Leveraging the 50-State Initiative, Connecticut and Maine Team Secure Full Dismissal of Coverage Claim for Catastrophic Property Loss

Regen O’Malley | Insurance Coverage Law Blog

On behalf of Gordon & Rees’ surplus lines insurer client, Hartford insurance coverage attorneys Dennis BrownJoseph Blyskal, and Regen O’Malley, with the assistance of associates Kelcie ReidAlexandria McFarlane, and Justyn Stokely, and Maine counsel Lauren Thomas, secured a full dismissal of a $15 million commercial property loss claim before the Maine Business and Consumer Court on January 23, 2020. The insured, a wood pellet manufacturer, sustained catastrophic fire loss to its plant in 2018 – just one day after its surplus lines policy expired.

Following the insurer’s declination of coverage for the loss, the wood pellet manufacturer brought suit against both its agent, claiming it had failed to timely secure property coverage, as well as the insurer, alleging that it had had failed to comply with Maine’s statutory notice requirements. The surplus lines insurer agreed to extend the prior policy several times by endorsement, but declined to do so again. Notably, the insured alleged that the agent received written notice of the non-renewal prior to the policy’s expiration 13 days before the policy’s expiration. However, the insured (as well as the agent by way of a cross-claim) asserted that the policy remained effective at the time of the loss as the insured did not receive direct notice of the decision not to renew coverage and notice to the agent was not timely. Although Maine’s Attorney General and Superintendent intervened in support of the insured’s and agent’s argument that the statute’s notice provision applied such that coverage would still be owed under the expired policy, Gordon & Rees convinced the Court otherwise.

At issue, specifically, was whether the alleged violation of the 14-day notice provision in Section 2009-A of the Surplus Lines Law (24-A M.R.S. § 2009-A), which governs the “cancellation and nonrenewal” of surplus lines policies, required coverage notwithstanding the expiration of the policy. The insured, the agent, and the State of Maine intervenors argued that “cancellation or nonrenewal” was sufficient to trigger the statute’s notice requirement, and thus Section 2009-A required the insurer to notify the insured directly of nonrenewal. In its motion to dismiss, Gordon & Rees argued on behalf of its client that Section 2009-A requires both “cancellation and nonrenewal” in order for the statute to apply. Since there was no cancellation in this case – only nonrenewal – Gordon & Rees argued that Section 2009-A is inapt and that the insurer is not obligated to provide the manufacturer with notice of nonrenewal. Alternatively, it argued that the statute is unconstitutionally vague and unenforceable.

The Court agreed with Gordon & Rees’ client that the statue is unambiguous because the terms “cancellation and nonrenewal” are not “mutually exclusive,” as was argued by the insured, agent and State intervenors. In doing so, the Court held that it was not bound by the definitions of “cancellation” and “non-renewal” found in Maine’s personal lines statutes (the definitions there expressly do not apply) and must interpret those terms based on their plain and common meanings. Based on this, the Court held: “the phrase ‘cancellation and non-renewal’ refers to the termination of a surplus lines insurance policy prior to the end of the policy period, with a failure to renew the policy.” The Court dismissed the complaint and cross-claim as no cancellation occurred, and the statute does not apply. Accordingly, there was no need to reach the arguments regarding constitutional infirmity.

Coronavirus (COVID-19): Coming Insurance Claims

Richard Goetz, Tancred Schiavoni, Allen Burton, Gary Svirsky, Kieran Humphrey, Zoheb Noorani and Janine Panchok-Berry | O’Melveny & Myers

While we do not yet have a firm fix on where the COVID-19 outbreak is heading, we do know one thing that is certainly on its way: a torrent of insurance claims. Every day we read about quarantined cities, cancelled travel plans, and disrupted supply chains across the globe. The scale of the outbreak—and its economic consequences—is almost like a natural disaster, but insurers do not typically sell coverage for corporate losses caused by epidemics or pandemics.

Based on recent natural disasters and epidemics, the claimed losses could fall into several categories:

  • Business Interruption: With massive shutdowns and disrupted supply chains, business-interruption claims are likely coming.
  • Decontamination Costs: Depending on the severity of the outbreak, organizations might incur voluntary cleanup costs. And governments and regulators may force other businesses to temporarily close to clean facilities.
  • Evacuation Costs: Several infected people have already been evacuated to their home countries. There could be more. To the extent that any business—such as the employer of an evacuee—is forced to bear these expenses, it will likely seek coverage for these costs.
  • Medical Expenses: Infected people may make claims for medical expenses—especially if they got sick during business travel. Either the employees themselves or their employers may seek coverage.
  • Travel Cancellation Losses: Many travelers have canceled travel and accommodation bookings (or may in the future be required to) as a result of the travel restrictions and quarantine laws being adopted around the world. This will inevitably lead to claims from individuals and businesses under their travel insurance.
  • Other: D&O claims and third-party liability suits are also sure to follow, particularly as the plaintiffs’ bar develops theories of liability.

