In my yellowed "Policy Kit," acquired sometime
in the last century, buried along with policies with monikers such as "OL&T,"
"M&C," and "SMP," is an "OCP" or owners and contractors protective liability
policy. While M&C, OL&T and SMP had their glory days and have since faded into
nothingness, OCP is alive and well, albeit a bit obscure.
& Stanovich Risk Managers, LLC
Often confused with OCIP (owner controlled insurance program or "wrap-up"
program), the OCP policy has been with us quite a while. But like its brethren
the M&C and OL&T policy, is the OCP policy ancient history?
Sooner or later we all figure out the oft-mentioned "old days" is relative.
For example, when my friend, who is an Episcopal minister, refers to the "old
days," we immediately demand clarification—are you talking Moses or Bruce Springsteen?
Because ancient history is also relative, a better question is whether the OCP
policy has outlived its usefulness. Of course, this begs the question, what
was the OCP designed to do in the first place? In particular, how is the OCP
usually used, and how does it "stack up" to more commonly used alternatives?
The complete title of this general liability form is Owners and Contractors
Protective Liability Coverage Form—Coverage for Operations of Designated Contractors
(CG 00 09 12 07), which is a lengthy and descriptive title. As suggested by
the title, the policy is intended to protect certain owners and contractors,
but only for operations performed for the named insured by the contractor listed
as the "Designated Contractor" on the Declarations Page.
One of the distinguishing features of the OCP liability policy is that it
is a protective liability policy. A protective
liability policy is arranged a bit differently than most liability insurance—the
policy is usually purchased by a contractor for the
sole benefit of another person or organization.
An example will help illustrate. A construction agreement between a project
owner and the project's general contractor might require the general contractor
to purchase an OCP policy for the owner, listing the owner as the policy's
named insured. Although the general contractor
in this example will pay the entire premium for the OCP policy, only the owner,
with the status of a named insured, receives any protection from this policy;
the general contractor is provided no liability insurance protection and thus
receives no benefit from the purchase of the policy.
While the nature of a protective policy may seem like the best of all possible
worlds to a project owner, it is crucial to recognize that the OCP policy provides
substantially less protection to the owner
then would a commercial general liability (CGL) policy.
In our previous example, the project owner is protected by the OCP policy
in only two circumstances: if the owner is held
vicariously liable for acts or omissions of the general contractor or
if the project owner is held directly liable for its acts or omissions in the
general supervision of the operations of
the general contractor. In fact, the policy expressly excludes coverage for
the project owner's liability arising out of the owner's (or the owner's employees)
acts or omissions if not arising out of "general supervision" of the general
This alone should strongly indicate to a project owner that relying solely
on an OCP policy for liability protection is not recommended. Even the most
cursory consideration of the potential direct
liability that project owners may face reveals the exposure is far greater than
that of general supervision of construction. Thus, it is axiomatic that the
project owner needs a full-blown CGL policy, even before taking into account
numerous other limitations found in the OCP when compared to a CGL policy.
Given the limited coverage offered, it might seem the OCP is past its prime
and of little practical use. However, the OCP is not designed to be a substitute
for a CGL; it is most effective when written in
conjunction with a CGL. Most commonly, an OCP policy is usually an alternative
to adding the owner or contractor as an additional insured on the CGL policy
of the general contractor or subcontractor.
What follows are some the benefits and drawbacks of the OCP policy compared
to the more common additional insured endorsements. To make the explanation
more concrete, let's apply each situation to a hypothetical general contractor
called Great Big General Contractor, Inc. (GBGC), and its subcontractor, Not
So Big Subcontractor, Inc. (NSBS).
The following are some of the benefits of an OCP policy.
Limits. As an additional insured, you have
to share the limits with all other insureds
(including the named insured) for the same occurrence and also must share the
aggregate limit for multiple occurrences. If you don't yearn to share (at least
your insurance), then the OCP policy is an option. The OCP policy limits (the
OCP policy has an each occurrence and an aggregate limit) are
dedicated exclusively to the named insured.
