Property Damage, Occurrences, Delays, Offsets and Fees. California Decision is a Smorgasbord of Construction Insurance Issues

Garret Murai | California Construction Law Blog | November 13, 2017

I read once that 97 percent of cases never go to trial. However, there are still the ones that do. And, then, there are the ones that do both. The following case, Global Modular, Inc. v. Kadena Pacific, Inc., California Court of Appeals for the Fourth District, Case No. E063551 (September 8, 2017), highlights some of the issues that can arise when portions of cases settle and other portions go to trial, the recovery of delay damages on a construction project through insurance, and the recovery of attorneys’ fees.

Global Modular, Inc. v. Kadena Pacific, Inc.

The U.S. Department of Veterans Affairs contracted with general contractor Kadena Pacific, Inc. (Kadena) to oversee construction of its Center for Blind Rehabilitation in Menlo Park, California. Kadena, in turn, contracted with subcontractor Global Modular, Inc. (Global) to construct, deliver and install 53 modular units totaling more than 37,000 square feet for a contract price of approximately $3.5 million.

Because Kadena had contracted with another subcontractor to install the roofing, Global agreed to deliver the units covered only by a roof deck substrate comprised of a three-quarter inch sheet of plywood. Delivery of the units was originally scheduled for the summer, however, due to project delays the units were not delivered until October and November.

Well, you can guess what happened.  The rains came and the units were damaged.

The Kadena-Global subcontract provided that Global would assume responsibility “for any loss or damage to the [units] . . . however caused, until final acceptance thereof by [Kadena].” The contract conditioned “final acceptance” upon the VA’s approval of the units. Kadena, however, as the general contractor, was responsible for the overall project schedule.

When Global refused to pay Kadena, Kadena sued, and Global countersued for the water damage. Before trial, the parties entered into a partial settlement. Global paid Kadena $321,975 except for claims covered by Global’s insurance policy with North American Capacity Insurance Company (NAC) and Global received $153,025 to dismiss  its failure-to-pay claims. At trial, Kadena presented evidence of its cost to repair the water damage and was awarded approximately $1 million.

In a separate action brought by NAC, Kadena and NAC filed competing motions for summary judgment on the issue of whether NAC’s policy required it to indemnify Global for the approximately $1 million award in the other action. The trial court ruled in favor of Kadena finding that the award was covered under the NAC policy. The trial court also ruled that the award should be offset by the $321,975 Global paid in settlement and that Global was liable to Kadena for $360,000 in attorneys’ fees.

NAC, Kadena, and Global each appealed, with: (1) NAC arguing that the water damage was not covered under its policy; (2) Kadena arguing that $321,975 settlement paid by Global should not be offset; and (3) Global and NAC arguing that the $360,000 in attorneys’ fees should not have been awarded to Kadena.

Messy enough for you?

The Appeal

NAC’s Argument That the Water Damage was Not Covered Under its Policy

On appeal, NAC, Global’s insurer, argued that the water damage was not covered under its policy. Typical of commercial general liability insurance policies, the policy covered “property damage” caused by an “occurrence,” which was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” From this broad occurrence-based coverage, the policy carved out a variety of exclusions.

One of those exclusions (Exclusion j(5)) excluded coverage for “[t]hat particular part of real property in which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” NAC argued that the phrase “are performing operations,” refers to works in progress and that the exclusion applies when property damage occurs before construction is complete and, because Global had not yet completed installation of the units, the exclusion applied. Global, on the other hand, argued that the phrase “are performing operations” only applied to particular components Global was physically working on at the time of the property damage and, because the water intrusion occurred while Global  was not working on the units, the exclusion did not apply.

Another exclusion (Exclusion j(6)) excluded coverage for “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” NAC argued that, because Global inadequately waterproofed the units, Global’s “work” was “incorrectly performed” and the exclusion applied. Global, on the other hand, argued that the term “work” refers to a product, such as warped or uneven floors, not to a process like covering units with plastic tarps, and that even if its waterproofing efforts were ineffective, the “particular part” of the “work” that was “incorrectly performed” was the use of a plywood substrate not the interior parts of the units.

