HANDLING COMPLEX CONSTRUCTION DEFECT CLAIMS INVOLVING
MULTIPLE CARRIERS AND MULTIPLE POLICIES
Complex
Construction Claims
In many cases we had to assist the insurers or the insureds with
damages to multiple homes in a subdivision or in a high rise building(s). The presence of multiple buildings or units, the
significant amounts of money at stake, and the presence of numerous other
carriers who advocate their separate, conflicting viewpoints makes the handling
of such construction defect cases very challenging.
The level of complexity in
defective construction claims may result in especially complicated issues for a
variety of reasons:
- Carriers have been developing special policy formats for this market, including wholly new concepts such as "wrap-up coverage."
- Some carriers have new contractual provisions - such as policy limitations, which, in effect, provide CGL coverage on a "claims made" basis or preclude application of a "continuous trigger" - in effect which may be difficult to coordinate with traditional formats used by other carriers.
- Other policy provisions which apply generally-- such as deductibles, SIRs, and the definition of a "claim"— require special analysis in the context of demands being made by a large group of homeowners and insurance carriers with competing interests and policy formats.
What is a CONSTRUCTION
defect?
According to the Insurance and
Risk Management Institute, a construction defect is generally speaking, a
deficiency in the design or construction of a building or structure resulting
from a failure to design or construct in a reasonably workmanlike manner,
and/or in accordance with a buyer's reasonable expectation. The most dangerous defects have the capacity
to fail, resulting in physical injury or damage to people or property. However, many defects present no increased
risk of injury or damage to other property but nevertheless cause harm to the
property owner in the form of loss of use, diminution in value, and extra
expenses incurred while defects are corrected. This latter type of defect is often referred
to as a passive defect.
Many states have more
specifically defined the term "construction defect" for purposes of
applying statutes that dictate processes for remedying and litigating
construction defect claims. These statutory
definitions vary by state. Nevada, for
example, uses the term constructional defects and defines it as follows:
“Constructional defect”
means a defect in the design, construction, manufacture, repair or landscaping
of a new residence, of an alteration of or addition to an existing residence,
or of an appurtenance and includes, without limitation, the design,
construction, manufacture, repair or landscaping of a new residence, of an
alteration of or addition to an existing residence, or of an appurtenance:
1. Which is done in violation
of law, including, without limitation, in violation of local codes or
ordinances;
2. Which proximately causes
physical damage to the residence, an appurtenance or the real property to which
the residence or appurtenance is affixed;
3. Which is not completed in a
good and workmanlike manner in accordance with the generally accepted standard
of care in the industry for that type of design, construction, manufacture,
repair or landscaping; or
4. Which presents an
unreasonable risk of injury to a person or property.
Whether, and to what to extent, coverage applies in liability
policies for claims alleging construction defects is a matter of serious debate
both in insurance circles and in the courts.
We wrote few weeks ago about some earthshaking decisions reached by the
majority of the jurisdictions during 2013 and 2014, finding construction defect
coverage under a contractors’ CGL policy.
These policies, however, are subject to numerous exclusions and Anti-Indemnification
Statutes, Right to Repair/Cure and Statutes of Limitations and Repose. In fact, the defendants in many of these
cases have been successful in defeating claims using the defenses of the
statutes of limitations and repose.
Among the more frequently
addressed exclusions are the so-called “business risk” exclusions, which
include the “damage to property”; “damage to your property”, and “damage to
your work” exclusions. Other potentially
applicable exclusions concern prior work; contractual liability; EIFS; mold;
owned property; earth movement, and known or continuing injury or damage. Claims for damages resulting from defective
drywall began to appear in about 2005, and courts have frequently addressed
whether the standard pollution exclusion, in addition to the above-mentioned
exclusions, bars coverage for such claims.
The subtleties of each
claim, different facts and precise policy language all contribute to the
disparity. And, in some cases, the decisions are simply not reconcilable. Legislation enacted by various states
concerning the right to repair/cure, statutes of limitations and repose, and
anti-indemnity statutes, are pertinent to the institution of a construction
defect lawsuit.
