Coverage for Construction Defects Caused by Subcontractor Work

Amanda M. Leffler | Brouse McDowell | September 12, 2017

The Ohio Supreme Court has held that claims for the cost to repair an insured’s own defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy.” See Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712. In its decision, however, the Court approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:

  • Repair and replacement of a policyholder’s own defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and,
  • Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.

Importantly, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. A recent decision from one of Ohio’s appellate courts suggests that defective work performed by a policyholder’s subcontractors may be covered, regardless of whether the subcontractor’s work caused any consequential damages.

In 2008, Ohio Northern University contracted with Charles Construction Services (CCS) to construct a hotel and conference center. Ohio Northern Univ. v. Charles Constr. Servs., Inc., 2017-Ohio-258 (3rd Dist.). CCS retained several subcontractors to complete the work. After construction was completed, Ohio Northern discovered significant water intrusion and related damages, as well as serious structural defects, and brought suit against CCS.

CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no obligation to defend or indemnify CCS. Cincinnati contended that, under Custom Agri, property damages arising from defective work could neverconstitute an occurrence, regardless of who performed the work. In response, CCS argued that Custom Agri was inapplicable because almost all of the work at issue had been performed by subcontractors, not by CCS, and because CCS had purchased products-completed operations coverage which applied to the defective construction claims arising from the work of its subcontractors.

The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed the “Damage to Your Property” and “Damage to Your Work” exclusions, which expressly preserved coverage for damaged work or damages arising from faulty work if (1) the work was performed by a subcontractor, and (2) the damage occurred after construction was completed. The appellate court correctly noted that if it were to adopt Cincinnati’s interpretation of the policy, it would render these provisions meaningless. The court found that, at a minimum, the provisions created an ambiguity that must be resolved in favor of the policyholder. Thus, the appellate court held that Cincinnati had a duty to defend and indemnify CCS.

Interestingly, though not analyzed by the appellate court, even if the work at issue had been performed by CCS and not its subcontractors, the damages alleged by Ohio Northern would have required that Cincinnati defend CCS and indemnify at least a portion of any award against it. This is because Ohio Northern asserted claims not only for the repair and replacement of defective work, but also for consequential damages arising from such work. As noted above, the Supreme Court in Custom Agri cited with approval prior lower court opinions, which held that CGL policies cover such claims for consequential damages. Insurers and policyholders in Ohio continue to test the scope of the Ohio Supreme Court’s decision in Custom Agri. As in any case involving complex coverage analysis, policyholders should consider retaining experienced coverage counsel to assist in the claim process so as to best position their claim for coverage.

California Supreme Court Affirms California Fair Plan Ass’n v. Garnes, and Preserves Homeowners’ Interests

Stephanie Poll | Property Insurance Coverage Law Blog | August 17, 2017

The California Department of Insurance recently issued a press release announcing that the California Supreme Court affirmed the homeowner reimbursement protections recently decided in California Fair Plan Association v. Garnes.1 Back in June, my colleague Kevin Pollack wrote about the recent decision and whether actual cash value means fair market value or replacement cost minus depreciation in, Does Actual Cash Value Mean Fair Market Value or Replacement Cost Minus Depreciation.

Last week, the California Supreme Court refused to consider the insurance industry’s petition to overturn a lower court’s decision that insurers must pay to repair a home even if the repair costs exceed the home’s market value. There, a house fire occurred and the homeowner submitted a claim for $320,549 to her insurer, California Fair Plan Association. This amount represented the cost to repair the damaged home, less depreciation. Garne’s FAIR fire insurance policy had a limit of $425,000, yet Fair Plan denied the claim and only paid $75,000, which was determined to be the fair market of the property in 2011 (in large part due to the mortgage-driven recession).

The supreme court’s refusal to consider the proposal ended an ongoing battle and cemented an important decision that protects homeowners’ interests. Insurance Commissioner Dave Jones stated: “This is an important win for homeowners who should have confidence their insurer will deliver on its promises regardless of housing value fluctuations.”2 Jones filed an amicus brief in support of Garnes, arguing the Insurance Code entitled Garnes to be reimbursed. The lower court agreed and relied on Jone’s interpretation of the Insurance Code when ruling in Ms. Garne’s favor.