While acknowledging NAC’s argument that commercial general liability insurance policies “are not designed to provide contractors and developers with coverage against claims their work is inferior or defective,” the Court of Appeal stated, “[t]he problem with NACs’ argument is that it is based on its view of the underlying policy of commercial general liability insurance and not on an application of the policy language to the facts of the case.” And, here, tarping the units, even if performed incorrectly or inadequately was not a part of Global’s “work.”

With respect to Exclusion j(5), the Court of Appeals concluded that the active, present tense construction of the policy language, “are performing operations,” indicated that the exclusion only applies to damage caused during physical construction activities and, because Global was not physically working on the units at the time of the water damage, the exclusion did not apply. With respect to Exclusion j(6), the Court held that the “only arguably defective components or parts of Global’s work are the plastic tarps, as they failed to keep the water out,” but “more importantly, there was no allegation the items for which Kadena sought repair and replacement costs – the drywall, insulation, framing, and ducting – were defective” (emphasis in original).

Result: Win for Global.

NAC’s Argument That Delay Damages Were Not Covered Under its Policy

On appeal, NAC further argued that the delay damages awarded for the 131 days Kadena spent remediating the water damage were not covered under its policy because it did not constitute “property damage.”

The Court of Appeal disagreed stating, “contrary to NAC’s contention, delay damages arising from “property damage” fall under the insuring clause, which obligates NAC to ‘pay those sums that the insured becomes legally obligated to pay as damages because of . . . . ‘property damage’ to which this insurance applies’” (emphasis in original). While the policy does not define damages, held the Court, “courts generally interpret the term to mean payments made to compensate a party for direct and consequential injuries caused by the acts of another” and “[h]ere, the 131 days of remediation was time Kadena could have spent completing the project had the units’ interiors not been damaged. That delay constitutes a consequential loss (a loss occasioned by the water intrusion) and as such, is part of the damages NAC must pay ‘because of’ property damage.”

Result: Win for Global.

Global and NAC’s Argument that Attorneys’ Fees Were Not Recoverable by Kadena

On appeal, NAC and Global argued that attorneys’ fees were not recoverable by Kadena because Kadena had released its right to obtain attorneys’ fees under the terms of its settlement with Global.

Under Code of Civil Procedure sections 1033 and 1033.5, explained the Court of Appeals, attorneys’ fees can be claimed as costs if allowed under law or statute. Further explained the Court, the Kadena-Global subcontract included an attorneys’ fee provision stating that Global “expressly agrees” to pay the reasonable attorneys’ fees Kadena incurs in “enforcing any provision or obligation arising under the contract.” This provision, while a one-way attorneys’ fee provision permitting only Kadena to recover attorneys’ fees, became bilateral under Civil Code section 1717, which provides:

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

Because the settlement agreement was intended to resolve all of the parties disputes except for claims NAC would cover, the agreement obtained two provisions, one releasing “all claims” arising from the VA project and another carving out a limited subset of claims arising from the VA project that the parties were reserving for trial:

4.1.1 Notwithstanding the language of Civil Code section 1542 and waiver provided in Section 4.2 of this Agreement, it is the parties’ express intent and they so agree that this agreement does not release claims from the Project related to  property damage, personal injury, [loss] of use and other claims that are covered under the [NAC] insurance policies described in Section 4.9.1 of this Agreement, true and accurate copies of which are attached to this Agreement as Exhibits “A” and “B”

(emphasis in original).

Based on this language, held the Court of Appeals, the settlement agreement allows Kadena to pursue its water damage claim and, as the prevailing party, to seek attorneys’ fees as part of that claim.

Result: Win for Kadena.

Kadena’s Argument that the $321,975 Settlement Paid by Global Should Not be Offset

Finally, on appeal, Kadena argued that the $321,975 settlement paid by Global should not offset the $1 million damage award covered by NAC’s policy because the payment represented payment in exchange for Kadena’s release of claims other than its water damage claim. In support of its argument, Kadena pointed to the Kadena-Global settlement agreement, which provided that the parties were agreeing to release all claims against one another except for claims from the project “related to” claims covered by NAC’s policy.

