Workshop D: The Construction Defect Case: Litigating the Defect or Litigating To Coverage THE THRESHOLD OCCURRENCE ISSUE WHERE WE ARE TODAY Paul Sandars III Lum, Drasco & Positan, LLC Clifford J. Shapiro Barnes & Thornburg, LLP Patrick Wielinski Cokinos, Bosien & Young, PC
What Did We Tell You In 2009? The ability to obtain insurance coverage for construction defect claims was going to be a hot and divisive issue across the United States. 2
What happened? Hundreds of decisions whether construction defect claims constitute an occurrence Hundreds of decisions whether construction defects constitute property damage Hundreds of decisions regarding the various construction- specific policy exclusions And they don t agree! 3
The Context Remains The Same - Typical Construction Defect Case Residential Owners-Condo Developer/Owner Insurance Insurance General Contractor AEs/Design Consultants Insurance Subcontractors Material Suppliers Building Product Manufacturers Insurance Insurance Insurance 4
Construction Defect Insurance Analysis Flowchart INSURING AGREEMENT "Property Damage" "Occurrence" "Trigger"/"Known Loss"/Notice BUSINESS RISK EXCLUSIONS Course of Construction Completed Operations Exclusion "J5" Faulty Workmanship I Exclusion "J6" Faulty Workmanship II Exclusion "L" Your Work *** subcontractor exception*** Exclusion "K" Your Product Exclusion "M" Impaired Property 5
The Threshold Occurrence Issue 6
Definition of Occurrence Remains the Same Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. 7
The CGL Policy History Remains The Same CGL policy forms were materially changed during the past 40 years The changes NARROWED the constructionspecific exclusions to provide BROADER coverage 8
1973 Policy Form The Business Risk Exclusions This insurance does not apply to: (n) property damage to the named insured s products arising out of such products or any part of such products; (o) property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof; or out of materials, parts or equipment furnished in connection therewith. 9
Broad Form Property Damage Endorsement Work Performed Exclusion This insurance does not apply to: (o) property damage to work performed by the named insured arising out of the work or any portion thereof; or out of materials, parts or equipment furnished in connection therewith. 10
The Your Work Exclusion with the The Subcontractor Exception (1986) 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. 11
The Big Picture: Intended Framework of the CGL Policy Remains the same! The insuring agreement specifically anticipates the occurrence of property damage caused by defective work. The construction-specific exclusions are intended to frame the fortuitous losses that are covered, as opposed to business risks. The exclusions narrow and define the scope of coverage for property damage caused by CD claims. 12
But: Underlying Hostility and Poor Use of Stare Decisis Also Still Exists CGL policies just aren t intended to cover shoddy workmanship or warranty work The CGL policy is not a performance bond Law review articles say that the CGL policy is not intended to cover defective work claims oprofessor Henderson, 1971 13
So, what happened? Articles in ABA s The Construction Lawyer and elsewhere Several state supreme court decisions changed the law to recognize that construction defect claims can be an accidental occurrence Trend is toward recognizing an occurrence and possible coverage where there is damage to something other than the insured s own defective work (but some glaring exceptions) States still split - three main categories 50 state survey updated for January, 2016 14
50-State Survey 2016
The 50 State Survey - Three Categories YELLOW - Unintentional defective construction work is an occurrence. If the insured did not subjectively intend to perform defective work and the damages were not expected or intended, then an occurrence exists. ORANGE Defective construction standing alone is not an occurrence, but faulty workmanship (by the insured or its subs) that causes property damage to something other than the defective work itself can be an occurrence. Red - All damages caused by faulty workmanship are reasonably foreseeable and are not fortuitous; therefore any damage to the insured s entire scope of work (and possibly beyond) is not an accidental occurrence. 16
Where are we? As of January, 2016: YELLOW states 2014 = 22 2015 = 21 2016 = 18 Red states 2014 = 12 2015 = 12 2016 = 11 ORANGE states 2014 = 9 2015 = 11 2016 = 14 Gray = 5; White = 2 NOTE: 25 states still do not recognize subjective intent as the standard *. 17
YELLOW STATES Subjective Intent Not Expected or Intended Sheehan Construction Company, Inc. v. Continental Insurance Company, 935 N.E.2d 160 (Ind. 2010). Court aligned itself with those jurisdictions adopting the view that improper or faulty workmanship does constitute an accident so long as the resulting damage was not expected or intended. 935 N.E.2d at 169. Court explained that if the faulty workmanship is unexpected and without intention or design and thus not foreseeable from the viewpoint of the insured, then it is an accident within the meaning of a CGL policy. Id. 18 18
