No Coverage for Installation of Defective Steel Framing

Tred Eyerly – June 23, 2014

The California Court of Appeal affirmed the trial court’s holding that the insurer had no duty to defend claims arising out of the insureds’ installation of defective steel framing in an apartment building. Regional Steel Corp. v. Liberty Surplus Ins. Corp., No. B245961(Cal. Ct. App. May 16, 2014) [decision here].

Regional Steel was a subcontractor for providing reinforced steel to the columns, walls, and floors of an apartment building under construction. Regional used 90 degree and 135 degree seismic hooks as approved by the general contractor, JSM Construction, Inc. The City building inspector issued a correction notice, however, requiring the exclusive use of the 135 degree hooks. Levels one through three had defective tie hooks and required repair. JSM refused to pay Regional’s invoices and withheld $545,000. JSM had to make repairs that required opening up numerous locations in the concrete walls, welding reinforcements to the steel placed by Regional, and otherwise strengthening the inadequate installation.

Regional sued JSM for the withheld payment. JSM cross-claimed, asserting breach of contract and breach of express and implied warranties.

Regional was an additional named insured under JSM’s policy with Liberty. Liberty rejected Regional’s tender of JSM’s cross complaint, asserting there was no damage to property alleged. Further, the tie hook problem did not constitute an “occurrence” because the alleged damage was not caused by an accident.

Regional sued Liberty. Regional contended that JSM asserted claims for damage to property and loss of use of tangible property based on JSM’s allegations that it needed to repair damage to the garage by opening walls and floors to install support columns, which was “other property.” Therefore, this case was distinguishable from F&H Constr. v. ITT Hartford Ins. Co., 118 Cal. App. 4th 364 (2004), which held that to bring defective construction within the insuring clause, the “damage” must be damage to property other than the property upon which the insured had worked.

The trial court granted summary judgment to Liberty. JSM only alleged facts arising out of the damage caused by the defective seismic hooks and did not allege any facts of any other damages attributable to Regional.

The Court of Appeals affirmed. The court was aware of a prior holding that installation of the insured’s asbestos material constituted physical injury to the building, even before any release of asbestos fibers. See Armstrong World Industries, Inc. v. Aetna Cas. & Surety Co., 45 Cal. App. 4th 1 (1996). Armstrong, however, noted the difference between the case before it (involving hazardous materials) and cases involving defective construction. California cases consistently held that coverage did not exist where the only property “damage” was the defective construction, and damage to other property had not occurred.

I do not agree with this reasoning. The court recognized that the faulty workmanship arose from an accident, i.e., Regional did not intentionally use the wrong tie hooks. Yet, the court determined there was coverage only if the property damage occurred to portions of the project not worked on by Regional. A better analysis would be to recognize there was an “occurrence” that caused property damage. Such property damage would be covered, however, only if the business risk exclusion hurdles could be cleared. See e.g., Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W. 2d 65, 76 (Wis. 2004).

via Insurance Law Hawaii: No Coverage for Installation of Defective Steel Framing.

When Are Site Safety Managers Not Site Safety Managers?

Kendall Jones – July 9, 2014

Answer: When they are hairdressers, musicians, bellhops and short order cooks posing as site safety managers. This may seem crazy, but last week two companies and seven individuals were indicted in New York State Supreme Court and charged with a number of offences including grand larceny, scheme to defraud and criminal possession of a forged instrument. The two companies indicted, Avanti Building Consultants, Inc. and NYCB Engineering Group, falsified over 450 safety inspection documents at roughly 40 construction sites in New York City in lieu of having actual site safety managers visiting and inspecting the sites.

In New York City there are laws that require a private third-party site safety manager licensed by the Department of Buildings be retained to inspect sites that involve exterior construction and demolition on buildings 15 stories or taller. These site safety managers are typically hired by the building owner or the general contractor and report directly to the Department of Buildings. The site safety manager is responsible for completing a daily safety inspection which requires being onsite for two hours each day, documenting the inspection in a log and reporting any safety concerns to the Department of Buildings.

