By: Gregory J. Spaun Published: June 2016

A Troubling Trend: Co-Insureds on a General Liability Insurance Policy

In the ever competitive world for the insurance premium dollar, brokers are under increasing pressure to come up with novel ways to save their clients money. The typical way that brokers have accomplished this goal was to shop their client’s policy at renewal time, and by examining their client’s business so that they could tailor the policy to remove those coverages (generally by introducing exclusions to the policy) which are not specifically germane to the client’s scope of work—such as by removing coverage for EIFS issues from a site contractor’s policy.

With many policies already thoroughly shopped around, and with many others already tailored to remove unneeded coverages, some insurance brokers have started a troubling trend of placing a construction project owner and its general contractor, or a general contractor and its subcontractor, on the same general liability policy as co-insureds. This process is loosely modeled after what are commonly known as “wrap-up” programs, or owner (or contractor) controlled insurance programs (OCIPs/CCIPs). These OCIP/CCIP programs place the owner, the general contractor and all subcontractors on a construction project onto a project-specific group insurance policy. There are, of course, issues which need to be dealt with in the context of an OCIP/CCIP, such as, for instance, whether a contractor’s off-site operations (at its fabrication shop) will be covered under the OCIP/CCIP program. However, by placing all parties to a construction project with a common insurance carrier, the inevitable cross claims asserted in a lawsuit (fighting over which contractor bears ultimate responsibility) are not as important to litigate because the claim is covered by the same OCIP/CCIP policy. By reducing, or even eliminating the need to engage in expensive in-fighting, the premiums for such programs tend to be lower.

With the so called joint policy, because not all parties to the construction project are intended to be co-insureds, the issue of cross claims remain. In order to get around the cross-claim exclusion common in most general liability policies, some carriers have attempted to draft amendments to the common cross suits exclusion which purport to not apply the exclusion to certain suits between Co-Insured A and Co-Insured B. A sample of such a form can be found by clicking here. Questions often arise as to whether a form such as the example sufficiently “excludes the exclusion”. Even in the example form, the exclusion only applies to property damage claims (thus still excluding cross claims in personal injury lawsuits) and completed operations (thus still excluding cross claims in lawsuits where the co-insureds are still working). Regardless, these amendments are generally illegal in New York.

Chapter 11 of New York Codes, Rules and Regulations governs financial products, including insurance. Paragraph c of Section 153.3 of Chapter 11 of the NYCRR prohibits group policies from being issued, except where:

(1)        the group is homogeneous in nature, based upon standards acceptable to the superintendent;

(2)        the group is formed for purposes other than obtaining insurance;

(3)        the group consists of at least ten group members engaged in similar activities giving rise to similar risks, based upon standards acceptable to the superintendent, except that a smaller number of members, but not less than five, may be covered on a group basis where each such member generates at least $5 million in annual revenues or annual premiums for such group total at least $500,000;

(4)        group members are either public entities or nonprofit organizations; and

(5)        coverage includes any kind of property/casualty insurance, but not a kind specified by section 1113(a)(16), (17), (21), (22), (23) or (25) of the Insurance Law.

Clearly, a co-insured arrangement like the one referenced above: 1) is not homogeneous in nature (being comprised of a construction contractor and a non-contractor, or two different trade contractors), thus violating ¶ c(1); 2) is formed for the purpose of obtaining insurance, thus violating ¶ c(2); 3) does not consist of at least 10 members (or 5 under the conditions referenced), thus violating ¶ c(3); and 4) does not include group members who are public or nonprofit entities, thus violating ¶ c(4). OCIP/CCIP programs get around these prohibitions by virtue of the the fact that policies covering shared interests are not defined as group policies (but only to the extent of those shared interests). Since an OCIP/CCIP policy is project specific, the interests of the insureds are shared. By the same account, because the OCIP/CCIP policy covers only the one project, it covers only those shared interests.

On the other hand, the practice of simply placing both an owner and a general contractor, or a general contractor and a subcontractor on a single policy as co-insureds fails that “only to the extent” test because, unlike an OCIP/CCIP policy limited to one specific project, a joint policy insures both entities for all risks, whether shared or not. As such, it is defined as an impermissible group policy. Where brokers try to get around this problem by restricting the policy to a single project, thus ensuring that all risks are shared, the problem of the cross claims exclusion still exists. This problem most often surfaces where there is a potential for the injured party’s claim to exceed policy limits (such as the young union construction worker who will never work again, where even “straight line” economic damages are easily into the millions of dollars). In such instances, it is likely that even where two entities are co-insured the owner entity will need to assert a cross-claim against the contractor (employer) entity, thus giving the carrier a reason to trigger the cross-suits exclusion and vitiate coverage. The carrier may also pre-emptively use this exclusion to deny coverage because of the possibility of such claims (and contend that such claims were not actually asserted solely to keep coverage intact). In practicality, the Co-Insureds may simply be buying themselves additional litigation against their carrier on the coverage issue—in addition to the underlying negligence action that they sought to be insured against in the first place. To truly deal with this problem, the cross claim exclusion needs to be removed from the policy in its entirety—something which carriers are loathe to do.

In sum, insurance brokers, insurance carriers and their clients would be cautioned against engaging in such joint policy practices. Of course, all would be well advised to consult with their attorneys to determine whether their insurance policy qualifies as a permissible OCIP/CCIP, an impermissible group policy that violates the above (or other applicable) regulations, or something in between.

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