The Consequences Of Not Giving Notice Of Disclaimer To Additional Insureds

Larry P. Schiffer | Squire Patton Boggs | July 31, 2019

Statutes and case law make it tough for insurance companies to disclaim coverage. In most jurisdictions, if an insurance company receives a claim or tender it must respond quickly and with specificity to avoid losing the right to assert an exclusion or other basis to deny coverage. Where the notice of claim comes in from a policyholder, the insurance company–if it chooses to disclaim coverage–simply notifies the policyholder in a timely manner of the basis for the disclaimer. Things get a bit more complicated when there are multiple additional insureds and the claim arises out of a construction project. To whom is the disclaimer owed?

In a recent case, a New York intermediate appellate court, addressed the consequences of not giving notice of a disclaimer to additional insureds.

In AVR-Powell C Development Corp. v. Utica First Insurance Co., No. 2016-11075 (N.Y. App. Div. 2d Dep’t Jul. 24, 2019), a subcontractor’s employee was allegedly injured while working on a construction site. The subcontractor obtained commercial general liability insurance, which also named the owner/general contractor and another related company as additional insureds. The owner/general contractor and its affiliates had their own general liability policy.

When the worker brought a claim against the additional insureds, the additional insureds’ insurer tendered the worker’s claim to the subcontractor’s insurer. The subcontractor’s insurer disclaimed coverage based on the employee exclusion in a letter sent to the subcontractor. After the worker commenced a personal injury action, the additional insureds insurer tendered the lawsuit to the subcontractor with a copy to the subcontractor’s insurer. The subcontractor’s insurer again disclaimed coverage based on the employee exclusion, but this time to the additional insureds’ insurer. Prior to trial, 6 years later, the additional insureds advised the subcontractor’s insurer that its disclaimer was ineffective because it was not sent to the additional insureds and made a renewed demand for coverage. The subcontractor’s insurer rejected the invalidity claim and, after receiving a copy of the subcontract, disclaimed directly to the additional insureds.

The additional insureds brought a coverage action against the subcontractor’s insurer and moved for summary judgment. The motion court granted the motion for summary judgment against the subcontractor’s insurer. On appeal, the appellate court affirmed.

In affirming, the court stated that under New York Insurance Law § 3420(d), “an insurer is required to provide its insured and any other claimant with timely written notice of its disclaimer or denial of coverage on the basis of a policy exclusion, and will be estopped from disclaiming liability or denying coverage if it fails to do so.” (citations omitted). Here, said the court, the subcontractor’s insurer did not give timely written notice of its disclaimer direction to the additional insureds until six years after the first demand for coverage was made. This failure, held the court, rendered the late disclaimer ineffective.

The court rejected the subcontractor’s insurer’s claim that its time to disclaim did not run until it received the subcontract. The court stated that the insurer did not need the subcontract to provide a disclaimer directly to the additional insureds based on the employee exclusion. The court held that an insurer may not delay disclaiming on a ground the insurer knows to be valid while investigating other possible grounds for disclaiming coverage. Accordingly, the court affirmed the motion court’s declaration that the subcontractor’s insurer was obligated to defend and indemnify the additional insureds.

How Specific Does A Specific Litigation Exclusion Have To Be?

Larry P. Schiffer | Squire Patton Boggs | July 30, 2019

Insurance policies often have general exclusions for known losses or prior acts.  The reason for this is that most insurance is for fortuitous risks–risks that will take place in the future; not risks that already have taken place.  For large policyholders that have ongoing litigation, it is not uncommon for a new carrier to craft a specific exclusion to preclude coverage for an existing claim or set of circumstances that already exists.  The First Circuit recently addressed a specific litigation exclusion to determine whether it was broad enough to cover new litigation and investigations arising out of the same investment product.

In USB Financial Services, Inc. of Puerto Rico v. XL Specialty Insurance Co., No. 18-1148, 2019 U.S. App. LEXIS 19946 (1st Cir. Jul. 3, 2019), the First Circuit addressed an appeal by policyholders of a summary judgment order granted to the insurance carriers based on the application of a specific litigation exclusion.  The circuit court affirmed.

Basically, there were a series of investigations and lawsuits over a certain financial product sold by the policyholders.  The policyholders sought new insurance going forward and the new carriers sought a specific litigation exclusion for the prior investigations and lawsuits.  Using a major broker and a well-known policyholder law firm, the policyholders negotiated a new policy along with the specific litigation exclusion.  The exclusions was broad and when the policyholder sought to negotiate a narrowing of the exclusion by replacing broad language with more narrow language, the carriers rejected the policyholders’ changes and the policyholders accepted the exclusion.

The exclusion precluded coverage of “any Claim in connection with any proceedings set forth below, or in connection with any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any such proceeding or any fact, circumstance or situation underlying or alleged therein.”  New investigations and lawsuits arose concerning the same financial product and the policyholders sought coverage.  The carriers disclaimed.

