Contractors: Consult Your Insurance Broker Regarding Your CGL Policy

David Adelstein | Florida Construction Legal Updates | February 10, 2018

Contractors:  do yourself a favor and consult your insurance broker regarding your commercial general liability (CGL) policy.   Do this now, especially if you subcontract out work.

CGL policies contain a “your work” exclusion.  The CGL policy is written such that it excludes “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” This exclusion will be raised in the post-completion latent construction defect scenario. (There are other exclusions that will be raised to a defect discovered during construction.)  Certain policies will contain a subcontractor exception to this “your work” exclusion.  You WANT this exception- no doubt about it so that this exclusion does not apply to work performed by your subcontractors.  Without this subcontractor exception, truth be told, this “your work” exclusion is a total back-breaker to contractors.   It will give your insurer an immediate out for many latent defect property scenarios since excluded from coverage is property damage to your work including work performed by your subcontractors.

In a recent opinion, Mid-Continent Casualty Co. v. JWN Construction, Inc., 2018 WL 783102 (S.D.Fla. 2018), an owner discovered water intrusion and damage at his property.  He sued the general contractor and the general contractor’s insurer filed a separate action for declaratory relief claiming it had NO duty to defend or indemnify its insured—the general contractor—in the underlying suit.  The court agreed because the contractor did not have the subcontractor exception to the “your work” exclusion.

If work was performed by JWN [contractor] or on JWN’s behalf-here by a subcontractor-then the “your work” exclusion applies.  Historically, insurers could be liable under commercial general liabilities policies resembling the policy in the instant case for certain types of damages caused by subcontractors….Nonetheless, insurers do possess the right to define their coverage as excluding damages arising out of a subcontractor’s defective work by eliminating subcontractor’s exceptions from the policy. An insurer is only liable for a subcontractor’s defective work when the “your work” exclusion does not eliminate coverage for work performed by a subcontractor….In conclusion, the insurance policy in this case excluded coverage for work performed not only by JWN, but also by JWN’s subcontractors.

JWN Construction, Inc., supra, at *4.

This ruling meant that the general contractor’s CGL insurer had no duty to defend or indemnify its insured—again, the contractor—for the defects or resulting water damage.  A total killer illustrating the absolute importance of the subcontractor exception to the “your work” exclusion in your CGL policy.

Can Your Insurance Company Change Its Position Regarding Coverage For Your Claim?

Lawrence Moon | Property Insurance Coverage Law Blog | February 17, 2018

Answer: It depends, on several factors, such as:

  1. The applicable state law,
  2. the insurance company’s prior position, or positions (e.g., did it accept or deny coverage?),
  3. how it expressed that position, or positions (e.g., did it accept coverage under a reservation of rights, or did it deny coverage based on a specific ground and reserve its right to assert other grounds for denying coverage?),
  4. whether the policyholder detrimentally relied on the company’s prior coverage position,
  5. whether the policyholder has been prejudiced by the insurance company’s change in its coverage position or the stated basis for its position, and
  6. whether a lawsuit has been filed.

In short, this is an area of insurance law that lacks uniformity across the country. In T-Mobile USA, Inc. v. Selective Insurance Company of America, the Ninth Circuit Court of Appeals may decide the limits of a liability insurance company’s right to change its coverage position, or more specifically, the bases for its coverage position, under Washington law.1 The Court of Appeals may also decide whether, under Washington law, the content of a Certificate of Insurance prepared by an insurance company’s authorized broker is binding on the company, even if the content of the certificate varies from the terms of the underlying policy. That is another area of law that varies somewhat across the country.

In the underlying case,2 the facts of which are relatively complex, T-Mobile USA (“T-Mobile”) was named in a lawsuit in New York. That lawsuit arose out of damage allegedly caused by a cell phone tower owned or constructed by one of T-Mobile’s subsidiaries (which also included T-Mobile as part of its name). T-Mobile attempted to tender the defense of that lawsuit to Selective Insurance Company (“Selective”) under a policy that Selective had issued to one of the subsidiary’s contractors. According to T-Mobile, Selective initially denied coverage for T-Mobile based on an exclusion in the policy, but T-Mobile did not learn of Selective’s initial basis for denying coverage until more than two years after T-Mobile had sent its tender letter to Selective. Six months after T-Mobile learned of the basis for Selective’s initial denial of coverage, Selective denied coverage for a different reason, namely, there was no coverage for T-Mobile under the policy and T-Mobile’s tender of the claim was deficient because it did not identify its subsidiary as tendering the claim.3