IS THERE AN OCCURRENCE AND PROPERTY DAMAGE WITHIN THE POLICY
PERIOD?
Is There An Occurrence?
The first step in any
coverage analysis is to determine whether the underlying claim or suit comes
within the scope of the insuring agreement of the policy including, under a
commercial general liability policy, whether the injury or property damage was
caused by an occurrence. “Occurrence” is
generally defined as an accident, including continuous or repeated exposure to
the same or similar general harmful conditions. Despite what may be similar policy language
and fact patterns involved in these claims, the interpretation of what
constitutes an occurrence in the context of a construction defect claim often
varies widely from one jurisdiction to the next.
Is There Property Damage?
In order to trigger coverage
under a commercial general liability policy, the insured’s liability must be
based on actual physical injury to tangible property or an actual loss of use
of such property. Where the construction
claim against the contractor does not involve tangible, physical injury, courts
have found no covered property damage.
Most courts have also held that claims limited to fixing or replacing
all or part of defective construction and/or claims of diminution in value,
because of defective construction work or materials with no physical injury,
are not claims for property damage.
Defective work or materials in and of themselves do not constitute
property damage.
For example, the plaintiff
must allege that the buildings experienced cracks in the walls, settling of the
slabs, soil subsidence, and separation in floor and walkways, just to name few
damages that courts have found that they constitute damage within the meaning
of the policy. Costs
Theories of Trigger of
Coverage
After an occurrence and property
damage is determined, the next question is how many policies and how many
insurers will be liable for the damages or for coverage for the damages, i.e.,
who pays? This is accomplished by
applying several theories of trigger of coverage. Trigger of coverage relates to when injury or
damage is deemed to have taken place, so as to implicate a particular policy
period. Construction defect claims
typically do not concern a discrete catastrophic event, but more frequently,
latent or progressive damage that may take place over an extended period of
time. As a result, the determination of
when property damage occurred and which policies must respond in the context of
a construction defect claim often results in thorny disputes between insurers
and policyholders.
Because comprehensive
general liability policies insure against damage or injury that occurs during
the policy period, courts generally hold that the time the construction defect-related
injury or damage occurs is the time the complaining party is actually damaged,
not the time when the faulty work was performed. Courts have adopted several different theories
for determining when a coverage-triggering event occurred and which policies
may have to respond. The five trigger theories that typically apply to
construction defect losses include:
1. The Manifestation Trigger:
The policies in effect at the time the property damage becomes apparent or is
discovered provides coverage. This
theory allows for a single policy to be put “on the risk” and “triggered”, with
a duty to defend and be held liable for when the injury is manifested or
“discovered”. This theory is much in use
in the United States.
2. The Exposure Trigger:
The policies in effect at the time of actual exposure to the damage causing substance
or event provides coverage. This
theory also results in multiple policy periods being triggered where an
exposure may take place over several years. The exposure trigger theory has been applied
to a variety of insurance decisions including asbestos, silica,
pharmaceuticals, and chemicals.
3. The Actual Injury or
Injury-In-Fact Trigger: The injury-in-fact trigger theory
holds that coverage is triggered by the existence of bodily injury or property
damage during the policy period. Each
insurance policy “on the risk” during the time period when damage actually occurs
is triggered. Based on the evidence
submitted, injury-in-fact may be determined as occurring at any time from
exposure through manifestation. The
actual injury/injury-in-fact theory requires the policy holder to prove the
discrete injury or damage during the insurance contract period. Nine states use this theory for CGL insurance
liability. They include: Minnesota,
Hawaii, Arkansas, Alabama, Nevada, Oregon, Texas, Washington, and North
Carolina.