“The equitable concept of offset,” explained the Court of Appeals, “recognizes it is unfair to require a defendant to compensate a plaintiff twice for the same injury.” “Thus, to warrant offset, Global’s settlement payment to Kadena must have compensated Kadena for the same harm as the jury’s damage award.” But here, held the Court, the jury was instructed by the trial court that any awarded damages should be limited to damages related to water remediation only and not to defective workmanship or pre-rain delays.

Result: Win for NAC.

Isn’t it nice when everyone’s a winner?

Conclusion

Global Modular underscores that, while commercial general liability policies are not intended to serve as a warranty covering poor workmanship, they do cover “property damage” that “occurs” from poor workmanship. Further, the case clarifies that delay damages may be recoverable depending on the language of the insurance policy. And, finally, the case serves as a reminder that when settling portions of a case, it is important to be clear what specific portions of a case are being settled, as parties may not seek damages for those settled portions, or an offset may apply.

If You Believe Your Appraisal Award Is Wrong – You Might Be Right

Jeff Zane | Property Insurance Coverage Law Blog | November 13, 2017

In theory, the appraisal process is intended to provide an efficient means of determining the cost to repair or replace damaged property. It is also intended to have a degree of finality – once the appraisal panel determines the amount of damages, the damages are typically fixed at that amount.

However, that does not mean you shouldn’t examine an appraisal award, or that you necessarily must accept it if it is substantially defective. In Texas, as in many states, an appraisal award may be set aside: (1) when the award was made without authority; (2) when the award was made as a result of fraud, accident, or mistake; or (3) when the award was not in compliance with requirements of the policy.1

If your appraisal award seems incorrect to you, try to obtain as much information as you can about the basis for the award. This is not always easy, because appraisal panels can be less than transparent about their reasoning and methods. For this reason, it is sometimes important that your appraiser attempt to memorialize as much as is possible about the panel’s deliberations through emails, notes or other contemporaneous records.

It may be possible to set aside an appraisal award, for example, if the panel improperly bases its award on repairs or replacement with materials that are not like kind and quality with the existing property.

To explain, most insurance companies promise in their policies they will repair or replace damaged property with materials of “like kind and quality.”2 Notwithstanding this clear language, a carrier’s appraiser may coax an umpire to reduce the amount of an award by basing it upon the cost to use a materially different roofing system. Perhaps the carrier feels that a 90-millimeter roof can be replaced by a 45-millimeter roof, or that premium tiles may be replaced by lower-grade tiles with a more limited life-span. Arguably, neither example represent materials of “like kind and quality.”3

If this happens, you might consider challenging the appraisal award because the appraisal panel has exceeded its powers by failing to comply with the terms of the underlying contract. Appraisal panels enjoy a good deal of discretion, but they do not enjoy the unfettered ability to stray from the governing insurance policy. If an appraisal award is “not in compliance with the requirements of the policy” because it does not comply with the “like kind and quality” provision, then a court should reject the award.

Challenging an appraisal award is always an arduous task, however, and you will want to consider your options carefully. If you have any doubts about your award, be sure to speak with an experienced attorney.
____________________
1 Garcia v. State Farm Lloyds, 514 S.W.3d 257, 265 (Tex. App. 2016), review denied (June 2, 2017). See also Hanson v. Commercial Union Ins. Co., 150 Ariz. 283, 285, 723 P.2d 101, 103 (Ariz. App. 1986) (“An award must comply, in substance and form, with the submission agreement. Thus, the act of an umpire in excess of his authority renders the award void, to the extent that the authority is exceeded. And the same result is reached, whether the authority is exceeded consciously or by mistake. Appraisers’ acts in excess of authority are not binding on the parties, without ratification.”).
2 The standard Texas homeowner’s policy, for example, provides that the insurance company will “repair or replace any part of the damaged property with material or property of like kind and quality.”
3 I also urge you to read – or re-read – my colleague Jonathan Bukowski’s excellent post regarding “matching” issues in an appraisal award in a recent Colorado case.

