Construction Defect Claims: Impact of Horizontal vs. Vertical Exhaustion Rules on Multiple Layers of Coverage

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Construction Defect Claims: Impact of Horizontal vs. Vertical Exhaustion Rules on Multiple Layers of Coverage Navigating Allocation Among Contractor's Policies, Contractor and Subcontractor Policies, and Additional Insured Carriers WEDNESDAY, SEPTEMBER 9, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Rebecca DiMasi, Partner, Buchanan DiMasi Dancy & Grabouski, Austin, Tex. David G. Jordan, Partner, Saxe Doernberger & Vita, Hamden, Conn. John B. Wilson, Esq., Senior Vice President, Marsh Risk & Insurance Services, Denver, Colo. 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.

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5 David G. Jordan Saxe Doernberger & Vita, P.C., Hamden, Connecticut Rebecca DiMasi Buchanan, DiMasi, Dancy, Grabouski, Austin, Texas John B. Wilson Marsh Risk and Insurance Services, Denver, Colorado Strafford Webinar September 9, 2015

6 Coverage Overlap GC s Corporate Excess Insurance Sub s Excess Insurance (GC s AI Excess Insurance) GC s Corporate Primary Insurance Sub s Primary Insurance (GC s AI Carrier) General Contractor ( GC ) Promise to Indemnify Sub-Contractor ( Sub ) Promise to Procure Insurance 6

7 Relevant Issues Multiple parties Multiple layers of coverage in AI context Loss exceeds limits of a single primary policy 7

8 Which Insurer Responds First? Typically primary insurer of downstream party (Additional Insured Carrier) has initial obligation to defend and indemnify the claim. Priority is established by Other Insurance language commonly found in most CGL Policies e.g. This insurance is excess over: Any other primary insurance available to you covering you for damages for which you have been added as an additional insured by attachment of an endorsement. When such language is not present, primary carriers of Upstream and Downstream Parties may dispute priority. See e.g. Briarwoods Farm, Inc. v. Cent. Mut. Ins. Co., 22 Misc. 3d 427, 428, 866 N.Y.S.2d 847, 848 (Sup. Ct. 2008). Which Insurer Responds Second? The AI Excess carrier OR the corporate primary policy? Disputes arise when, as is often the case, the subcontractor s primary CGL policy is insufficient to cover the loss to the injured party. 8

9 Priority of Coverage 2 schools of thought: 1.Priority determined by provisions of Insurance Policies: Review language of competing policies other insurance clauses; 2.Priority determined by the provisions of the Trade Contract: Determine intent of parties regarding risk transfer by reviewing the indemnity and insuring provisions of the underlying contract. 9

10 Priority of Coverage Horizontal Exhaustion All available primary policies must exhaust first Focus on policy language, not underlying contract Excess policy is a payer of last resort 10

11 Priority of Coverage VERTICAL EXHAUSTION AI policies (primary & excess) exhaust before upstream party s primary policy Focus on underlying contract s indemnity obligation, not policy language Reflects intent of parties Avoids circuity of litigation 11

12 Priority of Coverage Horizontal Cases Illinois California New York Vertical Cases 4 th Circuit (Virginia) 5 th Circuit (Texas) 8 th Circuit (Arkansas) Missouri Kentucky 12 12

13 Horizontal Exhaustion - Bovis Horizontal Exhaustion: The Bovis Case Owner (DASNY) Const. Mgr. (BOVIS) Illinois $1M Primary Policy Gen. Ctr. (STONEWALL) Liberty $1M Primary Policy Westchester $10M Umbrella Steel Ctr. (SMI-OWEN) Elevator Sub. (AJ MCNULTY) Great American Concrete Sub. (J&A) QBE $1M Primary United $5M Umbrella Decedent 13

14 Horizontal Exhaustion: The Bovis Case Trial Court Apportionment of AI Coverage for Bovis QBE $1,000,000 J&A Primary UNITED $5,000,000 J&A Umbrella LIBERTY $1,000,000 Stonewall Primary WESTCHESTER $10,000,000 Stonewall Umbrella ILLINOIS $1,000,000 BOVIS Primary 14

15 Horizontal Exhaustion: The Bovis Case Appellate Court Apportionment of AI Coverage for Bovis QBE $1,000,000 J&A Primary LIBERTY $1,000,000 Stonewall Primary ILLINOIS $1,000,000 BOVIS Primary UNITED $5,000,000 J&A Umbrella Sharing pro rata WESTCHESTER $10,000,000 Stonewall Umbrella 15

16 Vertical Exhaustion Indemnity/Circuity of Litigation Wal-Mart Stores, Inc. v RLI Ins. Co., 292 F.3d 583 (8th Cir 2002) American Indemnity Lloyds v Travelers Property Casualty Ins. Co., 335 F.3d 429 (5th Cir 2003) 16

17 Vertical Exhaustion: The Wal-Mart Case 3 National Union $10M Primary 2 1 RLI $10M Excess St. Paul $1M Primary Wal-Mart Retailer AI Status Indemnity Cheyenne - Manuf. Contract required $2M Primary Obtained - $1M Primary/$10M Excess Settlement - $11M: St. Paul $1M/RLI $10M DJ Wal-Mart and National Union sought to avoid contributing to $10M paid by RLI Result St. Paul $1M/RLI $10M 17

