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HomeMy WebLinkAboutAgenda Report - May 18, 1983 (40)® e ..9_ MEMORANDUM To: Honorable Mayor and City Council From: City Attorney Re: Protection for City from Suits Resulting From Defective Materials and/or Products Date: May 11, 1983 QUESTION: HOW CAN THE CITY OF LODI ADEQUATELY PROTECT ITSELF FROM SUITS RESULTING FROM INJURIES CAUSED BY DEFECTIVE MATERIALS AND/OR PRODUCTS USED IN PUBLIC WORKS PROJECTS? ANSWER: Require all general contractors doing work for the City of Lodi to maintain in addition to normal bodily injury and property damage insurance, independent contractor's insurance. ANALYSIS: In order to adequately protect the City of Lodi —7rom suits which result from injury caused by defective materials and/or products used in public works projects, it is my recommendation that the City of Lodi require all general contractors to maintain, in addition to the normal bodily injury and property damage insurance, independent contractor's insurance and to submit copies of same to the City of Lodi upon the execution of any contract with the City. The aforementioned requirements become necessary because of two very significant problems which face all cities today: (1) Oftentimes, the contractor or subcontractor uses substandard materials and/or products which do not meet plans and specifcalCions and the City is not aware of same. (2) The cities' coffers are thought to have "deep pockets" and they become the target defendant in many lawsuits where an individual is injured due to a defective product in a subdivision. With the lack of ability or desirability on the part of the Legislature to protect pudic entities from large claims, the cities must find ways in which to protect themselves where an individual has been injured due to a defective product used in a public works project. K-8 As I have said previously to this Council, at the present time, if the City has 18 liability for an injury, the City could be saddled with 1008 of the damage award. Oftentimes, in an injury caused by the failure of a particular substandard or defective product, it is difficult to determine where and by whom a particular product was manufactured, in order for the city to be able to sue said manufacturer for a failing product on an indemnification theory. The indemnification theory works thusly: If the city is sued because of a product which has caused injury to a person, the city under normal circumstances can go back and sue the manufacturer of said product for his negligence in manufacturing same. However, often- times, it is difficult if not impossible to determine who manufactured a particular product. Further, even when you have determined who manufactured the product, said manufacturer may or may not have adequate insurance to cover the loss. Due to the "joint and several liability" theory in California, a city would be required to pay all damages with no hope of recovery against the manufacturer. It is therefore necessary for the.city to ask the general _ contractor to have independent contractor's insurance. This would protect the city where a manufacturer, supplier, or subcontractor of a product was unable to be found and/or was uninsured or under insured. I have spoken with Jim Elson of Max Elson Insurance, the City's Agent of Record, and he did tell me that this type insurance coverage is available at a modest cost to the contractor. At the present time, I am reviewing along with Mr. Elson and Mrs. Reimche our specification requirements for contracting with the City as those specifications relate to insurance requirements, and it is my recommendation that the City, in order to protect itself, include a requirement for independent contractor's insurance coverage in said specifications. RONALD M. STEIN ' City Attorney RMS:vc . A- F- C. & S. BULLETINS Public C4b0r1&ttr a s.rety ffeetl*s OCP COVERAGE PART Aic-1 Dcccen1w. logo PROTECTIVE LIABILITY INSURANCE ,d Separate Coverage Part jor Owners and Contractors When a property owner hires a contractor to make alterations to an exist- ing building, construct a new building, or do other wor ct ,, the owner can become vicariously liable for the acts or omissions of the contractor carrying out the work. See Public Liability Ai- for the ltgal basis of this liability. A similar exposure attaches to a general contractor that hires subcontractors to do part of a job. For either the property owner or the general contractor, it is desir- able to employ some means of protecting against this exposure. As described on the Al. pages, the "independent contractors. hazard" can be covered in the owner's or contractor's own General Liability policy, but many owners and contractors prefer to place the burden of insuring upon the independent (or sub-) contractor. One method of doing this is to stipulate in the construction agreement that the owner be added to the contractor's Liability insurance as an additional insured, at the contractor's expense. The drawbacks to this approach are that ( l ) in the event both the owner and the independent contractor arc sued, both parties must share the single amount of insurance, and (2) the owner, merely an a'ditioual insured, h -is no control over payment of premium or other contractual ,duties