In affirming the grant of summary judgment to the carriers precluding coverage based on the exclusion, the court held that the common and usual meaning of the words of the exclusion were unambiguous and no coverage was available for any claim in any way involving the prior matters or any fact, circumstance or situation underlying or alleged in the prior matters.  Moreover, the court found that it was equally clear what the intention of the parties was as demonstrated by the negotiations that preceded the issuance of the insurance policies when the policyholders tried to modify the exclusion and the carriers refused.  Thus, held the court, although the language was undoubtedly broad, it was the language the policyholders bargained for during negotiations.  The court found that the policyholders were aware that the breadth of the unchanged exclusion and nevertheless agreed to purchase the policies as they read.

The court also rejected the argument that the scope of the exclusion rendered the policies illusory.  The court also rejected the argument that the exclusion should be construed in favor of the policyholders noting that those principles seek to protect a weaker party when there is a disparity at the bargaining table.  Here, the court found those concerns not to be present because the terms of the exclusion were clear and the parties negotiated the polices at arms-length.  The court noted that the policyholders were sophisticated financial players, which engaged a major insurance broker and a major policyholder law firm to negotiate the policy and the specific litigation exclusion.  The court concluded that the policyholders could have reasonably expected that they bargained for the plain reading construction that the court gave the exclusion in this case.

ISO Modifies Wrap-Up Exclusion

Jeffrey J. Vita | Saxe Doernberger & Vita | August 2, 2019

For those contractors and other parties enrolled in wrap-up insurance programs, one nagging issue frustrating risk transfer has been the Designated Operations Wrap-Up Exclusion found on many contractors’ programs. See, for example, ISO CG 21 54 01 96, which provides in relevant parts as follows:

“This insurance does not apply to ‘bodily injury’ or ‘property damage’ arising out of either your ongoing operations or operations included within the ‘products-completed operations hazard’ at the location described in the Schedule of this endorsement, as a consolidated (wrap-up) insurance program has been provided by the prime contractor/project manager or owner of the construction project in which you are involved.”

This exclusionary language creates an obstacle to the parties’ intended risk transfer in situations involving unenrolled trades or offsite exposures. For example, where an unenrolled trade causes a loss and the general contractor, construction manager and/or project owner are sued, the intent of the parties is for the upstream party(ies) to transfer the risk to the unenrolled party via the unenrolled party’s additional insured coverage. The existence of the wrap-up exclusion cited above, or any of the manuscript versions currently in use, however, frustrates this intent as certain courts interpreting the language have held the exclusion applies to the additional insured claim despite the fact that the downstream trade causing the loss is not enrolled in the wrap-up program.  

As a result, upstream parties have attempted to remedy this problem by requiring the unenrolled trades to endorse their programs either to modify the wrap-up exclusion such that it does not apply to instances where the named insured (downstream party) is not enrolled in the wrap-up program or to include an exception to the exclusion for a specific project. Alternatively, the downstream party has tried to modify the wrap-up exclusion such that it does not apply to additional insured claims. Finally, upstream parties may be forced to enroll parties in the wrap-up program that they did not initially intend to enroll, in order to avoid any gap in coverage. 

ISO has now solved this dilemma by issuing endorsement CG 21 54 12 19 which states that the wrap-up exclusion applies only if you (i.e. downstream party) “are enrolled in a ‘controlled (wrap-up) insurance program’ with respect to the ‘bodily injury’ or ‘property damage’ described…above at such location.” This new language closes a major loophole in the risk transfer scheme utilized in wrap-up insurance programs when dealing with unenrolled trades or offsite exposures.

Any owner in an OCIP or contractor in a CCIP should request that all unenrolled trades and enrolled trades providing offsite coverage utilize this new endorsement on their corporate programs to remedy this potential gap in coverage and reflect the parties’ intended risk transfer. 

Court of Appeals Finds Additional Insured Coverage Despite “Care, Custody or Control” Exclusion

Garret Murai | California Construction Law Blog | July 30, 2019

When things go wrong on a construction project it’s often a scramble of finger pointing. In McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company, Case No. D074219 (June 5, 2019), the California Court of Appeals for the 4th District considered whether an additional insured exclusion, excluding “property in the care, custody or control of the additional insured,” precluded a duty to defend by an insurer.

McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company

McMillin Homes Construction, Inc. was the developer and general contractor on a residential project known as Auburn Lane in Chula Vista, California.  McMillin subcontracted with Martin Roofing Company, Inc. to perform roofing work. Under the subcontract, Martin was required to obtain commercial general liability insurance naming McMillin as an additional insured.

The commercial general liability insurance policy secured by Martin was issued by National Fire and Marine Insurance Company. As is typical, the policy covered “property damage” and “personal injury” arising out of an “occurrence” during the policy period. McMillin was covered as additional insured under ISO endorsement form CG 20 09 03 97.

In 2014, homeowners at Auburn Lane sued McMillin for construction defects. The complaint alleged water intrusion and damages due to roofing defects. McMillin tendered defense to National Fire. However, National Fire denied the claim on the ground that an exclusion contained in the commercial general liability insurance policy, excluding “property in the care, custody or control of the additional insured,” precluded coverage and defense.