18 Vertical exhaustion Circuity avoids of Litigation Circuity of Litigation : unnecessary legal steps which result in AI excess carrier paying for loss Horizontal Approach GC Sued GC tenders to AI primary and AI Excess carrier AI primary pays but AI Excess asserts GC s corporate primary must pay next GC s primary pays AI excess carrier pays (GC corporate limits replenished) Subcontractor tenders indemnity lawsuit to its excess carrier (b/c primary carrier exhausted) GC s primary subrogates to GC s interests and sues Subcontractor for indemnity 18

19 Circuity of Litigation Vertical Approach GC Sued GC tenders to AI primary and AI Excess AI primary pays first, then AI Excess carrier pays Upstream insurers argue against circuity of litigation, i.e., that it is a waste of judicial resources to require them to pay for their portion of the allocated loss and then have to recoup, via subrogation, that payment from the subcontractor s excess carrier. 19

20 Circuity of Litigation: Indemnity Ins. Co. of North America v. St. Paul Mercury Ins. Co., 74 A.D. 3d 21 (N.Y. App Div. 1st Dept. 2010) NY Appellate Division First Department in Manhattan held that a priority determination in a construction case is irrelevant if: 1. A court has found that the upstream additional insured s, i.e., the owner s or general contractor s, liability is strictly vicarious to that of the named insured subcontractor, and 2. The subcontractor's insurers agreed to defend and indemnify the upstream party without reservation or qualification. 20

21 St. Paul Mercury YONKERS (GC) Contractual Indemnity Additional Insured ROMANO (Sub) Primary $1 M St. Paul Horizontal Exhaustion Primary $1 M Royal Excess $5 M St. Paul Excess $10 M Indemnity Ins. CIRCUITY Indemnity Ins. can force St. Paul Primary to pay first under principle of horizontal exhaustion but Yonkers could then pass that liability back to Romano via contractual indemnity, which would flow back to Indemnity Ins. Court shortcuts that result by simply holding that horizontal exhaustion does not apply. 21

22 TRADE CONTRACT / POLICY ENDORSMENT IMPLICATIONS Primary and Non-Contributory Language Trade Contract between GC and Sub may require Sub to obtain primary and excess CGL coverage which includes GC as an additional insured, with such additional insured coverage primary and non-contributory to the coverage insuring the GC as a named insured. COMMERCIAL GENERAL LIABILITY CG THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. PRIMARY AND NONCONTRIBUTORY OTHER INSURANCE CONDITION This endorsement modifies insurance provided under the following: COMMERCIAL GENERAL LIABILITY COVERAGE PART PRODUCTS/COMPLETED OPERATIONS LIABILITY COVERAGE PART The following is added to the Other Insurance Condition and supersedes any provision to the contrary: Primary And Noncontributory Insurance This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that: The additional insured is a Named Insured under such other insurance; and You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured. CG Insurance Services Office, Inc., 2012 Page 1 of FRM 22

23 Changing Landscape Anti-Indemnity Statutes Impact upon Priority of Coverage Statutory limitations upon scope of indemnity obligation, diminish circuity of litigation argument Statutory Limitations upon Additional Insured Coverage restricts vertical exhaustion 23

24 Anti-Indemnity Statutes Legislative limitation on contractual indemnity agreements +/- 43 states recognize some form of anti-indemnity limitation in construction contracts Exceptions: AL, DC, ME, NV, ND, PA, VT, WY Insofar as the claim against the upstream party implicates such party s own negligence, the argument that the sub s excess carrier will ultimately pay whether vertical or horizontal exhaustion is applied may not be accurate! 24

25 Anti-Indemnity Statutes: Insurance Implications A number of states preclude GC from Requiring Sub to obtain AI coverage which protects GC from its own negligence e.g., California, Colorado, Kansas, Louisiana, Michigan, Montana, New Mexico, Oklahoma, Oregon and Texas A few states have given some (but not a clear) indication that the anti-indemnity prohibition extends to insurance e.g., Georgia and Ohio To the extent claims against the additional insured implicate its own negligence, the AI Coverage and GC s own coverage may both be required to provide indemnity 25

26 Changing Landscape Evolution of ISO AI Coverage Limitations upon the Scope of AI coverage directly impact the Horizontal / Vertical Exhaustion Debate. 26

27 Additional Insured Changes Limits: No more than contract provides Policy Limits Contract Requirements $10 Million $5 Million $1 Million $1 Million GAP $2 Million 27

28 Scope of Additional Insured Coverage In Re Deepwater Horizon, 2015 WL (Tex. Feb. 13, 2015) Limited additional insured coverage to the scope of contractual indemnity Broad application of contractual language to additional insured coverage, where such coverage was provided where required by contract 28

29 What happens when the insured settles with the primary carrier for less than policy limits? It depends on your jurisdiction and policy language... 29

