Contractor Prevailing Against Subcontractor on Common Law Indemnity Claim

David Adelstein | Florida Construction Legal Updates

Common law indemnity is not an easy claim to prove as the one seeking common law indemnity MUST be without fault:

Indemnity is a right which inures to one who discharges a duty owed by him, but which, as between himself and another, should have been discharged by the other and is allowable only where the whole fault is in the one against whom indemnity is sought. It shifts the entire loss from one who, although without active negligence or fault, has been obligated to pay, because of some vicarious, constructive, derivative, or technical liability, to another who should bear the costs because it was the latter’s wrongdoing for which the former is held liable.

Brother’s Painting & Pressure Cleaning Corp. v. Curry-Dixon Construction, LLC, 45 Fla. L. Weekly D259b (Fla. 3d DCA 2020) quoting Houdaille Industries, Inc. v. Edwards, 374 So.2d 490, 492-93 (Fla. 1979).

Not only must the one seeking common law indemnity be without fault, but there also needs to be a special relationship between the parties (indemnitee and common law indemnitor) for common law indemnification to exist.  Brother’s Painting & Pressure Cleaning Corp., supra (citation omitted).  A special relationship has been found to exist between a general contractor and its subcontractors.  Id. at n.2.

Brother’s Painting & Pressure Cleaning Corp. exemplifies the rare application of a common law indemnity scenario.

In this case, a fire occurred in a renovated condominium unit.  The evidence revealed that that painters left rags with an oil-based product in a plastic bin overnight in the living room. The oil-based rags were not supposed to be left in the unit.  The next morning it was discovered a fire started in the plastic bin where the painters left the oil-based rags. The determination was that the oil-based rags spontaneously ignited.

The unit owner sued the contractor and the painter and the contractor asserted a cross-claim against the painter for common law indemnity.  The painter settled with the owner and, subsequently, the contractor settled with the owner. The contractor then pursued its common law indemnity claim against the painter seeking to recover the amount of its settlement against the painter. The trial court granted summary judgment in favor of the contractor for common law indemnity against the painter (that included the amount of the contractor’s settlement with the owner) and the painter appealed.  The appellate court affirmed.

The evidence revealed that the fire and corresponding damages “were caused by [the painter’s] sole negligent act of leaving an oil-soaked rag in the plastic garbage bin that was in the condominium unit.”  Brothers Painting & Pressure Cleaning Corp., supra.   The painter argued that common law indemnity should not apply because the operative complaint alleged that the contractor was also at fault for its failure to supervise.  The appellate court dismissed this argument explaining that allegations in a complaint do not control over the actual facts and “[t]he undisputed facts demonstrate that the fire was caused solely because [a painter’s] employee left a rag soaked in an oil-based stain in the condominium.” Brother’s Painting & Pressure Cleaning Corp., supra.

Lastly, the painter argued that the contractor’s settlement with the owner should preclude the common law indemnity claim.  This argument was also dismissed by the appellate court.  The settlement does not prevent the contractor from prevailing on a common law indemnity claim.  Moreover, the painter was on notice of the claim and of the settlement amount prior to the settlement being formalized.  Brother’s Painting & Pressure Cleaning Corp., supra,  (“Once a legal obligation has been established in the underlying action on the part of the indemnitee, the indemnitor will become bound by a settlement agreement in a suit against the indemnitee if the indemnitor was given notice of the claim and was afforded an opportunity to appear and defend the claim, as long as the settlement was not the result of fraud or collusion.”) (quoting Heapy Eng’g, LLP v. Pure Lodging, Ltd., 849 So.2d 424, 425 (Fla. 1st DCA 2003)).

While the contractor was able to prevail on a common law indemnity claim, a better claim would have been a contractual indemnification claim.  However, while not discussed, the subcontract evidently did not contain an indemnification provision.  This should serve as a reminder that all subcontracts should include a contractual indemnification provision.

Don’t Conspire to Build a Home…Wait…What?