The Insurance Commissioner appeared as an amicus curiae, or friend of the court. Jones’ interest was in protecting consumers and ensuring the Insurance Code is properly interpreted and enforced. Our friends over at United Policyholders also filed an amicus brief supporting Garnes and advocating for homeowners’ rights.
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1 California Fair Plan Ass’n v. Garnes, No. A143190, 2017 WL 2303165 (Cal. Ct. App. May 26, 2017).
2 http://www.insurance.ca.gov/0400-news/0100-press-releases/2017/release082-17.cfm

Colorado Statutory Bad Faith: Doubling Down On An Insurer’s Unreasonable Delay Or Denial

Jonathan Bukowski | Property Insurance Coverage Law Blog | August 19, 2017

In August 2008, Colorado created a statutory bad faith claim of action for first-party policyholders not only separate and distinct from a claim for common law bad faith breach of an insurance contract, but establishes a much more reasonable threshold to prevail against an insurer under Colorado Revised Statute § 10-3-1115 and Colorado Revised Statute § 10-3-1116.

Most importantly, the statute provides significant recourse for a successful policyholder in the form of:

  • Two times the covered benefit,
  • attorneys’ fees, and
  • court costs

To bring a claim for statutory bad faith under § 10-3-1115 and § 10-3-1116, the party(s) asserting the claim must have entitlement to benefits owed directly to or on behalf of an insured under an insurance policy. However, this does not include any nonparticipating provider performing services or a person asserting a claim against an insured under a liability policy.

Finally, the party asserting the claim must establish:

  1. The insurer delayed or denied authorizing payment of a covered benefit, and
  2. the insurer had no reasonable basis for delaying or denying the covered benefit.

Colorado Revised Statute § 10-3-1116 does not require proof of actual damages. Rather, a policyholder’s recovery is determined by the amount of the “covered benefit” in dispute. Therefore, the right of action is sufficient by itself without the need for an accompanying breach of contract claim, allowing a policyholder to recover two times the “covered benefit” even when the benefit is ultimately paid and no actual damages are sustained.

In passing this bad faith statute, Colorado has provided protection to its policyholders and a strong remedy against the insurers that unreasonably delay and/or deny valid claims.

Iowa Appellate Court Upholds Appraisal Award For Insured

Christina Phillips | Property Insurance Coverage Law Blog | August 20, 2017

Recently the Iowa Court of Appeals reversed the district court and upheld an approximate $1.4 million dollar appraisal award entered for the Walnut Creek Townhome Association.1

Walnut Creek’s thirty-six buildings had been damaged by a hail storm in August, 2012. Prior to that, however, the board had investigated issues with the shingles which turned out to be CertainTeed New Horizon shingles, known to have defects which caused cracking and crazing in the shingle applique and cause significant granular loss. Within a week of the hail storm, the association had the roofer conduct an inspection. The roofer concluded that he observed no hail impacts significant enough to warrant an insurance claim. Thereafter, the association had another roofer inspect the roof who concluded the roofs had hail damage and found eight to twelve hits per square. Ultimately, the association retained a public adjuster who similarly concluded the buildings had sustained hail damage and observed nine to eleven hits per square. Conversely, the insurer’s experts from Haag Engineering found that the damage observed was not consistent with hail damage and observed that the roofs were in poor condition. Depositors Insurance denied Walnut Creeks claim, excluding payment for the soft metals. Walnut Creek filed suit.

The court concluded that the parties could fully litigate whether all of the loss to the property resulted from a covered hail storm, but also stated that the appraisers and umpire must consider what damage was caused by hail and what was not. The appraisal proceeded and an award was entered for Walnut Creek in the approximate amount of $1.4 million. A couple of weeks later, a bench trial was held and the district court concluded that the appraisal was not binding or conclusive and dismissed Walnut Creek’s claims.

On appeal, the Iowa Court of Appeals concluded there was no reason to reject the appraisal award. Specifically, there was no reason to reject the appraisal panel’s determination of damage and possible causes. The structure of the appraisal award did not suggest fraud, mistake or malfeasance. As such, the court accepted the appraisal panel’s conclusions as to the amount of the loss and causation as binding.

The appellate court also concluded the district court erred in its application of the policy in light of the appraisal panel’s conclusion. In particular, the appellate court rejected the district court’s conclusion that the shingles contained a product defect that triggered deterioration—coverage excluded under (B)(2)—as it was inconsistent with the binding conclusion of the appraisal panel, which had specifically found that hail caused the damage. The court therefore reversed the judgment and ordered the district court to enter judgment in favor of Walnut Creek consistent with the appraisal panel’s award.
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1 Walnut Creek Townhome Association v. Depositors Ins. Co., 2017 WL 3077916 (Ct. App. Iowa, July 19, 2017).., 2017 WL 3077916 (Ct. App. Iowa, July 19, 2017).