In 2016, McMillin sued National Fire for declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing. The case was bifurcated, with the parties trying first, the issue of whether the exclusion precluded coverage. During the first phase of the bifurcated trial, McMillin argued that exclusion, excluding “property in the care, custody or control of the additional insured,” required that the property be in the “exclusive or complete” control of McMillin, and that here the property was not in the “exclusive or complete” control of McMillin, since McMillin subcontracted the roofing work to Martin.

National Fire, in turn, argued that nowhere in CG 20 09 03 97 are the terms “exclusive” or “complete” control used. Moreover, argued National Fire, ISO endorsement form CG 21 39 10 93, which precluded coverage for indemnity obligations, underscored the intent of the policy to preclude coverage for construction defects like the one at issue.

The trial court agreed with National Fire and McMillin appealed.

The Court of Appeal Decision

On appeal, the 4th District Court of Appeal identified several well-established principles applicable to the interpretation of insurance policies in California. Among them:

  • An insurer’s duty to defend is broader than its duty to indemnify and an insurer “must defend even where the evidence suggests but does not conclusively show the loss is not covered.”
  • An insurer’s duty to defend arises at the outset of a case “arising upon tender and lasting until litigation is resolved, or until the insurer has established there is no potential for coverage.”
  • Where an insurer denies coverage and a duty to defend, and an insured files an action for declaratory relief, the insured must only prove the existence of a “potential for coverage” while the insurer must establish “the absence of any such potential.”
  • Doubts as to whether an insurer owes a duty to defend is resolved in the insured’s favor.

The Court of Appeals, relying on Home Indemnity Company v. Leo L. Davis (1978) 79 Cal.App.3d 863), which involved a similar exclusion in which the court held that the exclusion did not apply where there was “shared” control, explained that while “McMillin was responsible for the whole project and coordinating schedules to ensure the project finished on time” “Martin was responsible for controlling its job site and supervising the roofing work.”  Thus, held the Court, “Martin an McMillin shared control over Martin’s roofing work.”

Moreover, explained the Court of Appeals, interpreting the policy in the manner urged by National Fire would not be consistent with McMllin’s objectively reasonable expectations, which was that, as an additional insured, it would be covered under Martin’s commercial general liability policy for property damage arising from Martin’s work.

Finally, as to National Fire’s CG 21 39 10 93 argument – which basically boiled down to: the policy was intended to preclude coverage for construction defect claims like the one involved, because together with CG 20 09 03 97, they were intended to preclude coverage for construction claims based in both tort and contract  – the Court of Appeal described the argument “convoluted.”

In interpreting insurance policy provisions, explained the Court, provisions are not interpreted to “protect the subjective beliefs of the insurer, but rather the objectively reasonable expectations of the insured.” And, here, the objectively reasonable expectation of McMillin was that as an additional insured, it would be covered by Martin’s commercial general liability insurance policy.

Can an Insurer Pay Insured’s Contractor Directly, Even When There Is a Dispute Regarding the Contractor’s Work?

Victor Jacobellis | Property Insurance Coverage Law Blog | July 24, 2019

Always double check the insured’s contract with a contractor doing repair work for a claim. The California Court of Appeal recently ruled, in Jozefowicz v. Allstate Insurance Company,1 that an insurer can directly pay a contractor when the contract provided that the contractor was appointed as the insured’s representative in fact to endorse and deposit insurance checks. The court came to this conclusion despite the fact there was a dispute over the contractor’s work.

In this case, the insured sued Allstate, his homeowners insurer, over a check for his fire-damaged home that the insurer sent to the insured’s contractor, who then deposited it. Allstate’s payment was for cleanup, repairs, and remediation of plaintiff’s home. The contract specifically stated that the contractor was appointed as the insured’s representative in fact to endorse and deposit insurance checks and directed Allstate to include the contractor’s name on any checks relating to the work. Having received a copy of the contract, Allstate issued a check payable to both plaintiff and the contractor. However, plaintiff never cashed it. Around the same time, a dispute arose between plaintiff and the contractor over the scope and quality of the work. The contractor later contacted Allstate and requested that the check be reissued and sent directly to the contractor. Allstate issued a second check, which the contractor deposited.

The appellate court upheld Allstate’s actions, determining that the contractor was validly acting as the insured’s representative in transferring the check to his bank. The court rejected the insured’s claim that no agency relationship was created between him and the contractor. The court reasoned that the insured created a power for the contractor to receive the check coupled with an interest in receiving the funds. The arrangement was plainly to provide security for the contractor to be paid for its work, and it authorized the contractor to act on its own in endorsing and depositing checks related to the restoration work.

Checking the contract is especially important for a public adjuster. In a situation like the above, the public adjuster would have to attempt to directly collect the funds from the contractor. Since a public adjuster and a contractor do not have a contractual relationship, collection attempts may be costly and time intensive.
1 Jozefowicz v. Allstate Ins. Co. (4th Dist. May 28, 2019) — Cal.App. 5th —, 2019 WL 2265126.