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.

Risk Management 101: Tailor Your Construction Insurance Requirements to the Discipline so You Don’t Get Taken to the Cleaners

James P. Bobotek | Pillsbury Winthrop Shaw Pittman LLP | October 3, 2017

In the world of construction, whether you’re a lender, owner, contractor or subcontractor, your success hinges largely on risk management. While there’s no substitute for sound business and construction practices (such as proper preconstruction planning, proven construction means and methods, use of experienced personnel, and stringent safety programs), among the most important project risk allocation tools are the contracts governing the various parties’ rights and obligations. Within those contracts, risk is primarily allocated through indemnity and insurance requirement provisions. When preparing insurance requirements for construction-related contracts, it is crucial to ensure these pieces are well-fitted and comfortable, like a good piece of tailoring. This requires the indemnity and risk obligations associated with each project discipline to be clearly identified and addressed.

Design professional contract requirements should include auto and commercial general liability, workers’ compensation/employer’s liability and, most importantly, professional liability coverages. Pay particular attention to the limits of the professional liability coverage; requiring excess limits for this coverage may be appropriate depending on the project’s size. Consider requiring that the coverage be “project specific,” either through a separate project policy or sublimits applicable only to the project. For large projects, a lender may consider requiring, or an owner may consider obtaining, owner’s protective professional insurance coverage, which indemnifies the owner directly for losses arising out of professional negligence of architects/engineers exceeding the limits available under the architects’/engineers’ own professional liability policies.

The entities performing construction work on the project should be required to carry auto and commercial general liability insurance, workers’ compensation/employer’s liability, and an excess liability policy providing coverage over the auto and CGL policies’ limits. Many owners also insist on payment and performance bonds from contractors and/or subcontractors. For those contractors and subcontractors performing any design-build functions, professional liability coverage should also be required. To prevent coverage gaps, contractors’ and subcontractors’ insurance requirements should include pollution liability coverage. If the owner procures the property or builder’s risk coverage, contractors and subcontractors should consider the need for an “installation floater” or similar coverage to protect their equipment and supplies onsite, offsite, and in transit.

While the liability coverage referenced above covers most project accidents resulting in (i) bodily injury, or (ii) damage to property other than what is being constructed, in most cases it does not cover damage to the structure being built. Although it is possible to obtain coverage for damage to construction projects under an owner’s existing property policy, coverage limitations in standard property insurance forms make procurement of a builder’s risk policy desirable in most cases. If a builder’s risk policy is purchased, consideration should be given to whether the owner or the contractor obtains it. This determination is best made on a project-by-project basis, taking into consideration such factors as the type of project (i.e., new construction or renovation of an existing structure); type of contract (cost plus or stipulated sum); financing/lender’s requirements (the owner may want to “bundle” soft cost and loss of income coverage with the builder’s risk policy to avoid claim delays and argument among insurers over coverage); the presence of a master property program (owner or contractor); location of project; the parties’ relative economic leverage to negotiate the most favorable premium and coverage; the contractor’s level of sophistication; and the owner’s desire to participate in project-specific risk management.

Finally, numerous risk management products, including insurance policies and bonds, are required to cover the risks presented by a construction project. To the greatest extent possible, the coverage provided by these policies should fit together. Policy provisions are drafted to create in one policy the exact coverage that was excluded by another policy—just as the pieces of a garment are sewn together without unintended gaps. Have your broker and/or attorney review all of your applicable policies to prevent gaps in coverage. You may need to amend one or more of your policies through endorsements, or purchase additional coverage, to close these gaps. Tailored properly, the project’s insurance program should fit like a well-made suit.

New Florida Federal Court Decision Exposes Construction Insurance Gap

Brian A. Wolf | Smith Currie & Hancock | June 8, 2015

Your insurance policy may not cover the costs of an expensive Chapter 558 construction defect process. Florida’s construction defect statute, Chapter 558, requires an owner to notify contractors of all alleged construction defects. After the notice is sent, the contractor notifies all of the trade contractors and a potentially expensive and time-consuming process of hiring experts, property inspections and letter writing ensues. Contractors will look to their insurance companies to cover the costs of hiring attorneys and experts to protect their interests during the process. Depending on the size and complexity of the project and the length of the owner’s list of alleged defects the 558 process can be expensive.