Traditional property and casualty insurance policies have limited coverage for epidemics. In fact, following the SARS outbreak in 2003, many insurance carriers began to include exclusions for epidemics and pandemics in business-interruption policies. Thus, many policies exclude coverage for losses “in connection with a notifiable infectious disease”—that is, a disease that doctors and medical staff must report to the government by law. So, there may be less insurance available for claims arising from COVID-19 than some businesses expect.

Still, a patchwork of policies may provide some coverage. Beyond workers’ compensation, property, and business-interruption, coverages including professional liability and some marine policies might respond in specific circumstances. While the practices used by some employers to contain the spread of the virus could give rise to claims of discrimination against protected classes, employment-practices liability policies might apply in those situations. D&O policies could cover shareholder allegations about lack of preparedness or a slow response to the crisis. General liability policies could cover illnesses by customers or other third parties. Property policies could provide coverage for decontamination and cleanup costs. Obviously, the language of each policy would govern.

The unusual circumstances of the claims that may be made over COVID-19 could give rise to a number of coverage issues:

  • Liability of Hotels/Cruise Ship Operators/Venues of Public Gatherings: These businesses risk liability for any outbreaks that occur on their premises on grounds of alleged negligence. Such situations may trigger commercial general liability policies.
  • Bodily Injury Damages: Many general liability policies cover damages “on account of, or because of, bodily injury.” But, what damages will be considered related to COVID-19? Will loss of reputation and brand value diminution because of the outbreak be damage “because of” bodily injury?
  • Damages Calculations: If a policy provides business-interruption coverage, how will those damages be calculated and what categories of damages will policyholders be allowed to recover?
  • Site-Liability Policies: Some policies provide coverage for remediation and third-party liability based on the presence of biological agents at certain sites, such as hotels or common carriers. These policies could be triggered if there is an outbreak in a hotel or at an airport.
  • Maritime Policies: Some maritime polices provide coverage if there is an outbreak of disease on a vessel. Since cruise-ship operators have been severely impacted by COVID-19, they will search for all possible coverage—and they may be surprised to find some available coverage where they did not expect it.

Obtaining coverage based on the unique circumstances related to COVID-19 may, in many cases, be like trying to fit a square peg into a round hole. What is clear is that these coverage questions will put a variety of issues to the test in courtrooms and before arbitration tribunals around the world. Both policyholders and carriers should be mindful that the cases arising from the outbreak may be highly complicated and contentious.

* * *

Just as SARS and MERS preceded it, COVID-19 is surely not the last pandemic. The novelty and nature of the financial risks presented by the current outbreak may encourage entrepreneurial market participants to turn to insurance-linked securities—not unlike catastrophe bonds for hurricane risk. While it is too late for similar offerings related to COVID-19, we may see robust interest in such products in the near future.

Coronavirus – Are We in For Historic Construction Delay Claims?

C. Michael Shull III | Frost Brown Todd

What if a general contractor’s completion of its work is delayed due to COVID-19 (coronavirus)? Is the contractor in breach? Or, is the delay in performance due to the virus excused? Does the contractor get additional time to complete work or additional compensation for the delay to its work schedule?

There are many ways that coronavirus can cause delays to a project. The supply chain can be disrupted in many ways. While lumber, steel, concrete and other materials are sourced more locally, others come from overseas, such as marble from Italy and fixtures from China. Currently, Italy and China are two of the nations most affected by the pandemic. Local agency closures may delay the issuance of permits, approvals or inspections necessary for a certificate of occupancy required for substantial completion. And, of course, workers and crews may either become ill or wish to stay home to avoid infection. Who bears this risk of delay?