California Court of Appeal: Inserting The Phrase “Ongoing Operations” In An Additional Endorsement Is Not Enough to Preclude Coverage for Completed Operations

Gary Barrera | California Construction Law Blog | September 11, 2017

In a victory for additional insureds, a California appeals court held, in Pulte Home Corp. v. American Safety Indemnity Co., Cal.Ct.App. (4th Dist.), Docket No. D070478 (filed 8/30/17), that an insurer’s denial of coverage for completed operations based on the inclusion of the phrase “ongoing operations” in an additional insured endorsement, was improper. Additionally, an insurer wishing to limit coverage under an additional insured endorsement to ongoing operations must do so via clear and explicit language.

Pulte Home Corp. v. American Safety Indemnity Co.

In the Pulte case, Pulte Home Corp. was the general contractor and developer for two residential housing projects beginning in 2003 and sold in 2005 and 2006.  During construction, Pulte entered into subcontracts that obligated the subcontractors to name Pulte as an additional insured on their policies for completed operations.  One of the insurers, American Safety, issued three types of additional insured endorsements with substantially similar language.  The first endorsement provided coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’ which is ongoing and which is performed by the [named insured subcontractor] for [Pulte]” on or after the endorsement’s effective date.  The second endorsement provided coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’ and only as respects ongoing operations performed by the [named insured subcontractor] for [Pulte]” on or after the endorsement’s effective date.  The third endorsement provided coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’” performed at the project designated in the endorsement and only for “ongoing operations performed by the [named insured subcontractor]” on or after the endorsement’s effective date.

In 2011 and 2013, two construction defect lawsuits were filed against Pulte by homeowners on each project. Pulte tendered its defense of the lawsuits to American Safety.  American Safety denied Pulte’s tenders, in part, on the grounds that coverage under the additional insured endorsements was limited to ongoing operations, and that the lawsuits alleged liability arising out of completed operations.  Pulte sued American Safety for bad faith.  The trial court ruled that American Safety’s denial of Pulte’s tenders was improper and that the additional insured endorsements were ambiguous because they did not effectively exclude coverage for completed operations.

The Appeal

On appeal, American Safety argued that the additional insured endorsements excluded coverage for completed operations because the inclusion of the phrase “ongoing operations” after the phrase “your work” was a limitation on “your work” and eliminated completed operations coverage. American Safety also argued that the endorsements limited coverage to the time frame of the subcontractors’ ongoing operations, and since the homes were sold as completed units, ongoing operations had already concluded.

The Court of Appeal rejected American Safety’s arguments. First, the court held that American Safety’s contention that there were no allegations of ongoing operations incorrectly focused on when the homeowners sustained financial damage through their purchase of the defective homes, and not when the homes became physically damaged.  The court opined that the property damage could have occurred while the subcontractor’s operations were ongoing but after the homes had been sold, and since the property damage became evident after the work was completed, American Safety was placed on sufficient notice that some of the subcontractors’ work could have been ongoing and/or completed during its policy periods, since the homes were built in phases.

Next, the Court of Appeal reaffirmed the trial court’s ruling that the additional insured endorsements were ambiguous because they combined coverage for ongoing and completed operations in a single clause, and failed to expressly limit coverage to the time of the subcontractors’ ongoing operations. The court held that the endorsements’ language allowing coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’” could reasonably be read as a grant of coverage for liability arising out of the named insured’s completed operations.  The court ruled that the mere linking of the phrase “ongoing operations” to the “liability arising out of ‘your work’” clause did not explicitly restrict coverage to ongoing operations.  The court explained that if the “ongoing operations” language was intended by American Safety to preclude coverage for completed operations, the endorsements had to expressly state that coverage was limited to claims arising out of work performed during the policy period.

The Court of Appeal also noted the subcontracts’ requirement that Pulte be named as an additional insured for completed operations. The court observed that at the time American Safety issued the additional insured endorsements and at the time of Pulte’s tenders, it was aware that the subcontracts obligated the subcontractors to name Pulte as an additional insured for completed operations.  The court ruled that based on American Safety’s knowledge of this information, it should have taken into account Pulte’s reasonable expectations of coverage in interpreting its policy, but it did not do so, thereby failing to give equal consideration to its interests and its insureds’ interests.

Conclusion

The Pulte decision should provide developers and general contractors with powerful ammunition against insurers’ attempts to deny completed operations coverage merely because the endorsements contain the phrase “ongoing operations,” without taking into account whether the wording of the endorsement is ambiguous. Pulte makes it clear that insurers intending to limit coverage to ongoing operations must ensure that their endorsements contain clear and unambiguous language to that effect. Pulte is also noteworthy from the perspective of a developer and general contractor because if a subcontractor’s insurer has knowledge of the subcontractor’s contractual obligation to add the developer or general contractor to its policies of insurance as an additional insured for completed operations, it obligates the insurer to consider the developer or general contractor’s reasonable expectations of coverage when evaluating an additional insured tender.

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