that the con-. t►.Ictor, the named insured, mutt perform in order to keep coverage in force. Simi- larly. the additional insured dors not necessarily receive notice of cancellation from the insurer and may be completely unaware that the insurance company or the contractor has cancelled the policy. Another method of dealing with the independent contractors hazard is to trans- fer the owner's liability in connection with the project to the contractor through a hold harmless agreement. Normally. the contractor will fund its contractual obli- gation to protect the owner through Contractual Liability insurance. ( See Public Liability Il- panes.) This method, too, can present problems. Unless the contractor has considerable assets, the contractor's Contractua! Liability insurance will be the only source of protection for a large judgment against the owner. If the Contrac- tual Liability coverage fails, in other worth, the contractor may be financially unable to hold the owner harmless. As in the additional insured situation. the owner is not a party to the contractors insurance and so may be unaware of policy cancella- tion or lapse. Another potential drawback to relying upon a hold harmless agree- ment is that courts have been known not to enforce hold harmless agreements in certain situations. Certainly, sound legal advice is a prerequisite to full reliance upon a hold harmless agreement. A third method of protecting the owner is the purchase of Protective Lia- bility insurance by the contractor in the name of the owner. (Likewise. a gen• eral contractor can gain protection by being the named insured of a Protective Liability policy purchased by a subcontractor.) Because the property owner is the named insured. the owner receives any lapse or cancellation notices from the Insurer. If the contractor has not paid premium as stipulated and (Osatlso" on nut P"*,) Public Liability Aic-2 PROTECTIVE LIABILiTY INSURANC& 11. C. aC S. BULLETI$(S r Deeembu. 10M the policy is in danger of lapse. the owner can pay the premium himself to continue the policy until other ararngements can be made. If Protective Lia- bility insurance is to be written in this way, a separate coverage part entitled "Owners and Contractors Protective Liability Insurance — Coverage for Op- erations of Designated Contractor" (OCP) is used. Like any other standard coverage part, the OCP form is attached to the General Liability jacket. The pages that follow. describe the provisions of the OCP coverage part. It is always possible, of course, that the contractov will be in a stronger Wr- gaining position than the owner, and insuring the independent contractor hazard will be the responsibility of the owner. In that situation, Protective Liability insur- ance as it is arranged in General Liability policies — Owners, Landlords. and Tenants (OIAT), Comprehensive General Liability (CGL), and so forth is more appropriate. See Public Liability Ai- pages. Insuring Agreement In a General Liability pxAcy such as OUT. CGL, or other, the independent contractors hazard is covered simply because there is no cxelusion pertaining to :ne hazard (or the exclusion has been deleted). The separate OCP coverage part applies only to the independent contractors hazard, and so the insuring agreement refers specifically to the exposure to be insured: brxlily injury or property damage "caused by an occurrence aril arising; out of (1) operations performed for the named insured by the contractor designated in the declarations at the location designated therein or (2) acts or omissions of the named insured in connection with his general supervision of such operations." The designated contractor and the designated location are stated in the declarations. The designated contractor, of course, is the contractor (or subcontractor) that purchases the OCP coverage in the name of the owner (or general contractor). and the designated location is the site of the project. The insuring agreement includes the usual provisions regarding the insurance company's duty to settle or defend suits or claims against the insured. This is an important aspect of OCP coverage, in that a suit for damages is likely to name all possible parties. Exclusions The extiusimm of the OCP coverage part are of course instrumental in defining the insuring agreement. Of the ten exclusions. two are unique to the OCP form. The first of these exclusions, exclusion "b." eliminates any coverage under the OCP form for bodily injury or property damage occurring after the designated con- tractor has competed the project at the described location. Service, maintenance, or repairs follov.+ing completion are specifically rxcepted from this portion of the exclusion, however. The exclusion goes on to state that there is also no coverage for bodily injury or property damage occurring after "that portion of the desig- nated contractor's work out of which the injury or damage arises has been put to its intends' by any person or organization other than another contractor or iCuntinued ON next peg*.! F. C. ! S. BULLETINS Public Lia ceesa « a s.., see"00 OCT COVERAGE PARTAic-3 Dftvmbw. 1980 subcontractor engaged in performing operations for a principxil a.: a p.