New Jersey’s Manifestation Destiny: Appellate Division Applies Continuous Trigger to Claims for Progressive Third-Party Property Damage and Highlights Fact-Sensitive Nature of Manifestation Date

Frederick J. Giordano | K&L Gates | November 3, 2017

The New Jersey Appellate Division (the “Appellate Division”) recently issued a ruling in Air Master & Cooling Inc., v. Selective Insurance Co. of America (“Air Master”) [1] applying the “continuous trigger” theory to third-party construction defect liability claims in which property damage progressively advances. The court also held that the “last pull” for purposes of determining the endpoint of coverage occurs when “the essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it,” [2] which is a fact-sensitive inquiry. [3] In doing so, the court declined to adopt the rule that “the last pull of the trigger does not occur until there is some expert or other proof that ‘attributes’ the property damage to faulty conduct by the insured.” [4]

Air Master involved property damage from progressive water infiltration in a multi-unit condominium in Montclair, New Jersey. [5] Air Master & Cooling Inc. (“AMC”), an HVAC subcontractor, was named as a third-party defendant in the construction defect claim [6] ; Plaintiff alleged construction defects caused by the faulty workmanship of AMC and other contractors resulting in property damage. AMC sought defense and indemnity from Selective Insurance Company of America (“Selective”), one of several insurers that had issued commercial general liability policies to AMC over successive policy periods. [7] Selective’s policy provided coverage for damage during the policy period of June 22, 2009 through June 22, 2012. [8]

According to a November 4, 2010 news article, some residents began noticing damage as early as 2008. [9] A subsequent comprehensive moisture survey was performed on April 29, 2010, which revealed identified moisture damage on the roof and linked the damage to water infiltration. [11] Selective disclaimed coverage, asserting that it was not responsible for damage that manifested before the beginning of the policy period in 2009. The trial court applied the continuous trigger but agreed with Selective that the property damage manifested before its policy incepted and granted summary judgment in favor of Selective. AMC appealed the ruling. [12]

AMC argued on appeal that “continuous trigger principles should govern third-party liability coverage analysis in construction defect cases that involve progressive property damage.” [13] Further, AMC argued that continuous trigger principles “extend coverage to all insurance policies in effect from the time of the insured’s work on the construction project through the time by which it was known, or there was sufficient reason to know, that the manifested property damage was attributable to the insured’s work.” [14] Accordingly, AMC argued the manifestation date occurred when the 2010 expert study was issued, attributing the property damage to AMC’s work. [15]

Selective argued that property damage to the building had already manifested before its policy period commenced. It urged the court to find that the point of manifestation was in 2008, when certain residents reported water infiltration that prompted remedial investigations. [16]

The court first considered whether it should apply the continuous trigger theory, commonly applied in insurance claims that arise from the installation of asbestos-related products. [17] The doctrine holds “all the insurers over that period [from the date of exposure to manifestation are] liable for the continuous development of the [harm].” [18] The result of the theory is that coverage aggregates from the date of first exposure until the “manifestation date” [19] subject to insurance coverage having been available to the policyholder [20] and potential allocation or apportionment between carriers. [21] In holding that the “continuous trigger” theory should apply, the court noted that since the decision in Owens-Illinois, an asbestos-related bodily injury and property damage coverage case, [22] case law has extended the continuous trigger theory “beyond the asbestos context to other progressive forms of third-party injuries,” [23] including a Supreme Court case that “implicitly approved the use of continuous trigger in a construction defect context.” [24] The court further noted that public policy favors applying a continuous trigger approach because many construction defects are not immediately obvious. [25]

The court also considered when “the ‘last pull’ of that trigger for purposes of ascertaining the temporal end point of a covered occurrence happens . . . .” [26] In establishing the “end point” or “last pull” of coverage under a “continuous trigger” theory, the court rejected AMC’s “‘novel’ argument that the end date should be delayed until it first appears that the damage is ‘attributable’ to the conduct of the specified insured.” [27] Moreover, the court stated it was “unwise” because of the difficulty in applying the doctrine in practice due to its fact-dependent nature in requiring a “defendant-specific determination of when each defendant reasonably could have been deemed to be at fault in contributing to the progressive harm.” [28] Thus, the court rejected AMC’s argument and opted to use a “date of initial manifestation that is common to all parties.” [29]

