Residency and Personal Property Opinion Vacated

Michelle E. Gaston and Katherine MacCorkle Mullins | Steptoe & Johnson | October 5, 2017

Based upon the agreement of the parties, the United States District Court for the Southern District of West Virginia vacated and withdrew the memorandum opinion previously issued by the Court in Shank v. Safeco Ins. Co. of Am., No 2:15-CV-09033, 2016 WL 4534028 (S.D. W.Va. Aug. 30, 2016) (mem.).  See also Steptoe & Johnson Client Alert (Nov. 15, 2016).  Shank v. Safeco Ins. Co. of Am., No 2:15-CV-09033, 2017 WL 4118966 (S.D. W.Va. Aug. 22, 2017).

In Shank I, the Court addressed the following issues: (1) whether an insurer may deny coverage based upon actual residency rather than vacancy of a dwelling, and (2) to what degree an insurer may require an insured to detail personal property losses in the event of a “total loss” fire damage claim.

With respect to the first issue, the Court previously noted that West Virginia has adopted the 1943 New York Standard Fire Policy by statute.  W. Va. Code § 33-17-2.  For multiple line coverages, the language of the fire portion must be at least as favorable to the insured as the applicable portions of the standard fire policy.  Id.  In Shank I, the Safeco policy provided coverage for the “residence premises,” which was defined to include “where you reside.”  The Court found that the “residence premises” provision contained in the Safeco policy was unlawfully more restrictive than the standard fire policy’s vacancy provision.

With respect to the second issue, the Court found that the insureds had substantially complied with the policy’s requirements for describing their personal property loss, despite the fact that the insureds were unable to provide ages or costs for their itemized property.  The Court determined that because the real property was a total loss, the insureds were also entitled to the policy limits established for the loss of their personal property.

The Court’s August 22, 2017 decision vacates and withdraws the 2016 opinion.

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 Construction Coverage From Liberty Mutual, Ironshore Targets Integrated Projects

Insurance Journal | September 14, 2017

Liberty Mutual and Ironshore’s dedicated construction practices have introduced an Integrated Primary Wrap Up/Project Specific program offering general liability (GL) and professional liability (PL) protection for medium and large construction projects developed through design-build or integrated project delivery (IPD). Workers’ compensation (WC) coverage will be available as a separate policy.

The new product helps better manage risk for projects that leverage design-build and IPD systems by offering an integrated policy addressing the GL and PL exposures inherent with these approaches.

According to Aldo Fucentese, vice president, National Insurance Specialty Construction, the new integrated product helps remove the potential gaps in coverage intrinsic to the design-build and integrated project delivery methods.

The new Primary Wrap Up/Project Specific policy has separate policy primary limits for GL and designers & contractors professional liability insurance (DCPL). GL is underwritten on an occurrence basis, and DCPL as a claims-made policy with retroactive protection. Completed operations and extended reporting period cover are available as are program extensions, including rectification coverage. Protective & indemnified party coverage is offered by Ironshore on a separate follow form excess policy with difference in conditions/difference in limits protection. GL & PL clash deductible can be available for additional premium.

“The design-builder’s professional liability exposures are related to the professional services assumed in the agreement with the owner and then subcontracted to design professionals on the project,” said Ben Beauvais, executive vice president, Casualty & Construction, Ironshore. “The level of project risk that the design-builder undertakes according to the contract agreement may vary from very onerous to fair-and-equitable. The professional liability coverages and the included risk management services are tailored to provide an integrated solution to design-build contractors’ complex exposures.”

Windstorm Insurance May Not Be Your Only or Best Option

John A. Moore | Daily Business Review | October 2, 2017

As commercial and residential property owners in South Florida assess their damage after Hurricane Irma they should be cognizant that a claim against their own windstorm insurance may not be the only or best option. This is true in part because making a claim against one’s own insurer will inevitably require the payment of a deductible and may result in future higher premiums. Accordingly, consideration should be given as to whether other sources of recovery may exist to cover the damages.

An analysis of the damage including the causes is a necessary starting point. If, for example, a structural component such as roof shingles or membranes failed, the failure might be due to a manufacturing defect or defective installation. In those situations it may be possible to seek recovery from the product manufacturer or those involved in the construction, including the contractor, engineer and architect either based upon a construction defect claim or a warranty claim.

If the failure is the result of a construction defect the next aspect to consider is whether the work that failed was performed within the last 10 years. The 10-year time frame is important because Florida Statute Section 95.11(3)(c) provides a 10-year statute of repose for construction defects that requires a lawsuit be brought within 10 years “after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer whichever date is latest.” Although the law is clear that any construction defect claim is barred if it is not commenced within the 10-year statue of repose, the timing of when that 10-year period is triggered is less clear and may be later than one would think. For instance, a Florida state court ruled that the date of final payment instead of the date the work was completed was the point at which the statute of repose started to run. Whereas another Florida state court decided that the trigger for the statute of repose could be the date at which the engineer of record filed a final plat for the project, even though that filing took place three years after the certificate of occupancy had been issued and the owner had taken possession of the property.