-trt of the same project." The effect of the exclusion is to restrict UCI' coverage to operations in progress. If the named insured of an OCP form is a property owner, exclusion "b" eliminates coverage in the OCP form for occurrences that are already covered in the insured's Premises and Operations Liability insurance. That is, once the contractor's work is completed. any liability resulting from that completed work and falling upon the owner is a subject of the owner's Premises and Operations coverage. Naturally, if the ultimate fault for the injury is attribu- Uble to the designated contractor, the owner's Liability insurer has the right to take action against the contractor. If the named insured of an (X:1' form is a general contractor ( that is, a sub- contractor has purchased the pancy in the name of the general contiactor), exclu- sion "b" eliminates any coverage that the general contractor would have for bodily injury or property damage arising out of connpleted operations performed by a subcontractor. if, for example, a guest in the property owner's establishment were injured by a defect in the subcontractor's completed work and succeeded in winning damages from the general contractor. the general contractor would not have cov- erage under its OCP form. Rather, the general contractor's appropriate source of insurance recovery would be its own Completed Operations coverage. (See Public Mabiiity Prb- pages.) (Note. however, that even Completed Operations coverage - - does not cover liability for property damage to work performed by or on behalf of the named insured. See Public Liability Pri- pages for further comment on the so-called Injury to Work Performed exclusion.) Another exclusion unique to the OCP form is of bodily Injury or property damage arising out of any act or omission of the named Insured or an em- ploys of the: named insured, other than the named insured's supervision of work perfetrsed by the designated contractor.. This exclusion is actually more in the way of a reinforcement of the OCP insuring agreement than a limita- tion on conragc Any act or omission of the named insured falling outside the supervisory role is more properly a subject of the insured's Pretnisei and Operations Liability insurance. Gare, Custody. or Control Bxelesion The Care. Custody. or Control exclusion of the OCP form has two notable differences from the usual wording. The exclusion, which in' other General Lia- biiity .forms applies to property damage to (1) 'property owned or occupied by or rented to the insured. (2) property used by the insured, and (3) property in the cam custody, or control of the insured or as to which the insured is for any pur- pow exercisi� physical control, is broadened in the OCP fohn with the addition of s.fourth section. "property damage to ... (4) work performed for' the insured by the .designated contractor." The effect of the added language can be'seeen, for exampk where the insured is the general contractor of a project and the desig- to..u..w .w sst Mit.) LS Public Liability Aic-4 PROTECTIVE. LIARILITY—EXCLUSIONS F. C. & S. BULLETiNS n rM.b". logo touted t .uh) contractor i, erecting a Lyall. I i, because of the subcontractor'., faulty workm:urship, the wall o4lapses during construction and injures a passerhy, th.: 00' will apply to a resulting claim against the general contractor. If. however, the prs,ikrty owner ImIge., r claim against the general contractor for dantage to the wall it'eli, the added Language will prevent coverage under the general contractor's OCI' I,olicy. The other altrration of the hare, Custody. •,r Control exclusion is the deletion of the twt) exceptions that normally iollow the exclusion in other General Liability forms. The first exception covers damage to property used by or in the care, eu.- Nxh•, or control of the insured, provided that reslxwnsibility for the property was assurrred under :a written sidetrack agreement. The second exception provides that property in the carr. cu.taly, or control of the insured --- other than property owned, occupied, rented, or used by the insured — damaged as a result of use of an elevator at I,retni.eS owned, rented, or controlled by the named insured is covered (except damage to the elevator itself). With respect to the sidetrack excep- tion, it seems highly unlikely, if not impossible, that the named insured of an OCP policy could become vicariously liable for a designated contractor's obligation under a sidetrack agreement. likewise. the elevator exception has no conceivable appli- cation within the OCP framework. in other words, neither exception is relevant to the independent contractor% hazard and their deletion does not raise a coverage problem for the OCP insured. For further comment oil the Care, Custody. or Control exclusion in general, see Public Liability Dpe- pages. Business Risk Exclusion Although exclusion "j" of the OCP form is identical to an exclusion common to other General Inability forms, it deserves special comment in regard to its OCP certtext. To paraphrase, the exclusion applies to loss of use of tangible property that has not been physically injured or destroyed resulting front (1) delay or lack of performance of a contract or (2) failure of products or work to perform as represented. Application of the Business Risk exclusion, as it is