What is an OCIP Policy?
Prior to owner controlled insurance programs (“OCIPs”), developers, general contractors and subcontractors carried their own general commercial liability policies (“GCLs”). It was, and still is, often the case that the general contractor is required to name the developer as an additional insured under its policy, and the general contractor in turn requires the subcontractors to name the general contractor as an additional insured to their individual policies. Of course, the general contractor typically extracts from the subcontractors a broad indemnification agreement that will shift liability to the subcontractor in the event that litigation stemming from a construction project arises.
The result of this arrangement is that any claim related to the project begins with the subcontractors indemnifying the general contractor, thereby invoking coverage under the subcontractor’s individual policies that are depleted until each individual policy limit is met. Thus, tranches of coverage are created – when one flow dries, the next coverage tranche begins to flow, typically resulting in the general contractor’s policy serving as the final line of defense once all individual policy limits have been met.
The abundance of construction defect litigation has created a shift in the structure of insurance coverage for commercial and residential construction projects of all sizes in Florida. Under an OCIP policy, only one commercial liability policy covers an entire project rather than dozens of policies. The objective behind use of an OCIP policy is that litigation costs are reduced when all claims are brought under one policy because the need for covered parties to implead third parties and assert cross-claims against one another is dispensed with. In practice, the use of OCIP policies has generally been successful in at least reducing construction defect litigation costs, but is still not completely free of problems.
Intricacies of Multi-Party Litigation Under an OCIP Policy
In the prior approach, where each subcontractor maintained their own GCLs, subcontractors who are defendants to a construction defect suit received defense counsel appointed by their respective insurers, whereas under an OCIP policy, one law firm may be appointed to simultaneously represent several subcontractors. Although the latter approach may ultimately permit the expedient and cost-efficient resolution of numerous construction defects alleged in a single lawsuit, the identity of the subcontractors and their respective roles in any given construction project can complicate judicious resolution of claims. For instance, some sub-contractors who are responsible for completing related and/or complementary aspects of a project are all insureds under a general OCIP policy that covers all subcontractors. It is unsurprisingly often that the subcontractors charged with performing similar aspects of a job will attempt to shift liability away from themselves and unto the other subcontractors, regardless of who ultimately insures the subcontractors.
Many experienced contractors identify the potential conflict early on in the lawsuit and, despite that the claimant’s recovery will come from a common fund, will oppose joint representation of all subcontractors by a single law firm and instead, seek representation by counsel of their choice to overcome the perceived conflict. By way of example, in a defect lawsuit, a stucco manufacturer may attempt to shift liability to the stucco subcontractor and create a conflict for the counsel representing the parties who now possess interests adverse to one another. In this scenario, the stucco manufacturer may decline the insurer’s choice of counsel whereas the stucco subcontractor does not object to joint representation by the OCIP insurer’s defense firm of choice. If the insurer does not permit the stucco manufacturer to retain its counsel of choice, then, in the manufacturer’s view, it is essentially left without an adequate defense. Notwithstanding lack of insurer approval, the stucco manufacturer accordingly could nonetheless retain its private counsel, but in so doing, the manufacturer may expose itself to absorbing the costs of litigation.
Enter EmbroidMe.com, Inc. v. Travelers
Most OCIPs contain provisions vesting the insurer not only with the duty, but the right to indemnify and defend its insured; this right often vests the insurer with right to appoint defense counsel of its choice. Furthermore, many OCIPs contain provisions that dispense with its obligation to pay expenses incurred in litigating a claim without the insurer’s consent. If the subcontractor’s counsel of choice is retained prior to obtaining insurer approval, the insurer may ultimately decline the pre-approval bills, even if the insurer ultimately approves of the subcontractor’s counsel of choice.
In EmbroidMe.com, Inc. v. Travelers Prop. Cas. Co. of Am., 845 F.3d 1099, 1105 (11th Cir. 2017), the insured, EmbroidMe, had an insurance policy that provided coverage for the underlying lawsuit in which it was alleged EmbroidMe infringed on a third-parties copyright. Under the operative policy, the insurance company had not only the duty, but the right to indemnify and defend EmbroidMe for a covered claim, which also included the right to appoint defense counsel. Rather than notify the insurance company of the claim, EmbroidMe retained counsel of its choice and litigated the case for eighteen months, amassing $400,000 in defense fees before notifying the insurance company and obtaining its approval, as required by the policy.
Once EmbroidMe made a tender, the insurance company acknowledged that the claim is likely covered and agreed to defend EmbroidMe going forward, but refused to reimburse EmbroidMe for the pre-tender fees incurred, resulting in the commencement of a breach of contract claim under the policy. The insurance company obtained summary judgment upon its argument that the policy language excluded coverage for legal fees unilaterally incurred without its prior approval. On appeal, the Eleventh Circuit affirmed the district court and held that the “policy excludes from coverage legal expenses incurred by an insured without the approval of the insurer.” Id. at 1106.
Although the stucco manufacturer in the hypothetical above has made a tender, unlike EmbroidMe, if it is subject to a provision permitting its insurer to appoint defense counsel of its choosing—and assuming that the insurer did not agree to provide defense under a reservation of rights—the insurer is still within its contractual rights to deny any fees unilaterally incurred by the insured without obtaining the insurer’s prior approval. Thus, if the stucco manufacturer nonetheless proceeds to incur legal costs without its insurer’s approval, it does so at its own peril. The stucco manufacturer’s only hope of overcoming this scenario is by meeting the high burden that the insurer provided a “defense so inadequate that the insurer can be said to have ‘forced’ the insured to obtain its own counsel[.]”
In short, if you are covered under an OCIP policy, it is best to leave choice of defense counsel to the insurer. This is especially true since approximately 99% of all civil lawsuits filed are resolved by means of alternative dispute resolution where there is no admission of liability and in the OCIP context, payment for the settlement is drawn from a common pool of funds. Indeed, 99% of the time, the “adverseness” between co-defendants such as our two stucco subcontractors is rather illusory in the context of an OCIP funded settlement. And for the 1% of the time where it may be an actual issue, the subcontractor is not without recourse.