Builder's Risk Coverage for Construction Defects and Accidents Caused by Defective Workmanship

Transcription

1 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 THURSDAY, JANUARY 26, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Finley T. Harckham, Shareholder, Anderson Kill, New York John S. Torigian, Member, Krell & Torigian, Houston 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 BUILDER S LIABILITY COVERAGE FOR CONSTRUCTION DEFECTS AND ACCIDENTS CAUSED BY DEFECTIVE WORKMANSHIP Stafford Publications Webinar 1 p.m. EST January 26, 2017 John S. Torigian Krell & Torigian Houston, Texas Finley T. Harckham Anderson Kill New York, N.Y

6 SPEAKER INTRODUCTIONS John Torigian Finley Harckham 6

7 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

8 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

9 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

10 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

11 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

12 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

13 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

14 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

15 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

16 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

17 Contractual Liability Coverage Issues 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

18 Contractual Liability Coverage Issues 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. (9 th Cir. 2013) 18

19 Contractual Liability Coverage Issues 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 (5 th 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. 19

20 Contractual Liability Coverage Issues 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

21 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

22 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

23 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

24 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

25 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

26 Proper Analysis for Coverage for Completed Projects 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

27 Proper Analysis for Coverage for Completed Projects 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

28 Proper Analysis for Coverage for Completed Projects 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

29 Proper Analysis for Coverage for Completed Projects Determine whether a subcontractor s work caused damage to the completed project. 29

30 Typical Insurer Arguments The CGL policy covers tort claims not breachof-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

31 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

32 Responses to Insurer Arguments 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

33 Responses to Insurer Arguments True. CGL policies and performance bonds are two different products. 33

34 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

35 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

36 Coverage Issues in All States Coverage Allowed PCOH Coverage Not Addressed Coverage Not Allowed Lower Courts Ruling Divided 36

37 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

38 Your Property Exclusion Exclusion (j)(6) does not exclude property damage included in PCOH coverage. See American Girl. 38

39 Work Product Exclusion The plain wording of exclusion (k) shows that work product does not apply to real property. See also Wanzek. 39

40 ISO Endorsements Remove Coverage ISO Endorsement CG 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 Exclusion Damage to Work Performed by Subcontractors on Your Behalf Designated Sites or Operations, (Identical to CG but applies only to those sites or operations designated in the schedule of the endorsement) 40

41 Warning Concerning OCIPs Endorsement CR entitled CROSS LAWSUITS AND CLAIMS EXCLUSION The terms of this endorsement remove coverage for all contractors included in Owner Controlled Insurance Program (OCIP). 41

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43 CONTRACTOR S OWN INSURANCE CAN BE ENDORSED TO BE EXCESS OF WRAP For completed operations coverage For operations coverage 43

44 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

45 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

46 PANELISTS CONTACT INFORMATION John S. Torigian (713) Finley T. Harckham (212)