Ben Volpe | Colorado Construction Litigation

In 1986, the Colorado General Assembly enacted the Pro Rata Liability Act, codified at C.R.S. § 13-21-111.5, which eliminated joint and several liability for defendants in favor of pro rata liability.[1] The statute was “designed to avoid holding defendants liable for an amount of compensatory damages reflecting more than their respective degrees of fault.”[2] However, the following year, the Colorado legislature carved out an exception to preserve joint liability for persons “who consciously conspire and deliberately pursue a common plan or design to commit a tortious act.”[3] Because of this conspiracy exception, plaintiffs try to circumvent the general rule against joint and several liability by arguing that construction professionals defending construction defect cases were acting in concert, as co-conspirators. Plaintiffs argue that if they can prove that two or more construction professionals consciously conspired and deliberately pursued a common plan or design, i.e., to build a home or residential community, and such a plan results in the commission of a tort, i.e., negligence, the defendants may be held jointly and severally liable for all of the damages awarded.

Since 1986, Colorado courts have construed the “conspiracy” provision in § 13-21-111.5(4), but some have disagreed as to what constitutes a conspiracy for purposes of imposing joint liability.

Civil Conspiracy

In Colorado, the elements of civil conspiracy are that: “(1) two or more persons; (2) come to a meeting of the minds; (3) on an object to be accomplished or a course of action to be followed; (4) and one or more overt unlawful acts are performed; (5) with damages as the proximate result thereof.”[4]

With respect to the fourth element, Colorado adheres to the view that “[t]he gist of [a civil conspiracy] action is not the conspiracy charged, but the tort working damage to the plaintiff.”[5] In Contract Maintenance Co. v. Local No. 105, the Colorado Supreme Court stated “the purpose of the conspiracy must involve an unlawful act or unlawful means.”[6]

In Pinon Sun Condo. Ass’n, Inc. v. Atain Specialty Ins. Co., a condominium association hired a public adjuster for the claims process and a construction company to conduct estimates and repairs after the condominiums sustained hail damage.[7] After a dispute over the amount of the claims paid, the association sued the insurers for breach of contract, among other claims.[8] The insurers counterclaimed, alleging fraud and civil conspiracy against the association, the public adjuster, and the construction company.[9] In its Order Granting in Part and Denying in Part Motions for Summary Judgment, the court granted summary judgment in favor of the association, public adjuster, and construction company on the fraud claim because the insurers failed to prove one of the elements of fraud.[10] Noting that the fourth element of a civil conspiracy requires an unlawful overt act, the court also granted summary judgment in favor of the association, public adjuster, and construction company on the civil conspiracy claim because the insurer failed to prove fraud, which was critical to showing an unlawful overt act.[11] Thus, although the association, public adjuster, and construction company acted in concert with one another, no conspiracy existed because no unlawful act or unlawful means in furtherance of a conspiracy existed.

Conspiracy in the Construction Context

However, in construction defect cases, the fourth element of civil conspiracy is not so clear.

In Resolution Trust Corp. v. Heiserman, the Colorado Supreme Court opined that “although the execution of a common plan or design may in many circumstances not result in wrongful conduct causing injury or damages,” . . . it may in some circumstances result in a tort such as negligence, causing injury or damages.[12] Thus, joint and several liability may be imposed on two or more persons pursuant to C.R.S. § 13-21-111.5(4), even when the conspiracy results in the tort of negligence.

Although the language of Heiserman appears to say that one may “conspire” to be negligent and thus be held jointly and severally liable, trial courts will not equate lawful contracting to do construction and design work with tortious conspiracy, absent some other evidence of tortious conduct. Indeed, Heiserman held that for joint and several liability to be applied, the trigger for liability had to be based on something other than a breach of contract.[13] The following cases help define the contours of this issue.

Rivergate Lofts Condo. Owners Ass’n v. Rivergate Lofts Partners, LLP: A tort must be reasonably foreseeable to result from the agreement.