Subjective Intent North Dakota Sup. Ct. K&L Homes, Inc. v. American Family Mut. Ins. Co., 2013 ND 57 (April 5, 2013) (overruling Burd & Smith) There is nothing in the definition of "occurrence" that supports that faulty workmanship that damages the property of a third party is a covered "occurrence," but faulty workmanship that damages the work or property of the insured contractor is not an "occurrence."... We conclude faulty workmanship may constitute an "occurrence" if the faulty work was "unexpected" and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected. 19
Damage to Other Property Cases - Uncertainty Cases uniformly recite that where the property damage is only to repair and replace the insured s own defective work, there is no occurrence BUT they differ when the work of the policyholder damages other work not defectively installed that is part of the policyholder s own scope of work (which can be the entire project) Those that find an occurrence in this situation are ORANGE; other decisions are RED 20
Damage to Other Property Alabama Sup. Ct. Flip Flop Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2013 Ala. LEXIS 122, 2013 WL 5298575 (Ala. Sept. 20, 2013) Court held there can be no occurrence unless there is damage to property outside of the insured s scope of work. Homebuilder s scope of work was the entire home Therefore, the court held there was no coverage because the alleged defects and property damage were all related to the home. RED 21
Damage to Other Property Alabama Sup. Ct. Flip Flop (Ala. March 28, 2014) (2014 WL 1270629) It is not appropriate to use the kind of property damage at issue to determine whether there is an occurrence Performing defective work inadvertently is an accidental occurrence -- but the cost to repair or replace defective work itself is not property damage caused by an occurrence Damage beyond the defective work itself CAN be property damage caused by an occurrence -- even if it is to another part of the policyholder s OWN scope of work (here the home) 22
Subcontractor 2015 Case Damage to Other Property Old Republic Insurance Company v. Leopardo Companies Inc. et al., Case No. 1:14-cv-02421 (N.D. Illinois, March 11, 2015) Holds that alleged damage to property outside of an insured subcontractor s scope of work can constitute an occurrence Specifically rejects -- for insured subcontractors -- the argument that alleged property damage to any part of the entire building or structure cannot be an occurrence under Illinois law. 23 23
Big News! New Jersey Supreme Court To Reconsider Weedo Cypress Point Condominium Association v. Adria Towers LLC, 441 N.J.Super 369 (App. Div. 2015); No. 76348 (N.J. Oct. 29, 2015) (granting cert) Appellate court decision distinguishes Weedo because it construed 1973, not post-1986, policy forms Decision rejects argument that CGL policy is somehow turned into a performance bond if coverage exists States as majority rule that construction defects causing consequential damages constitute an occurrence 24
Take Aways Occurrence Issue State law remains split, but the trend appears to be in favor of finding an occurrence in the construction defect context where the defective work was not intended or expected by the policyholder The favorable law is significant for the duty to defend 25
Take Aways Occurrence Issue Of course, coverage does not depend solely on whether there is or could be an occurrence The battle is now increasingly focused on the constructionspecific policy exclusions And also, in some cases, the contractual liability exclusion 26
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Exclusions Re-Redux: Construction Defect Coverage Since 2009 Workshop D The Construction Defect Case: Litigating the Defect or Litigating to Coverage Patrick J. Wielinski Cokinos Bosien & Young
Waylon Jennings Mamas Don t Let Your Babies Grow Up to be Cowboys Mamas don t let your babies grow up to be cowboys Don t let em pick guitars and drive in old trucks Let em be doctors and lawyers and such 29
Traditional Business Risk Exclusions Exclusion j(5): Operations Exclusion j(6): Incorrect Work Exclusion k: Your Product Exclusion l: Your Work 30
Outlier Exclusions Exclusion m: Property not Injured/Impaired Property Exclusion b: Contractual Liability Exclusion n: Product Recall 31
1966-1973 Business Risk Exclusions (n) property damage to the named insured s products arising out of such products or any part of such products; (o) property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof; or out of materials, parts or equipment furnished in connection therewith. 32
1986 Your Work Exclusion l. 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. 33
