Occurrences in Construction Defects Claims

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Occurrences in Construction Defects Claims Navigating Divergent Views on Occurrence Issues to Maximize Coverage or Limit Liability Exposure TUESDAY, FEBRUARY 28, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Christopher C. French, Partner, K&L Gates, Pittsburgh Carl A. Salisbury, Partner, Kilpatrick Townsend & Stockton, New York Jeffrey Bolender, President, Bolender & Associates, Torrence, CA The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Conference Materials If you have not printed the conference materials for this program, please complete the following steps: Click on the + sign next to Conference Materials in the middle of the lefthand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

3 Continuing Education Credits FOR LIVE EVENT ONLY For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps: Close the notification box In the chat box, type (1) your company name and (2) the number of attendees at your location Click the SEND button beside the box

4 Tips for Optimal Quality Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial and enter your PIN -when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

5 Occurrences in Construction Defects Claims CARL A. SALISBURY

6 CARL A. SALISBURY Carl Salisbury is a partner on the Insurance Recovery Team at Kilpatrick Townsend & Stockton. He has more than 20 years of experience in the litigation and trial of complex commercial disputes. In addition to handling general commercial matters, Mr. Salisbury has more than 20 years of courtroom and trial experience in complex commercial insurance cases and has represented the full gamut of companies in disputes involving large insurance claims, from small and middle-market corporations, condominium associations, restaurants, and non-profit institutions, to Fortune 100 companies. He has helped corporate policyholders recover for insurance claims involving environmental pollution, workplace discrimination, bodily injuries and property damage, mold contamination, construction defects, and a variety of other commercial disputes. He received is law degree at Wake Forest University School of Law, where he was Managing Editor of the Wake Forest University Law Review. He also served as a judicial clerk to the Hon. Reynaldo G. Garza on the United States Court of Appeals for the Fifth Circuit. He is admitted to practice in New York; New Jersey; the U.S. District Court for the District of New York; the U.S. District Court for the District of New Jersey; the U.S. Court of Appeals for the Third Circuit; and the Supreme Court of New Jersey.

7 We re Talking About Property Damage Property Damage means: (1) physical injury to or destruction of tangible property which occurs during the policy period, including loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property that has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period. 7

8 Occurrence Coverage What is an occurrence? Typical policy definition: An accident, including continuous or repeated exposure to substantially the same general harmful conditions. But what is an accident? Usually undefined, but often considered to be an event that is unintended and unexpected. Is defective construction unexpected? 8

9 The Occurrence Issue Two main lines of case authority: If the damage is the unintended result of faulty workmanship, it is an accident and a potentially covered occurrence. If the damage is construction-related, it is the result of an intentional act and therefore not and occurrence. What about mistakes / negligent workmanship? 9

10 The Port Imperial Case The accidental nature of an occurrence is determined by analyzing whether the alleged wrongdoer intended or expected to cause an injury. If not, then the injury is accidental, even if the act that caused the injury is intentional. Port Imperial Condominium Association, Inc. v. K Hovnanian Port Imperial Urban Renewal, Inc., HUD-L

11 The Hathaway Case 6-1 decision. Faulty workmanship is an occurrence. Resulting property damage or bodily injury must be neither expected nor intended. Court rejected insurer s argument that faulty workmanship is not an occurrence because the underlying acts were performed intentionally. An occurrence can arise where faulty workmanship causes unforeseen or unexpected damage. American Empire Surplus Lines Insurance Co. v. Hathaway Development Co., S.E.2d, 2011 WL (Ga. Mar. 7, 2011) 11

12 The Business Risks Exclusions Three flavors: Damage to Property Damage to Your Product Damage to Your Work 12

13 Damage to Property Exclusion The insurance does not apply: That particular part of real property on which you or any contactors or subcontractors working directly or indirectly on your behalf are performing operations. The insurance does not apply: That particular part of your property that must be restored, repaired or replaced because your work was incorrectly performed on it. Key exception: The Damage to Property exclusion does not apply to property damage included in the products-completed operations hazard. 13