On a partial summary judgment motion regarding joint and several liability in a construction defect case, La Plata County District Court Judge David Dickinson concluded the Colorado Supreme Court’s discussion in Heiserman regarding whether an agreement must include intent to commit a tort is dicta.[14] Judge Dickinson further concluded “as a result of the agreement, it must at a minimum be reasonably foreseeable that the agreement will result in the commission of tortious acts in furtherance thereof.” Id. at *7. Thus, due to a lack of evidence of agreement to violate the building code in the design-build agreement, Judge Dickinson found no conspiracy existed and granted partial summary judgment in favor of the construction company defendant. Id.

Villas at La Campanella Property Owners v. Hunnahs, LLC et al.: Benign cooperation does not establish joint liability.

In another La Plata County case, on a defendant’s motion for determination of a question of law regarding joint and several liability, Judge William Herringer determined that construction defect defendants would not be held jointly and severally liable because the plaintiff homeowners association was unable to establish facts to show the defendants agreed, in any way, to engage in tortious conduct.[15] More specifically, the judge acknowledged that the plaintiff presented factual evidence that the defendants worked together and coordinated closely on the construction project. However, the judge stated:

[That defendants worked together] is unsurprising and would be expected for a project of this nature. However, the mere fact that there were cooperative efforts and communication is insufficient for the imposition of joint liability. While the Plaintiff does not need to show that the defendants had the “specific intent” to commit a tortious act, the Plaintiff must produce some evidence of a “common plan or design” that results in the commission of a tort. Benign cooperation with a tortfeasor does not make a defendant jointly responsible for the tortfeasor’s misconductOne who innocently, and carefully, does an act which happens to further the tortious purpose of another is not acting in concert with the other.”[16]

Polmer et al. v. Hi Point Home Builders LLC et al.: Lawful contracting to build a home is not in and of itself a C.R.S. § 13-21-111.5(4) conspiracy.

In Polmer v. Hi Point Home Builders, El Paso County District Court Judge William Bain also ruled on a motion to determine a question of law regarding joint and several liability in a construction defect case.[17] In this case, RMG engineers designed the grading and excavation plans for a new development, conducted soils testing, and provided the structural designs and observation and compliance services for construction of the homes.[18] Ruling against joint and several liability, Judge Bain found that the plaintiff provided insufficient evidence that RMG “conspired” with the other construction defendants to recommend a new design, or that the construction defendants conspired to market the home fraudulently or build it defectively, based merely on the fact the parties lawfully contracted with each other.[19]

Conclusion

Taken together with Heiserman, the cases are clear on this point: Parties cannot be said to conspire when they have merely engaged in lawful contracting.[20] However, each case presents “unique factual circumstances” and “detailed factual findings will be necessary” to make a determination of whether any given contractual relationship among construction professionals will rise to the level of conspiracy under C.R.S. § 13-21-111.5(4).[21]


[1] James W. Avery, The Pro Rata Liability Act and Imposition of Joint Liability Against Physicians, Colo. Law., 2/98, at 89.

[2] B.G.’s, Inc. v. Gross ex rel. Gross, 23 P.3d 691, 694 (Colo. 2001).

[3] C.R.S. § 13-21-111.5(4). This is also known as “actions in concert,” which is broader than civil conspiracy, not requiring express agreement or proof of intent to commit a tortious act. Resolution Tr. Corp. v. Heiserman, 898 P.2d 1049, 1056-57 (Colo. 1995).

[4] Loughridge v. Goodyear Tire & Rubber Co., 192 F. Supp. 2d 1175, 1186 (D. Colo. 2002).

[5] Resolution Tr. Corp. v. Heiserman, 898 P.2d 1049, 1055 (Colo. 1995) (quoting Prosser and Keeton on the Law of Torts § 46, at 324 (5th ed. 1984)).

[6] Contract Maintenance Co. v. Local No. 105, 415 P.2d 855, 857 (Colo. 1966) (en banc); see also Nelson v. Elway, 908 P.2d 102, 106 (Colo. 1995) (en banc) (An unlawful overt act is a required element of civil conspiracy.).

