Download construction liability claims: are you covered?

CONSTRUCTION LIABILITY CLAIMS:
ARE YOU COVERED?
(IND004)
Speakers:
Edward M. Joyce, Partner, Jones Day
Scott Allan, Senior Vice President, Lehman Brothers Holdings Inc.
The views expressed by the speakers are not
those of the speaker’s employer, firm, clients, or
any other organization.
The opinions expressed do not constitute legal or
risk management advice.
The views discussed are for educational purposes
only, and provided only for use during this
session.
Learning Objectives
At the end of this session, you will:
• Understand your insurance policy provisions in the context of
construction liability claims
• Decipher the complex balance of policy definitions within the
work and product exclusions
• Identify and address common pitfalls when presenting your
construction liability claims
Are You Covered?
Construction Liability Insurance
Overview
• Basic Insurance Policy Coverage
• Commercial General Liability Broad Form Coverage
• Owner Controlled Insurance Program (OCIP)
• Contractor Controlled Insurance Policy (CCIP)
• Who Should Buy Insurance?
• Non-Delegable Responsibility
• How Much Insurance Should I Purchase? Require?
• Coverage Gaps / Overlap
Claim Management Starts At
Project Inception
• Know Your Project - Know Your Risk
• Understand the Project and the Participants
• Design Risk Allocation
• Structure Contracts Accordingly
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Indemnification
Insurance Requirements
Policy Prioritization
Cost Sharing
Read the Entire Agreement
• Proper Additional Insured Coverage
• Review Critical Aspects of Insurance Placed by Third
Parties
• Tracking Evidence of Insurance
Know Your Project
Know Your Risks
• Know Your Project
• Parties to the Construction Project
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Owner
Lenders / Investors
Design Professionals
General Contractors
Subcontractors
Know Your Project
Know Your Risks
• Potential Sources of Loss
• Design Defect
• Design Professionals
• Design / Build Contractors
• Construction Defect
• Materials
• Workmanship
• Earth Movement / Settlement
• Patent Defects vs. Latent Defects
• Consequential Loss
Know Your Project
Know Your Risks
• What’s Insurable? What’s Not?
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CGL Policy v. Warranty Policy
Business Risk Exclusions
Contractual Liability
Construction Defect vs. Warranty
Presenting Your Claim
• Identify Potential Parties
• Understand Applicable Indemnification Provisions and
Available Insurance
• Obtain Certified Copies of Potentially Applicable Policies
• Notice All Potential Insurance Companies
• Named Insured / Additional Insured
• Primary / Excess
• Coverage May Depend On Perspective
• Proper and Timely Notice of Claims
• Initial Notice
• Keep it Broad / Don’t Speculate
Presenting Your Claim
• Establish Effective Relationship with Your Insurer
• Be a Proactive Participant
• Establish Effective Communication
• Selection of Defense Counsel
• Signs of Trouble
• Who is the Client?
• When is Coverage Counsel Appropriate?
Coverage Issues
• Duty to Defend
• “Legally obligated to pay as damages”
• Occurrence
• Bodily Injury and Property Damage
• Known Loss
• Exclusions
Slide 12
CGL Insuring Agreements
• A typical CGL insuring agreement provides in part:
• a. We will pay those sums that the insured becomes
legally obligated to pay as damages because of “bodily
injury” or “property damage” to which this insurance
applies. . . .
This insurance applies only to “bodily injury” and
“property damage” which occurs during the policy
period.
Slide 13
CGL Insuring Agreements
• A typical CGL insuring agreement provides in part:
• The “bodily injury” or “property damage” must be
caused by an “occurrence.” The “occurrence” must take
place in the “coverage territory.”
• “We will have the right and duty to defend any ‘suit’
seeking those damages.”
(NOTE: payment of defense costs does not erode policy
limits)
“Legally Obligated To Pay As
Damages”
• Encompasses two distinct concepts:
• “Legally obligated” which would include liability for
breach of contract; and
• “As damages” which includes all monetary sums
awarded in judgment to a third party.
Slide 15
“Legally Obligated To Pay As
Damages” (Continued)
POTENTIAL ISSUES:
• Do actions in equity (injunction, mandamus)
which seek monetary damages fall within the “as
damages” definition? Current tide is that they are
covered.
• Do costs incurred in complying with an injunction
constitute damages? Traditionally no, but tide is
turning.
• Are costs incurred to prevent or mitigate property
damages covered? Courts are “all over the map.”