Avanti apparently hired unlicensed individuals, some of which they recruited through Craigslist, to falsify safety logs and forge the signatures of at least 10 licensed site safety managers. They were eventually caught someone at the Department of Buildings realized Avanti was using the credentials of a deceased site safety manager who had passed away a year ago. Even after Avanti was discovered using a dead man’s credentials they attempted to replace those falsified safety logs with other sets of forged safety logs. All this from a company whose website claims they have “earned a remarkable reputation as a leading A/E/C consulting firm. Richard Marini, CEO created a solid foundation and unmatched footprints in the field of building consulting. Avanti is committed to operating a quality organization of unwavering ethics and quality results. We guarantee it!”

As a result of the investigation into Avanti, the Department of Buildings and the Department of Investigation conducted more than 400 site visits that resulted in 80 violations and roughly 30 stop work orders in addition to a similar scheme being conducted by NYCB Engineering Group. In addition to using the credentials of licensed site safety managers without permission to falsify inspection logs, they also used licensed site safety managers who knowingly allowed their credentials to be used to falsify documents. In one instance NYCB assigned a site safety manager to perform inspections at 14 sites in one day. This means that a site safety manager magically performed a minimum of 28 hours of work in a 24-hour period.

This type of corruption and fraud puts a black mark on the entire construction industry and undermines the construction firms that hired these companies to ensure that they were providing a safe working environment for their employees. It’s bad enough that these companies were ripping off their clients by charging them for safety inspections that weren’t actually being completed. (They were also paying these unlicensed individuals $20 – S25 an hour when actual site safety managers make upwards of $100 an hour or more and pocketing the difference.) Even worse, by not actually completing safety inspections they were endangering the lives of the construction workers at these sites along with those of the general public.

via When Are Site Safety Managers Not Site Safety Managers?.

Policyholders Can Fully Collect Under a Flood Policy and a Wind Policy at the Same Time

Chip Merlin – July 18, 2014

Intelligent policyholders are not sticking around when their house is being destroyed documenting how much damage was caused by wind and then the flood that accompanies most of these catastrophic events. Yet, their insurance companies want to act as if their policyholders can play god. They demand that policyholder determine what damage was exactly caused by wind before the flood storm surge washed a lot of the evidence away.

Some insurance companies even claim their policyholders are crooks and cheats if they ask each company – the flood and wind carrier – to pay. I am hearing this from some Superstorm Sandy insurance adjusters. Most policyholders are underinsured following a major tropical storm or hurricane and need both policies to pay, at least in part, to be fully indemnified.

This is not the first time this issue has arisen. A good legal discussion of this factual pattern is found in Robichaux v. Nationwide Mutual Insurance Company:1

“Nationwide is contending that…an insured who submits a claim under a SFIP that does not segregate wind damage from flood damage or who submits a claim under a SFIP that includes claims for property damage that are doubtful or uncertain in origin does so at the peril of losing the wind damage benefits that would otherwise be payable under his homeowners policy.

. . .In essence, Nationwide is arguing that the burden is on the insured to properly segregate his losses at the time he makes a claim for SFIP benefits, and that if the insured errs and claims any damages under the SFIP that actually prove to be wind damages, the insured is estopped to make a subsequent claim for these wind damages under his homeowners policy. If this rule were established and followed, the wind insurer, the insurer who sold the homeowners policy, would then have no obligation to pay benefits for wind damages that would otherwise be covered.

. . .I find no authority to support Nationwide’s argument that by making a claim for damages under one policy an insured forfeits his rights under another policy if his original claim proves to be erroneous or over inclusive. In my opinion this would lead to an unjust result.

Insureds are entitled to recover their storm losses under all available insurance policies in accordance with the terms of those policies and the evidence showing the cause of the losses. In the context of catastrophic hurricane losses, the cause of the insured’s property damage is more often than not uncertain and more often than not disputed. It would be unreasonable and unjust to require an insured to correctly segregate his damages between flood losses and wind losses at the time he makes his initial claims at the peril of losing the insurance benefits he has paid for if his attempt at segregating these damages later proves to be incorrect. See: Palmer v. State Farm Fire and Cas. Co., 2007 WL 1459391 (S.D.Miss.2007).

