No Coverage for Faulty Workmanship Based Upon Exclusion for Contractual Assumption of Liability

Tred R. Eyerly | Insurance Law Hawaii | June 5, 2019

    The Supreme Court for West Virginia determined the policy’s contractual assumption exclusion barred coverage for the general contractor based upon claims of faulty workmanship. J.A. St & Assocs. v. Bitco Gen. Ins. Corp., 2019 W. Va. LEXIS 205 (May 1, 2019).

    J.A. Street & Associates, Inc. entered a contract with the developer, Thundering Herd Development, L.L.C., to build a commercial shopping center on seventy-eight acres of land. Street agreed to oversee the site preparation for the development and the construction of many of the buildings. Thundering Herd retained an engineering firm, S&ME, Inc. to do geotechnical exploration and to provide advice regarding land preparation for the shopping center. Thundering Heard also entered an agreement with the Target Corporation to construct a store on a pad to be prepared at the shopping center. 

    Street hired subcontractors to prepare the site by grading the land and installing fill material. A slope was constructed at the rear of the proposed Target site, but it failed, causing a landslide, damage to the pad, and damage to adjacent property owned by a third party. Thundering Heard incurred $721,875 in additional costs to repair this slope, reconstruct the Target site, and compensate the neighbor for the damage to the adjacent property. 

    Another problem arose with the foundation of Shops A when the walls began cracking due to settlement. Remedial action included the installation of pilings under the foundation and grout injection under the slab, as well as repairs of damage to the building. 

    Thundering Heard filed suit against S&ME. The complaint was later amended to add Street as an additional defendant based upon Street’s failure to comply with the construction contracts. resulting in harm to the shopping center due to the landslides.

    Street was insured under several CGL, umbrella and excess policies. Bitco General Insurance Corporation provided a defense to Street. Bitco also filed a declaratory judgment action asking the court to rule that it had no duty to defend or indemnify. Street filed a third-party complaint against all of its insurers who issued CGL, umbrella or excess policies during the period of construction. 

    In ruling on six different summary judgment motions, the circuit court found there was an “occurrence” resulting in “property damage” under the insurers’ policies. However, the contractual liability exclusion precluded coverage under each policy. 

    On appeal, the court found that the installation of fill material, the grading of the land, the construction of the slopes and other site preparation work constituted faulty workmanship and use of materials. Therefore, correction of the site preparation work was not covered under Bitco’s CGL policy. But damages for other injury to property that resulted from the alleged faulty workmanship, such as cracked walls or floors in structures caused by the setting of improper fill material, was covered “property damage.”

    But Bitco’s policies excluded “‘bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” Thundering Herd’s underlying complaint sought to have Street to pay damages by reason of Street’s alleged assumption of liability in contract claims for the recovery of money. Such a claim was not covered by the policies. 

      In addition to the exclusion in Bitco’s policies, the umbrella and excess policies had similar exclusions for the contractual assumption of liability. Therefore, none of the insurers owed a defense to Bitco and the circuit court’s six orders granting summary judgment to the insurers were affirmed. 

Reasonableness of Notice…Is it Fact Specific?

Christina Phillips | Property Insurance Coverage Law Blog | August 6, 2019

Policy language varies when it comes to how and when an insured is required to give notice of a claim. Some policies have a definitive time frame setting forth when notice must be given, but others use terms such as “prompt,” “immediate” or “as soon as practicable.” When the policy does not provide a definitive timeframe, the question of whether an insured’s notice complied with the policy’s notice requirement can be questioned. In such situations, courts will look to various factors to determine whether the insured’s notice was “reasonable.”

In that regard, I recently wrote a blog, Assessing the ‘Reasonableness’ of Notice, which addressed the various factors a court will look at to determine whether notice of a claim is reasonable. Two recent cases from the Northern District of Illinois demonstrate exactly how the application of these factors to the facts of a given case can result in differing outcomes.

By way of recap, there are five factors an Illinois state or federal district court will look at in determining the reasonableness of notice under an insurance policy:

  1. The specific language of the policy’s notice provision;
  2. The insured’s sophistication in commerce and insurance matters;
  3. The insured’s awareness of an event that may trigger insurance coverage;
  4. The insured’s diligence in ascertaining whether coverage is available; and
  5. Prejudice to the insurer.

In Huntington Chase Condominium Ass’n v. Mid-Century Insurance Company,1 the board became aware that its property may have sustained hail damage in August 2014. At that time, it was reported by a resident that storm damage might have occurred on May 12 or 20, 2014. Huntington did not report the claim to its carrier until November 2014.

Mid-Century argued that it had been prejudiced because sometime after the storm event and before notification Huntington had replaced 12 of the 53 roofs. The court ultimately concluded that there was no prejudice to Mid-Century where it was not responsible for paying the replacement cost of those 12 roofs and was able to inspect and reach conclusions about the purported hail damage to the remaining 41 roofs.

The court also looked at the sophistication of Huntington. The court ultimately concluded that while it was not a bank or insurance company, Huntington, as a corporate entity, was to be considered sophisticated. However, despite the fact that it was “sophisticated,” the court noted that its relative sophistication in the fields of commerce and insurance did nothing to show that it should have been made aware of the event earlier or moved faster to verify that a hail storm had taken place.