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, Case No. 9:13-cv-80831-KAM (S.D. Fla. June 4, 2015), Altman’s insurer refused to cover Altman’s legal and expert costs incurred in the 558 process. The insurance company successfully argued that the 558 process is not a lawsuit and it is not a formal dispute resolution proceeding; thus, the insurance company is not required under the policy language or Florida law to pay for the expenses of the 558 process.

The Federal Court noted that whether an insurer is required to defend a Chapter 558 proceeding is a case of first impression in Florida. The Court had to decide whether the 558 process triggered the insurance companies duties under the insurance contract even though the owner’s allegations of construction defects were being asserted in a mandatory pre-suit notice and not in a formal dispute resolution process such as a lawsuit.

The Court reviewed the insurance policy and determined that the insurance policy specified that the insurer’s duty to provide a defense was triggered by a formal “Suit” defined as litigation, arbitration or another formal dispute resolution proceeding. Next the Court evaluated whether the Section 558 process was a formal dispute resolution proceeding. The Court did not find any Florida cases on point so it reviewed cases outside of Florida that defined dispute resolution proceedings. Although the Court acknowledged some cases that broadly defined formal dispute resolution proceedings, the Court determined that the Section 558 notice and right to cure statute provides owners and contractors with a “mechanism” to resolve a dispute and not a formal “proceeding.” Thus, the Court held that the insurance company properly denied the contractor with a defense.

The Court’s decision has significant consequences for contractors. Contractors rely on their insurance and the insurance of their subcontractors to cover legal and other costs that are inherent in participating in a 558 process. There are three things that contractors and subcontractors can do to avoid going out of pocket for legal fees in a 558 process. The first option is to seek a modification of their insurance policy that would specifically require their insurer to pay for a legal defense during the 558 process. The second option is state in their contract with the owner that 558 will not apply to the contract and thereby avoid the process altogether. Section 558 specifically allows contracting parties to opt out of 558. The last option is to send an immediate formal denial of the allegations of any 558 notice rather than engaging in the process.

Remember, 558 is supposed to protect contractors by forcing owners to give notice of defects and provide a contractor with a reasonable opportunity to cure the defects and avoid litigation. However, if the 558 process itself presents a financial burden that your insurer will not cover, then you have options. Insurers should understand that the 558 process can lead to an early resolution of owner claims and a savings to the insurance company of defense and claims costs; thus, insurers should weigh the benefits of covering defense costs of a 558 process against the costs of a formal dispute resolution proceeding.

via New Florida Federal Court decision exposes construction insurance gap – Lexology.

Construction Group Expands at The Hartford

Advise & Consult, Inc. – April 2, 2013

The Hartford is focusing on midsize and large construction companies, and as such is adjusting its Construction Group.  Expansion of its Construction Group capabilities brings underwriting, claims management and loss control facilities together as well as adding construction underwriters in key markets across the United States.

Leading the company’s insurance underwriting and sales for the construction sector is Thomas M. Boudreau, vice presdident fo construction insurance.  He will be reporting to Ross Fisher, the vice president of The Hartford Construction Group and Bond.  Mr. Bourdreau comes from AIG where he served as AIG’s construction industry practice leader and primary construction profit center manager for the United States and Canada.  He also held roles in underwriting and field sales over the past 10 years, which also included vice president of the company’s largest US region which represented more than 50 commercial insurance lines.

The Hartford Construction Group provides property and casualty insurance and risk management services for midsize and large construction companies and focuses on heavy trade contractors, commercial builders and sub-contractors.  They also offer guaranteed cost, loss sensitive and wrap-up insurance programs and claims and loss control services.