Because Selective’s policy was subject to Washington law, T-Mobile filed a lawsuit in Washington seeking an order that Selective was contractually obligated to defend and indemnify T-Mobile in the New York case. T-Mobile contended that Selective’s authorized broker provided T-Mobile an insurance certificate that identified T-Mobile as an additional insured under Selective’s policy. According to T-Mobile, the terms of the certificate should be binding on Selective. T-Mobile also argued that, under Washington law, Selective should be estopped, or barred, from asserting that its tender of the claim was deficient because had Selective promptly raised that issue when T-Mobile initially sent its tender letter, T-Mobile could have corrected its tender by naming its subsidiary.4

According to T-Mobile, Selective’s denial of coverage based on the exclusion in the policy lacks merit, and because Selective should be barred from raising its defective tender defense, there is no basis for Selective to refuse to provide coverage for T-Mobile under the policy.5
In ruling on the parties’ cross-motions for summary judgment, the District Court noted that “[u]nder Washington law, an insurer may not change the basis for avoiding liability after litigation has begun,”6 and “[a]n insurer is charged with the knowledge which it would have obtained had it pursued a reasonably diligent inquiry.”7 However, the District Court ruled that the estoppel doctrine can only be invoked if there is coverage under the policy; it could not be used to create coverage when none would otherwise exist.8

The District Court also found that, under Washington law, the certificate of insurance was not binding on Selective and as a result, T-Mobile was not an insured party under the policy. Consequently, T-Mobile could not invoke the estoppel doctrine to prevent Selective from raising its coverage defense based on the fact that T-Mobile was not an insured party under the policy.

T-Mobile has appealed those rulings to the Ninth Circuit Court of Appeals. I’ll be watching this case and will keep you updated.
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1 T-Mobile USA, Inc. v. Selective Ins. Co. of America, No. 17-35932 (9th Cir.).
2 T-Mobile USA, Inc. v. Selective Ins. Co.of America, No. 15-1739, 2017 WL 2774070 (W.D. Wash. June 27, 2017).
3 Id. at **1-4.
4 Id. at *4.
5 Id. at **7-15.
6 Id. at *8 (citing Karpenski v. Am. Gen. Life Cos., LLC, 999 F.Supp.2d 1235, 1245 (W.D. Wash. 2014)).
7 Id. (citing Bosko v. Pitts & Still, Inc., 454 P.2d 229, 234 (Wash. 1969)).
8 Id. at **8-15.

Will New York Law Go the Way of Weedo: Tenth Circuit Predicts New York Court of Appeals Will Hold that Property Damage Caused by a Subcontractor’s Defective Workmanship Can Constitute an Occurrence Under a Contractor’s CGL Policy

Bryan Keane and Katie Pfeifer | Dorsey | February 15, 2018

On February 13, 2018, the Tenth Circuit Court of Appeals reversed a lower court decision, which concluded that, under New York law, the property damage caused by a subcontractor’s faulty workmanship did not qualify as a covered occurrence because the only damages were to the EPC contractor’s own work product.  In Black & Veatch Corporation v. Aspen Insurance (UK) Ltd., No. 16-3359, the Tenth Circuit disagreed, predicting the New York Court of Appeals “would join the clear trend among state supreme courts holding that damage from faulty subcontractor work constitutes an ‘occurrence’” under a standard CGL policy.

Black & Veatch (B&V) was hired to engineer, procure, and construct jet bubbling reactors (JBRs), which eliminate contaminants from the exhaust from coal-fired power plants.  As is a common scenario with EPC contractors, B&V subcontracted the engineering and construction of the internal components to Midwest Towers, Inc. (“MTI”).  After work was completed on several reactors and work was ongoing on others, the project owner alleged it had sustained damages because deficiencies in the components procured and constructed by or on behalf of MTI caused internal components of the JBRs to deform, crack, and sometimes collapse.

B&V settled with the owner for $225 million, and sought coverage for a portion of the settlement amount under its CGL policies.  The primary insurer paid its limits, but the first level excess insurers, with limits of $25 million, refused to indemnify B&V.  The excess insurers claimed, in part, that the damages were solely to B&V’s own work – the internal components of the JBRs (and, indeed, the entire project); according to the insurers, as a result, damage to those components does not constitute an “occurrence” under a CGL policy.  And, without an “occurrence,” there is no coverage.

New York law applied to the dispute, per the policy’s language.  B&V sued, and lost on summary judgment, with the lower court concluding that, under New York law, “damage arising from construction defects was not an ‘occurrence’ under the Policy unless the damage occurred to something other than B&V’s own work product,” which here was not the case.  (The excess insurers raised several other defenses, including several exclusions, which the Tenth Circuit did not address as the lower court stopped at the conclusion that there was no “occurrence”).

