Insurance Community University Construction Liability 1 The webinar will begin shortly. There is...

Insurance Community University

Construction Liability

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Disclaimer

Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state

jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by Insight do not

modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting

and Management Inc. In providing these materials, Insight assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of

the instructional materials provided. Copyright 2010 – 2011 All Rights Reserved

www.insurancecommunitycenter.comLaurie: 714.803.5830 [email protected]

Marjorie: 714.206.9583 [email protected]

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Your Instructor Today

Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR

Insurance Community Center, LLCDirector of Education

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Insight on Contractor’s Liability – Five Key Issues You Need To Know


Objectives

1. GC and Subcontractors Operational Exposures

2. Construction defect litigation risks 3. Occurrence coverage triggers and limitations 4. Definitions including BI; PD; Your Products;

Your Work; Products-Completed Operations Hazard and impact on insured contractors

5. Additional insureds including edition dates required by contract; waiver of subrogation; primary and non-contributory requirements

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General Contactor and Subcontractor’s Operational

ExposuresUnderstanding The

Construction Participants

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Land Owner

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Land Lease

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Easement

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Owner

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Developer

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Architect

• Planning, designing and (often) oversight of a building’s construction– Translates owner’s needs into builder’s

requirements– Must understand building codes and means

and methods of construction to • Create proper design• Comply with public safety • Means and methods of construction to produce

a properly built building

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Engineer

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Contractors

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Additional parties involved post-construction

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Owner

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Tenant

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Purchaser

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Potential Plaintiffs

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Why Are Contractors Sued?

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Why Are Builders Sued?

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Definition Of Legal Liability

• A responsibility or obligation of one party to another party that is enforceable in a court of law

• Legal liability can be imposed by:– Tort (Common Law)– Statute or regulation– Legal contract (Contract law)– Responsibilities assumed in a contract

• The contract may be oral or written

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DESCRIPTION OF TORTS

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Type of Tort

Measure Examples

Negligence Prudent person conceptWhat a person who is considered “prudent” would or would not do in the same or in a similar situation

Contractor fails to install scaffolding correctly and an employee of another contractor is injured when the scaffolding collapses


DESCRIPTION OF TORTS

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Type of Tort

Measure Examples

Strict liability

Liability that is based on or requires only proof of proximate cause (causation), not negligenceA liability concept evolving in civil courts whereby a party is responsible for injury or damage if arising out of a defect in design, manufacturing, marketing or completed buildings

Developer may be held liable (in some states) for the proper completion of a building project

Absolute liability

Responsibility without regard to fault or negligenceRes ipsa loquitor- “the thing speaks for itself”

Contractor uses explosives to clear a job site and bystanders are hurt by flying debris


The CGL Occurrence Policy

Responds when an insured is legally liable

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Occurrence Form

• The policy must be in force when the injury or damage takes place.

• Thus a contractor that closes down their business is still exposed to lawsuit years in the future and must continue to have coverage in place until the statute of repose is exhausted

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Occurrence Form

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Occurrence Form

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Policy Changes

• Known Loss or Damage– The policy contains language that says once

a claim or suit is known to specific “insureds”, such as a partner, officer, sole proprietor, there is no coverage in the next policy renewal. This is to remove stacking of limits and invoking more than one policy once the policyholder is aware of a loss.

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Policy Changes

• Prior Work Exclusions– Remove coverage for “occurrences” within

the current policy year that arise out of work performed and/or completed prior to the policy year.

– The prior policy year during which the work was performed and/or completed will not respond unless the “bodily injury” or “property damage” occurred during that policy year as well.

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Policy Changes

– This is a dangerous endorsement as it can leave the contractor insured without coverage.

– This is also a dangerous endorsement for Additional Insureds, such as General Contractors and Project Owners as it can leave them without coverage on the contractor’s policy.

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Re-Writing Dangers

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•Insured Pays•Claim Arises•Claim Submitted•Claim Denied


Occurrence Coverage Triggers And Limitations

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Contractors and their General Liability Coverage

Is there damage other than to the contractor’s own work?