4. The Continuous Loss Trigger
Theory: carriers
on the risk from the initial exposure through manifestation are considered to
be triggered. All
policies in effect over a span of time, beginning from the first exposure to
injurious conditions, continuing through any period of latency while the
resulting damage remains undiscovered and is progressing, and ending at the
time the injury manifests itself to the insured, are implicated. See Montrose Chemical Corp. v. Admiral Ins. Co., 10
Cal.4th. 645, 1995. The Court said that
there is limitation on potential indemnity, where the damage must occur during
the policy period and as a result from the accident or continuous or repeated
exposure or conditions. The policy on
the risk at the time the policyholder first obtains knowledge of “bodily
injury” or “property damage” is the last policyholder that can be triggered. Many states follow this continuous loss
trigger model in CGL third party liability claims as well. Including: Colorado,
New Jersey, Pennsylvania, Indiana, Illinois, Massachusetts, Georgia, Kansas,
South Carolina, Wisconsin, Missouri, and Tennessee.
5. The Double Trigger Theory. A
variation on the continuous or “triple” trigger theory is the “double” trigger
theory, applied by at least one court. Zurich
Ins. Co. v. Raymark Indus., Inc., 118 Ill.2d 23, 112 Ill.Dec. 684, 514 N.E.2d
150 (1987), aff'ing 145 Ill.App.3d 175, 98 Ill.Dec. 512, 494 N.E.2d 634 (1986).
Interpreting an earlier version of the
uniform CGL policy that defined “bodily injury” as “bodily injury, sickness, or
disease,” the Illinois Supreme Court found adequate medical evidence in the
record that “bodily injury” in the form of lung tissue damage occurs at the
time of exposure, “disease” exists when the condition is manifest or reasonably
capable of clinical detection, and “sickness” includes the claimant's
disordered, weakened, or unsound state before clinical manifestation.
ALLOCATION OF LOSS
After all the contributing
insurers and policies are determined, the final question is how much each
insurer and each insurance policy will pay.
Because construction defect claims often implicate consecutive policy
periods, the total amount of coverage available to respond to a claim may
exceed the total amount of damages. In
such circumstances, the damages must be allocated among the triggered policies
or policy years. The issue of how a loss
should be allocated in a construction defect claim is closely tied to the
applicable trigger of coverage, and the resolution of one typically compels
consideration of the other.
Courts have applied two main
methods for determining how policies will contribute to the damages: the pro-rata allocation and the all sums allocation
method.
Pro Rata
– Policies respond in a particular policy period in proportion to the “time on
the risk” and the total number of years triggered by the loss. Under this approach, each triggered policy is responsible
for a portion of damages based on the years it was on the risk in comparison to
the total number of years triggered by the loss. This approach is tied to policy language
limiting exposure to those damages that take place during the policy period. For this approach to apply, the damage must
be continuous and indivisible.
Complex
construction defect cases typically involve multiple parties, often with
overlapping responsibilities, whose actions are alleged potential causes of
some or all of a claimant’s damages. If
the case is decided by a jury, then the common law negligence procedure guides
the percentage contribution from each defendant. For example, pursuant to Colorado’s Pro Rata Act, each party’s damages
liability is determined by multiplying the damages attributable to an
indivisible injury to which that party contributed by the percentage fault the
jury allocates to that party.
All Sums
– Policies in a particular policy period may respond in full, subject to their
limits. This approach is based on the
“all sums” language in policies and allows an insured to pick which policy
years that will respond to a loss. This
method is also called “joint and several liability” method and allows an
insured to chose the insurance to which the losses are allocated and the
deductible which must be paid.
Anti-Indemnification
Statutes, Right to Repair/Cure and Statutes of Limitations and Repose
Outside the case law which
impacts the analysis of insurance coverage for construction defect claims, many
states have also enacted legislation which further defines, creates or
restricts rights among owners, developers, and contractors. This statutory
framework may include ant indemnity statutes, “right-to-repair” or
“right-to-cure” statutes, and statutes of limitation and repose.
Transfer of risk by
contract, via indemnity or hold-harmless agreements, is a common practice in
the construction industry. In response to such contractual arrangements, many
states have case law or statutory regulations that set up anti-indemnity rules
for construction projects, to strictly regulate and in some cases prohibit
contractual risk transfer.
Several states have passed
legislation, known as “right-to-repair” or “right-to-cure” statutes.
The intent of these statutes
is to protect the construction trade and offer an alternative to immediately
proceeding to costly litigation. Key
provisions of these statutes include:
1. Requiring
written notice regarding alleged defects from homeowners to builder, with such notice
usually required up to 90 days prior to proceeding with filing a suit.