[7] Pinon Sun Condo. Ass’n v. Atain Specialty Ins. Co., No. 17-cv-01595, 2019 WL 4747673, at *1 (D. Colo. Sept. 27, 2019).

[8] Id. at *2.

[9] Id.

[10] Id. at *4-6.

[11] Id. at *9.

[12] Resolution Tr. Corp. v. Heiserman, 898 P.2d 1049, 1055 (Colo. 1995).

[13] Heiserman, 898 P.2d at 1055 (“We conclude that the term ‘tortious act’ appearing in section 13–21–111.5(4) includes any conduct other than breach of contract that constitutes a civil wrong and causes injury or damages.”).

[14] Rivergate Lofts Condo. Owners Ass’n v. Rivergate Lofts Partners, LLP, No. 10CV19, Order on Motion for Partial Summary Judgment of Defendants Okland and Sill, at *6 (La Plata Ct. Dist. Ct. Oct. 4, 2011).

[15] Villas at La Campanella Property Owners v. Hunnahs, LLC et al., No. 13CV30099, Order Granting Defendant ABC Welding, Inc.’s Motion for Determination of a Question of Law Regarding Joint and Several Liability, (La Plata Ct. Dist. Ct. Aug. 21, 2015).

[16] Id. at *2-3 (internal citations removed & emphasis added).

[17] Polmer et al. v. Hi Point Home Builders LLC et al., No. 2013CV30763, Order: (Proposed) Order: re: Motion for Determination of a Question of Law Regarding Joint and Several Liability, (El Paso Ct. Dist. Ct. Oct. 15, 2015).

[18] Polmer et al. v. Hi Point Home Builders LLC et al., No. 2013CV30763, First Amended Complaint at ¶¶ 16-19, (El Paso Ct. Dist. Ct. Oct. 15, 2015).

[19] Polmer et al. v. Hi Point Home Builders LLC et al., No. 2013CV30763, Order: (Proposed) Order: re: Motion for Determination of a Question of Law Regarding Joint and Several Liability, at *2 (El Paso Ct. Dist. Ct. Oct. 15, 2015).

[20] See also Logixx Automation, Inc. v. Lawrence Michels Family Trust, 56 P.3d 1224, (Colo. App. 2002) (“[W]e conclude that there can be no conspiracy by two or more parties to a contract to breach that contract.”); In re Stanley, 2011 WL 10656536 (E.D. Cal. July 1, 2011) (“[A] party to a contract cannot be bootstrapped into a conspiracy tort.”). “The claim of civil conspiracy . . . requires proof of an unlawful intent.” Nelson v. Elway, 971 P.2d 245, 250 (Colo. App. 1999). Joint and several liability cannot be imposed “for doing in a proper manner that which they had a right to do . . . .” Id.

[21] Resolution Trust Corp. v. Heiserman, 898 P.2d 1049, 1057 (Colo. 1995).

Pay-When-Paid: What is a Reasonable Amount of Time to Withhold Payments to a Subcontractor?

Brent R. Laman | Smith Currie & Hancock

In an early Rolling Stones classic, Mick Jagger sang, “Ti-i-i-ime is on my side.” The refrain to that hit melody “yes it is” appears to hold true if you are a subcontractor in New York looking to get paid for completed work even while the owner and general contractor duke it out in protracted litigation over amounts you are owed.

A recent New York state decision underscores the unenforceability in that state of the payment risk shifting term commonly known as a “pay-if-paid” clause and adds nuance to the interpretation of payment timing mechanisms referred to as “pay-when-paid” provisions. The project was the construction of four apartment buildings at a total cost of just more than $5,000,000.00. Not quite a year into the project, a payment dispute arose between the owner and general contractor, Plank, LLC. In response, Plank demobilized the site. At that time, Plank owed the electrical subcontractor, A.E. Rosen Electrical Co., Inc., $161,805.49. The owner later paid Rosen $44,527.00, and Rosen pursued its lawsuit against Plank for the remainder.