When in Doubt, Read the Contract

Most construction contracts break delays down into three categories: those caused by the project owner or its design team, those caused by the contractor, and a third category where the delay arises due to neither the actions of the owner nor contractor, but from circumstances beyond either party’s control. Whether the general contractor is entitled to an extension of its agreed-upon time for performance (contract time) or an increase in compensation (contract price) in connection with the delay often depends upon the cause of delay’s category. Typically, those delays attributable to the contractor’s failures warrant neither an increase in the contract time or the contract price. Those delays caused by the owner or its team usually warrant an increase to both. Those delays caused by neither the owner nor the contractor – often referred to as force majeure events – will typically warrant an increase in the contract time and therefore relief from any liquidated damages. Still, entitlement to an increase in the contract price varies greatly from contract to contract.

Common Contractual Language Regarding Delays

Contract forms typically used in the construction industry address the issue of force majeure damages a bit differently. The ConsensusDocs Form 200, for example, drafted for use between an owner and a contractor, lists within Article 6.3 four categories where the delay is essentially due to an owner’s action or inaction, and provides both an increase in the contract time and contract price if they occur. For delays caused by force majeure events, an adjustment to the contract time is to be provided, but the provision (6.3.3) neither expressly prohibits nor requires an increase in the contract price. Is the coronavirus such a force majeure event? In fact, the ConsensusDocs 200 specifically mentions “epidemics” as a delay for which the contract time will be equitably adjusted. On March 11, 2020, the World Health Organization (WHO) announced that coronavirus was a pandemic. WHO defines a pandemic as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people.”

If the coronavirus itself did not fall within the force majeure definitions of a particular contract, and “pandemic” or “epidemic” are not specifically mentioned, then possibly one of its consequences does. For example, force majeure situations under the ConsensusDocs 200 also include “transportation delays not reasonably foreseeable,” “adverse governmental actions,” and a catch-all “unavoidable accidents or circumstances.”

Another popular industry form, the AIA A201 (2017), at Article 8.3.1 offers a contractor an extension of the contract time for delays due to “labor disputes, fire, unusual delay in deliveries, unavoidable casualties . . . or other causes beyond the Contractor’s control”, as well as “other causes that the Contractor asserts, and the Architect determines, justify delay.”

The A201 does not provide for an automatic increase in the contract price for these force majeure delays (or even for delays caused by the owner). Instead, it simply says that damages for delay by either party are not precluded.

Frequently the standard terms of both the ConsensusDocs 200 and AIA A201 are revised in favor of one of the parties’ interests. For example, an owner may revise them to provide for no damages due to delay under any circumstance, even those beyond the contractor’s control. But some states have passed legislation declaring void any contract which provides no damages for delay in the event that the owner is the cause of the delay, but leaves open the issue of damages in the case of force majeure events. Even if the contract form does provide for additional time or compensation in such circumstances, however, the contractor will still need to prove that the delay was in fact occasioned by the pandemic, and likely the exact amount of time that the pandemic affected the project’s critical path, as well as the lack of available mitigation measures and the provision of notice as required by the contract.

Federal Government Contracts

Some public contract provisions, such as federal government contracts, have their terms as to delay claims determined by statute and regulation. For example, for federal government construction projects the Federal Acquisition Regulations at 48 CFR §52.249-14 “Excusable Delays” (for insertion in cost-reimbursement construction contracts among others) provide that:

. . . the Contractor shall not be in default because of any failure to perform its contract under its terms (within the Contact Time) if the failure arises from causes beyond the control and without the fault or negligence of, the Contractor.

Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, . . . (5) epidemics, (6) quarantine restrictions . . . (8) freight embargoes.

If the contractor’s failure is because one of its subcontractor’s performance is delayed by such causes, a failure to timely perform likewise will not constitute a default. 52.249-14(c) provides that upon request of the contractor of a schedule extension, the contracting officer will determine whether the contractor’s failure to meet the required schedule does, in fact, flow from one of the enumerated causes, and if so the delivery schedule shall be revised. Additional compensation to the contractor is however, not provided in such instances. The Federal Acquistion Rregulation (FAR) provision applicable to fixed-price construction contracts, 48 CFR §52.249-10, likewise provides for an extension of time for completing the work shall be provided, upon adequate proof by the contractor, that the delay in completion is due these same causes.

Relief via a claim of excusable delay due to analogous situations, such an influenza epidemic, however, has not been as easily obtained in the past as one might think. Several claims of excusable delay due to an influenza epidemic have been denied where the contractor has failed to show that the epidemic was the sole cause, not merely a contributing cause, of the performance delay. The contractor must also establish the actual extent of the delay caused by the epidemic. See e.g. Ace Electronics Associates, Inc., ASBCA Nos. 11496, 11781, 67-2 BCA ¶ 6456 (July 18, 1967) Additionally, a contractor will find difficulty alleging that its performance is excused simply because one or more key personnel were affected by an epidemic. Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (August 29, 1995).