On appeal, the Tenth Circuit analyzed whether the damage to B&V components, due to the actions of its subcontractor, could constitute an occurrence under New York law.  The court looked at the policy’s language – explaining that to conclude that defective workmanship cannot constitute an occurrence would render several exclusions or exceptions to exclusions surplusage, in violation of New York law.  The court also reviewed the evolution of the standard CGL policy, and in particular the “Your Work” exclusion and the “Subcontractor Exception” to the exclusion, noting the expansion of coverage over the years to include coverage to the contractor for damage caused by a subcontractor’s work.

In addition, the Court discussed that “[s]tate supreme courts that have considered the issue since 2012 have reached ‘near unanimity’ that ‘construction defects can constitute occurrences and contractors have coverage under CGL policies at least for the unexpected damage caused by defective workmanship done by subcontractors.”  Finally, the court distinguished or dismissed as based on outdated policy language several decisions by intermediate New York courts, thereby concluding that such decisions do not preclude a conclusion that defective workmanship can constitute an occurrence.

Based on its methodical analysis, the court concluded that the damages at issue were caused by a coverage-triggering occurrence, and, as a result, remanded the case to the lower court for further proceedings.

While not a decision from the New York Court of Appeals itself, Black & Veatch is an important case for insureds in the construction industry.  Construction contracts, especially on large projects, often specify application of New York law.  And insurers – either based on case law or, as frequently is the case with policies originating from the London market, based on a contractual choice of law provision – often advocate for application of New York law to coverage disputes.  And, if a claim arises, a common defense to coverage is that New York intermediate courts have concluded that defective workmanship is not an occurrence.  But the Tenth Circuit has delivered at least a blow to that argument, and certainly a road map to dispute the argument.

The basic fact pattern in Black & Veatch is common in the construction industry:  general contractor seeks coverage for damages caused by a subcontractor’s work.  And the excess insurer’s response is also common.  But, as the Black & Veatch court noted, in recent years there has been a shift in the courts in favor of the conclusion that defective workmanship can constitute an occurrence.  Indeed, in 2016, the New Jersey Supreme Court overturned the “seminal case regarding the issue of whether CGL policies cover construction defects” – Weedo v. Stone-E-Brick, Inc.  The Black & Veatch case provides a basis for believing that the interpretation under some New York cases, that defective workmanship cannot be an occurrence, may go the way of Weedo.

California Supreme Court Holds that the Right to Repair Act is a Homeowner’s Exclusive Remedy for Damages Arising from Construction Defects for New Residential Construction

Robert Nobel | TLSS Construction Law Blog | February 15, 2018

In McMillin Albany LLC et al. v. The Superior Court of Kern County (Van Tassel) [Case No. S229762], the California Supreme Court held that California Civil Code §§ 895 et seq. (the “Right to Repair Act”) provides the exclusive remedy for construction defect claims for economic loss and resulting property damages arising from new residential construction. The Supreme Court also held that homeowners are required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act.

The long-awaited holding in McMillin resolved a split in authority among the California Court of Appeals, and effectively overruled the holdings in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC [(2013) 219 Cal.App.4th 98 (“Liberty”)] and Burch v. Superior Court [(2014) 223 Cal.App.4th 1411 (“Burch”)], to the extent inconsistent with McMillin. In Liberty and Burch, the California Court of Appeals held that the Right to Repair Act is not the exclusive remedy for construction defect lawsuits that allege  resulting property damage arising from new residential construction. Homeowners were thus not required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act because such lawsuits could be maintained as common law claims.  As to construction defect lawsuits where resulting property damage had not occurred (i.e. pure economic loss), such claims are barred by the holding in Aas v. Superior Court [(2000) 24 Cal.4th 627] unless they can be brought under the Right to Repair Act.

In McMillin, a construction defect lawsuit was brought by the purchasers of 37 new single-family homes from McMillin Albany LLC. The homes were purchased at various times after January 2003, thus implicating the Right to Repair Act. In 2013, the homeowners initiated the lawsuit against McMillin Albany LLC alleging numerous construction defects in their respective homes. The complaint included common law causes of action for negligence, strict products liability, breach of contract and breach of warranty, as well as a claim for violation of the Right to Repair Act.