called. might arise in the OCP context as follows: a general contractor is the named insured under an OCP form. The designated (sub-) contractor fails to complete his portion of the work on time. causing a delay in completion of the project that pre- vents the owner from opening business as planned. If the owner sues the general contractor for loss of use of the premises. the OCP will not protect the general contractor, because of the Business Risk exclusion. There is an important exception to the exclusion. however. The exclusion does not apply to loss of use of undamaged property if the loss of use results from sudden and accidental damage to work performed by or on behalf of the named insured after the work has been put to mce by any person other than an insured (of the OCP form). Idwnnwd on Kst DAN..) • f F- C. & 3. BULLETINS Public 'IbibiMy CM aOUT s Bartely S.ettt�lt OCP COVERAGE PART Aic-a >� December, t VtiY There are few i►ossibilities of application of thi exception under the 00" form. First, there is exclusion "b," discussed earlier, of IxxIdy injury or prolxrty damage occurring; after all work :at the premises is completed or after that par- ticular part of the designated contractor's work has been lout to it: intemled use by anyone other than another contractor or subconractor. Say, for example. that a general contractor for the construction of a new store is the named insured of an OCP form purchased by the heating; and electrical subcontractor. hollowing; the compaction of the building;. the furnace failt, because of faulty installation by the sutwontractor, and the store is forced to close down for a week. The store makes a loss of use claim against the general contractor. Will the general con- tractor's OCP apply to the loss? If the furnace merely failed to meet the lest) of performance warranted by, the named insured. perhaps because it was not of sufficient capacity for the building, the named in<ured's coverage for the claim is flatly excluded by the Business Risk exclusion. If, instead, the furnace's failure resulted from a sudden and accidental burnout of its wiring, the Business Risk exclusion would ►tot apply, because of the excep- tion to the exclusion described earlier. Still, h!►wever, there would be no coverage for the claim, because of exclusion "b." All work on the Project ivas completed at the time of the loss. Even if all work on the project had not been completed at the time of loss and the furnace had not been put to use by the owner, the possibilities for coverage are still slight. If, for example, the suLcontractor had completed work on the furnace and only the general contractor had put the furnace to use at the time of its injury, exclusion "b" would not apply to the owner's loss of use claim —but the Business Risk exclusion would. Simply, the excep- tion to the exclusion would no longer apply. The injury to the furnace, al- though sudden and accidental, occurred after the subcontractor's work had been put to use by the named insured. The exception to the Business Risk exclusion is applicable only when the work has been put to use by someone •'other than an insured." The only possibility for coverage in this instance, it seems, is if the sub- contractor had put its work to use but had not yet turned it over to the general contractor or owner. In these circurnsances only, exclusion "b" does not apply and the exception to the Business Risk exclusion does apply. Other Exclusions The remaining exclusions of the OCP form are also common to other General Liability forms a. -.d do not present special cmnplications. Exclusion "a," of assumed liability. is substantially the same as found in other forms. The effect of Exclusion "a" in the context of the Independent Contractors coverage of other General Lia- bility policies is discussed on Public Liability AiA (O"tlawd M se:n pace.) Public Liability Aic-6 13ftemlow. tow 'r • . -o OCP COVERAGE PART F. C. & S. BULLETINS The other OCP exclusions are idzntical to those of other forms: the ex- clusion of pollution or contamination (see Public Liability Cop-) ; the War exclusion; the exclusion of obligations under workers' compensation or simi- lar laws; the exclusion of employment related injuries or any obligation of the insured to indemnify another because of damages arising out of such injuries; and the exclusion of the use of mobile equipment in prearranged or organir:ed racing, etc., or the use of snowmobiles or their trailers. 'hhe OCP form has no exclusion of automobiles, and so the named insured is protected for liability resulting from the use of an ailtomobilr within the scope of activities described in the insuring agreement. Limits —Elating The OCP coverage part is written subject to three limits — a limit for bodily injury to all persons injured in a single occurrence, a limitforall property damage per occurrence, and an aggregate property damage limit. The fo:m stipulates that if more than one project is designated in the schedule, the aggregate limit is to apply separately to each project. Premium development for the OCP coverage part is governed by the same Commercial Lines Manual rules and rates that apply to the independent contractors hazard of General Liability policies. See Public Liability Ai- pages. Y."