In our hypothetical, when GBGC requires NSBS to purchase an OCP with GBGC as
the named insured (NSBS would be the contractor "designated" on the OCP Declarations),
the OCP policy limits available to GBGC can be exhausted only by payment of
claims on behalf of GBGC—there is no sharing involved!
Other Insurance. The battle lines are drawn
when the coverage for the additional insured is to be "primary and noncontributory."
In our hypothetical, if GBGC was an additional insured on the CGL policy of
NSBS, GBGC would likely expect that the liability coverage available to GBGC
as an additional insured would be primary
coverage to GBGC (the NSBS CGL insurer would respond first) and the CGL insurer
for NSBS would not seek contribution from
GBGC's own CGL insurer.
Of course, this doesn't always work as planned. The OCP policy's
Other Insurance condition helps resolve this persistent problem by stating:
The insurance afforded by this Coverage
Part is primary insurance and we will
not seek contribution from any other
insurance available to you unless the
other insurance is provided by a contractor
other than the designated "contractor" for the same operation and job location
designated in the Declarations. [Emphasis added.]
Simply put, the OCP insurer will pay on behalf of GBGC first and will not
seek contribution from GBGC's own liability insurance.
Policy Cancellation. From time to time,
a general contractor tenders a claim to the CGL insurer of its subcontractor,
seeking coverage as an additional insured and, to its surprise, finds the subcontractor's
CGL policy has been canceled. If in our example, GBGC tendered a claim as an
additional insured to the CGL insurer of NSBS and found the policy was canceled,
GBGC could refer back the certificate of insurance. However, GBGC would find
that NSBS's insurer stated it would endeavor
to provide GBGC notice of cancellation, but if it didn't, its agent or insurer
of NSBS is not liable. By contrast, the OCP policy is issued to and should be
delivered to the named insured (GBGC).
Possibly more importantly, the OCP policy cannot be canceled without giving
advance written notice to the first named insured (GBGC) as well as the designated
"contractor" (NSBS). Reliance on a certificate of insurance and the "endeavor"
wording for cancellation notice is not a concern with the OCP policy.
Losses. While the OCP does not benefit
the "designated contractor" in that no liability insurance protection is provided
to the "designated contractor" (who in our hypothetical is NSBS), there is a
very clear "noncoverage" benefit to the contractor purchasing OCP coverage for
another. Losses paid by the OCP insurer are usually outside of the contractor's
liability insurance program and therefore there is usually little or no effect
on the contractor's own insurance costs. If the insurer of the OCP policy purchased
by NSBS for GBGC pays a $1 million liability loss on behalf of GBGC, that loss
will usually not be factored into future premiums of NSBS.
This benefit is even greater to the contractor purchasing the OCP
if the contractor has a loss-sensitive program,
such as large deductible program. If NSBS has included GBGC as an additional
insured on NSBS's CGL policy, and NSBS's CGL is written with $250,000 each-occurrence
liability deductible, the same claim paid on behalf of GBGC as an additional
insured would likely cost NSBS $250,000, the amount of the deductible. When
considering its deductible, the OCP policy looks much more attractive to NSBS.
Continuing with our illustration, the following are some the limitations of the
OCP policy compared to the more common additional insured endorsements.
Limited Insuring Agreement. As noted above,
the coverage promised to the named insured is indeed very limited in its scope.
The insuring agreement has two parts to consider.
First, the named insured is covered only for its liability for the acts of
the designated contractor, but only while the designated contractor is performing
operations for the named insured at the location specified in the Declarations.
In our example, GBGC is covered only if the liability of GBGC is alleged to
arise from the actions of NSBS. In other
words, coverage only applies to GBGC if the allegations are that GBGC is liable
because of the negligence of NSBS. Imposing
liability on a blameless party (GBGC) for the actions of others (NSBS) is often
called vicarious liability. Coverage for the actions of GBGC (except for "general
supervision") is expressly excluded.