Dynamic Duo: The Twisted Path from 1966 to 1986 CGL Forms Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979) 449 cases R. Henderson, Insurance Protection for Products Liability and Completed Operations What Every Lawyer Should Know, 50 NEB. L. REV. 415 (1971) 141 cases 34
Impaired Property/Property Not Physically Injured Exclusion Property damage to impaired property or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy, or dangerous condition in your product or your work ; or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. 35
Definition of Impaired Property Tangible property, other than your product or your work, that cannot be used or is less useful because: a. It incorporates your product or your work that is known or thought to be defective, deficient, inadequate or dangerous; or b. You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by the repair, replacement, adjustment or removal of your product or your work or your fulfilling the terms of the contract or agreement. 36
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Case Scenario - U.S. Metals v. Liberty Mutual U.S. Metals, Inc. v. Liberty Mut. Group, Inc., S.W.3d, 2015 WL 7792557 (Tex. Dec. 4, 2015) 350 defective flanges supplied by insured are welded in place in diesel units in two Exxon refineries One leaks, 20 others have anomalies Extensive damage to non-defective piping, insulation, etc., to replace the defective flanges 38
Case Scenario - U.S. Metals v. Liberty Mutual $16M claim settled for $6M, insured seeks $2.2M from Liberty which denies coverage Whether the installation of the flanges that were irreversibly attached to the refineries caused physical injury (property damage) to the refineries (tangible property) Insured argued that irreversible incorporation caused property damage, so that the costs of cutting out the defective flanges were covered 39
U.S. Metals Replacement of the Insured s Product or Work Can the third party s property be restored to use by the repair, replacement, adjustment or removal of the insured s product or work? If replacement or repair of the insured s product or work destroys the third party s property to which it is irreversibly attached, is coverage for that destroyed property also excluded as part of replacing the insured s product or work? 40
Replacement of the Insured s Product or Work U.S. Metals Your work means the named insured s own work or work performed on its behalf. Your product means goods or products manufactured or distributed by the named insured. Impaired property means property other than the named insured s products or work. 41
Replacement of the Insured s Product or Work - U.S. Metals Terms should be mutually exclusive? If the insured s work is intertwined with the work of others, the impaired property cannot be repaired by extracting the insured s work and replacing it? Should coverage depend on whether the terms replacement or repair include the third party s product? 42
Replacement of the Insured s Product or Work - U.S. Metals Court makes distinction between restoration to use versus replacement during repairs The diesel units were restored to use by the repairs so they constitute excluded impaired property Insulation, gaskets, etc. that were destroyed in the repairs were not restored to use, but were replaced and were not impaired property 43
Replacement of the Insured s Product or Work - U.S. Metals Court upheld coverage for the cost of ripping and tearing out non-defective work to repair or replace purely defective work But limited to property which cannot be restored to use, but which is destroyed in the process May not be limited to the impaired property exclusion context Parties have filed petitions for review 44
Contractual Liability Exclusion Bodily injury or property damage for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: (1) That the insured would have in the absence of the contract or agreement; or (2) Assumed in a contract or agreement that is an insured contract Insured Contract : contract in which the insured assumes the tort liability of a third party. Tort liability means liability that the insured would have in absence of contract. 45
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Contractual Liability Exclusion Gilbert Gilbert Tex. Const., L.P. v. Underwriters at Lloyd s London, 327 S.W.3d 118 (Tex. 2010) Contract to construct rapid transit railway right of way for DART. Flood while job in progress. Public entity has sovereign immunity Negligence claim against insured contractor eliminated under economic loss rule The insured agreed to repair any damage to the property of third parties or to reimburse the cost to the owner 47
Contractual Liability Exclusion Gilbert Assumption of liability in the Contractual Liability Exclusion means liability that extends beyond the obligations that the insured would have under general law Exclusion (b) bars coverage for property damage claim of neighboring landowner who was third party beneficiary of the insured s contract 48
