Industry Report Shows Ore. Proposals Could Cost $200M

Insurance News Net – March 15, 2013

The Property Casualty Insurers Association of America issued the following news release:

Lessons learned in other states demonstrates that expansion of bad faith laws leads to increased costs for consumers, businesses and court systems. Oregon lawmakers should avoid importing several bad faith laws from other states that have only led to increased litigation and higher consumer costs, said the Property Casualty Insurers Association of America (PCI).

“Oregon lawmakers should pay close attention to the cost increases resulting from expansion of bad faith laws in California, Florida, and Washington,” said Kenton Brine, PCI assistant vice president. “Conversely, a study by the West Virginia Insurance Commissioner found that insurers operating in states allowing third-party bad faith lawsuits face bodily injury claim costs that are 25 percent higher than non-third-party tort states. This led to the West Virginia Legislature eliminating third-party bad faith lawsuits in 2005, which resulted in a $200 million savings in loss costs over the next five years.”

A new PCI report provided findings from different studies examining the impacts on litigation and costs following enactment of bad faith statutes. For example:

* After Washington enacted a first-party bad faith law in 2007, within slightly more than a year 1,000 notices of intent to file a lawsuit had been filed with the Office of the Insurance Commissioner. Two years later, 1400 more notices were filed. Washington’s four-year average auto personal injury protection claim cost increased more than five percentage points faster after enactment of the new law (25.2% post law vs. 19.7% prior). During the first two years of Washington’s first-party bad faith law, the homeowners loss costs rose an additional 21.9 percent compared to other states, costing an additional $190 million in losses for Washington residents.

* After the Royal Globe court decision in California implemented a bad faith doctrine, the annual bodily injury insurance premiums increased between 32 and 53 percent. The elimination of Royal Globe in 1988 reversed this trend and the average bodily injury payment in California fell relative to that in 29 out of 31 other tort states.

* Florida’s statutory third-party bad faith law caused bodily injury loss costs to be 30.2 percent higher.

“Oregon lawmakers have a clear choice. They can learn from the increased litigation, higher court costs and greater insurance premiums that resulted from increased bad faith litigation in other states or they can roll the dice and let Oregon consumers pay the price,” said Brine. “Oregon already has strong unfair claims handling laws and regulations. Given the tenuous economy, now is not the time to approve new laws that are proven to increase costs for consumers and businesses.”

To view the report click here:$file/Oregon_BadFaith__031

via Insurance News – Industry Report Shows Ore. Proposals Could Cost $200M.

Pennsylvania Makes Its Mark On National Chinese Drywall Coverage Dispute With “One Occurrence” Decision

Andrea Cortland – March 12, 2013

On February 15, 2013 a Pennsylvania federal district court held that the shipment of defective drywall from China to the United States constituted one “occurrence” for purposes of insurance coverage, and the occurrence took place when the damage caused by the drywall manifested itself in the residences or buildings of the underlying plaintiffs. With this ruling, Pennsylvania joins Virginia as one of the few states to opine regarding the number of occurrences in the Chinese drywall context.

Devon International, Devon International Industries, and Devon International Group (collectively, Devon), imported a single order of drywall from China to Pensacola, Fla. Unbeknownst to Devon, the drywall was defective, as it contained an inordinately high amount of sulfur, and a few years after selling the drywall to distributors in the United States, Devon was hit with a multitude of Chinese drywall lawsuits in various jurisdictions.

As is common with Chinese drywall cases, the plaintiffs in the underlying lawsuits generally alleged the sulfur emitted by the drywall damaged their real and personal property. Faced with these lawsuits, Devon turned to its liability insurer, Cincinnati Insurance Company (Cincinnati) to defend and indemnify it under the liability policies issued to it by Cincinnati for two consecutive policy periods. Although Cincinnati accepted Devon’s tender, the parties disagreed as to whether the underlying claims against Devon arose out of a single occurrence or multiple occurrences. Litigation between Devon and Cincinnati ensued.

