Once upon a time, there were two brothers – John and Michael – who were both new to real estate development. They each purchased a parcel of vacant land next door to each other with the intent of building six-story apartment buildings. Both brothers hired a general contractor (GC) to oversee construction activity; entered into a contract containing hold harmless, indemnification and additional insured language in their favor; and were included as additional insureds (AI) on the GC’s general liability policy. They both knew their AI status would not protect them completely throughout the course of construction, so the brothers obtained additional insurance options:
- John’s GC purchased an Owners and Contractors Protective (OCP) insurance policy in John’s name.
- Michael consulted with his insurance broker and purchased an Owner’s Interest policy.
During and after the course of construction, they had several issues occur in which their coverage came into play – and the brothers learned what their policies truly covered. One of them, however, had to learn the hard way.
Within the first weeks of the project, there was a terrible ice storm that caused two pedestrians to slip on ice on each of John’s and Michael’s properties. Were both of them covered?
- John was not covered. Because John’s OCP insurance covered premises liability only in relation to construction activities, John did not have coverage for the accident.
- Michael was covered. His Owner’s Interest policy provided full premises coverage.
Several weeks later, the spring weather allowed construction to continue. The contractors were trying to make up for lost time and got a little sloppy, leaving their tools on the sidewalk. On John’s property, a pedestrian tripped over a hammer. In this case, John’s OCP policy coverage was triggered because the accident was a result of construction activities. Thankfully, the rest of construction finished with no further incidents.
After construction was completed, the brothers both decided that managing the apartments would be too much for them and converted their apartment buildings into condominiums. It didn’t take long for all of their units to sell. Things were looking up. But, about a year after completion, both John and Michael received urgent calls.
- At John’s building, there was a major leak in the roof from a construction defect. The leak caused damage in multiple condo units, amounting to several thousands of dollars in repairs. John’s OCP insurance did not include coverage for completed operations – so no coverage was triggered.
- Next door at Michael’s, things were even more serious. A condo unit owner was out on the balcony enjoying the weather when, suddenly, the balcony collapsed – leading to very serious injuries. Thankfully, Michael had included extended completed operations coverage that was offered in his Owner’s Interest policy for six years after completion of the project, which was the statute of repose for related claims.
What did John and Michael learn?
- An owner needs to make sure the right amount and types of insurance coverage are in place for their premises to cover perils not directly related to construction.
- An owner needs to make sure to have insurance coverage for construction defects that are discovered after construction is complete.
- Because an owner has exposure to construction defect incidents for several years after completion, the owner should consider coverage for completed operations up to their state’s statute of repose.
To learn more about the differences between OI and OCP insurance, download Argo Construction’s OI/OCP highlight sheet, which features a coverage comparison chart, appetite details and coverage highlights.