2. Allowing
the builder to inspect the premises.
3. Providing
for a response to the homeowner’s claim, including an offer to repair, pay a monetary
compromise, or decline the claim.
4. Limitations
for the “reasonable” cost of repairs and possible reimbursement of legal fees.
5. Requirement
that the right-to-repair provisions are stated in the sales contract.
A “statute of limitations”
is a period of time in which a claim may be brought, beginning from the time of
discovery of an injury. A “statute of repose” acts as a bar on any claims, and
usually starts on a certain date, such as the close of escrow, transfer of
title or occupancy, varying by state. Where the periods of time differ, the
statute of limitations may be tolled or extended for reasons set forth in the
statute. Most states have many, often overlapping statutes of limitations.
September
16, 2014
Equitable Garnishment Judgment Against CGL Insurer
Upheld
In the recently decided Village
at Deer Creek Homeowners Association, Inc. v. Mid-Continent Casualty Co.,
432 S.W.3d 231 (Mo.App. 2014) , the court decided that a judgment awarded to a
homeowners association against the CGL insurer of its contractor was for
property damage caused by an “occurrence” as defined in the insurance policies
and accordingly upheld the judgment in excess of $4,000,000.
The declarations of a
homeowners association (HOA) required the HOA to “maintain, repair and replace
. . . the exterior portions of all [townhome] Units” subject to exceptions not
applicable in this case. The declarations further permitted the developer (who
was also the builder/general contractor) to control the HOA until such time as
it was required to be turned over to the control of the homeowners.
Prior to the time of the
turnover, homeowners complained about water leaks to the developer, who then
tried to fix them with funds of the HOA. After the turnover, the HOA and 47
homeowners sued the developer/contractor in Kansas for the water leaks,
including damage to both the interior and exterior of their townhomes. The
developer/contractor notified its CGL insurers of the lawsuit, both of whom
accepted the defense under a reservation of rights.
Prior to trial, the
plaintiffs indicated their willingness to settle all claims against the
developer/ contractor within the limits of the CGL policies. The insurers,
however, would not agree to a settlement and would not agree to their insured’s
subsequent demand to withdraw their reservation of rights. As a result, the
insured terminated the insurers’ defense and then reached an agreement with the
plaintiffs that any recovery obtained would be collected solely from the CGL
insurers. In exchange, the developer/contractor agreed not to offer evidence at
trial or cross-examine witnesses. Not surprisingly, the Kansas court found in
favor of the plaintiffs and entered a judgment against the developer/contractor
in excess of $7,000,000.
Following the judgment, the
plaintiffs filed an equitable garnishment action against the CGL insurers in
state court in Missouri. The developer/contractor also asserted claims for bad
faith failure to settle, breach of fiduciary duty and breach of contract. After
a trial of the equitable garnishment action, the Missouri court found in favor
of the HOA and entered a total judgment commensurate with the underlying Kansas
judgment in excess of $7,000,000. One of the CGL insurers reached a settlement
with the HOA, while the other insurer moved forward with an appeal.
The remaining
insurer/appellant made several arguments on appeal: (1) the underlying Kansas
judgment against the contractor/insured was not for “property damage” but
rather the cost to repair defective construction; (2) the underlying judgment
did not property allocate the association’s damages between covered property
damage and uncovered costs to repair defective construction; (3) the Missouri
trial court should have permitted the insurer to amend its Answer to include a
“your work” exclusion; and (4) damage to the townhomes was not an occurrence as
defined by the CGL policy.
The court of appeals
decided that the Kansas judgment was for property damage that was the result of
an occurrence as defined by the CGL policy. Specifically, the court found that
the installed exterior cladding system failed, which permitted water intrusion
that not only damaged the exterior but also other components of the exteriors
of each townhome. It was not contested that there was also water intrusion into
each of the 137 townhomes as a result of defective construction by the insured.
This case is interesting
because it contributes to the continuing evolution of the application of CGL
policies to defective construction as to what is and is not covered.
Metropolitan
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