Have any of your insureds asked you to comment on the coverage afforded and the cost-effectiveness of a Contractors Pollution Liability Policy for a specific project that covers some but not all of the parties engaged in construction activities…
Providing coverage for some but not all of the parties involved in a construction project may lead to confusion, unwanted disputes, litigation, and uneven protection against the financial consequences of an environmental incident. Under a construction contract, the general contractor is usually responsible to the owner for claims arising out of the construction activities, including those arising from a release of pollutants caused by or exacerbated by construction activities. Construction contracts typically contain an indemnification provision that goes along with the promise of the general contractor to be responsible for these types of claims. In this type of indemnity situation, the general contractor is responsible to the owner for claims arising out of the activities of subcontractors hired to perform services on its behalf.
With respect to environmental damage claims (bodily injury, property damage or cleanup), the general liability policies purchased by the general contractor and by subcontractors often contain pollution exclusions. To address this potential coverage gap, the owner or general contractor may purchase a Contractor’s Pollution Liability policy on an owner-controlled (OCIP) basis. These policies insure the owner, the prime contractor, and all subcontractors of every tier against claims arising out of a pollution incident caused by construction activities. OCIP policies are a cost-effective method of providing environmental protection for the project with uniform coverage and adequate limits for all contractors and for the owner.
An alternative method of insuring against environmental risk is for the parties to purchase separate policies and require each subcontractor to purchase its own CPL policy that would provide protection either to the project alone or for all projects where the insured entities provide services during a policy year. A downside to this approach is that it allows contractors to satisfy an insurance requirement with potentially lower limits and inferior coverage to that which is typically available through an OCIP Policy. It also may result in situations where contractors that do purchase practice policies (applying to all projects they work on) could exhaust their available limits through payments on claims unrelated to the current project. In such cases, the owner, developer, and prime contractor may be relying on the promise of a small contractor to pay for claims arising out a pollution incident that occurs during construction activities that is unsupported by insurance.
Since it is difficult for the owner to assure itself that the prime contractor and subs have purchased and maintained the required insurance, there is a possibility of claims not being paid when they arise. There may also be disputes regarding the cause of a release and claims by third parties that name more than one party or crossclaims filed by one contractor or subcontractor against other contractors.
The least desirable situation is where the prime contractor and subcontractors are not required to purchase environmental insurance but are nonetheless expected to be responsible for the costs of any claims arising out of pollution events caused by construction these cases, the owner is relying on the promise of the contractor and subs to be responsible for claims, but not assuring the financial ability of these parties to respond when a claim occurs. Such claims are likely to result in contentious disputes and litigation among the parties and may ultimately require the prime contractor and subs with substantial net worth to respond on behalf of subs that are judgment-proof.
From an insurer’s perspective, insuring only the owner or the owner and general contractor is viewed as a similar risk as insuring these parties along with all of the contractors and subcontractors involved in the project. The same is true where these parties are asked to bring whatever insurance they have to the project and no other coverage requirements are imposed. Based on general conversations with CPL carriers, they generally don’t recognize a significant difference in insuring only the owner and prime contractor and insuring these parties along with all contractors and subs since they expect to be, as the insurers of the prime contractor or owner, the ultimate source of all material resources devoted to resolving claims that may arise. Therefore, the carriers will likely not be willing to offer premium reductions if the policy is structured to cover only the owner and the prime.
Given this situation, we recommend that an owner, developer, or prime contractor strongly consider a single Contractor’s Pollution Liability Policy covering all parties involved in the construction project with the broadest protection possible and limits that reflect the recognized environmental risks associated with the project. This minimizes internal disputes and litigation and maximizes the protection afforded to the project and the parties for the financial consequences of an environmental event. A properly structured OCIP Program may be cost-effective and superior coverage solution for the construction context.