RECENT DEVELOPMENTS IN INSURANCE COVERAGE FOR

CONSTRUCTION RISKS

Jeffrey J. Vita

Saxe Doernberger & Vita, PC

October 8, 2012

Defective Construction – Is it an “Occurrence”?

• Certain legislatures have recently entered the fray:

Arkansas - A.C.A. §23-79-155

Colorado - C.R.S.A. § 13-20-808

Hawaii - H.R.S. § 431:1-217

South Carolina - S.C. Code Ann. § 38-61-70

• Sophisticated/larger insureds have negotiated an amended policy definition of “occurrence”

Legislating Around Bad Court Decisions

Sample Statute:

A.C.A. §23-79-155

a) A commercial general liability insurance policy offered for sale in this state shall contain a definition of “occurrence” that includes:

(1) Accidents, including continuous or repeated exposure to substantially the same general harmful conditions; and

(2) Property damage or bodily injury resulting from faulty workmanship.

b) This section is not intended to restrict or limit the nature or types ofexclusions from coverage that an insurer may include in a commercialgeneral liability insurance policy.

Contracting Around Bad Court Decisions

Sample Endorsement:

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.ES 98 003 01 11

AMENDED DEFINITION OF OCCURRENCE ANDINSURING AGREEMENT ENDORSEMENT

This Endorsement shall not serve to increase our limits of insurance, as described in the LIMITS OF INSURANCE section of this policy.

It is agreed that Par. 13, “occurrence,” of Section V – DEFINITIONS is deleted in its entirety and replaced with the following:

13. “Occurrence” means an accident, including continuous or repeated exposure tosubstantially the same general harmful conditions that happens during the term ofthis insurance. Unless otherwise excluded, an “occurrence” can include yournegligent construction work when the faulty workmanship was unintended.(Emphasis added) . . .

ES 98 003 01 11 Copyright© 2011www.amsafety.com

Recent Court Decisions Re: “Occurrence”

• Burlington Ins. Co. v. PMI Am., Inc., 2:08-CV-1054, 2012 WL 995294 (S.D.Ohio Mar. 23, 2012)(Under Ohio law, even if insured's faulty workmanshipin replacing sections of a kiln shell was not itself a covered “occurrence”damages categorized as collateral or consequential damages, were an“occurrence”)

• Acuity v. Soc'y Ins., 810 N.W.2d 812 (WI.App. 2012)(Damage to engineroom building that was caused by accidental soil erosion due to faultyexcavation techniques constituted an “occurrence” within the meaning ofcontractor's commercial general liability (CGL) policy)

• Aquatectonics, Inc. v. Hartford Cas. Ins. Co., 10-CV-2935 DRH ARL, 2012 WL 1020313 (E.D.N.Y. Mar. 26, 2012)(faulty workmanship in connection with the installation of tile in the pool caused damage only to the pool—and not to anything other than the pool – was not an “occurrence” under NY law)

Additional Insured Coverage – Privity

Compare:

Section II - Who Is An Insured is amended to include as an additional insured any person ororganization for whom you are performing operations when you and such person ororganization have agreed in writing in a contract or agreement that such person ororganization be added as an additional insured on your policy. - CG 20 33 07 04

With:

WHO IS AN INSURED - (Section II) is amended to include any person or organization thatyou agree in a “written contract requiring insurance” to include as an additional insuredon this Coverage Part - CG D6 04 05 10

Recent Court Decisions Re:Privity Requirement

• Venable v. HilCorp Energy Co. Inc., 2010 WL 1817757 (E.D.La. 2010)(Projectsupervisor’s liability claim for injury suffered by subcontractor’s employee, undersubcontractor’s CGL policy was not covered, because Supervisor was notconsidered an Additional Insured, due to lack of contract between Supervisorand subcontractor.)