In Cincinnati Ins. Co. v. Devon International, Inc., No. 11-5930 (E.D. Pa.), Judge Gene Pratter considered cross-motions for summary judgment filed by Devon and Cincinatti. The parties agreed that Pennsylvania law governed the coverage dispute. Accordingly, Judge Pratter discussed Pennsylvania’s approach to determining the number of occurrences for purposes of insurance liability, and specifically, the decision in Donegal Mutual Ins. Co. v. Baumhammers, 938 A.2d 286 (Pa. 2007), in which the Pennsylvania Supreme Court tackled this issue for the first time. As Judge Pratter explained, the Baumhammers court noted there are two key competing approaches for determining the number of occurrences – the majority cause approach and the minority “effects” approach – and ultimately concluded that the cause approach was the proper method. Judge Pratter noted that, under the “cause” approach, if all the claims against Devon stem from one proximate cause, and Devon had some control over that cause, then there is a single occurrence.

After consideration of the facts, Judge Pratter held that “[h] ere, all the injuries to the underlying plaintiffs and claims against Devon originate from a common source: Devon’s single purchase and shipment of defective drywall from Shandong, [China]. Moreover, Devon had some control over the cause of the injuries, in that it chose to purchase and distribute the defective drywall. Therefore, the Court finds that there is only one ‘occurrence’ for purposes of insurance coverage.” Judge Pratter further held that since the effects of the imported drywall manifested themselves during the first policy period, the single occurrence took place during that policy period, even though for some claimants, no damage would have manifested until the second policy period.

The Eastern District of Pennsylvania’s ruling in Cincinnati Ins. Co. v. Devon International, Inc. is significant because it provides rare guidance on the number of occurrences issue in the Chinese drywall context. To date, only one other court in the nation has considered the issue. (Dragas Management Corp. v. Hanover Insurance Co., No. 2:10-cv-547 (E.D. Va., July 21, 2011)). The holding also provides guidance for Pennsylvania courts (and other courts that may need to interpret Pennsylvania law) regarding the number of occurrences issue in the liability context in general, which determines the amount of policy limits available to an insured, as well as the applicable deductibles.

The import of this decision in the Chinese drywall context is, however, limited for several reasons. First, the decision relies on Pennsylvania law and the majority of Chinese drywall coverage disputes involve insureds and damage located in other jurisdictions where Pennsylvania law will not likely apply. Second, the decision is factually limited because distinctions may be drawn between the insured in Devon International, who had one single purchase and shipment of the defective drywall from China, and distributors further down the supply chain, as well as the drywall installers who have many such shipments. Third, the decision’s overall impact is greatly limited by the recently approved global settlement in the Chinese Drywall Multi-District Litigation, which resolves the vast majority of third-party Chinese drywall cases. However, some plaintiffs have opted out of the global settlement, and to the extent those claimants bring suit in Pennsylvania or Pennsylvania has a strong nexus to their case, the Devon International decision may be critical to the disposition of those cases.

via Pennsylvania Makes Its Mark On National Chinese Drywall Coverage Dispute With “One Occurrence” Decision – Insurance – United States.

To Lien or not to Lien – What About my General Conditions?

Tyler P. Scarbrough – February 1, 2013

In 182 Tenth, LLC v. Manhattan Construction Co., 316 Ga. App. 776 (2012), the Georgia Court of Appeals recently addressed a material and labor supplier’s inclusion of general conditions costs in its claim of lien. The Court held that general conditions costs representing overhead and administrative costs were not lienable expenses and did not fall within the objective of the statute because such costs did not increase the value of the real property by becoming part of the real property.

In 182 Tenth, a materials and labor supplier filed a claim of lien pursuant to O.C.G.A. §44-14-361.1 against the owner’s real property for furnishing labor, services, and materials on a construction project for the improvement of the owner’s real property. Under the Georgia statute, the lien arises as to “property for which [lien claimants] furnish labor, services, or materials.” Id. at 780. The materials and labor supplier testified that the claim of lien arose from items set forth in various payment applications submitted in accordance with the construction contract. Id. A review of the itemized general conditions cost in the payment applications revealed that:

these costs represented overhead or administrative costs, and shows charges for items described as staff, preconstruction, mobilization, phone/water, power, job site trailer, safety, job toilets, office supplies, computers, small tools, fuel and oil, temporary road, blueprints, job site copier, record drawings, progress photos, postage/courier, sidewalk barricades, job site communications, temporary fence, job signage, cleanup crew, dumpster rentals/pulls, final clean, unit certifications, builder’s risk insurance, and general liability insurance.