The subcontract between Rosen and Plank required Plank to make progress payments to Rosen within fifteen days of receiving corresponding payments from the owner. Plank also agreed to make a final payment to Rosen within thirty days of receiving the final payment from the owner. The contract contained the specific stipulation that “[t]he parties acknowledge that this is a ‘pay when paid’ timing mechanism and not a ‘pay if paid’ provision,” likely because New York courts had decided 25 years prior that “pay-if-paid” provisions were void for public policy reasons (more on this below).

Plank raised this contract provision as defense in the lawsuit, arguing simply that it could not be liable for payment to Rosen because it had not yet been paid by the owner. It is worth noting here that by the time the court was asked to consider this defense, more than two years had passed from the date Rosen had completed the work for which payment was demanded. If that argument sounds no different than what would have been argued had the provision been a “pay-if-paid” provision, it is. The result was a ruling from the court highlighting the Empire State’s limitations of the time-based “pay-when-paid” provisions versus the absolute conditional nature of “pay-if-paid” provisions. The court concluded that Plank could not use the contract provision to effectively shift all risk of owner non-payment to Rosen, thereby converting a contractual timing-of-payment mechanism into a conditional “pay-if-paid” provision shifting risk of owner non-payment to the subcontract. Therefore, the provision could only be enforced to the extent the delay in payment was for a reasonable amount of time after the work was complete. To hold otherwise would be to obliterate any difference between the two types of provisions.

If you are building in New York, the question begged by this court’s holding is: what is a reasonable amount of time for a general to withhold payment under a “pay-when-paid” provision when the general has not been paid by the owner? The New York court first looked to a federal case that considered three years to be an unreasonable amount of time, then, without much in the way of explanation, held that the “well over two years” Rosen had waited for payment was an unreasonable amount of time. Of course, there is a lot of ground between what a subcontractor may consider a timely payment, say 30 to 60 days after submission of a payment request, and the “well over two years” at issue in the case. What if it had only been one year or even six months? The court gave no indication as to whether a shorter period of time would have been reasonable.

Perhaps a more useful question to ask is, “What happens when a savvy contract lawyer decides to “draft around” the A.E. Rosen ruling?” For instance, what if the provision said something like “General Contractor (GC) agrees to make payment to Subcontractor (SC) within 15 days of receiving a corresponding payment from Owner. The Parties agree that: (i) in the event of a lawsuit or arbitration between the GC and Owner or (ii) the Owner’s bankruptcy or insolvency, and where the GC has not been paid by the Owner, it is reasonable for GC to wait five years after SC’s work is complete for GC to make payment for that work. The Parties agree that five years is reasonable because neither party is banking on this job to stay solvent or feed their families.” This example may lean toward being silly, but the point is made. Will the New York courts come in and protect the subcontractor from itself by rewriting these provisions, replacing five years with their own ideas of “reasonable,” or will they uphold the sacred freedom to enter into potentially perilous contracts? The importance of being able to draft an enforceable “pay-when-paid” provision is underpinned by the increasing number of states that have passed statutes outright prohibiting or severely limiting “pay-if-paid” provisions.

New York long ago decided that “pay-if-paid” provisions were unenforceable and void as against public policy. The stated legal reason for these decisions was based on close examination of New York’s lien laws with the courts finding that “pay-if-paid” provisions amounted to an impermissible waiver of lien rights. The same is true of California and other states. Of course, courts can often succumb to tortured legal reasoning to arrive at the result they intended from the outset; often knowing where they will land before they figure out how to jump there. A more practical concern, and a reason actually noted in the A.E. Rosen court’s decision, is that suppliers and small contractors on large construction projects need reasonably prompt payment for their work and materials in order for them to remain solvent and stay in business. Of course, the same could be said for many small businesses. On the other hand, the multi-tier, multi-contract nature of a large construction project is unique and has spawned some unique risk-shifting provisions.

