Contractors: Consult Your Insurance Broker Regarding Your CGL Policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Compliance with Building Code Included in Property Damage

Tred R. Eyerly | Insurance Law Hawaii | February 5, 2018

A Circuit Court in Florida issued a final judgment determining that the insured’s obligation to comply with building code provisions was included in the property damage experienced. Pin-Pon Corp. v. Landmark, Am. Ins. Co., No. 312009CA012244 (Fla. Cir. Ct. Dec. 28, 2017). The decision is here.

At trial, the plaintiff’s architect testified that the total pricing for the code upgrades was $6.2 million. On appeal, the appellate court ruled that plaintiff’s Exhibit 98, an Upgrade Insurance Claim, was improperly admitted as a business record. The appellate court stated that the jury may have considered Exhibit 98 in determining the amount of code upgrade damages. Therefore, the verdict was reversed and remanded for a trial on the code upgrade damages only.

On remand, the plaintiff presented testimony from its architect that the code upgrades were required by the 2004 Florida Building Code because the storm damaged more than 50% of the aggregate area of the building. Another witness testified that the amount of code upgrade damages sustained by the plaintiff and submitted to Landmark was $6.2 million. The testimony and documentary evidence submitted by the plaintiff showed that the cost analysis and methodology used in preparing it was accurate.

Landmark did not present any testimony regarding the scope of code upgrade repairs required by the building code. Nor did Landmark present any testimony establishing that plaintiff’s claimed damages were unreasonable or unnecessary. Therefore, Pin-Pon was allowed to recover from Landmark the amount of $5,644,668.79, together with statutory interest.

California Department of Insurance Provides Notice that Mudslides are Covered Losses

Denise Sze | Property Insurance Coverage Law Blog | February 7, 2018

Southern Californians impacted by the mudslides that followed the devastating wildfires in Ventura and Santa Barbara may see some light at the end of the tunnel with the big question of whether insurers will cover their mudslide loss. Over the last few week Californians have lost their homes when the rains brought homes down from the mountainsides ravaged by fire. With the vegetation gone, the hills and mountains simply could not hold during the heavy rains and mud flowed downhill at 20 miles per hour at what witnesses can only call a “wall of mud” that consumed homes and lives within its path. For many, this meant losing all worldly possessions when their houses slid down the hillside and were buried in mud. Even the ability to rebuild in the area is a question for many.

After these devastating losses, homeowners found themselves where many insurers indicated that the mudslide/mudflow was not a covered loss and reservation of rights letters were sent to the insureds. Many homeowner policies were written as if to exclude mudslides as a result of fire and then subsequent rains. Only a few insurers stepped up to the plate to say the loss was covered and began paying the claims and their insureds were immediately issued additional living expenses so they could begin recovery. The legal and insurance community in California, well aware of Howell v. State Farm Fire & Casualty Company,1 have been waiting on insurers to step up and cover the mudslides excluded from their policies because the policies as written with the exclusions were contrary to California case law.

In Howell, the property owner made a claim for landslide damage to her property following heavy rains. The insurer denied the claim because the policy excluded coverage for earth movement and water damage. The property owner presented expert testimony that the landslide occurred due to a fire, which was covered under the policy and which destroyed vegetation on the slope the summer before the landslide. The California Court of Appeal concluded that an insurer providing coverage under a property insurance policy may not contractually exclude coverage when an insured peril (such as fire) is the efficient proximate cause of a loss, regardless of other contributing causes.2 The appellate court found that because fire was the efficient proximate cause of the mudslide, the policy exclusion for damage caused by mudslide was not enforceable.3

On January 29, 2018, the California Department of Insurance issued a statement and an opinionthat the recent Thomas fire was the efficient proximate cause of the California mudslides and therefore the mudslide losses in Santa Barbara County are covered regardless of exclusions.

Under the Department of Insurance’s analysis, it is implied that insurance policies written to exclude these mudflow/mudslide losses to homes within the Thomas Fire vicinity are contrary to California Insurance Code Section 530 and Julian v. Hartford Underwriters Insurance Company,4where the efficient proximate cause doctrine is the “preferred method of resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one is not.” The insurance claims process for those victims of the Thomas Fire and subsequent mudslides will find that rebuilding is a long way off but the Department of Insurance’s notice gives insurers a great deal to think about and whether their policies and the written exclusions are proper.
_____________________
1 Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446 (1990).
2 Id. at 1448.
3 Id. at 1452.
4 Julian v. Hartford Underwriters Ins. Co., 35 Cal.4th 747, 753 (2005).