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Auto-Owners Ins. Co. v. Pozzi Window Co. 984 So.2d 1241 (2008) (Florida Supreme Court)

• Homeowner sued for water intrusion damage to a multi-million dollar home caused by the negligent installation of custom windows

• The US Court of Appeals for the 11th Circuit certified a question to the Florida Supreme Court – Does PCOH coverage protect a GC against liability for

repair or replacement of a subcontractor’s “defective work”

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Auto-Owners Ins. Co. v. Pozzi Window Co. 984 So.2d 1241 (2008) (Florida Supreme Court)• The Supreme Court of Florida ruled that

there is no coverage for repair or replacement of “defective windows” installed by a subcontractor, as actions taken to remedy inclusion of construction defects are not “property damage” covered by a CGL form

• Affirmed by US District Court

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Auto-Owners Ins. Co. v. Pozzi Window Co. 984 So.2d 1241 (2008) (Florida Supreme Court)• It appears that the court states that

coverage is available to a general contractor for all liability arising from actual property damage caused by the subcontractor’s work, including damage to the subcontractor’s work, but that remedying substandard workmanship that does not cause cognizable damage is not covered.

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Contractors and their General Liability Coverage

Is the loss excluded from the policy?

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CG 22 94 / CG 22 95:

• The standard General Liability policy contains an exclusion removing coverage for any damage to “your work” but, more importantly, contains an exception to that exclusion.

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CG 22 94 / CG 22 95:

l. 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.

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CG 22 94 / CG 22 95:

• CG 22 94 and CG 22 95 removes the exception under exclusion l. that provides coverage for a contractor for damage arising out of work performed for them by a sub-contractor. CG 22 95 specifies the sub-contractors by name

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Exclusion – Damage To Work Performed By Subcontractors On Your Behalf (CG 22 94)Exclusion l. of Section I – Coverage A – Bodily Injury And Property Damage Liability is replaced by the following:2. ExclusionsThis insurance does not apply to:l. 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"

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Diamond Heights Homeowners Ass’n. v. National American Ins. Co. 227 Cal. App. 3d 563 (1991)• The insured was sued for defective work

in a condominium project• The insurer denied, based on exclusion

m. – the “business risk” exclusion

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Diamond Heights Homeowners Ass’n. v. National American Ins. Co. 227 Cal. App. 3d 563 (1991)• The trial court agreed with the insurer

and the decision was upheld in the appeals court

• The court stated that "such an exclusion gives the insured more incentive to perform the work properly and provides for a lower premium; the denial of coverage was proper"

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Willets Point Contracting Corp. v. Hartford Ins. Group 429 N.Y.S.2d 230 (1980)• Willets contracted with a county to

perform road repair and resurfacing. Their contract required that they allow ingress and egress to each property owner’s location that might be impacted by the job

• A service station owner sued for loss of profits when the public was denied access to the station

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Willets Point Contracting Corp. v. Hartford Ins. Group 429 N.Y.S.2d 230 (1980)• The court found there to be no coverage

due to exclusion m. and stated that "an examination of exclusion m. reveals a clear and unambiguous desire by the insurer to exclude from the coverage damages arising from the breach of representations or warranties made by the named insured as to the level of performance of its work

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Willets Point Contracting Corp. v. Hartford Ins. Group 429 N.Y.S.2d 230 (1980)• The decision was upheld by the New

York court of appeals in 1981

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Charles E. Brohawn and Bros., Inc. v. Employers Commercial Union Ins. Co. 409 A.2d 1055 (1979)• Brohawn constructed a concrete

pedestal which was designed to support a steam generator

• Before it was mounted, it was discovered that the pedestal was defective

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Charles E. Brohawn and Bros., Inc. v. Employers Commercial Union Ins. Co. 409 A.2d 1055 (1979)• Brohawn tendered for defense and the

carrier declined citing exclusion n. – the so-called sistership exclusion

• The court concurred with Employers Commercial that the policy exclusion applied as the defect was discovered prior to failing while in use