Regardless of why, more states have hopped on the bandwagon of prohibiting “pay-if-paid” provisions, primarily through enactment of prompt payment statutes. The following states have statutes that if they do not outright ban “pay-if-paid” provisions, limit (or appear they may limit) their application: North Carolina, South Carolina, Massachusetts, Illinois, Maryland, Missouri, and Wisconsin. Several states have no reported cases dealing with conditional payment provisions and some specifically allow them; however, the takeaway is always to know your state’s law on conditional payment provisions, and, if possible, draft around them in your favor. If your contract is enforced in a state that has banned “pay-if-paid” provisions, careful contract drafting might provide a general contractor with a lengthy period of time to hold onto its money while it tries to negotiate a resolution with the owner as to subcontract funds owed. On the other hand, if you are a subcontractor contracting in one of these states and your subcontract contains a “pay-if-paid” clause, you might consider letting it lay; before taking that course, however, you should consult with counsel on the effect of leaving in such a provision and resulting costs you might incur in attempting to litigate over the enforceability of this risk shifting mechanism. In either event, a thorough vetting and review of the contract before signing it, even if that includes retaining counsel on the front end to review the terms, may be the best way to ensure that enough time is on your side to protect and ensure your payment rights and obligations.  That may, after all, be the best way for you to get the satisfaction you desire.

Insurer Entitled to Reimbursement of Defense Costs Under Unjust Enrichment Theory

Tred R. Eyerly | Insurance Law Hawaii

    The federal district court for the district of Hawaii determined that the insurer could recover defense costs from an additional insured consistent with its Reservation of Rights letter under an unjust enrichment theory. Giga, Inc. v. Kiewit Infrastructure W. Co., 2020 U.S. Dist. LEXIS 10151 (D. Haw. Jan. 22, 2020).

    This case was related fall-out from the Arthur case. Arthur v. Dept. of Hawaiian Homelands, 185 Haw. 149 (Haw. Ct. App. 2015). A prior post on the case is here

    In Arthur, a resident, Mona Arthur, of the Kalawahine Streamside Housing Development, was killed when she apparently slipped and fell from a hillside adjacent to the project. She was on the hillside tending to her garden there. At the bottom of the hill was a two foot fence in front of a drainage ditch, where Mona allegedly hit her head.

   Mona’s husband, William Arthur, sued a variety of defendants including the land owner, designer, developer, civil engineer and others. William alleged the defendants were negligent in the design, construction and supervision of the construction of the hillside area. 

    The developer hired Kiewit as general contractor for grading and site work. Kiewit subcontracted with Pacific Fence to construct a debris fence between the homes and the adjacent hillside. Among the many indemnity provisions between the various parties, Pacific Fence agreed to indemnify Kiewit “to the fullest extend permitted by law.”

    Island Insurance was Pacific Fence’s CGL carrier and issued a certificate of insurance to Pacific Fence for work on the hillside. The certificate included Kiewit as an additional insured. 

    When sued under a third party complaint related the the death of Mona Arthur, Kiewit filed a fourth party complaint against Pacific Fence, asserting a claim for contribution because Kiewit was entitled to an immediate defense and full indemnification from Pacific Fence. 

    Island Insurance accepted on behalf of (Pacific Fence) Kiewit’s tender of defense to the Arthur complaint, subject to a detailed reservation of rights. Among the rights reserved was the right to seek reimbursement from Kiewit of attorneys fees and other costs if it was determined that Pacific Fence was not obligated to defend Kiewit under the subcontract.

    The Island Insurance letter made clear that Kiewit was an “additional insured” under the policy, but the Kiewit/Pacific Fence subcontract appeared to be an “insured contract” of Pacific Fence. Therefore, Island would indemnify Pacific Fence for its liability to Kiewit under the subcontract’s indemnity clause, to the extent Pacific Fence’s liability to Kiewit was based upon “bodily injury” caused by an “occurrence” during the policy period and not subject to any exclusion.