Finally, the Appellate Division addressed the task of identifying the appropriate “last pull” date. [30] The court held the “last pull” occurred when “the essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it.” [31] The court defined “essential” as connoting “the revelation of the inherent scope of [the] injury.” [32] The court determined that neither the 2010 news article nor the 2010 expert report was dispositive of the manifestation question. [33] Because of the “sparse record” and lack of evidence regarding “persons who have knowledge of what information was known at what times about the building’s construction defects,” the court remanded the case for further proceedings. [34]

In Air Master, the Appellate Division has provided significant guidance to insureds with policies governed by New Jersey law by formally extending the continuous trigger doctrine to claims involving progressive property damage, particularly construction defect claims. Moreover, although the court rejected an analysis determining when the damage became “attributable” to a particular insured, it affirmed the test regarding the “last pull” date common to all parties as a fact-sensitive inquiry into when the essential nature and scope of the property damage becomes known.


[1] __ N.J. Super ___, Docket No. A-5415-15T3, 2017 WL 4507547 at * 1 (Oct. 10, 2017).

[2] Id.

[3] Id. at * 10.

[4] Id. at * 10.

[5] Id. at 1–2.

[6] Id.

[7] Id. at 2.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id. at 3.

[13] Id.

[14] Id.

[15] Id.

[16] Id. at 1.

[17] Id. at 3.

[18] Id. at 4.

[19] Point in time when an injury or disease first presents or manifests itself.

[20] Under Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994), once insurance for the risk at issue was no longer reasonably available, the end date of the coverage block is the date when coverage became unavailable.

[21] Air Master, 2017 WL 4507547 at * 5.

[22] Owens-Illinois, 138 N.J.at 454–56.

[23] Air Master, 2017 WL 4507547 at * 5.

[24] Id. at 6 (citing Potomac Ins. Co. v. PMA Ins. Co., 215 N.J. 409, 422 (2013)).

[25] Id. at 6.

[26] Id. at 1.

[27] Id.

[28] Id.

[29] Id.

[30] Id. at 8.

[31] Id. at 1.

[32] Id. at 9.

[33] Id. at 10.

[34] Id.

New Jersey Court: Continuous Trigger Ends When Nature of Damage Is Known

Melissa Brill and Laura B. Dowgin | Cozen O’Connor | October 20, 2017

Last week, the New Jersey Appellate Division issued a decision that may have a significant impact on insurance coverage for progressive property damage claims in the state. In Air Master & Cooling, Inc. v. Selective Ins. Co. of Am., No. A-5415-15T3, 2017 WL 4507547 (N.J. Super. Ct. App. Div. Oct. 10, 2017), the court first confirmed that a “continuous trigger” applies to third-party construction defect claims. A continuous trigger requires multiple successive insurers on the risk from the date of exposure through manifestation to cover a loss. Previously, New Jersey appellate courts had applied “continuous trigger” to analogous cases, such as property damage and bodily injury claims arising from the installation of asbestos products, environmental contamination, and toxic torts. At least one trial court had applied a continuous trigger to “delay manifestation property damage claims.” See Cypress Point Condominium Ass’n v. Selective Way Ins. Co., HUD-L-936-14, 2015 WL 1515944 (Law Div. Mar. 30, 2015). The Air Master decision confirms that a continuous trigger theory will be applied to allegations of continuing property damage over a period of time in the construction defect context.

The insured in this case, Air Master, had performed HVAC work at a condominium building in Montclair, New Jersey between November 2005 and April 2008. The condominium association brought a lawsuit against certain contractors after water infiltration and resulting damage was discovered. Air Master was named as one of several third-party defendant sub-contractors. Selective issued a series of policies to Air Master from June 2009 through June 2012 and denied coverage to Air Master, arguing that the property damage had already manifested before the June 2009 policy incepted. Selective pointed to a November 2010 local news story that had reported that residents began noticing water infiltration starting in early 2008. Air Master argued that the water damage was not discovered until the condominium association’s expert consultant issued a report in May 2010.