Second, the named insured of an OCP is covered only for its liability arising
out of its acts or omissions in the "general supervision" of the designated
contractor and then only for the operations at the location shown in the Declarations.
In our example, GBGC is only covered for its direct liability—that is, for its
own actions—if the liability arises out of "general supervision" of NSBS. "General
supervision" is not defined, so it can be a bit difficult to determine exactly
where coverage begins and ends for GBGC.
If GBGC was an additional insured on the CGL policy of NSBS, using the Insurance
Services Office, Inc. (ISO) CG 20 10 or CG 20 33 July 2004 edition date, whether
the liability alleged against GBGC involved only
GBGC's vicarious liability for the actions of NSBS or "general supervision"
is not decisive as to coverage. Provided the liability was
caused at least in part by the acts or omissions
of NSBS (or in part by NSBS's subcontractors) in the performance of NSBS ongoing
operations for GBGC, GBGC is provided coverage as an additional insured. Put
another way, if NSBS actions in performing for GBGC are even a slight factor
in causing the injury or damage that is alleged to be the liability of GBGC,
GBGC is protected as an additional insured.
Vicarious Liability. When coverage is limited
to the vicarious liability of the named insured, coverage applies only to liability
imposed on the named insured as a result of the designated contractor's acts
and not as result of the named insured's own acts or failure to act. Although
the OCP does not use the phrase "vicarious liability," one court stated:
… the courts must construe the "arising out of [the subcontractor's work]"
provision as one providing coverage in cases where the alleged liability
is vicarious. [Emphasis added.]
St. Paul Fire & Marine Ins. and Hardin Constr. Grp.,
Inc. v. Hanover Ins. and Travelers Ins., 187 F. Supp. 2d. 584 (E.D.N.C.
However, conventional wisdom to the contrary, one who engages an independent
contractor is usually not vicariously liable
for the acts or omissions of the independent contractor.
Except as stated in sections 410–429, the employer of an independent contractor
is not liable for physical harm caused to another by an act or omission
of the contractor or his servants.
Restatement of the Law (Second) of Torts.
While there are clearly exceptions to this general rule, the general rule
is still observed in many instances. For example, in a situation where the court
was ascertaining coverage for an insured covered only for its vicarious liability
for the acts of an independent contractor, the court observed:
North Carolina courts recognize three exceptions to the rule that general
contractors are not subject to liability when their subcontractors have
been negligent: 1) situations where the general contractor/employer retains
control over the manner and method of the subcontractor's substantive work;
2) situations where the work is deemed to be inherently dangerous; and 3)
situations involving negligent hiring and/or retention of the subcontractor
by the general contractor. Rather, each of the exceptions to the
no-liability rule suggest forms of direct liability—liability
on the part of the general contractor for something the general contractor
has done or failed to do. [Emphasis added.]
St. Paul Fire & Marine Ins. and Hardin Constr. Grp.
The court went on to find no coverage for the additional insured:
The complaint does not, at any point, mention vicarious liability, nor does
the complaint assert in lay terms that Durham seeks to hold Hardin liable
for J&A Mechanical's negligent acts. Thus, it would appear that
Hardin's liability, as alleged in the
complaint, does not arise out of J&A Mechanical's
work but rather, out of its own independent acts and omissions, alleged
in detail in Durham's complaint. [Emphasis added.]
As the court found the insured was provided coverage only for its vicarious
liability, and there was no attempt to impose vicarious liability on insured,
no coverage was afforded to the insured.
The limited circumstances in which vicarious liability may be imposed on
those who engage independent contractors has been the topic of some discussion
by a few courts in the context of additional insured coverage. Here is one court's
We reject Maryland Casualty's argument that the intent of an additional
insured endorsement is to "provide protection where the named insured, performing
a job for the additional insured, blunders." Where the additional insured
is held no more than vicariously liable for
the acts of the named insured, the additional insured would have
an action for indemnity against the primary wrongdoer. "Thus,
an endorsement that provides coverage only
for the additional insured's vicarious liability may be illusory and provide
no coverage at all." In this light, it is obvious that additional
insureds expect more from an endorsement clause than mere
protection from vicarious liability.