Warranty Considerations

With respect to a potential product or workmanship warranty claim, obviously the specific language of the warranty needs to be reviewed to determine what the warranty purports to cover and to exclude. Again, it is important to know the cause of the damage, keeping in mind that there may be more than one cause, as it is more likely that coverage under the warranty will exist if the damage is caused by wind and driven rain as opposed to damage caused by windblown debris. The warranty may contain language that excludes coverage for damages caused by “Acts of God” which is an expression frequently used in the law and generally refers to damages caused by natural disasters or forces of nature that exist independent of any human acts. And although hurricanes are generally considered to be an “Act of God,” the inclusion of such language does not necessarily mean that one cannot pursue a warranty claim. It is possible to challenge such exclusions in situations where the product or work failed in wind speeds that are within the design criteria for the property’s location. With respect to Hurricane Irma, the National Weather Service in Miami’s preliminary reports of wind speeds in Miami-Dade and Broward County show that the sustained wind speeds did not exceed those of tropical force winds, which is less than 74 mph, and that the maximum hurricane force gusts did not exceed 100 mph. These wind speeds are well within the South Florida Building Code design criteria.

Interestingly, if the issuer of your warranty declares it to be void because the product or work was exposed to hurricane force winds, it may be possible to claim the value of the loss of that warranty as one of your damage components in a property insurance claim, provided of course that you suffered actual direct physical loss or damage to covered property.

If it is apparent that the neighbor’s tree or its limbs falling onto your property caused the damage, the general rule is that you are responsible and you would need to make a claim with your own insurer. If, however, the tree was diseased, had dead limbs or had been otherwise improperly maintained it is possible to prove that the neighbor was negligent and therefore liable for the damage.

Accordingly, the options available to a property owner will be dependent upon the type of damages and the cause of them, and in the case of construction defects whether the work was done within the last 10 years.

Coverage for Construction Defects Caused by Subcontractor Work

Amanda M. Leffler | Brouse McDowell | September 12, 2017

The Ohio Supreme Court has held that claims for the cost to repair an insured’s own defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy.” See Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712. In its decision, however, the Court approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:

  • Repair and replacement of a policyholder’s own defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and,
  • Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.

Importantly, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. A recent decision from one of Ohio’s appellate courts suggests that defective work performed by a policyholder’s subcontractors may be covered, regardless of whether the subcontractor’s work caused any consequential damages.

In 2008, Ohio Northern University contracted with Charles Construction Services (CCS) to construct a hotel and conference center. Ohio Northern Univ. v. Charles Constr. Servs., Inc., 2017-Ohio-258 (3rd Dist.). CCS retained several subcontractors to complete the work. After construction was completed, Ohio Northern discovered significant water intrusion and related damages, as well as serious structural defects, and brought suit against CCS.

CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no obligation to defend or indemnify CCS. Cincinnati contended that, under Custom Agri, property damages arising from defective work could neverconstitute an occurrence, regardless of who performed the work. In response, CCS argued that Custom Agri was inapplicable because almost all of the work at issue had been performed by subcontractors, not by CCS, and because CCS had purchased products-completed operations coverage which applied to the defective construction claims arising from the work of its subcontractors.

The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed the “Damage to Your Property” and “Damage to Your Work” exclusions, which expressly preserved coverage for damaged work or damages arising from faulty work if (1) the work was performed by a subcontractor, and (2) the damage occurred after construction was completed. The appellate court correctly noted that if it were to adopt Cincinnati’s interpretation of the policy, it would render these provisions meaningless. The court found that, at a minimum, the provisions created an ambiguity that must be resolved in favor of the policyholder. Thus, the appellate court held that Cincinnati had a duty to defend and indemnify CCS.

Interestingly, though not analyzed by the appellate court, even if the work at issue had been performed by CCS and not its subcontractors, the damages alleged by Ohio Northern would have required that Cincinnati defend CCS and indemnify at least a portion of any award against it. This is because Ohio Northern asserted claims not only for the repair and replacement of defective work, but also for consequential damages arising from such work. As noted above, the Supreme Court in Custom Agri cited with approval prior lower court opinions, which held that CGL policies cover such claims for consequential damages. Insurers and policyholders in Ohio continue to test the scope of the Ohio Supreme Court’s decision in Custom Agri. As in any case involving complex coverage analysis, policyholders should consider retaining experienced coverage counsel to assist in the claim process so as to best position their claim for coverage.