• Pro Con, Inc. v. Interstate Fire & Cas. Co., 2011 WL 2579825 (D.Me. 2011)(project General Contractor was an AI under Sub-subcontractor’s policy despitenot having a written contract with such Sub-Subcontractor. The court found thatthe AI endorsement did not require a direct contract between the GC and theSub-sub, but rather only that there be a contract requiring the GC to be namedas an AI. )

• Westfield Ins. Co. v. FCL Builders Inc., 948 N.E.2d 115 (Ill. App. 2011)(insurerwas not obligated to defend or indemnify GC in action brought by sub-subcontractor's injured employee. “The policy explicitly and unambiguouslyrequires a direct, written agreement to that effect in order to cover anyone otherthan [the named insured] under the policy. Because no such written agreementever existed between [the named insured] and [the general contractor], [thegeneral contractor] cannot be an additional insured under the policy.”)

Additional Insured Coverage –Adequate Limits?

AI Endorsement may limit coverage to that which is minimally required by contract; E.g.:

The limits of insurance afforded to such person(s) or organization(s) will be:

a. The minimum limits of insurance which you agreed to provide, or

b. The limits of insurance of this policy whichever is less.

Legislative Restrictions Upon AI CoverageNO YOU DON’T!

Certain State Anti-indemnity Statutes Include Restrictions upon AI Coverage to Indemnitee:

• California - Cal. Civ. Code Ann. § 2782• Colorado – Colo. Rev. Stat. § 13-21-111.5 • Georgia – Ga. Code § 12-8-2• Montana – Mont. Rev. Code § 28-2-2111• New Mexico - N.M. Stat. Ann. § 56-7-1• Oklahoma – Okla. Stat. § 15-221• Oregon – Or. Rev. Stat. § 30.140• Louisiana - LSA–R.S. 9:2780• Texas - Tex. Civ. Prac. & Rem. Code § 130.002(1)&(2)

Sample Language:

“Any provision in a construction agreement thatrequires the purchase of additional insuredcoverage for damage arising out of death or bodilyinjury to persons or damage to property from anyacts or omissions that are not caused by thenegligence or fault of the party providing suchadditional insured coverage is void as against publicpolicy.”

Colo. Rev. Stat. Ann. § 13-21-111.5(d)

BUILDERS RISKThe Policy Often Less Thought of . . .

BUILDERS RISK

1. “First Party Insurance” - Covers owners and contractors for their own losses.

2. Covers losses from physical loss to the structure (and may include certain “soft costs” business interruption costs)

3. Only covers losses that occur during construction

4. Either Provides “All Risk” (everything not specifically excluded) or “Specified Peril” coverage (only what is specifically listed as covered)

5. Policy language is non-standardized

CGL

1. “Third Party Insurance” – Covers ownersand contractors for liability to others.

2. Covers damages because of PropertyDamage, Bodily Injury and/or Personal andAdvertising Injury

3. Covers losses during construction “ongoingoperations” and subsequent to completion“completed operations,” so long as lossoccurs during policy period.

4. Requires BI, PD or PI caused by“Occurrence,” subject to policy exclusions

5. Policy language is standardized

Coverage may overlap and utilizing both forms of coverage (whenappropriate) can preserve limits (or sublimits) and maximize recovery

KEY ISSUES REGARDING BUILDERS RISK INSURANCE

• Deductibles and Sublimits (The illusion of coverage)

• Subrogation – “As Their Interests May Appear”

• Concurrent/Sequential Causes of loss – ACC exclusionary language

• Critical Exclusions:

“Faulty Workmanship” / Design Exclusion –(overzealous interpretation turns all risk coverage into no risk coverage)

“Subsidence” (Natural or Man-Made) (Rapid or Gradual) – Earth Movement/Soil Issues are Not Uncommon

Questions

Thank You

Jeffrey J. Vita

Saxe Doernberger & Vita, PC

1952 Whitney Avenue

Hamden, CT 06517

jjv@sdv.law