for and purchases it, the sub has no underlying coverage. Rather, the insurance company issues the policy in the name of the owner or GC (the policy information page identifies the contractor doing the work). For example, assume Owner A hires Contractor B to build a small office building. Contractor B purchases an OCP policy insuring Owner A for liability it incurs from Contractor B’s work. If Contractor B erroneously cuts down trees on a neighboring property and the neighbor sues Owner A, the OCP policy pays for A’s defense and the cost of any settlement.
This is a much different arrangement than additional insured coverage. In that arrangement, Owner A has coverage under a policy issued in Contractor B’s name. Owner A may be one of many parties that B’s policy covers.
Beyond that difference, there are advantages and disadvantages to each approach. Assume that B’s policy covers losses up to a total of $2,000,000 during the policy term. If Owner A is an additional insured, he is sharing that $2,000,000 with B and any other parties with coverage under that policy. However, an OCP policy in A’s name will provide a separate amount of insurance just for A. Also, Owner A may want the insurance company to notify him in advance if it decides to cancel B’s insurance. An additional insured under B’s policy usually does not have any rights to advance notification. As the party named on the OCP policy, however, A is entitled to advance notice. This can be important, as the advance notice requirement may be included in the construction contract.
One disadvantage of an OCP policy is that it does not provide completed operations coverage. Coverage ceases when the contractor finishes the job. If the contract requires completed operations coverage, the subcontractor may have to ask his insurance company to add the GC as an additional insured for this coverage on his own liability policy. Also, because the OCP is a separate policy, the insurance company will charge an additional premium for it, something they might not do for adding an additional insured. The OCP policy covers losses only if the GC is held liable for the subcontractor’s actions. It will not cover the GC’s sole liability for its own actions. However, recent changes to additional insured coverage have had this effect as well. Finally, OCP policies may be more difficult to obtain than additional insured coverage.
Which coverage arrangement to choose is a matter of negotiation between the subcontractor and the GC. Both contractors should discuss the options with their insurance agents and become informed about what each form does and does not cover. Most importantly, whichever coverage is selected should meet the insurance requirements and other provisions of the construction contract.