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Superior Steel, Inc. v. Bituminous Casualty Corp. 415 So. 2d 354 (1982)• Superior was sued for having installed

defective anchor bolts• The bolts did cause physical damage to

property, other than the product itself, after installation

• Exclusion n. was held not to exclude coverage

• The case was found for Superior Steel

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Construction Defect Litigation Risks

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Strict Liability

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Negligence

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Breach of Express Warranty / Contract

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Breach of Implied Warranty of Habitability

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Fraudulent Concealment / Misrepresentation

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Right To Cure Statutes

• Many states have in place statutes that require parties contending that damage is occurring from defects must take certain actions to contact the builder and the builder must take certain actions to remediate the problem all within proscribed timelines.

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Statutes of Limitations and Repose

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Statutes of Limitations

• A statute in the common law legal system that sets forth the maximum period of time, after certain events, that legal proceedings based on those events may be initiated

• These provisions are usually included in the civil code in the jurisdiction of the event

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Statutes of Limitations

• Imposition of statutes of limitation can be avoided or tolled by a number of equitable factors, such as the age of the injured party

• Some statutes of limitation only begin to run when the injury or damage to a third party is discovered

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Statutes of Repose

• This statute puts a time restriction on certain legal rights if they are not acted upon by a certain deadline

• A statute of repose is designed to bar actions after a specified period of time has run from the occurrence of some event other than the injury which gave rise to the claim

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Statutes of Repose

• Statutes of repose are enforced much more strictly than statutes of limitations

• All statutes of limitation are statutes of repose, but some statutes of repose operate differently from statutes of limitation

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Definitions including BI; PD; Your Products; Your Work; Products-Completed Operations Hazard

and impact on insured contractors

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CGL Exclusions

DAMAGE TO “YOUR PRODUCT” Excludes damage to the named insured’s product

DAMAGE TO “YOUR WORK” Excludes damage to the named insured’s work.

Covers work performed on the named insured’s behalf by subcontractors, working directly or indirectly on the named insured’s behalf.

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Definitions“Your Product”

21."Your product": a.Means: (1)Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by: (a)You; (b)Others trading under your name; or (c)A person or organization whose business or assets you have acquired; and (2)Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products. b.Includes(1)Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your product"; and (2)The providing of or failure to provide warnings or instructions. a.Does not include vending machines or other property rented to or located for the use of others but not sold. 65


Definitions“YOUR WORK” 22."Your work":

a. Means: (1) Work or operations performed by you or on your

behalf; and (2) Materials, parts or equipment furnished in

connection with such work or operations. b. Includes(1) Warranties or representations made at any time

with respect to the fitness, quality, durability, performance or use of "your work", and

(2) The providing of or failure to provide warnings or instructions.

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Additional insureds including edition dates required by contract; waiver of

subrogation; primary and non-contributory requirements

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Additional Insured Issues

• Who is covered• Scope of coverage• When coverage ends• Edition date available from insurer• Indemnity can start where AI language

stops coverage– Both are limited to the coverage, exclusions,

conditions and limitations in the policy

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Types of Insureds

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What is an Additional Insured?

• A person or organization, other than the named insured, who is protected by the terms of the policy as an insured

• These are in addition to those who have insured status within the standard policy.

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• Typically required in a business contract of which the Named Insured is a party.

• These parties have full rights to the policy protection, to the extent of the wording on the additional insured endorsement.