One should also take care to remember that if a delay is otherwise excusable, the failure of a contractor to establish reasons for not obtaining the requisite material(s) from another source can result in a denial of excusable delay and an extension of the time of performance. Cryer & Parker Elecs., Inc. ASBCA 15150, 71-2 BCA ¶ 8943.

The world “analogous” is used above hesitantly. Whether the coronavirus pandemic is analogous to anything seen before is surely debatable. Each day brings a fresh set of developments that suggest our current situation is unlike any faced in modern times. Returning to the FAR clauses above, the recitation of epidemics, quarantines, the sovereign action of the government, embargoes, and other circumstances beyond the control of a contractor were likely not listed with the anticipation that they might occur simultaneously.

For Contractors: Remember to provide notice. Contractors whose performance is affected by COVID-19 should provide notice as required under their contract, both in the format and within the time required. Suggest a meeting with the owner to discuss this possibility before it even occurs, if possible. Yes, the owner is no doubt aware of the pandemic in general but not yet as to your specific challenges. If a solution to the delay is possible with the owner and the architect’s approval, propose it. Owners will be keen to get the project completed as soon as possible. If the pandemic causes a full or partial shutdown of the work, remember to protect it and all materials as best as possible. If such protection requires atypical measures, discuss those with the owner to find a solution and protect materials onsite from the elements.

For Owners: If your contractor puts you on notice of a delay due to the pandemic, schedule a meeting. Identify with the contractor whether the delay is due to workforce or supply chain issues, and determine whether their effects might be mitigated by switching to materials from a different source (i.e., local rather than overseas). If the contractor on your project is already severely behind schedule here at the onset of the coronavirus pandemic, make sure to document the status of the project now in order to avoid the pandemic and its effects being used (or attempted) to excuse performance failures, and perhaps liquidated damages which have already accrued.

For Everyone: Communication on projects will be more important than ever before, because whether due to the virus’ effect on the workforce or the government’s reaction to it, all participants on a project will need to be flexible and responsive. If you are about to enter into a construction contract, go ahead and address the pandemic and possible ramifications now if you can.

We really are all in this together. Owners are anxious to get their projects completed without delays and additional costs. Contractors are worried about completing their current projects as well and maintaining the safety of their workforce. It is best to try and work mutually towards a solution as each challenge arises.

Ways of Evaluating Property Damage Claims in Various Contexts

Bremer Whyte Brown and O’Meara

Potential damages in a lawsuit may come in many forms depending on the facts of the case. Common damages include medical expenses, loss of earnings, property loss, physical pain, and mental suffering. Of the many damages Plaintiffs may claim, one of the most prevalent and recognizable is property damage. This article briefly discusses these types of damages which fall under two major categories – Real Property and Personal Property.

Broadly speaking, “real property” means land, and “personal property” refers to all other objects or rights that may be owned. Ballentine’s Law Dictionary defines “real property” as: “Such things as are permanent, fixed, and immovable; lands, tenements, and hereditaments of all kinds, which are not annexed to the person or cannot be moved from the place in which they subsist. . . .” (Ballentine’s Law Dict. (3d ed. 2010).) “Personal property” is defined as: “Money, goods, and movable chattels . . . . All objects and rights which are capable of ownership except freehold estates in land, and incorporeal hereditaments issuing thereout, or exercisable within the same.” (Id. (emphasis added).)

Real Property

Real property may be damaged or “harmed” through trespass, permanent nuisance, or other tortious conduct. The general rule is that Plaintiffs may recover the lesser of the two following losses: (1) the decrease in the real property’s fair market value; or (2) the cost to repair the damage and restore the real property to its pre-trespass condition plus the value of any lost use. (Kelly v. CB&I Constructors, Inc.) However, an exception to this general rule may be made if a Plaintiff has a personal reason to restore the real property to its former condition, sometimes called the “personal reason” exception. In such cases, a Plaintiff may recover the restoration costs even if the costs are greater than the decrease in the real property’s value, though the restoration cost must still be “reasonable” in light of the value of the real property before the injury and the actual damage sustained.

Personal Property

Several forms of recovery are available for damage to personal property, depending on the severity of the harm, the type of personal property at issue, and the recovery sought.