14 Products Completed-Operations Hazard Appears in Definitions section of the CGL policy. Courts uniformly treat it as an affirmative grant of coverage for certain kinds of damages arising from a contractor s product or work. If bodily injury or property damage occurs away from premises the contractor owns or rents and arises from the contractor s faulty workmanship or product, then the damage is covered under the products-completed operations hazard. Covers damage caused by a contractor s faulty construction or workmanship once the work is complete, e.g., after the contractor delivers the fully constructed building to the owner. 14

15 Damage to Your Product and Damage to Your Work Exclusions Damage to Your Product : Insurance does not cover Property damage to your product arising out of it or any part of it. Damage to Your Work : Insurance does not cover Property damage to your work arising out of it or any part of it and included in the products-completed operations hazard. Key Exception: Exclusion does not apply if the damage or the work out of which the damage arises was performed by a subcontractor. 15

16 Fitting the Pieces of the Puzzle Together The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. Questions to answer to determine if there is coverage: Is the damage an accident from the standpoint of the insured? Has the building been delivered to the Owner or put to its intended use? Was the defective construction the fault of a subcontractor? 16

17 Weedo and the New Jersey Federal Courts Pennsylvania National Mutual Casualty Ins. Co. v. Parkshore Development Corp., et al., No (3 rd Cir., Dec. 10, 2010) Relied on Weedo in holding While other courts have permitted an occurrence where faulty construction damages only the insured s own work, New Jersey courts foreclose such a possibility. Does not discuss the Damage to Your Own Work exclusion, which has an exception for work performed by a subcontractor. In a footnote, the Court observed that Subcontractors did all of the work at the condominium project. 17

18 Occurrences in Construction Defects Claims: Navigating Divergent Views on Occurrence Issues to Maximize Coverage or Limit Liability Exposure Webinar February 28, 2012 Copyright 2010 by K&L Gates LLP. All rights reserved.

19 Christopher French 19

20 Christopher French 20

21 Christopher French 21

22 Christopher French 22

23 Christopher French Courts Determinations of Whether Construction Defects Are Occurrences Christopher French, Construction Defects: Are They Occurrences? 47 Gonz. L. Rev 1 (2011) Extensive discussion of the issue, arguments and case law 23

24 Christopher French The Weedo Case Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979) Subcontractor applied Stucco to a house poorly Cracked and had to be replaced 24

25 Christopher French The Weedo Case Policy at issue contained 1973 standard form business risk exclusions Court held no coverage Court viewed claims essentially as breach of warranty claims 25

26 Christopher French The Weedo Case Court reasoned that the policyholder/contractor should be responsible for satisfying customers Court relied upon a 1971 law review article by Roger Henderson Professor Henderson s law review article was based upon the 1966 business risk exclusions, not the definitions of occurrence or property damage 26

27 Christopher French The Weedo Case Court never discussed whether faulty workmanship was an occurrence Court never analyzed whether faulty workmanship constituted property damage or caused property damage Business risk exclusions were redrafted in 1986 to reduce their scope 27

28 The Case Law Since Weedo Majority rule is that construction defects are occurrences Christopher French Supreme Courts of Alaska, Florida, Georgia, Indiana, Kansas, Minnesota, Mississippi, South Carolina, South Dakota, Tennessee, Texas and Wisconsin have held in favor of policyholder - See Gonzaga article, pp for list of cases 28

29 The Case Law Since Weedo Christopher French At least four states have passed statutes that effectively mandate that construction defects are occurrences. See Ark. Code Ann (9) (Supp. 2011); Colo. Rev. Stat (3) (2010); Haw. Rev. Stat (2011); Act of May 17, 2011, No. 26, 1, 2011 S.C. Acts at Pro-insurer holdings in Arkansas, Kentucky, Pennsylvania and West Virginia - See Gonzaga article, p. 27 for list of cases 29