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• Generally added by endorsement or included by a company specific provision that is triggered by some requirement for this status by a written contract or agreement entered into by a named insured

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Basic Considerations Regarding Additional Insureds• Determine the interest of the additional

insured• Who is to be included?• Scope of coverage required by contract

vs. scope of coverage allowed by the AI endorsement– Edition date available from insurer

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Basic Considerations Regarding Additional Insureds• When does the coverage requirement

end in the business contract?• Additional insured status can provide

better response for the additional insured rather than just contractual liability

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Basic Considerations Regarding Additional Insureds• Can better protect Named Insured’s

coverage as defense costs are in addition to the limit for the Additional Insured, rather than within the limits under contractual

• Additional Insureds are not granted automatic notice of cancellation or non-renewal

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Basic Considerations Regarding Additional Insureds• Blanket additional insured

– Used on accounts where a significant number of Additional Insureds are needed

– Review the language for applicability– When required by contract– To the extent required by contract– Can provide broader coverage than the

business contract requires

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Common Additional Insured Endorsements to the CGL • Additional Insured – Owners, Lessees or

Contractors – Scheduled Person or Organization CG 20 10– Provides coverage for persons or

organizations involved in construction projects

– A number of editions issued since 1985 have contained significant changes in language affecting the coverage provided for the AI

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Common Additional Insured Endorsements to the CGL • CG 20 10 11 85 edition contained

extremely broad coverage for the AI– No scheduled person or organization– AI covered for sole negligence– Ongoing AND completed operations– Limited availability in the marketplace

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Common Additional Insured Endorsements to the CGL • The current CG 20 10 07 04 edition

affords coverage only for scheduled persons or organizations; ongoing operations; injury or damage to the third party is caused by, or partly caused by, the Named Insured

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Additional Insured – Owners, Lessees or Contractors – Completed Operations CG 20 37• To be used either stand-alone or in

conjunction with the CG 20 10 • Provides coverage for the AI for covered

loss as defined in the “products-completed operations hazard” protection for the scheduled Additional Insured

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Additional Insured – Owners, Lessees or Contractors – Completed Operations CG 20 37• This is in direct response to the

necessity in construction contracts to provide this type of Additional Insured language

• Provides an opportunity for an additional premium charge

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Additional Insured – Owners, Lessees or Contractors – Completed Operations CG 20 37

• The 07 04 edition of this endorsement is triggered as long as the named insured (or someone acting on their behalf) has contributed to the covered loss

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Other Insurance Conditions Clause Primary and

NoncontributoryContractual requirement

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Other Insurance Conditions Clause Primary and Noncontributory• The policy to which they have been

added as A.I. needs to be revised to act as primary for them, even though they have another primary policy of their own

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Subrogation

• The assignment to an insurer by terms of the policy or by law, after payment of a loss, of the rights of the insured to recover the amount of the loss from one legally liable for it.

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CGL Form Language - CG 00 01 Conditions8. Transfer Of Rights Of Recovery Against Others To Us If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring “suit” or transfer those rights to us and help us enforce them

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CGL Waiver of Subrogation Endorsement – CG 24 04

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Waiver of Transfer of Rights of Recovery Against Others To Us - CG 24 04 05 09We waive any right of recovery we may have against the person or organization shown in the Schedule above because of payments we make for injury or damage arising out of your ongoing operations or "your work" done under a contract with that person or organization and included in the "products-completed operations hazard". This waiver applies only to the person or organization shown in the Schedule above.

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Polling Ahead

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Summary

• Use your construction checklists to identify specific areas of risk and insurance that you will need to understand when viewing and discussing these concerns with your insured– Needs will differ if the insured is a

developer, General Contractor, Sub-contractor or Sub-sub

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Summary

• Describe the various types of language that can be encountered

• Production/Service teams should devise discussion strategy that will be used

• Create coverage solutions– Identify coverage differences among your

various insurance companies

• Stay on the straight and narrow – do not verge into legal advice

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Summary

• Due to court decisions over the past decade and extremely proactive attorneys, the cost to defend and pay damages is increasing steadily

• Insurance companies are providing less and less coverage

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Summary

• Insurance companies must give fair warning to buyers and their agents/brokers about the limitations of coverage

• Agents and brokers must be extremely careful about reviewing limiting endorsements AND changing insurance companies

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Summary

• The long tail of claims in this area means that you will target for E & O claims years after placing the coverage

• Claims are increasing for “illusory” coverage

• Put everything in writing to the contractor– Provide details of coverage– Obtain sign-offs

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