Contractual Liability Exclusion Ewing Ewing Construction Co., Inc. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014) Garden variety defective work claim Addressed the standard implied warranty found in 3.5, AIA Document A201, General Conditions of the Contract for Construction Trial court ruled that the Contractual Liability Exclusion applied Gilbert 49
Contractual Liability Exclusion Ewing Certified Question Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, assume liability for damages arising out of the contractor's defective work so as to trigger the Contractual Liability Exclusion? 50
Contractual Liability Exclusion Ewing Allegations that a contractor failed to perform in a good and workmanlike manner and that it negligently performed its work under the contract were substantively the same A contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract and thus, does not assume liability for damages arising out of its defective work to trigger the Contractual Liability Exclusion 51
Contractual Liability Exclusion Crownover *Crownover v. Mid-Continent Casualty Co., 772 F.3d 197 (5th Cir. (Tex.) 2014) *Attempt to extend Gilbert to liability for breach of express warranty to repair defects, the equivalent of 12.2.2 of AIA Document A201 in the 2007 edition of the General Conditions. *Source of the insured contractor s liability was its express contractual duty to repair, and that alone was not sufficient to constitute an expansion of liability beyond that which existed under general law. *Express warranty to repair defective workmanship is no greater than an insured s general obligation to repair damages resulting from its failure to exercise reasonable care in performing work. 52
Product Recall Exclusion Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of: Your product ; Your work ; or Impaired property ; if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it. 53
Johnny Cash Ring of Fire I fell into a burning ring of fire, I went down, down, down and the flames went higher And it burns, burns, burns, The ring of fire, the ring of fire 54
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Workshop D: The Construction Defect Case: Litigating the Defect or Litigating To Coverage What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Paul A. Sandars, III Lum, Drasco & Positan LLC
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? State Courts and Federal Courts interpreting state law have numerous conflicting interpretations of occurrence and property damage as applied to disputes in those States. But what about State Legislatures? Have they weighed in? With those States who have, does it change anything for policyholders? In 2009, we did not predict any Legislative remedy. 57
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Colorado May 21, 2010 Colorado General Assembly enacted specific, detailed findings, including that: Insurance policies affecting construction professionals in Colorado was of vital importance to the economy and welfare of Colorado citizens Construction insurance policies were increasingly complex, often containing multiple, lengthy endorsements and exclusions conflicting with the reasonable expectations of the insured (emphasis added) 58
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Colorado General Assembly s findings (cont.) Correct policy interpretation of damage coverage is in the best interest of all interested parties insurers, construction professionals, and owners Colorado policy favors broad protection for insureds Insurers have a broad duty to defend, which is a first-party benefit General Security Indemnity Co. of Ariz. v. Mountain States Cas. Co., 205 P.3d 529 (Colo. App. 2009) failed to consider the insured s reasonable expectation that the insurer would defend on the policy 59
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Colorado General Assembly Findings (cont.) The statute was enacted to clarify and confirm the interpretation of CGL policies Gen. Security Indemnity Co. had found that claims of defective workmanship, on their own, were not an occurrence 60
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Thus, the Colorado passed a statute which enacts a presumption that the work of a construction professional, as defined in the policy, is an accident, unless the damage is intended or expected by the insured But, no coverage for damage to an insured s own work unless covered elsewhere No coverage which is not included in the policy In interpreting an occurrence a court may consider the insured s objective, reasonable expectations, and why the insured purchased the policy Exclusions do not appear to be limited 61
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Hawaii Enacted an occurrence statute on June 3, 2011 Not applied retroactively Construction professional and liability insurance policy are defined Occurrence not defined, but the statute should be read in harmony with the legislative findings Statute was amended in reaction to Group Builders, Inc. v. Admiral Ins. Co., 231 P.3d 67 (Haw. Ct. App. 2010) 62