30 Christopher French Courts Holding Construction Defects Are Occurrences Unless policyholder expected or intended its work to be defective, construction defects are occurrences Supreme Court of Florida s decision in United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007) is a leading example of a propolicyholder decision 30

31 Christopher French Courts Holding Construction Defects Are Occurrences Court rejects the insurer s arguments one by one Does not matter if it is foreseeable that the work was defective Damages resulting from a breach of contract can be an accident 31

32 Christopher French Courts Holding Construction Defects Are Occurrences Allowing recovery does not turn insurance policies into performance bonds - Performance bonds guarantee completion of project - Performance bonds cover owner of property, not contractor 32

33 Christopher French Courts Holding Construction Defects Are Occurrences Contractors cannot effectively control quality of subcontractor s work, so allowing insurance recovery does not encourage contractor or subcontractor to do sloppy work Definition of property damage does not distinguish between damage to the contractor s or subcontractor s work versus damage to other property 33

34 Christopher French Courts Holding Construction Defects Are Occurrences Weedo involved different business risk exclusions so it is of no precedential value The existence of business risk exclusions proves construction defects are occurrences - Exclusions would be unnecessary otherwise 34

35 Christopher French Courts Holding Construction Defects Are Occurrences if Property Other than the Work at Issue Was Damaged See Gonzaga article, pp for list of cases Basic reasoning is that policyholder did not expect or intend for property separate from its work to be damaged Poor reasoning because the contractor does not expect or intend its work to be defective 35

36 Christopher French Courts Holding Construction Defects Are Not Occurrences Because They Are Not Accidents See Gonzaga article, p. 35 for list of cases Pennsylvania Supreme Court decision in Kvaener Metals Division of Kvaener U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006) Coke oven battery contructed defectively 36

37 Christopher French Courts Holding Construction Defects Are Not Occurrences Because They Are Not Accidents Undefined term accident means unexpected, which implies more fortuity than is present in a construction defect situation Court did not explain what evidence, if any, supported a finding that the contractor expected or intended its work to be defective 37

38 Christopher French Courts Holding Construction Defects Are Not Occurrences Because They Are Not Accidents Court relied on Professor Henderson s 1971 article, which was based upon the 1966 business risk exclusions Court did not analyze business risk exclusions at issue 38

39 Christopher French Courts Holding Construction Defects Are Not Occurrences Because To Hold Otherwise Would Transform Insurance into Surety or Performance Bonds See Gonzaga article, pp for cases Very similar reasoning to decisions in which the courts held construction defects are not accidents 39

40 Christopher French Courts Holding Construction Defects Are Not Occurrences Because To Hold Otherwise Would Transform Insurance into Surety or Performance Bonds Basically a public policy argument in which courts want to force contractors to bear the financial responsibility for repairing their own defective work Courts that have reached such a conclusion ignore the definition of occurrence and do not analyze whether the contractor expected or intended its work to be defective 40

41 Christopher French Courts Holding Construction Defects Are Not Occurrences Because To Hold Otherwise Would Transform Insurance into Surety or Performance Bonds Such courts are also confused regarding the difference between a performance bond and insurance - One protects the owner, the other protects the contractor against third party claims 41

42 Christopher French Courts Holding Construction Defects Are Not Occurrences Because the Damages Are the Foreseeable Consequences of Intentional Acts See Gonzaga article, p. 41 for cases Courts reaching such a holding analyze whether the damage was foreseeable Circular reasoning: that damages may result from defective workmanship is obvious 42

43 Christopher French Courts Holding Construction Defects Are Not Occurrences Because the Damages Are the Foreseeable Consequences of Intentional Acts The reasoning of such decisions is unsound because it is often foreseeable that damages may result from negligence - That is reason people/companies buy insurance 43

