John P. Knight | Morrison Mahoney
The truism in the insurance world that “the best case is a settled case” is sometimes worth a closer look.
Insurers are motivated to settle cases for a variety of reasons, primarily to prevent future fees and expenses, and to avoid the potential risks presented by a claim. But while it may seem self-evident, when an insurer does settle a claim, it must be sure that it is actually responsible for paying that particular claim. Insurers do not always do this, as we examine below—especially in the complex setting of construction accidents, where numerous insurance policies are potentially at play in response to a construction claim—and that can be a costly error.
CASE IN POINT: DIFFERENT INSURANCE POLICIES IN A CONSTRUCTION ACCIDENT CLAIM
This situation has presented itself in a claim arising out of a construction accident in which the general contractor’s primary and excess insurer settled a serious injury claim for $2.35 million. In the settlement, the primary insurer agreed to pay $2 million, and the insurer that believed it was the excess carrier agreed to pay $350,000. The settlement was very favorable for the insured and the insurer, and it appeared as though the case could be filed away in the “best case is a settled case” category.
Unfortunately, just before the excess insurer paid its $350,000 portion of the settlement, it realized that it was not actually the excess insurer for the loss. The underlying lawsuit was brought against the general contractor at the project, and the insurer was an excess insurer for the general contractor. However, the insurer was the excess insurer on the general liability policy which had been issued to the general contractor.
This became an issue because the claims against the general contractor were being handled on an owner-controlled insurance program (“OCIP”) policy. The primary insurer that agreed to the $2.35 million settlement was the primary insurer on the OCIP policy. However, the excess carrier which committed to pay $350,000 toward the settlement was not the excess carrier on the OCIP policy.
This created a very problematic scenario for both the insured and insurer parties:
- The excess insurer that committed to the settlement faces a potential problem if the excess carrier that should have been involved in negotiations (the OCIP excess carrier) does not agree to pay the $350,000 portion of the settlement which the “incorrect” excess insurer committed to pay. The plaintiff would have a viable breach of contract, and perhaps even a bad faith claim, against the excess insurer that mistakenly accepted responsibility for the claim and committed to the payment of $350,000 unless the “correct” excess insurer pays the claim.
- It would similarly be a bad result for the insured if this settlement is compromised. The insured obtained a good settlement that brought closure to the case, and that outcome is now in jeopardy.
- Finally, the primary insurer faces the possibility of the settlement being undone and litigation continuing, which would result in the primary carrier being responsible for substantial additional legal fees and expenses.
Both the insurer and insured parties in this case hope that the “correct” excess insurer will recognize that the settlement was a good one and pay the settlement, thereby arriving at the same outcome as had been expected. If this occurs, the mistaken commitment of the “wrong” excess carrier to pay the excess portion of the settlement will have caused a great deal of anxiety, but ultimately no adverse consequences. However, it remains to be seen whether that will happen, and there are numerous potentially adverse consequences for the various parties involved if this is not the ultimate outcome.
THE IMPORTANCE OF ENROLLING IN OCIP AND CCIP PROGRAMS
Although the situation described in the example above may seem like a highly unusual one, it illustrates the potential complexities that can arise in the setting of construction projects which involve numerous parties and numerous policies of insurance. In a typical scenario, contractors and subcontractors have their own general liability policies. Additionally, there will often be OCIP policies (such as we saw in the above case) or CCIP (contractor-controlled insurance program) policies. In the above case, the general contractor had a GL policy, but the contractor was covered for the claims at issue by the OCIP policy. As noted above, where parties could potentially be covered on numerous policies of insurance, it is critically important to make sure that the claim is being handled on the correct policy.
It is also critically important in the setting of a construction project that is governed by an OCIP or CCIP policy to make sure that all subcontractors at the project who are supposed to be covered by the OCIP or CCIP policy have taken the necessary steps to enroll in the program. In one case involving a fatality at a project arising out of the negligence of a crane operator, the crane company was supposed to be covered on the OCIP policy. The case involved clear negligence with substantial damages, and the OCIP insurer expected that it would be paying a substantial settlement, as well as substantial legal fees. However, the crane company never enrolled in the OCIP program. As a result, the general liability insurer of the crane operator, not the OCIP insurer, was required to pay the claim on behalf of the crane operator.
What made matters even worse for the crane operator’s GL insurer was the fact that there was a contract between the general contractor and the crane company which required the crane company to defend and indemnify the general contractor. That provision would not have been relevant if the crane operator had enrolled in the OCIP program. Since this did not happen, this language was implicated.
The net effect of all of this was that the GL insurer for the crane company had to pay both the settlement and the defense costs involved in the claim. The case eventually settled for $4 million, and there were substantial attorney fees and expenses associated with the defense of the case. The failure of the crane company to get enrolled in the OCIP program was ultimately a windfall for the OCIP insurer, and an expensive oversight for the crane company’s GL insurer.
REMINDER: AVOID THE TRAPS IN INSURANCE CONSTRUCTION PROGRAMS
Both scenarios reviewed here highlight the potential complexities and mistakes that can arise in the setting of construction project OCIP and CCIP policies of insurance. There are two key takeaways:
- From the standpoint of the insured, it is imperative to make sure that the steps that need to be taken to be enrolled in the CCIP or OCIP program are fulfilled so that the insured will get to participate in the OCIP/CCIP program.
- From the standpoint of the insurer, it is critical to carefully review the policies of insurance that are potentially implicated to make sure that the correct policy of insurance is being accessed.
Although it is often true that “the best case is a settled case,” errors can disprove the rule. That fact is likely well understood by the excess insurer that offered $350,000 on a case in which the policy was not implicated, and the GL insurer of the crane company that paid upwards of $4.5 million in defense and indemnity on a claim it should not have paid. As these two cases illustrate, it is critical to have defense counsel with an understanding of the potential complexities that might arise with competing insurance policies in the setting of construction accidents.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.