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Hawaii, cont. Legislative Findings Legislature found that Group Builders created uncertainty and invalidated coverage which insureds understood to exist Prior to Group Builders, insureds had purchased policies with good faith understanding that property damage caused by construction defects were covered The sudden invalidation of these policies may be economically disastrous to contractors, building owners, injured persons, and the general public 63
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Hawaii, cont. Legislative findings An uninsured liability for damages to people and property could result in the loss of millions of dollars and business closure for the construction professional and the project Absence of redress for harmed individuals Therefore, law was enacted to restore coverage paid for by construction professionals, and to ensure the enforcement of their good-faith expectations in purchasing the policy 64
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? South Carolina South Carolina passed a statute, effective May 17, 2011, which mandated CGL policies to have occurrence language as follows: (1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and (2) property damage or bodily injury resulting from fault workmanship, exclusive of the faulty workmanship itself 65
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? South Carolina, cont. The amendment, though, is not intended to restrict or limit exclusions Supreme Court of South Carolina addressed the issue in Auto-Owners Ins. Co. v. Rhodes, 405 S.C. 584 (S.C. 2013) The Court addressed pre-amendment interpretation of occurrence in construction defect cases. South Carolina had previously followed the majority rule that faulty workmanship on its own was not an occurrence 66
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? South Carolina, cont. Prior case had held that subcontractor negligence resulting in property damage had fallen in the subcontractor exception to the your work exclusion, but the exception did not apply if the work was done by a subcontractor on behalf of the policyholder Ultimately, though, the Court found an occurrence based upon the specific facts in the case. 67
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Arkansas Occurrence statute was enacted in 2011. It adopts the ISO form language. Legislative history indicates that conflicting State court decisions had caused uncertainty with regard to coverage BUT the Legislature was careful to state that nothing in the definition was intended to restrict exclusions 68
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? New Jersey A Bill has been proposed in the Assembly, requiring the following definition of occurrence in a New Jersey CGL policy: a. an accident, including continuous or repeated exposure substantially the same general harmful conditions; and b. property damage or bodily injury resulting from faulty workmanship 69
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? New Jersey, cont. Notably, the bill expressly states that it does not limit or restrict the nature or types of exclusions No action has been taken on the bill But, the Supreme Court of New Jersey has granted certiorari in Cypress Point Condo. Ass n v. Adria Towers, LLC, 441 N.J. Super. 369 (N.J. App. Div.), cert. granted, 223 N.J. 355 (N.J. 2015) 70
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? New Jersey, cont. The Appellate Court held that unintended and unexpected consequential damages caused by defective subcontractor work constitute property damage and an occurrence in a CGL policy, based on a contractor s reasonable expectation that a subcontractor s work is different than a general contractor s work The New Jersey Supreme Court has taken up the question of whether those damages were property damage and an occurrence based on the subcontractor s work causing consequential damages to the common areas of a condominium and to individual unit owners property 71
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? New Jersey, cont. Weedo v. Stone-E-Brick FUGGETABOUTIT!! 72
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Conclusion These statutes all address allocation of risk between insurer and insured The occurrence battle is only the threshold Legislatures may be fearful of wading into this debate because if they are too pro-insured, insurers will not want to write policies in the state But, as Hawaii noted, the absence of insurance could lead to increased costs for owners and direct consumers, as well as to the state economy in general 73
What Constitutes an Occurrence in a CGL Policy? Legislatures in Five States Provide Guidance Or Do They? Conclusions, cont. In these states, it appears that policy holders may have one less battle, but will still have to fight against the exclusions. Perhaps Legislators should not be part of this debate. 74
*Questions? 75