    In Arthur II, the Hawaii Supreme Court concluded that any duty to defend based on an indemnitor’s own potential wrongdoing(i.e., not based on an indemnitee’s “sole negligence or willful misconduct”) was not determined at the outset of the underlying litigation as in an insurance coverage case. The complaint allegation rule did not apply because the court had determined that Haw. Rev. Stat. sec. 431:10-222 prohibited a promisor in a construction contract from being contractually required to defend a promisee against liability caused by the promisee. Haw. Rev. Stats. sec. 431:10-222 established than an indemnity provision seeking to indemnify against liability for bodily injury caused by the sole negligence of the promisee was invalid as against public policy. Therefore, with respect to a construction contract, the scope of a promisor’s duty to defend was determined at the end of the litigation. Arthur II determined that the Kiewit/Pacific Fence subcontract’s indemnity clause was void and violated the statute to the extent it required an immediate defense of potentially non-covered claims. Island should not have been defending Kiewit. 

    After the Arthur case settled, Island filed this declaratory relief action against Kiewit, seeking declaratory relief and reimbursement of costs incurred in defending Kiewit in the Arthur litigation. Island filed a motion for partial summary judgment, arguing that it did not owe a duty to defend Kiewit, and was entitled to enforce Island’s reservation of rights letter. It was established at the end of the Arthur litigation that Pacific Fence had no duty to defend and was not responsible for any defense costs to Kiewit. Island was therefore entitled to a declaratory judgment as a matter of law. The reservation of rights letter was clear. Island reserved the right to stop paying for Kiewit’s defense if it was determined that there was no potential for Pacific Fence to have to indemnify Kiewit under the subcontract. 

    The decision was not based upon insurance law. Therefore, the court did not reach – and offered no opinion regarding – the unresolved question of Hawaii law whether an insurance company defending an insured under a reservation of rights would be entitled to seek reimbursement of defense costs. Instead, the court relied on a quasi-contract theory of unjust enrichment to allow Island Insurance to enforce its reservation of rights letter. Island was entitled to reimbursement. 

Construction Wrap-Up Insurance Programs: Erecting a Solid Foundation, Part II

Dennis J. Artese, Finley T. Harckham and Luma S. Al-shibib | Construction Executive

In the construction industry, owner-controlled insurance programs (OCIPs) and contractor-controlled insurance programs (CCIP), also referred to as “wrap-ups,” commonly are used to provide insurance coverage for the owner, general contractor and subcontractors on a project. Part I previously covered the basics and implementation of wrap-ups.

PROTECTING INTERESTS IN A WRAP-UP PROGRAM

Regardless of whether an owner is implementing an OCIP, a general contractor instituting a CCIP or a subcontractor enrolled in an OCIP/CCIP, it is important to be aware of the limitations that wrap-up coverage affords. A party can better protect its interests by being adequately informed. Because these insurance programs are fairly sophisticated, it is advisable to retain the assistance of an insurance broker that specializes in the purchase and implementation of wrap-up insurance programs. 

1. Have the broker read and understand the insurance requirements for the project. This includes the insurance specifications for the project as a whole, as well as those that individuals are required to maintain. The project contract will list the insurance specifications for the project participants. Participation in an OCIP/CCIP may not satisfy all of the contractual insurance requirements (e.g., offsite liability). It is important to know what types and amounts of insurance coverage is required to maintain on a project (both with or without an OCIP/CCIP being implemented on that project) and ensure compliance with those requirements. A broker experienced in construction insurance placements should be able to identify the insurance requirements for a project and ensure that involvement in the wrap-up program for that project, whether as a sponsor or participant, complies with contractual insurance obligations. 

2. Have the broker read and understand the OCIP/CCIP manual and insurance policies. This will allow the broker to assess and advise clients as to the different types of coverages that are and are not afforded under the wrap-up. By comparing the coverage provided under the OCIP/CCIP with the insurance specifications set forth in the construction contract, the broker and client can determine whether additional insurance is needed outside of the wrap-up program. Notably, a wrap-up may not provide coverage for all types of claims. Often, builder’s risk coverage is not included in an OCIP or a CCIP. Also, wrap-ups typically do not provide coverage for activities occurring off the construction site, even though they may be related to the project. 