44 Christopher French Courts Holding Construction Defects Are Not Occurrences Because the Damages Are the Foreseeable Consequences of Intentional Acts For example, people buy auto insurance because they know that accidents happen and, when they do, damage results - That does not mean they intend to cause the accidents that do occur 44

45 Occurrences in Construction Defects Claims Jeff Bolender INSURANCE COVERAGE COUNSEL 45

46 Jeff Bolender Managing Shareholder of Bolender & Associates, A Professional Law Corporation Memberships: California State Bar, 1994 Hawai i State Bar, 2006 District of Columbia Bar, 2007 Nevada Star Bar, 2008 LA County Bar Association Cark County Bar Association South Bay Bar Association Defense Research Institute Construction Law Section, Nevada State Bar Insurance & Health Law Section, Nevada State Bar Insurance Litigation Section, Hawai i State Bar Benjamin Aranda III Inns of Court Rolling Hills Plaza 2601 Airport Drive, Suite 360 Torrance, California jbolender@bolender-firm.com , ext. 106 INSURANCE COVERAGE COUNSEL 46

47 Jeff Bolender Managing Shareholder of Bolender & Associates, A Professional Law Corporation Recent Publications: Meeting the Challenges of Raising Insurance Issues at Mediation, DRI In-House Defense Quarterly, Autumn 2011 Hot Topics in Construction Defect Litigation and Related Insurance Coverage Issues, Nevada State Bar, October 2011 The Fun Never Ends - Key Insurance Coverage Developments from 2009 to 2010, DRI, September 2010 The ABC s of Analyzing a Liability Insurance Policy, Nevada State Bar, June 2010 Rolling Hills Plaza 2601 Airport Drive, Suite 360 Torrance, California jbolender@bolender-firm.com INSURANCE COVERAGE COUNSEL 47

48 Overview of Insurer s Perspective Occurrence Related Case Law Contract Interpretation Case Comment: Weedo Case Comment: J.S.U.B. Case Comment: Fire Insurance Exchange Case Comment: Specialty Services Single versus Multiple Occurrences INSURANCE COVERAGE COUNSEL 48

49 Occurrence Related Case Law Case law undeveloped in many states Existence versus number of occurrences Fundamental nature of occurrence issue -Per occurrence limit -Deductible/SIR -Coverage determinative Malleable concept INSURANCE COVERAGE COUNSEL 49

50 Occurrence Related Case Law Case law undeveloped in many states Existence versus number of occurrences Fundamental nature of occurrence issue Insuring agreement analysis, not exclusionary Deletion of expected or intended language -Property damage -Occurrence -Trigger of coverage -Known losses INSURANCE COVERAGE COUNSEL 50

51 Occurrence Related Case Law Case law undeveloped in many states Existence versus number of occurrences Fundamental nature of occurrence issue Insuring agreement analysis, not exclusionary Deliberate acts, unexpected or unintended losses Occurrence as causative event, e.g., liability-producing act Negligence not synonymous with occurrence or accident INSURANCE COVERAGE COUNSEL 51

52 Contract Interpretation Accident is not ambiguous in CD context Contra Proferentem: ambiguities interpreted against insurer Doctrine of Reasonable Expectations Three-part rule of interpretation: 1. Plain meaning governs: The terms must be read in their ordinary and popular sense in the context of the policy as a whole and the circumstances of the case. INSURANCE COVERAGE COUNSEL 52

53 Contract Interpretation Accident is not ambiguous in CD context Contra Proferentem: ambiguities interpreted against drafter Doctrine of Reasonable Expectations Three-part rule of interpretation: 2. Objective reasonable expectations: A true ambiguity must be interpreted in the sense the insurance company reasonably believed the policyholder understood the disputed policy language when the policy was issued, i.e., in accordance with the insured s objectively reasonable expectations. INSURANCE COVERAGE COUNSEL 53