30 Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) Settlement by insured with primary carrier did not eliminate excess coverage Excess carrier no rational interest in whether insured collected full primary limits Public policy: delay, promotion of litigation, chilling effect on settlements But parties could impose conditions precedent if they chose to do so 30

31 Cases following the Zeig rationale: Koppers Company, Inc. v. Aetna Casualty and Surety Company, 98 F.3d 1440 (3d Cir. 1996) (Pennsylvania law) (court did not focus on policy language; settlement with primary carrier functionally exhausted primary policy) Trinity Homes, LLC v. Ohio Casualty Insurance Company, 629 F.3d 653 (7 th Cir. 2010) (Indiana law) (policy was ambiguous; did not clearly require payment of full CGL limit) Rummel v. Lexington Insurance Company, 123 N.M. 752, 945 P.2d 970 (N.M. 1997) (policy language liability of the Company under this policy shall not attach unless and until the Insured s Underlying insurance has been paid or has been held liable to pay the total applicable underlying limits did not preclude underlying insurer from settling for less than its limits and being credited for the balance) 31

32 Comerica Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) Distinguished Zeig - lack of specificity in excess policy language Different result with specific policy language Public policy favors settlements, but can not supersede unambiguous policy language Policy required actual payment of losses by the underlying insurer 32

33 Cases following the Comerica rationale: Citigroup, Inc. v. Federal Insurance Company, 649 F.3d 367 (5 th Cir. 2011) (excess policies not ambiguous; plain language dictated primary carrier pay full limits before excess coverage was triggered) Qualcomm, Incorporated v. Certain Underwriters at Lloyd s, 161 Cal.App.4 th 184, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008) (policy language was not ambiguous; did not apply Zeig because it placed policy considerations above plain language, employed a strained interpretation of payment, and stated that parties could use express language) 33

34 Policy language supporting no excess coverage: Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367, (5 th Cir. 2011) (emphasis added) (a) all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities, (b) the full amount of the Underlying Insurance policies have been collected by the plaintiffs, the Insureds or the Insureds counsel, and (c) all Underlying Insurance has been exhausted. The insurer shall only be liable to make payment under this policy after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance. only after any Insurer subscribing to any Underlying Policy shall have agreed to pay or have been held liable to pay the full amount of its respective limits... in the event of the exhaustion of all of the limit(s) of liability of such Underlying Insurance solely as a result of payment of loss thereunder. 34

35 Policy language supporting no excess coverage: Qualcomm, Inc. v. Certain Underwriters at Lloyd s, 161 Cal.App.4 th 184, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008) Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability. Comerica Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) Policy required actual payment of losses by underlying insurer, and stated that the policy does not provide coverage for any loss not covered by the Underlying Insurance solely by reason of the reduction or exhaustion of the available Underlying Insurance through payments of loss thereunder. 35

36 Consolidated Ins. Programs: A.K.A Wrap Ups Helps avoid much of the finger pointing and allocation arguments involved when projects are insured by traditional programs Priority coverage issues still emerge with respect to unenrolled contractors and their insurance carriers 36

37 Wrap-up Coverage Priority Issues Disputes between Wrap and Non-Wrap Insurers Case Example: Certain Underwriters v. Ill. Nat l Ins. Co U.S. Dist. LEXIS (S.D.N.Y. 2015) Neither Wrap Manual nor Policies Other Ins. Clauses Caused Either Policy to Be Primary 37

38 Wrap-Up Coverage Priority Disputes Wrap-up Exclusions CASE EXAMPLE: Structure Tone, Inc. v. National Cas. Co., 13 N.Y.S.3d 52 (N.Y. App. Div. 1st Dep t 2015) Ins. Co. of The State of Pennsylvania Project Wrap-up Insurer National Cas. Ins. Co. CGL Insurer for KEC Structure Tone included as an AI Project CM - Structure Tone, Inc. (STI) ENROLLED IN WRAP UP Electrical Subcontractor - Kleinknecht Electric Co. Inc. (KEC) NOT ENROLLED IN WRAP UP KEC employee injured while performing work on the Project sues Project Owner and STI. STI seeks AI coverage under Nat l Cas. Policy. HELD: Wrap-up Exclusion under Nat l Policy applies to AIs, thus barring coverage for STI. 38

39 National Cas. Co. Wrap Up Exclusion This insurance does not apply to bodily injury arising out of either your ongoing operations or operations included within the products-completed operations hazard at the location described in the schedule of this endorsement, as a consolidated (wrap-up) insurance program has been provided by the prime contractor/project manager or owner of the construction project in which you are involved. (Emphasis added). 39

40 TAKE AWAYS Review all relevant policies to assess scope, limits, and other insurance provisions Determine applicable state/jurisdiction that may govern the policies and the trade contract(s) Upstream Parties (e.g., General Contractors and Owners) should insist upon primary and non-contributory language in downstream parties (e.g., Subcontractors ) insurance policies Upstream Parties should seek to include a vertical exhaustion provision in their own insurance policies Consider whether a consolidated insurance (a/k/a wrap-up ) program is cost-effective and otherwise appropriate for your project 40

41 Questions?

42 Contact Us David Jordan Rebecca DiMasi John B. Wilson