Noting that the that the board took prompt action after becoming aware of the potential damage to retain a roofer to investigate and file a claim, the court concluded that the board’s delay in notification between August 2014 and November 2014 was not unreasonable.

In contrast, the court in Towne Place Condominium Ass’n v. Philadelphia Insurance Company,2found that the association’s delay in reporting damage from the same May 20, 2104, storm was unreasonable.

Town Place originally reported its claim on July 24, 2014, as having an April 12, 2014, loss date. In connection with its claim, Towne Place noted that it did not know if it had “damage from any other storms.” Philadelphia investigated the claim and ultimately denied coverage on September 17, 2014, stating that the buildings did not sustain damage from “this year’s storms.” Nine months later, Philadelphia was advised that Towne Place had retained counsel. In October 2015, Towne Place’s counsel hired a meteorologist to investigate whether the damage was caused by a different storm date. On December 3, 2015, Towne Place notified Philadelphia that it was now asserting a May 20, 2014, date of loss.

Noting that the policy required Towne Place to give notice “[a]s soon as possible,” including a “description of …when” the damage occurred, the court concluded that Towne Place’s initial July 24, 2014, notification which included the statement “[w]e don’t know if we’ve had damage from any other storms” was insufficient to given notice of the May 20, 2014, loss. As such, the court assessed whether the December 3, 2015, notice was reasonable.

In assessing the factors, the court found that three factors weighed heavily against reasonableness. First, the court concluded that as a corporation managing a large property, with access to various experts including legal counsel, Towne Place was a sophisticated business entity when it came to homeowners’ insurance claims.

Second, it concluded that the insured’s awareness of an event that may trigger insurance coverage also weighed heavily against reasonableness. In that regard, the court noted that the insured was conclusively aware of an event at least as of July 24, 2014, that caused damage.

Third, the court found that the insured’s diligence weighed against reasonableness. In part, the court focused in on the time frame after Philadelphia denied the claim, noting that Towne Place did not perform any investigation during the nine-month period after the denial.

Notwithstanding the fact that Philadelphia admitted that it did not suffer any prejudice from Towne Place’s delay as it was able to investigate the loss, the court reasoned that the insured’s delay in reporting the claim eighteen months after the event, sixteen months after it placed the original claim, and over fourteen months after Philadelphia denied the claim was not insignificant and ultimately granted summary judgment in favor of the insurer. Notably, in its analysis the court in Towne Place did not cite or appear to consider the Huntington decision. One wonders if it had, whether it would have changed its conclusion.

The Towne Place and Huntington decisions highlight that the facts of a given case have a great impact on the way the reasonableness factors are applied. In other words, here, both insureds were making a claim related to the same storm date. One set of facts supported that the notice was reasonable, one did not. Regardless of the difference in conclusions, the Towne Place and Huntington decisions highlight the fact that when it comes to assessing reasonableness, condominium associations are considered sophisticated entities in insurance related matters.
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1 Huntington Chase Condominium Ass’n v. Mid-Century Ins. Co., 397 F.Supp.3d 687 (N.D. Ill. March 29, 2019).
2 Towne Place Condominium Ass’n v. Philadelphia Ins. Co., 2019 WL 3287837 (N.D. Ill. July 22, 2019).

A Second Level of Protection to Indemnitees

Thomas L. Oliver III | Bradley Arant Boulg Cummings | July 31, 2019

Construction and Procurement Law News, Q2 2019

It is not uncommon for indemnitees to attempt to add language to indemnification provisions providing additional liability protections from the indemnitor. And courts and legislators are wary of language in indemnity agreements that create obligations on the indemnitor to indemnify the indemnitee for its own acts or omissions and create restrictions on the indemnitee’s rights to do so. A recent Florida court attempted to strike a balance between an indemnitee’s right to indemnification generally and protecting an indemnitor from indemnifying the indemnitee for its own fault.

In CB Contractors, LLC v. Allens Steel Products, Inc., a general contractor of a condominium project brought a contractual and common law indemnification action against its subcontractors arising out of a construction defect action brought against the contractor by the condominium association.

The subcontract’s indemnity clause stated: “Subcontractor’s indemnity obligations hereunder shall apply regardless of whether or not the claims, damages, losses, and expenses or causes of actions are caused in part by a party indemnified hereunder […].” In essence, the subcontract, on its face, allowed the general contractor to seek indemnity for claims, damages, and losses as a result of its own fault.

Florida Statute § 725.06 (2004), which applies to construction of buildings, states that “[a]ny portion of any agreement […] promis[ing] to indemnify or hold harmless the other party to the agreement […] for damages to persons or property caused in whole or in part by an act, omission, or default of the indemnitee […] shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract […].”

Applying this statute, the lower court found that the entire indemnity clause was void and unenforceable. The general contractor appealed the trial court’s decision.

On appeal, the appellate court disagreed and found that the entire indemnity clause was not void and unenforceable, but instead concluded that only the specific portion of the indemnity clause purporting to impose indemnity obligations for the contractor’s own acts or omissions was unenforceable.

This ruling, which reflects the same middle-of-the-road approach followed by many jurisdictions, provides protection to the indemnitor without completely voiding the parties’ indemnification agreement. This decision could have been different under a different state’s stricter law regarding indemnity. Contracting parties should carefully consider the extent of indemnity included in their contracts, especially in light of the relevant jurisdiction’s law regarding those protections.

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.