The Life of a Construction Defect Claim

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1 The Life of a Construction Defect Claim Cradle to End Description of a SEWUP Construction Claim OCIP vs Traditional Insurance Plan Owner Controlled Insurance Program (OCIP) is a group of insurance policies purchased by the owner on behalf of the construction participants which covers the designated project. They are also known as Wrap ups because all of the insurance purchased by the owner are wrapped into one program. Who is insured: Owner (District) and all Contractors of any tier with whom are contracted to perform operations at a designated project site and who have enrolled in the OCIP. 1

2 The Traditional Insurance Model DISTRICT DESIGN LEGAL MANAGER???????? CONTACTOR A ACTOR B ACTOR C ACTOR D ACTOR E CONTACTOR F ACTOR G ACTOR H ACTOR I ACTOR J So what s the problem? 2

3 Life Cycle Construction Defect claims have a life cycle consisting of an occurrence or Manifestation of defect, an Investigative Period, and eventually it s end through Resolution by settlement or trial. Construction defect cases in California operate under the statutes of limitation and repose dictated in California Code of Civil Procedure sections 337 (four years Breach of Contract), (four-year window to bring suit for a "patent or obvious defect) and (10 year window to bring suit for "latent" or hidden defects) The last two periods commencing on the date of Substantial Completion. MANIFESTATION OF A DEFECT Three years after substantial completion water stains are noticed on decorative ceiling tiles. Director of Facilities investigates to determine if maintenance issue exists related to water intrusion via windows, roofs or penetrations in elevation. Maintenance issue is eliminated and Construction Defect is suspected. Director notifies Insurance broker or carrier at number of a possible water intrusion issue with damage being caused to carpet, ceiling tiles, baseboard, fixtures, etc. 3

4 Long Beach CCD Building T South Quad Complex Building 102,300 sq. ft. two story administration and classroom building Completed: 8/19/2009 Observation: Nov water stains observed on decorative wood ceiling panels Notice of Loss: 12/29/2011 Investigation begins: 01/12/2012 Suspected locations: roof tiles, parapet wall, scuppers Wet Carpet Observed After Rainfall 4

5 INVESTIGATION INVESTIGATION 24 to 48 hours after being reported a claim is opened, an adjuster is assigned and the investigation begins. The adjuster will contact both the District official and the General Contractor to obtain information on the status of the project, request copies of contracts and any other pertinent information related to the scope of work for the implicated contractor (s). 5

6 INVESTIGATION The adjuster will then, after review of all of the requested documents, consider appointing an independent expert who will conduct a visual inspection photographing the conditions if necessary and will make recommendations to the carrier for further inspections or testing, including Destructive Testing, if required. The expert will also recommend a testing protocol, including the location and scope of testing in order to identify the source of the damage. The District may elect to retain an expert of their own (at their own expense) to either conduct their own investigation or to oversee the carrier s expert and advise the District on the appropriateness of the Scope of Testing and the recommended Scope of Repair. Water Testing 6

7 Infrared Imaging During Testing IR Report Summary 7

8 Destructive Testing of Suspect Area Destructive Testing Begins 8

9 Leak Location Found INVESTIGATION The District has control in accepting the recommended protocol and scope of repair. If all parties are unable to reach an agreement then an independent arbitrator can be assigned to resolve the dispute and establish an acceptable Repair Protocol and Scope of Repair. 9

10 RESOLUTION Only after the source of the damage has been confirmed and estimates for repairs obtained willanoffertosettletheclaimbemadebythe carrier. If the District agrees, then the carrier will submit a Settlement Agreement and Release of all claims for review and signature. Once completed, funding will be made. FACTORS THAT CAN EFFECT SETTLEMENT Design issues- Often times issues related to design are discovered. The Commercial General Liability policy excludes damages caused by design requiring a tender of claim to the design/engineering professionals. Tolling Agreements- Allows for additional time if SOL will force litigation. All parties must agree in writing. Litigation required- If Tolling Agreement cannot be entered into. Recovery of Expert Fees and Costs- Stearman v Centex Homes (2000) 78 Cal App 4 th 613 California Civil Code of Procedure provides that an action shall be brought to trial within five years after the action is commenced against the defendant. If not, the case is Dismissed With Prejudice. 10

11 FACTORS THAT CAN EFFECT SETTLEMENT The Traditional Insurance Program is adversarial in nature forcing each implicated party to seeking apportion fault to another implicated trade resulting in protracted litigation, increased fees and costs and erosion of available limits. The average CD claim in a Traditional Insurance format lasts 24 to 36 months before settlement is achieved. Often times longer. The average OCIP claim lasts 10 months. Same Architect? 11