Disputed Facts on Cause of Collapse Results in Denied Cross-Motions for Summary Judgment

Tred R. Eyerly | Insurance Law Hawaii | January 22, 2018

Although the court concluded that the policy covered a loss caused by the weight of snow, disputed facts as to the cause of the collapse led to the denial of cross-motions for summary judgment. Freeway Drive Inv., LLC v Employers Mut. Cas. Co., 2017 U.S Dist. LEXIS 207165 (E.D Mich. Dec. 18, 2017).

Freeway Drive owned a single story commercial building insured by Employers Mutual Casualty Company (EMCC). The building sustained damage when trusses within the roof shifted and dropped, causing visible sagging. EMCC denied Freeway Drive’s claim.

Freeway Drive hired structural engineer Abdul Brinjikji to inspect the damage. He visited the building three times. On the first visit, he saw snow on the roof but could not estimate how much. Nevertheless, he opined that the collapse was caused by an overload of snow. He developed a plan to shore up the roof and repairs commenced.

After repairs were completed, Brinjikji visited the property a second time. He sill opined that the collapse was caused by snow load. His opinion did not change after this third visit.

EMCC retained an engineer, Richard Hamann, who also investigated the cause of the collapse. After the inspection, EMCC stated in a letter to Freeway Drive that the damage to the roof trusses was a result of fire retardant applied to the roofing structure when it was built. Over time, the fire retardant, along with moisture in the attic, resulted in structural failure of the trusses. EMCC concluded that the loss did not fall within the policy’s collapse coverage, that the damage was not caused by a “specified cause of loss” as defined by the policy, and that the loss was subject to the policy’s collapse exclusion.

After receiving EMCC’s denial letter, Freeway Drive tested a sample of the truss lumber for the presence of fire retardant. The test indicated the presence of small amounts of Boron, which was one of three major fire retardant tracer elements. But the amount of total fire retardant that permeated into the wood was minimal. Brinjikji later testified that Boron did not affect wood like earlier used fire retardants in older buildings did.

Freeway Drive sued EMCC and cross-motions for summary judgment were filed. The court first determined that the policy was “all-risk,” meaning the loss was covered unless the particular damage was specifically excluded.

Next, the court noted that “weight of snow” was a specified cause of loss” under the policy. While EMCC did not dispute that damage caused by weight of snow was covered under the policy, it contended that the plain language of the “Collapse Exclusion” barred coverage for collapse due only to the weight of snow. EMCC said that coverage could only be extended if a snow-load collapse occurred after construction, remodeling, or renovation was complete, and because of the use of defective materials or methods.

The court disagreed with EMCC’s attempt to limit the analysis to the “Additional Coverage – Collapse” provision of the policy. Although collapse was excluded from the policy, the exclusion did not apply if coverage was provided under the Additional Coverage-Collapse provision or if the collapse was caused by a “specified cause of loss.”

EMCC argued that the collapse exclusion exception had to be read in harmony with the Additional Coverage – Collapse provision. Interpreting the policy to provide collapse coverage for collapse solely due to a specified cause of loss rendered as surplusage the unambiguous language of the Additional Coverage-Collapse provision.

Freeway Drive argued that the plain language provided that collapse coverage was restored under the exclusion when the collapse was due to the weight of snow. The Additional Coverage – Collapse clause and the “specified causes of loss” provision were distinct exceptions to the collapse exclusion that had to be applied separately.

The court agreed with Freeway Drive. The policy provided coverage for collapse due only to a “specified cause of loss,” i.e., the weight of snow, regardless of the Additional Coverage – Collapse provision.

Nevertheless, the experts disagreed on the cause of the loss, creating a factual dispute as to whether the weight of snow, or deterioration due to fire retardant, caused the collapse. Hamann said that further testing was needed on the roof trusses. In the first test, traces of fire retardant were found. Brinjikji could not say for certain that the conditions in which the retardant could have affected the trusses did not occur. Neither party could demonstrate the absence of a dispute of material fact that either the weight of snow, degradation, or both, caused the loss. Therefore, summary judgment could not be granted to either party.