In the trial court, McMillin Albany LLC moved for an order staying litigation to allow the parties to engage in the pre-litigation notice and cure procedures under the Right to Repair Act. The trial court denied the motion, relying upon the California Court of Appeals holding in Liberty.  McMillin Albany LLC appealed the trial court ruling.

On appeal, and disagreeing with the holdings in Liberty and Burch, the California Court of Appeals ruled that the parties must follow the pre-litigation notice and cure procedures because the Right to Repair Act is the exclusive remedy for construction defect claims where property damage has occurred.  The Court of Appeals observed that “the Legislature intended that all claims arising out of defects in residential construction involving post-2003 sales of new homes be subject to the standards and requirements of the Act.”

The California Supreme Court affirmed the ruling of the California Court of Appeals.  In its analysis, the Supreme Court looked to the language of the Right to Repair Act and its legislative history to determine whether the common law had been supplanted where construction defect claims resulted in property damages.  In this regard, the Supreme Court recognized that Section 896 states the Right to Repair Act applies to “any action” seeking damages for construction defect.  This section also states that “claims or causes of action shall be limited to violation of” the functionality standards set forth in the Right to Repair Act and apply only to “original construction intended to be sold as an individual dwelling unit.”

Moreover, Section 944 identifies what damages may be recovered under the Right to Repair Act by a homeowner, which covers the kinds of damages recoverable in a construction defect lawsuit, and Section 943 establishes that such damages may only be recovered under the Right to Repair Action, absent an express exception. The damages recoverable under the Right to Repair Act include pure economic losses, unlike a common law claim.

Furthermore, the Supreme Court recognized that “the creation of a mandatory pre-litigation process and the granting of a right to repair, would be thwarted if we were to read the Act to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of the Act, for construction defect claims involving damages other than economic loss.”

Accordingly, the Supreme Court held the Right to Repair Act shows a legislative intent to modify the common law and effectively “provides that construction defect claims not involving personal injury will be treated the same procedurally going forward whether or not the underlying defects gave rise to any property damage.”  Therefore, “claims seeking recovery for construction defect damage are subject to the Act’s pre-litigation procedures regardless of how they are pleaded.”

Insurance Fraud – It’s a Widespread Industry Problem

Emily Marlowe | Property Insurance Coverage Law Blog | February 20, 2018

Fraud is generally defined as an act done with the intent to deceive or misrepresent others in order to attain or secure some unlawful gain or deprive a victim of a legal right. Different courts, states, and bodies of law throughout our country have their own unique causes of action based in fraud, or where fraud is the primary allegation.

Fraud (on behalf of insurance companies) is more common than people realize. As recently as last week, California’s Insurance Commissioner started an investigation into Aetna Insurance Company1 after Aetna’s former medical director admitted under oath that the Insurance Company would deny insurance coverage without ever actually looking at a patient’s medical records. This was Aetna’s custom and practice, as admitted by its former medical director.

This type of fraud is not exclusive to Aetna or medical insurance – this is common in property and disaster insurance as well.

In the aftermath of Hurricane Sandy (2012), we saw this all too frequently. In fact, this issue was so problematic that the New York Attorney General indicted several NFIP flood insurance company engineers and engineering companies for fraudulently altering engineering reports. The flood insurance companies used the fraudulently altered reports to support their denial of property owners’ proper claims for covered flood damages. For example, the insurance company engineer reports originally blamed the flood water for causing severe structural damage to the homes, but the reports were changed to say there was no structural damage, or the flood water did not cause the damage. The changed reports were used by the insurance companies to significantly reduce the claim payout, or outright deny the claim.

This issue is so common and pervasive that insurance industry insiders have blown the whistle on their former insurance company employers. Back in 2006, the Rigsby sisters, who were both former claims adjusters for State Farm, blew the whistle on their former employer and insurance industry titan State Farm. The Rigsby sisters said that after a thorough investigation of property owners Hurricane Katrina claims they frequently would reach the conclusion that the property damage was caused by wind (which would be covered by the property owner’s insurance policy with State Farm), but State Farm would change the conclusion and say that the damage was flood-related, and therefore not covered under the policy. State Farm would entirely disregard the conclusions reached by their licensed adjusters, and fraudulently change the conclusion to avoid payment on the claim. The jury determined that State Farm owed over $4 million in damages related to this fraud.

Insurance Company fraud is not as uncommon as people may think. If you believe that you are a victim of this type of insurance company fraud, you should contact an experienced insurance attorney.
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1 February 12, 2018, California Department of Insurance Press Release, available at http://www.insurance.ca.gov/0400-news/0100-press-releases/2018/statement017-18.cfm (last accesses February 19, 2018).