Builder's Risk Coverage for Construction Defects...

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Presenting a live 90-minute webinar with interactive Q&A

Builder's Risk Coverage for Construction Defects

and Accidents Caused by Defective Workmanship Navigating Mere Defective Workmanship, Accidents and

External Causes, Express Exclusions, and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, JANUARY 26, 2017

Finley T. Harckham, Shareholder, Anderson Kill, New York

John S. Torigian, Member, Krell & Torigian, Houston

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BUILDER’S LIABILITY COVERAGE FOR CONSTRUCTION DEFECTS AND ACCIDENTS

CAUSED BY DEFECTIVE WORKMANSHIP

Stafford Publications Webinar

1 p.m. EST

January 26, 2017

5

John S. Torigian Krell & Torigian

Houston, Texas

Finley T. Harckham Anderson Kill

New York, N.Y.

© 2017

SPEAKER INTRODUCTIONS

• John Torigian

• Finley Harckham

6

Overview

• Evolution of the contractor business model

• Business risk – reduced quality controls

• Insurance implemented

• Commercial General Liability Policy (CGL)

• Provides coverage for:

• Ongoing operations

• Completed operations

7

1986 GCL Form

• Initial preclusion of subcontractor defective work

• Creation of “Broad Form Property Damage Endorsement” (BFPD)

• Limited coverage for defective work

• Incorporated into 1986 GCL policy

• “Subcontractor Exception to Your Work Exclusion”

8

2000 GCL Form

• Modification – “Damage to Your Work”

– "Property damage" to "your work" arising out of it or any part of it and included in the "products completed operations hazard".

– This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

9

Insuring Agreement in Section I, Coverage A, 1

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of ...“property damage” to which this insurance applies.

b. This insurance applies to...“property damage” only if:

1) The...“property damage” is caused by an “occurrence” that takes place in the coverage territory;

2) The...“property damage” occurs during the policy period; and,

3) Prior to the policy period, no insured knew that the “property damage” had occurred.

10

Definitions

“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

“Products-completed operations hazard”:

• Includes all “bodily injury” and “property damage” occurring away from premises you own or rent and arising out of “your product” or “your work” except:

– Work that has not yet been completed or abandoned. However, “your work” will be deemed completed at the earliest of the following times:

• When all the work called for in your contract has been completed. • When all the work to be done at the job site has been completed if your

work calls for work at more than one job site. • When that part of the work done at the job site has been put to its

intended use by any person or organization other than another contractor or subcontractor working on the same project.

11

Definitions

An “Occurrence” may trigger multiple policy periods.

– Property damage can occur gradually.

– Trigger of coverage varies from state to state

• Manifestation

• Injury in fact

• continuous trigger

12

Definitions

“Property damage” means:

– Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

– Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

“Your work” means “work or operations performed by you or on your behalf …

and includes “warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of ‘your work’ …”

13

Business Risk Exclusions This insurance does not apply to . . .

Damage to Property

– “Property damage” to: • That particular part of any property that must be restored, repaired or

replaced because “your work” was incorrectly performed on it

• Exclusion does not apply to “property damage” included in PCOH coverage.

– “Property damage” to • “that particular part of real property on which you or any subcontractors

are…performing operations, if the Property Damage arises out of those operations”

– Issues re: “particular part” exclusions • What does “particular part” mean?

– The entire job site?

– Just the part of the jobsite being worked on at the time of the accident?

– Differing court interpretations

– May depend upon the facts 14

Business Risk Exclusions

This insurance does not apply to . . .

– “Property damage” to:

• “premises you own, rent or occupy.”

– Common issue:

• What property does the contractor “occupy”?

• Majority view – just areas where temporary offices and equipment are stored.

• Minority view – all areas under the contractors’ control.

– examples

15

Contractual Liability Coverage Issues

• Exclusion for liability “assumed in a contract or agreement”

– Two exceptions:

1. If the insured would have been liable in the absence of a contract or agreement.

2. Liability assumed under an “insured contract”.

16


• First Exception – When would the insured have been liable in the

absence of the agreement?

• If the contractor would have been liable in tort.

• In other words, if the construction contract did not include an indemnification obligation and contractor was at fault.

• What about liability of a subcontractor?

– In many states contractor is not liable for subcontractor negligence

17


• Second Exception A. What is an “insured contract”?