After confirming that continuous trigger was the appropriate legal framework for progressive property damage caused by construction defect(s), the issue before the court was to determine the endpoint for a covered occurrence — or the last “pull of the trigger.” The court concluded that coverage ends when the “essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it.” Air Master argued that this should be further narrowed to when there is expert or other proof that links the injury to the particular conduct of the insured. This was akin to the equitable tolling doctrine developed in the statute of limitations context, whereby an injured plaintiff has additional time to file suit until they have reason to know they have been injured and to attribute that injury to the fault of a particular defendant. The court rejected this theory, stating that the “policy considerations that justify the equitable tolling of statutes of limitations for plaintiffs do not pertain to insured defendants who have potentially caused a progressive injury.” (emphasis in original). The court instead held that the end date for coverage is the date of initial damage manifestation common to all defendants, without attribution to the particular insured.

This decision clarifies the law in New Jersey as to the appropriate coverage period for continuous property damage claims caused by construction defects. However, determining the manifestation date that effectively ends coverage may prove to be a fact-intensive inquiry. The court found that the manifestation cannot be “merely tentative,” but need not be “definitive or comprehensive.” Rather, there must be awareness of an “essential” manifestation, which falls somewhere between tentative and definitive. In Air Master, the court refused to accept Selective’s argument that the news report of resident complaints in 2008 was adequate to prove manifestation and remanded the case for further discovery on the issue. An expert or transition report detailing the nature and extent of property damage is likely sufficient to prove manifestation. However, there is the possibility that the date could be earlier if there was sufficient evidence of earlier knowledge.

Northern California Wildfires — Important Insurance Coverage Considerations

Edward P. Sangster and Paul C. Fuener | K&L Gates | October 20, 2017

The ongoing Northern California wildfires are already the most destructive in the state’s history. In addition to the tragic loss of dozens of lives, California officials have reported that at least 5,700 structures have been destroyed. The economic impact is enormous, and many businesses, particularly in California’s Wine Country, have suffered major losses. Affected businesses likely may have insurance coverage in place to assist with rebuilding and repair of damaged structures, lost production and business income, extra expenses incurred as a result of the wildfire’s impact, and potentially lost income as a result of damage to suppliers and customer locations, including “attraction properties” that draw business to the area.

It is important that businesses impacted by the wildfires understand their potential insurance rights to maximize an insurance recovery in the event a business makes a claim. The wildfires will give rise to a variety of individualized issues, which will vary depending on each insured business’s particular circumstances. The following checklist provides a general overview of selected issues that may be relevant to such claims.

IDENTIFYING POSSIBLE COVERAGE

The most common source of responsive coverage for most businesses is likely to be the first-party coverage insuring the assets of the business. While there are standard insurance industry forms for the coverage, some insurers have issued tailored policies to meet an insured’s particular risk scenarios. Evaluation of specific policy language by reference to relevant law is critical.

Businesses may have first-party coverage that includes the following specific elements:

• “Property damage” coverage for damage or complete destruction of any property resulting from fire or another insured peril that may be classified as “insured property” under the policy, including buildings and other structures, equipment, supplies, and other personal property.

• “Business interruption” coverage, which generally covers the insured’s loss of earnings or revenue resulting from property damage caused by an insured peril but often leads to significant disputes regarding the proper quantification of the insured loss.

• “Contingent business interruption” coverage, which generally covers the insured with respect to losses, including lost earnings or revenue as a result of damage to property of a supplier, customer, or some other business partner or entity — even where the insured’s own property is not itself damaged.

• “Attraction property” coverage, which is a sub-category of contingent business interruption coverage that may apply where an insured business — such as a hotel or restaurant — suffers loss of income as a result of damage to a designated “attraction property,” such as a nearby sports venue, theme park, or convention center.

• “Extra expense” coverage, which generally covers the insured for certain extra expenses incurred by the insured as a result of an insured event — e.g., fire damage to the insured’s property or to a contingent business interruption property — and in order to resume normal operations and mitigate other losses.