54 Contract Interpretation Accident is not ambiguous in CD context Contra Proferentem: ambiguities interpreted against drafter Doctrine of Reasonable Expectations Three-part rule of interpretation: 3. Contra Insurer Rule: If the previous rule fails to resolve the ambiguity or uncertainty, the ambiguous language is resolved against the insurer as the drafter of the policy. AIU Ins. Co. v. Sup.Ct. (FMC Corp.) (1990) 51 Cal.3d 807, INSURANCE COVERAGE COUNSEL 54

55 Case Comment: Weedo 405 A.2d 788 (New Jersey 1979) [T]he question is whether th[e] policy indemnifies the insured against damages in an action for breach of contract and faulty workmanship on a project, where the damages claimed are the cost of correcting the work itself. While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting. Id. at 791. INSURANCE COVERAGE COUNSEL 55

56 Case Comment: Weedo 405 A.2d 788 (New Jersey 1979) [T]he question is whether th[e] policy indemnifies the insured against damages in an action for breach of contract and faulty workmanship on a project, where the damages claimed are the cost of correcting the work itself. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. Id. INSURANCE COVERAGE COUNSEL 56

57 Case Comment: J.S.U.B. 979 So.2d 871 (Fla. 2007) Case precedent shows the Court s holding was based upon a different definition of occurrence Definition of Occurrence : As defined in the policies, an occurrence is an accident, including continuous or repeated exposure to substantially the same general harmful conditions. U.S. Fire Insurance Co. v. J.S.U.B., Inc., 979 So.2d 871 (2007). INSURANCE COVERAGE COUNSEL 57

58 Case Comment: J.S.U.B. 979 So.2d 871 (Fla. 2007) Case precedent shows the Court s holding was based upon a different definition of occurrence J.S.U.B. s Rationale: The polic[ies] define occurrence as an accident but leave accident undefined. Thus, under our decision in CTC Development, these policies provide coverage not only for accidental events, but also injuries or damage neither expected nor intended from the standpoint of the insured. J.S.U.B., Inc., 979 So.2d at 883. INSURANCE COVERAGE COUNSEL 58

59 Case Comment: J.S.U.B. 979 So.2d 871 (Fla. 2007) Case precedent shows the Court s holding was based upon a different definition of occurrence CTC Development: [B]eing susceptible to varying interpretations, [the undefined term accident ] encompasses not only accidental events, but also injuries or damage neither expected nor intended from the standpoint of the insured. This definition comports with the language used in standard comprehensive general liability policies and with the definition of the term accidental set forth in Dimmitt as unexpected or unintended. State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1076 (Fla. 1998). INSURANCE COVERAGE COUNSEL 59

60 Case Comment: J.S.U.B. 979 So.2d 871 (Fla. 2007) Case precedent shows the Court s holding was based upon a different definition of occurrence Policy Definition in Dimmitt: [A]n accident including continuous or repeated exposure to conditions, which result in BODILY INJURY or PROPERTY DAMAGE neither expected nor intended from the standpoint of the INSURED... Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Corp. (Fla. 1993) 636 So.2d 700, 702 INSURANCE COVERAGE COUNSEL 60

61 Case Comment: J.S.U.B. 979 So.2d 871 (Fla. 2007) Case precedent shows the Court s holding was based upon a different definition of occurrence Faulty legal reasoning, unpersuasive precedent - J.S.U.B. relied on holding in CT Development - CT Development relied upon holding in Dimmett - Dimmett interpreted different policy language - CT Development s facts show no accident happened INSURANCE COVERAGE COUNSEL 61

62 Case Comment: Fire Insurance Exchange 104 Cal.Rptr.3d 534 (Cal. Ct. App. 2010) Homeowners mistakenly built on their neighbor s property Focus upon the act: Where the insured intended all of the acts that resulted in the victim's injury, the event may not be deemed an accident merely because the insured did not intend to cause injury. Indeed, it is well established in California that the term accident refers to the nature of the act giving rise to liability; not to the insured's intent to cause harm. Id. at 537. INSURANCE COVERAGE COUNSEL 62