182 Tenth, LLC, 316 Ga. App. at 780.

The Court noted that the right to a lien under the statute proceeds upon the theory that the work and material or machinery for which the lien is sought has increased the value of the property by actually becoming part of the property. As a result, “the items of general conditions costs described in the payment applications were not lienable because they were not labor, services, or materials which actually went into and became a part of the property.” Similarly, the Court held that any interest due on the unpaid payment applications was not a lienable item either.

Bottom Line: The decision in 182 Tenth is instructive. Claimants should be careful to lump all amounts due into a claim of lien unless, as this case suggests, those amounts represent items that went into and actually became part of the property. Segregating these costs on the front end may help avoid dismissal of the lien claim which may result in the loss of a lien claimant’s rights under Georgia law.

via To lien or not to lien – what about my general conditions? – Lexology.

Economic Loss Rule, 1850-2013, R.I.P.

Stan Martin – March 12, 2013

The folks who eroded the privity rule in A.R. Moyer v. Graham have now abolished the economic loss rule in Tiara Condominium Ass’n v. Marsh & McClennan.  The decision, issued March 7, 2013 by the Florida Supreme Court, is blunt: “We . . . hold that the application of the economic loss rule is limited to products liability cases.  Therefore, we recede from prior case law to the extent that it is inconsistent with this holding.”  Wow!

This particular case arose when a condo association sued its broker because the condo had less insurance coverage than expected, a fact discovered after it undertook hurricane damage repair work that cost more than the available coverage.  The facts of this case are less significant, though, than the sweeping decision of the Florida Supreme Court.  The Florida high court called the economic loss rule “a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses.”  It goes on to state: “The rule has its roots in the products liability arena, and was primarily intended to limit actions in the products liability context.”

The economic loss rule, or doctrine, dates to the mid-nineteenth century according to some commentators, although most are in agreement that the doctrine came into focus in the 1960’s.  This rule has been a standard arrow in the quiver of attorneys defending professionals against tort claims for many decades.  Although eroded in many jurisdictions – some have allowed economic loss claims when the plaintiff was “foreseeable,” or when the defendant had “negligently misrepresented” something (e.g., a drawing or specification) – no state appears to have been so bold until now as to declare the rule to be dead for non-product liability claims.  This decision will be discussed, critiqued and criticized (and even lauded in some circles) for years to come.  As most readers are aware, a decision by one state’s high court will not necessarily result in other states following suit, but this decision, now a part of the judicial record, will probably be cited frequently in the arena of tort claims arising from construction projects.

Coincidentally, the Florida Construction Law Update blog reports, in an entry dated prior to the Florida court decision, that the state legislature is considering a bill to effectively impose the economic loss rule by statute.

via Economic Loss Rule, 1850-2013, R.I.P. : Duane Morris Construction Law.

How Minor Construction Defects Can Turn Into Major Structural Problems

These condos were built in 1980, and investigated in 2003. The nominal water intrusion took 23 years to manifest itself in the form of a minor deck surface collapse which alerted the owner to investigate.

Needless to say it was well beyond the ten year statuette of limitations; this was not a restoration that was litigated. This was a 280 unit complex of high end condos, ranging in square footage from 3000 square feet to 6500 square feet.

The repair requirements included, re-framing the deck to current structural engineering codes, replacing guard railings, replacing waterproofing and flashing on the wear surface, replacing stucco and adding fresh air vents at the reconstructed underside of these decks. The decks varied in sizes, but this particular unit cost approximately $6000 to replace.

The overall restoration cost would have been approximately = 280 x $6000 = $1,680,000.


via How Minor Construction Defects Can Turn Into Major Structural Problems.