Fair market value frequently plays a role in determining the amount of recovery. Fair market value is “the highest price that a willing buyer would have paid to a willing seller, assuming: 1. That there is no pressure on either one to buy or sell; and 2. That the buyer and seller are fully informed of the condition and quality of the [item of personal property].” 

If the personal property had value before the harm occurred and still retained a part of its value following the harm, a Plaintiff may recover the lesser of either: (1) the reduction in the item’s value because of the harm; or (2) the reasonable cost of repairing it. The formula for recovery changes if the personal property will still lose value even if the repairs are performed: recovery becomes the difference between the item’s value before the harm and its lesser value after the repairs have been made plus the reasonable cost of making the repairs, but this award may not exceed the value of the item before the harm occurred. If repairs cannot be made, the formula for damages changes yet again; recovery is the fair market value of the item before the harm occurred minus the item’s fair market value immediately following the harm. 

If the personal property is lost or destroyed because of the harm, recovery is more straightforward. Simply put, the Plaintiff is entitled to the fair market value of the item of personal property just before the harm occurred. 

In some instances, personal property has “special value” to its owner, over and above its market value. Put differently, the law recognizes additional recovery for “property which has a market value and also a peculiar value to the owner . . . .” (Zvolanek v. Bodger Seeds, Ltd.) To recover damages for property having special value, a Plaintiff must prove: (1) that the item had some market value; (2) that the item had a unique value to the Plaintiff; and (3) that the Defendant had notice of this unique value before the harm or that the Defendant’s conduct was intentional and wrongful. Note that “peculiar value” does not include sentimental or emotional value; it “refers to a property’s unique economic value” or “special characteristics” that increase its monetary value. (McMahon v. Craig) It is also worth noting that there is no set formula for determining the amount of special value, making this form of recovery more difficult to evaluate. 

A Plaintiff may receive an additional award for the loss of use of the personal property (i.e. the amount of time he or she is unable to use the item). To determine recovery for a Plaintiff’s loss of use, a Plaintiff must prove the reasonable cost to rent a similar item for the amount of time reasonably necessary to repair or replace the item. 

Evaluating property damage depends on a number of factors, including the type of property, the extent of the damage, and the recovery sought. While many damages can be estimated based on market value and the cost of repairs, wildcard damages such as the personal reason exception for real property and special value recovery for personal property can have an unpredictable impact on damage calculations. As with all damages, case-specific facts matter when making property damage determinations. For Plaintiffs, it is wise not to count on recovery that is more difficult to prove. For Defendants, it is prudent to allow for a healthy margin of error. 

Contractor Entitled to Defense for Alleged Faulty Workmanship of Subcontractor

Tred R. Eyerly | Insurance Law Hawaii

    Applying Nevada law, the Federal District Court in Florida found that the general contractor was entitled to a defense of claims based upon alleged faulty workmanship of a subcontractor. KB Home Jacksonville LLC v. Liberty Mutual Fire Ins. Co, 2019 U.S. Dist. LEXIS 151235 (M.D. Fla. Sept 5, 2019).

    KB Home completed six residential developments utilizing various subcontractors. One subcontractor was Florida State Plastering, LLC (FSP) for installing stucco. Eighty-eight complaints against KB Home implicated FSP’s stucco work. Plaintiffs alleged that the stucco subcontractor’s work suffered from construction defects, causing damages not only to the exterior stucco, but also the underling wire lath, paper backing, house wrap, wood sheathing, interior walls, interior floors and other property. 

    Ironshore insured FSP under a CGL policy. KB Home was an additional insured for liability for property damage caused by “your work.” KB Home was also insured under its own CGL policy with Liberty Mutual. Both insurers refused to defend.

    KB Home filed suit for a declaratory judgment. Liberty Mutual then agreed to defend. Ironshore argued that KB Home was not entitled to partial summary judgment because there were material facts in dispute. The court concluded that the underlying complaints alleged “property damage,” caused by an “occurrence” of FSP’s allegedly faulty workmanship. Further, there were allegations of damage to property other than FSP’s own work. The underlying complaints alleged that FSP’s faulty stucco installation caused damage to paper backing, house wrap, wood sheathing, interior walls and interior floors. 

    Ironshore next argued it still had no duty to defend because Liberty Mutual was providing KB Home a defense. The court disagreed. The presence of multiple insurers did not excuse any single insurer from fully defending the insured. Therefore, KB Home’s motion for partial summary judgment was granted to the extent Ironshore had a duty to defend.