• Standard definition: “that part of any contract or agreement…under which the insured assumes the tort liability of another party to pay for bodily injury or property damage to a third person or organization”

B. Issues: 1. Whose liability must the insured be assuming?

• The liability of its counterparty in the insured contract to a third party?

rationale – “another party” must mean another party to the insured contract

APL Co. v. Valley Forge Ins. (9th Cir. 2013)

18


1. Whose liability must the insured be assuming? (cont’d)

• the liability of any other party to any third party? – e.g., the liability of a subcontractor to the counterparty.

rationale – “another party” can mean anyone who is indemnified.

Colony National v. Manitex (5th Cir. 2012)

• Court decisions are mixed:

modified construction policies makes clear it can be the assumption of liability of a subcontractor to the owner.

uses “another party” and “third party” interchangeably.

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1. Whose liability must the insured be assuming? (cont’d)

• Example:

Solely for purposes of liability assumed in an Insured Contract for a third party, reasonable attorney fees and necessary litigation expenses incurred by or for that third party are deemed to be damages because of Personal and Advertising Injury provided:

1. Liability for such third party, or for the cost of that third party’s defense has also been assumed in the same Insured Contract, and

2. Such attorney fees and litigation expenses are for defenses of that third party against a civil or alternative dispute resolution proceeding in which damages to which this policy applies are alleged.

20

Business Risk Exclusions

This insurance does not apply to . . .

Damage to Your Work

– "Property damage" to: • “Your work” arising out of it or any part of it and included in PCOH

coverage

• Exclusion does not apply if the work was performed by a subcontractor.

21

PCOH COVERAGE

• Damage to work in progress is NOT Covered under PCOH Coverage.

• Damage to “your work” or arising out of “your work” (the work of the insured) is not covered.

• Damage caused by subcontractors working on your behalf is not covered, unless it is within the scope of the products completed operations hazard (PCOH) coverage.

22

PCOH COVERAGE

• Applies to claims for post-completion property damage.

• A subcontractor must be at fault.

– The “subcontractor exception” eliminates the “your work” exclusion if the damage is caused by a negligent subcontractor.

• Is damage to the “defective” work itself covered?

23

Emerging Law 1. American Family Mutual Insurance Company v. American Girl, Inc.

(Wis. 2004) 268 Wis.2d 16 (“American Girl”);

2. Lee Builders, Inc. v. Farm Mutual Bureau Insurance (Kan. 2006) 281 Kan. 844 (“Lee Builders”);

3. Travelers Indemnity Company of America v. Moore & Associates (Tenn. 2007) 216 S.W.3d 302 (“Moore & Associates”);

4. Lamar Homes, Inc. v. Mid-Continent Casualty Company (Tex. 2007) 242 S.W.3d 1 (“Lamar Homes”);

5. United States Fire Insurance Company v. J.S.U.B., Inc. (Fla. 2007) 979 So.2d 871 (“J.S.U.B.”);

6. Auto Owners Insurance Company v. Newman (S.C. 2009) 385 S.C. 187 (“Newman”);

7. Architex Association, Inc. v. Scottsdale Insurance Company (Miss. 2010) 27 So.3d 1148 (“Architex”); and

8. Sheehan Construction Company, Inc. v. Continental Casualty Company (Ind. 2010) 935 N.E.2d 160 (“Sheehan”).

24

Proper Analysis for Coverage for Completed Projects

• Evaluate the policy as a whole. Look first at the initial grant of coverage, then at any “exclusions” and then at any “exceptions” to exclusions.

• Threshold question: Is the claim for “property damage” caused by an “occurrence”?

• How has the state law defined “accident”?

25


• Sample definitions of “accidents” deemed to be “occurrences”:

– “An event not reasonably to be foreseen, expected and fortuitous” including “negligent acts of the insured causing damage which is undesigned and unexpected.” Moore & Associates (Tenn. 2007)

26


• Sample definitions of “accidents” (cont.):

– Faulty workmanship that is neither intended nor expected from the standpoint of the contractor. J.S.U.B. (Fla. 2007)

– “An unexpected happening or event, which occurs by chance and usually suddenly, with harmful result, not intended or designed by the person suffering the harm or hurt.” Newman (S. C. 2009)

27


• Determine whether the insured’s faulty workmanship was intended or accidental—depends on the facts and circumstances of a particular case.

• Argue that “business risk exclusions” would be unnecessary if:

– No construction defects, whether negligently or intentionally caused, were included in the insuring agreement

– No losses caused by breach of contract could ever be “occurrences”

28


• Determine whether a subcontractor’s work caused damage to the completed project.

29

Typical Insurer Arguments

• The CGL policy covers tort claims not breach-of-contract claims.