In Ferguson v. State Farm Ins. Co., 2007 WL 1378507 (E.D.La.2007) Judge Berrigan faced a similar factual situation to this. The plaintiffs were insured under both a SFIP and a homeowners policy. Plaintiffs apparently claimed their hurricane losses were payable under both policies. On the basis of a telephone conversation, the SFIP benefits were paid, and State Farm argued that the plaintiffs should be estopped from claiming additional benefits under their homeowners policy. The Court disagreed, holding that the plaintiffs had a right to recover the wind damages covered by the homeowners policy. The Court determined that estoppel did not apply on the facts then before it.

This issue is important in New Jersey and New York as Superstorm Sandy litigation is getting in full swing and those clever insurance defense attorneys are trying their best to keep their neighbors from collecting benefits.

1 Robichaux v. Nationwide Mut. Ins. Co., No. 06-1165, 2007 WL 2783325 (S.D. Miss. Sept. 21, 2007).

via Policyholders Can Fully Collect Under a Flood Policy and a Wind Policy at the Same Time : Property Insurance Coverage Law Blog.

Second Circuit – Architect’s Faulty Designs were Two Separate Defects

Matthew D. Stockwell – July 15, 2014

On June 23, 2014, the Second Circuit Court of Appeals issued a decision in the case Dormitory Authority of the State of New York v. Continental Casualty Company (2014 WL 2808073), a declaratory judgment action filed by a building owner against the architect’s insurance carrier over the faulty design of a dormitory. The issue in this case was whether two design defects in the structure of the building were “related.” The owner sought a declaration that the design flaws were two separate defects because, if so, two separate policies would have responded to the claims, but if not, there would not have been sufficient limits to remediate both defects. Although this decision has not received much attention yet, the importance lies in the Second Circuit’s agreement that the defects were separate, notwithstanding policy language that attempted to group related wrongful acts.

After the project was completed, it was determined that the architect incorrectly estimated the steel requirement for the structural steel girts and exterior façade (“Steel Girt Defect”). The owner sent a demand letter to the architect in 2002. Separately, it was also discovered that snow and ice were sliding off of the building on the sidewalk below. A study determined that the design of the façade failed to account for temperature variations appropriate for a building in New York (“Façade Defect”). A claim was first asserted against the architect in 2004.

The architect’s professional liability policies are claims-made policies that defined “related claims” as “all claims made against [the architect] and reported to [the insurer] during any policy year arising out of . . . a single wrongful act or related wrongful acts.” The policies further provided that “[a]ll related claims shall be considered a single claim first made and reported . . . within the policy year in which the earliest of the related claims was first made and reported.” The two separate claims implicated two different policies because they were reported at different times. The district court granted summary judgment in favor of the owner, finding that the Façade Defect was not related to the Steel Girt Defect. On appeal, the insurer argued that the demand letter for the Steel Girt Defect was broad enough to include all design defects in the building. The Second Circuit disagreed and found that the demand letter focused entirely upon the Steel Girt Defect and “could not be fairly read as an omnibus claim concerning all architectural defects . . .”

The insurer also argued that the defects were “related claims” under the policy because they arose out of a single wrongful act or related wrongful acts. The Second Circuit rejected this claim as well, holding that one defect relates to the structural integrity of the building, while the other relates to the building’s aesthetic design. Furthermore, each system had its own distinct engineering considerations and involved different design teams and contractors. The problems also manifested themselves at different times, resulted in different types of damage, and the solutions to each issue were completely different. Importantly, the Court stated, “[t]hat both may have resulted from the generalized negligence of the Architects is an insufficient degree of relatedness.”

via Second Circuit – architect’s faulty designs were two separate defects – Lexology.