Occurrence
• Occurrence vs. claims made policies
• Various trigger of coverage theories
• “Continuous and repeated exposure to conditions”
• Allocation when multiple policies are triggered
• Number of occurrences
Property Damage
Definition of “property damage”:
“a. Physical Injury to tangible property, including all
resulting loss of use of that property; or b. Loss of use
of tangible property that is not physically injured.”
POTENTIAL ISSUES:
• Breach of contract
• Diminution in value
• Delay and impact damages
• Preventative costs/loss mitigation
Common Exclusions
Contractual Liability
This insurance does not apply to . . .
“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 contact or agreement;
or
2) Assumed in a contract or agreement that is an “insured contract” . . .
“Insured Contract” can include a lease, an easement, an
agreement pertaining to your business to assume the tort liability of
another party.
Common Exclusions
Owned Property
• Most policies exclude damage to property
owned by the insured.
• Usually does not arise in the construction
context except for developers.
• When does the property transfer -- contract
governs, not the policy.
Common Exclusions
Care, Custody and Control
Excludes property damage to property in the care,
custody or control of any named or additional
insured.
• Damage to “other property” not excluded.
• Necessary part of the work -- excluded.
• Incidental to the work -- not excluded.
Common Exclusions
Faulty Workmanship
Excludes property damage for which “the restoration,
repair or replacement of which has been made
necessary by reason of faulty workmanship thereon by
or on behalf of the insured.”
POTENTIAL ISSUES INCLUDE:
• Can be interpreted as ambiguous because it could
apply to either flawed quality of finished product or
flawed process during construction (not both). Courts
have gone both ways.
• Some courts have held, despite drafting intent, that
the exclusion applies to completed operations.
Common Exclusions
Completed Operations
CGL insurance policies usually exclude “property
damage” arising out of “your work.” The exclusion
does not apply, however, if the work was performed
on your behalf by a subcontractor.
POTENTIAL ISSUES INCLUDE:
• When was the policyholder’s work “completed”?
• When did the property damage occur?
• Endorsements either eliminate or limit the
subcontractor exception.
Common Exclusions
Impaired Property Exclusion
Exclusion states that insurance does not apply to:
“Property damage” to “impaired property” or property
that has not been physically injured, arising out of:
• A defect, deficiency, inadequacy or dangerous
condition in “your product” or “your work;” or
• A delay or failure by you or anyone acting on your
behalf to perform a contract or agreement in
accordance with its terms.
This exclusion does not apply to the loss of use of other
property arising out of sudden and accidental physical
injury to “your product” or “your work” after it has
been put to its intended use.
Common Exclusions
Impaired Property Exclusion (Continued)
“Impaired property” means 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:
a. The repair, replacement, adjustment or removal of “your
product” or “your work;” or
b. Your fulfilling the terms of contract or agreement.
Common Exclusions
Impaired Property Exclusion (Continued)
POTENTIAL ISSUES INCLUDE:
• Some courts have interpreted as ambiguous and
refused to apply it in its entirety.
• Exclusion can not apply to physically injured
property, only “loss of use” property damage.
• Exclusion should not apply where the
incorporation of the defective work to tangible
property results in no actual physical damage to
tangible property but where the removal of that
defective work has or will injure other property.
Common Exclusions
Alienated Premises
Excludes property damage to any premises the
policyholder sells, gives away, or abandons, if the
property damage arises out of any part of those
premises.
POTENTIAL ISSUES INCLUDE:
• Damage to other property is not excluded.
• Some courts interpret the “arises out of” limitation as
requiring a proximate causal relationship. Other
courts are satisfied with some lesser causal link.
Common Exclusions
Business Risk/Your Work
Excludes property damage to “That particular part of any property
that must be restored, repaired or replaced because ‘your work’
was incorrectly performed on it.”
"Your work" means:
a. Work or operations performed by you or on your behalf; and
b. Materials, parts or equipment furnished in connection with
such work or operations.
“Your work” includes warranties or representations made at any
time with respect to fitness, quality, durability or performance of
any of the items included in a. or b. above.
Common Exclusions
Business Risk/Your Work (Continued)
POTENTIAL ISSUES INCLUDE:
• Does not apply to the “property damage” included
in the products-completed operations hazard.
• Applies to work performed “on it,” meaning the
property must pre-exist. Examples include
remodeling or service work.
Additional Insured Issues
• Does the additional insured have evidence of the
insurance policy/certificate of insurance?
• Have the policy limits have been exhausted by other
claims?
• Has the insurance policy been cancelled for failure to
pay premiums?
• Is there “Other Insurance”?
• Are there allocation issues?
Questions?