Marathon Ashland Pipeline v. Maryland Cas.,
243 F.3d 1232 (10th Cir. 2001).
Even though the above case concerns interpreting the breadth of an additional
insured endorsement, it is revealing to consider how little coverage this court
believes is provided for an insured when the coverage is for its vicarious liability
for the acts of an independent contractor.
General Supervision. Courts have provided
some guidance as to what it considered to be "general supervision." In
Union Electric v. Pacific Indem., 422 S.W.2d
87 (Mo. App. 1967), an employee (Palmer) of the subcontractor (Davey) was seriously
injured when he came into contact with an uninsulated power line when trimming
trees around the line pursuant to a contract with Union Electric. Palmer brought
a complaint against Union Electric, alleging Union Electric was negligent in
failing to warn Palmer of inadequately insulated power lines. Union Electric's
insurer contended that Union Electric's alleged liability did not result from
Union's supervision of Davey in that Union
supervised only the result of the work did
not supervise the method, manner, or means of performance of the work.
The court ruled:
The factual situation presented shows the insured's contract with Davey
required the insured [Union Electric] to designate
the areas along the distribution and transmission lines of the insured where
Davey would cut and trim trees. … we hold that the words "general
supervision" as used in the policy in question do not mean supervision of
the method, manner, and/or means employed by Davey…We hold that the words
mean supervision of the work of Davey only to the extent necessary to see
that the work was done in accordance with the contract…and
to provide the area of the transmission lines
where Davey would cut and trim the trees. Palmer's claim fell within
the coverage of the policy. Insured's failure to warn Palmer arose out of
its supervisory function. [Emphasis added.]
In a similar case, Continental Cas. v. Florida &
Light Co., 222 So. 2d 58 (Fla. App. 1969), the Court of Appeals in Florida
found allegations made by an injured employee of a contractor to constitute
omissions of general supervision, requiring the insurer to provide defense to
Florida Power & Light. Specifically, the court cited the following specific
allegations made by the contractor's injured employee:
Among other specific allegations were the following: Florida Power & Light
(1) negligently failed to provide the employee with a safe place to work,
(2) negligently failed to make reasonable inspection of the work site and
the equipment on which the contractor was to do the work, (3) negligently
failed to take reasonable precautions and adopt proper safeguards to protect
him while he was doing the work, and (4) negligently required the work to
be done upon a high voltage electrical transmission line which was so situated
that there was a great danger of grounded material and equipment thereon
being energized. All of these allegations
may in their implications charge acts which
constitute omission of general supervision under the broad language
of the policy. This interpretation is authorized under the principle that
any ambiguous term of an insurance policy will be most strongly construed
against the insurance company. [Emphasis supplied.]
While the courts may find the scope of "general supervision" to be quite
broad when interpreting the insuring agreement of the OCP liability policy,
consider the facts and ruling in Citizens Mut. Ins.
v. Employers Mut. Liab. Ins., 212 N.W.2d 724 (Mich. App. 1973). There,
a contractor of the City of Alma was installing a new sewer line for the city
when an employee of the contractor was killed when the trench in which the employee
was working collapsed due to a water main rupture (the rupture caused the side
walls of the trench to collapse). Coworkers of the worker could not shut off
the water main as the hydrant key necessary to shut off the water was not available.
The court observed:
"General supervision" of the actions of an independent contractor digging
a sewer line does not and cannot, in
our view, extend to keeping a hydrant key available for use in a possible
emergency. It was the "act or omission of the named insured [Alma]
or his employees".
This is just exactly what Employers clearly, plainly, and unequivocally
excluded from its coverage. [Emphasis
Whether the City of Alma would have been covered as an additional insured
under the CG 20 10, July 2004 edition, endorsement to the subcontractor's CGL
for a similar incident is speculation at best. However, if it could be found
that the contractor's acts or omissions had at least been a factor in the death
of its own employee, the City of Alma would have had coverage as an additional
insured. For example, if the City of Alma pointed to the contractor's failure
to use a trench box to protect its employee, such an omission may be argued
as partly causing the bodily injury.