• The economic loss rule prohibits CGL coverage for breach-of-contract claims.

• Defective work cannot be an “occurrence” because it is not accidental; contractors should expect faulty workmanship to result in property damage.

• CGL policies are not performance bonds.

30

Responses to Insurer Arguments

• “Occurrence” definition does not distinguish between “tort” and “contract” claims but is instead broad in scope; ISO issues a “breach of contract” endorsement, not present in the post-1986 standard form CGL policy.

• Economic loss rule is a liability defense or remedies doctrine, not a test for coverage; “economic loss” is nowhere mentioned in CGL policy.

31


• Failure to perform under a contract is not always intentional; accidental, inadvertent acts of contractors that cause property damage are covered. CGL policies provide coverage for accidental, inadvertent acts of contractors even if they breach a contract so long as there is damage to a person or property.

32


• True. CGL policies and performance bonds are two different products.

33

The Occurrence Issue

• Two main lines of authority on construction project negligence:

– If the damage is the unintended result of faulty

workmanship, it is an “accident” and a potentially covered “occurrence.” See recent Supreme Court decisions in Florida (J.S.U.B. and Pozzi), Texas (Lamar Homes) and Tennessee (Moore and Assoc.).

– If the damage is construction-related, it is the result of an

intentional act and cannot be an accidental occurrence. See Pennsylvania Supreme Court decision (Kvaerner).

34

Subcontractor Activities Causing “Property Damage”

1. Negligent soils engineering advice that caused the building foundation to sink and the rest of the structure to buckle and crack. American Girl—Wisconsin Supreme Court.

2. Leaking windows leading to cracking and leaking of the exterior stucco of a home. Lee Builders—Kansas Supreme Court.

3. Cracking sheetrock and stone veneer in a home caused by defects in the foundation. Lamar Homes—Texas Supreme Court.

4. Negligent application of stucco that resulted in water intrusion. Newman—South Carolina Supreme Court.

5. Failure to place rebar in the foundation of a home resulting in total loss of building. Architex—Mississippi Supreme Court.

35

Coverage Issues in All States

36

Coverage Allowed

Coverage Not Allowed

PCOH Coverage Not Addressed

Lower Courts’ Ruling Divided

If Jurisdiction Recognizes “Faulty Workmanship” As an Occurrence

Ask these questions to determine whether there is coverage:

1. Was the caused by an unexpected or unintended act of a subcontractor?

2. Did the faulty workmanship of the subcontractor cause “physical damage” to insured property or “loss of use” of the property within the definition of “property damage” in the CGL policy?

37

Your Property Exclusion

Exclusion (j)(6) does not exclude “property damage” included in PCOH coverage.

See American Girl.

38

Work Product Exclusion

The plain wording of exclusion (k) shows that “work product” does not apply to real property. See also Wanzek.

39

ISO Endorsements Remove Coverage

ISO Endorsement CG 22 94 10 01 EXCLUSION—DAMAGE TO WORK PERFORMED BY

SUBCONTRACTORS ON YOUR BEHALF • This insurance does not apply to:

• Damage To Your Work

• "Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."

ISO Endorsement CG 22 95 10 01 Exclusion—“Damage to Work Performed by Subcontractors on Your Behalf—Designated Sites or Operations,”

(Identical to CG 22 94 01 but applies only to those sites or operations designated in the schedule of the endorsement)

40

Warning Concerning OCIPs

Endorsement CR 0204 08 04 entitled “CROSS LAWSUITS AND CLAIMS EXCLUSION”

The terms of this endorsement remove coverage for all contractors included in Owner Controlled Insurance Program (OCIP).

41

CONTRACTOR’S OWN INSURANCE CAN BE ENDORSED TO BE “EXCESS OF WRAP”

• For completed operations coverage

• For operations coverage

43

DEFENSE COVERAGE

• Duty to defend is broader than the duty to indemnify

• Triggered by the mere “potential” of a covered claim

• Insurers may have a right to recoup if there is a finding of no covered claim

44

Conclusions

There are many pitfalls associated to purchasing insurance coverage that may be worth millions of dollars to you should defective work occur on one of your projects. The trend today across the country seems to be more towards coverage, but there are a number of products sold by the insurance industry that may take such coverage away.

A competent insurance coverage attorney is a necessity in determining whether or not coverage for defective work exists.

45

PANELISTS’ CONTACT INFORMATION

• John S. Torigian

– (713) 951-7603

– [email protected]

• Finley T. Harckham

– (212) 278-1543

– [email protected]

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