3. Does the wrap-up program have sufficient policy limits? The construction contract will specify the amount of insurance that is required to be maintained on the project. Typically, the party procuring the wrap-up policies (either the owner or the general contractor) will attempt to obtain the highest policy limits that are financially feasible. Since wrap-up limits are shared by all enrolled participants on a project, consult with the broker to assess whether those limits are sufficient to adequately protect interests. If not, individual coverage that applies excess of the wrap-up program’s policy limits may be needed. 

Corporate policies may contain wrap-up exclusions that exclude coverage for claims related to or arising from a project subject to an OCIP/CCIP, except to the extent that specifically identified projects are endorsed with excess of wrap-up coverage. If you decide that you want your corporate policy limits to apply excess of the wrap-up policy limits on a particular project, then have the policy endorsed accordingly. 

4. When does coverage under the wrap-up program begin? Once a contractor or subcontractor begins work on a project prior to being enrolled in the OCIP/CCIP, then they likely are not covered under the OCIP/CCIP for claims arising out of work performed prior to being fully enrolled in the wrap-up program. In this event, it is important to make sure they are coverage under their individual corporate policies during the pre-enrollment period. This may require a modification to the standard wrap-up exclusion discussed above. Specifically, those exclusions are interpreted as barring coverage for any claims related to a project for which a wrap-up program has been implemented even if those claims relate to work performed prior to the inception of the wrap-up and/or enrollment therein. In consultation with a broker, determine the necessary modifications that must be made to the wrap-up exclusion in the corporate liability policies in order to prevent a situation where claims related to work on a project are not covered by either corporate policies or the OCIP/CCIP. 

5. Do individual corporate policies provide coverage for project-related offsite activities? Depending on the wrap-up program’s policy provisions, any project-related work or activities occurring off the construction site may not be covered under the OCIP/CCIP. If this is the case, then, based on the anticipated level of offsite project-related activities, it might be prudent to obtain offsite coverage under corporate liability policies through a modification of the wrap-up exclusion endorsement. 

6. Is the wrap-up being implemented mid-stream? If so, is there protection for completed operations claims arising from work performed prior to implementation of the OCIP/CCIP? Although OCIPs/CCIPs generally are implemented prior to the commencement of the construction project, a wrap-up implemented mid-stream (after the start of the project), while complicated, nevertheless may be feasible. If involved in a mid-stream wrap-up, be cognizant of the possibility that work performed prior to the implementation of the wrap-up could give rise to a claim after the completion of the project. 

Typically, wrap-up programs will provide completed operations coverage for project-related claims that arise from work performed after the implementation of the OCIP/CCIP – but not before. At the same time, individual corporate policies may exclude claims for any work performed in connection with a project on which a wrap-up has been implemented – regardless of whether that work was performed prior to or after the implementation of the OCIP/CCIP. 

In order to ensure adequate completed operations coverage for project-related work performed prior to the implementation of an OCIP/CCIP that is commenced mid-stream, the broker should confirm that the corporate program will provide coverage for completed operations claims arising from work performed prior to the implementation of the project’s wrap-up program. 

A wrap-up program has a number of potential benefits; however, these policies may not provide complete or iron-clad coverage for enrolled participants. Whether a sponsor or a participant in an OCIP/CCIP, protect interests by working with an insurance broker or risk management consultant to conduct appropriate due diligence regarding: 

  • the insurance requirements of the construction project; 
  • the scope and limits of coverage under the wrap-up program; and 
  • the scope and limits of coverage under the corporate liability policies. 

Once properly advised as to the parameters of what is covered, contractors and subcontractors can better assess what, if any, additional coverage they may need depending on the type of project-related work and activities in which they will be engaged. 

While wrap-up insurance programs are being utilized with increased frequency, the interplay between the wrap-up program’s insurance policies, the individual corporate insurance policies of the enrolled participants and the project contract’s insurance specifications, may give rise to complexities. This article provides tips on how to avoid potential pitfalls, but when encountering a coverage dispute in connection with a wrap-up program, consult and retain experienced insurance coverage counsel to represent the company.