63 Case Comment: Fire Insurance Exchange 104 Cal.Rptr.3d 534 (Cal. Ct. App. 2010) Homeowners mistakenly built on their neighbor s property Court s Rationale: [The homeowners] intended to build the house where they built it. Accepting their contention that they believed they owned the five and one-half foot strip of land and had the legal right to build on it, the act of construction was intentional and not an accident even though they acted under a mistaken belief that they had the right to do so. Id. at 540. INSURANCE COVERAGE COUNSEL 63

64 Case Comment: Specialty Services (3 rd Cir. 2010) 609 F.3d 223 (Penn. law) Installation of outdoor synthetic turf with splits in the subsurface impermeable membrane Defects caused drainage system to fail leading to the settlement of the subgrade and an uneven, unstable field surface Holding: Pennsylvania law interprets occurrence such that in order for a claim to trigger coverage, there must be a causal nexus between the property damage and an occurrence, i.e., a fortuitous event. Faulty workmanship, even when cast as a negligence claim, does not constitute such an event; nor do natural and foreseeable events like rainfall. Id. at 231. INSURANCE COVERAGE COUNSEL 64

65 Single versus Multiple Occurrences Developing nature of related case law - Earlier cases favored policyholders re: deductibles - Two lines of case law developed: cause vs. effect - Carriers employed earlier holdings to enforce per occurrence limit - Application to Self-Insured Retentions Endorsements Statement of the two rules: Effects Test: The determinative factor is the effect of an accident or event, with each resulting injury or instance of damage constituting a separate occurrence. Nicor, Inc. v. Associated Elec. & Gas Ins. Services Ltd., 223 Ill. 2d 407, , 860 N.E.2d 280, (2006). INSURANCE COVERAGE COUNSEL 65

66 Single versus Multiple Occurrences Developing nature of related case law - Earlier cases favored policyholders re: deductibles - Two lines of case law developed: cause vs. effect - Carriers employed earlier holdings to enforce per occurrence limit - Application to Self-Insured Retentions Endorsements Statement of the two rules: Cause Test: The majority of jurisdictions have adopted the cause test wherein the courts look to the cause of injury rather than its injurious effects to determine the number of occurrences. Chemstar, Inc. v. Liberty Mut. Ins. Co., 797 F. Supp. 1541, (C.D. Cal. 1992) aff'd, 41 F.3d 429 (9th Cir. 1994). INSURANCE COVERAGE COUNSEL 66

67 Single versus Multiple Occurrences Whittaker Corp. v. Allianz Underwriters, Inc. (1992) 11 Cal.App.4 th 1236 (Cal. law) - Defective panels sold and installed in 1,400 vehicles - One $5,000 deductible chargeable despite multiple injuries Chemstar, Inc. v. Liberty Mut. Ins. Co. (9th Cir. 1994) 41 F3d 429, 433 (Calif. law) - Manufacturer sued for defective plaster in 28 homes - One deductible because all damages resulted from same cause, i.e., failure to provide warning U.E. Texas One-Barrington, Ltd. V General Star Indemnity Co., (5 th Cir. 2003) 332 F.3d 274 (Texas law) - 19 apartment buildings sustained damage from leaking pipes - 19 deductibles owed because focus on event giving rise to liability INSURANCE COVERAGE COUNSEL 67

68 Multiple Occurrences The Problem: Defects in the installation of windows, the construction of balconies, and the sealing of seams where different materials meet all cause water intrusion and damage. The carrier argues that each defect is a separate occurrence requiring a separate deductible or SIR to apply to each. The Analysis: The occurrence is typically the cause. The policy defines occurrence as including continuous or repeated exposure to substantially the same general harmful conditions. The reasonable expectations of the insured. 68