• “Ingress and egress” coverage, which generally covers the insured when access to a business premises or location is blocked for a time.

• “Civil authority” coverage, which generally covers the insured for losses arising from an order of a governmental authority that interferes with normal business operations. Similar to contingent business interruption coverage, civil authority coverage may apply even when there is no damage to the insured’s property.

• “Service interruption” coverage, which generally covers the insured for losses related to electric or other power supply interruption.

• “Advance payments” may be expressly required under the terms of a commercial property policy, even if the full extent of the insured loss is still being adjusted by the insurance company. Such advance payments can be important where a business cannot afford a protracted adjustment period.

• “Claim preparation” coverage, which generally covers the insured for the costs associated with compiling and certifying a claim.

COMMON INSURER RESPONSES

In response to insurance claims resulting from the California wildfires, insurers may raise a number of potential limitations or restrictions on coverage for a business’s claims. Here are just a few common issues raised by insurers, particularly when faced with large claims:

• There was no covered business interruption. Insurers will often take a very narrow view of what constitutes a business interruption, sometimes arguing that a complete cessation of operations is necessary to support a claim. The insurer may also dispute the necessity or cause of the interruption. For example, the insurer may argue that at least some part of the interruption or reduction in an insured business was the result of an unrelated business decision by the company, or the consequence of an economic downturn, and it was not caused solely by fire damage to insured property.

• The claim is for losses beyond the allowed recovery period. Policies sometime include provisions specifying that it only covers loss of income and related expenses for a specified period of time after an insured event occurs. If the policy does not define that period, it may be tied to the time it would take your company, employing reasonable mitigation efforts, to resume normal business operations under the circumstances. In view of the magnitude of the California wildfires and the number of properties affected, the length of time it will take to repair property and resume normal business operations may be longer than the length of time had the claim been from an isolated event affecting a single facility.

• The claim is subject to a per-occurrence deductible. Many policies have a per-occurrence deductible or other self-insurance features that may reduce the amount of coverage available, depending on how the number of occurrences issue is addressed. For example, there may be disputes about whether each fire constituted a separate occurrence. This issue can also impact the amount of per-occurrence policy limits that may be available to an insured business.

CLAIM PRESENTATION

Most policies include specific provisions for presenting a claim. The manner in which a claim is presented can have a significant impact upon recovery. This cannot be understated. Policyholders should be proactive in assembling an insurance recovery team, including working with accountants and claim professionals as well as insurance coverage counsel. At a minimum, a policyholder should consider the following common policy provisions:

• Notice of Loss. Most policies require the insurer be notified as soon as practicable or within a specified time frame after circumstances that may lead to a claim. Policyholders should seek to notify all potential insurers.

• Proof of Loss. Property policies generally require a sworn proof of loss summarizing the amount and extent of the damage or loss. The insurer may require this proof of loss within a specified timeframe, though it is not uncommon for insurers to agree to extend this deadline. A policyholder should consider requesting a written agreement extending the time for submission of a proof of loss (and potentially other policy conditions) depending on the nature of the loss.

• Suit Limitation. Policies may include “suit limitation” provisions, which provide that an action to recover under a policy is barred if not initiated by a certain timeframe. In some states, these provisions are not enforceable, while in other states, they are enforceable. Therefore, businesses should consult counsel to determine the limitations period that may be applicable to their claim.

CONCLUSION

Businesses that have suffered losses because of the California wildfires should not overlook the significant financial protection that may be provided through their insurance policies. Businesses should act carefully and proactively to maximize coverage. Experienced insurance coverage counsel is often needed to assess the viability and strength of a policyholder’s claim, in dealing with the insurers’ loss adjusters, and in maximizing the policyholder’s potential insurance recovery. K&L Gates has represented clients in dealing with claims arising from many types of natural disasters and perils, including fires, hurricanes, and floods, as well in other complex insurance claims for over 30 years. The firm maintains a group dedicated to assisting policyholders in assessing and prosecuting insurance coverage claims.