Costs. While a small premium usually is
charged for extending coverage to an additional insured, the premium for the
OCP policy is based on the contract price between the named insured and the
designated contractor (usually with a rate per $1,000 of the contract price).
Thus, a separate OCP can be several thousand dollars of premium (or more) depending
on the size of the project, the limits required, etc. While it usually is the
responsibility of the general contractor or subcontractor to purchase the OCP,
such costs must usually be factored into the overall cost of the project by
the owner or general contractor.
Limits. Because of the arrangement of the
OCP policy—the policy is purchased for the benefit of the named insured by the
designated contractor—the named insured will not likely have limits beyond the
limits provided in the OCP policy Declarations page. In contrast, although it
is sometimes unintended, an additional insured at times has available to it
the full limits of not only the CGL policy of the subcontractor, but also the
full limits of the subcontractor's umbrella or excess liability insurance program.
For example, if GBGC is a named insured on its own OCP policy purchased by NSBS,
the umbrella insurer for NSBS will not usually provide limits to GBGC in excess
of the OCP policy.
If GBGC was an additional insured on the CGL policy of NSBS, GBGC might have
available to it not only NSBS CGL limit, but also the full limit of NSBS umbrella
program, even if the limits of NSBS umbrella program exceed what was required
of NSBS in its agreement with GBGC.
Completed Operations. The OCP policy excludes
coverage for bodily injury or property damage if such injury or damage takes
place after the earlier of when the operation has been completed or put to its
intended use by anyone other than another contractor or subcontractor working
for the Designated Contractor on that project.
The ISO CG 20 37 and many insurers' independently filed additional insured
endorsements provide coverage for the additional insured for bodily injury or
property damage within the products and completed operations hazard. This coverage
option is not available on the OCP policy.
Understanding the benefits and drawbacks of the OCP liability policy is vital
to properly evaluate whether an OCP liability policy is a workable alternative
to ISO's or an insurers' independently filed additional insured endorsements.
While the limited insuring agreement of the OCP liability policy needs to be
carefully considered, in certain circumstances the OCP liability policy may
actually provide broader coverage than ISO's or an insurer's own additional
insured endorsement forms.
For example, if GBGC was deemed to be solely negligent in causing an injury
to an employee of NSBS, in most instances, coverage would likely be denied to
GBGC as an additional insured, despite the fact that the ISO CG 20 10 (July
2004 edition) additional insured endorsement does
not require NSBS to be negligent. The requirement is only that NSBS or
its subcontractor cause in part the injury
by its acts or omissions. At least one court
has recognized this by unequivocally stating "…the plain meaning of 'act or
omission is not negligence.'" See
Maryland Cas. v. Regis Ins. and RAN Holding Corp.,
1997 U.S. Dist. Lexis 4359 (E.D. Pa.).
Nevertheless, if GBGC was the named insured on an OCP liability policy purchased
for GBGC by NSBS, GBGC would clearly have coverage for is sole negligence provided
the sole negligence arose out of GBGC's acts or omissions in the "general supervision"
of NSBS. However, if the sole negligence (or any negligence) of GBGC did not
arise out of the actions of "general supervision," then an additional insured
coverage endorsement may indeed provide greater protection for the additional
Further, to the extent that insurers continue to contend their additional
insured endorsements provide only coverage
for vicarious liability imposed on GBGC
for the actions of its subcontractors, the OCP liability policy would also afford
broader protection to GBGC as the OCP includes,
in addition to coverage for vicarious liability, coverage for GBGC's
acts or omissions for general supervision.
In short, the tradeoffs of OCP versus additional insured are numerous and
must be carefully weighed to determine what is and what is not required or needed
by the additional insured.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.
Please use the print button on the IRMI toolbar to print/preview this page.
© 2000-2014 International Risk Management Institute, Inc. (IRMI). All rights reserved.