Jett Abramson | Property Casualty 360° | November 9, 2016
An emerging trend: treating each alleged defect within a single construction defect suit as a separate occurrence.
Much has been written about and litigated regarding the topic of an “occurrence” as it is applied within the four walls of a commercial insurance policy.
There was the famous World Trade Center case (SR International Business Insurance Co. Ltd v. World Trade Center Properties LLC, et al) in which the events of 9/11 were mostly defined as a single occurrence.
In the casualty arena, specifically construction, we have seen “occurrence” be adjudicated in various ways depending on the degree of negligence of the policyholder, resulting damage versus damage to work itself, and the venue for the claim (for example, American Home Assurance Co. v. Trumbull Corp., Westfield Insurance Co. v. Custom Agri Systems Inc., Travelers Indemnity Co. of America v. Moore & Associates. Inc., etc).
Partially as a result, we have seen various states develop their own distinct opinions and statutes regarding what qualifies as an “occurrence” within the CG0001 policy form (see South Carolina, Hawaii, among others). However, there is a dearth of literature on the topic of an occurrence when it comes to the narrow focus of construction defects within the scope of a Controlled Insurance Program.
For decades, insurance and claims professionals have seen insurers treat individual construction-defect lawsuits each as single occurrences within controlled insurance programs; even suits alleging multiple and various defects in construction involving multiple trades. Claims adjusters have typically asked policyholders for one deductible payment or self-insured retention satisfaction during the loss adjustment process, and proceeded to defend and indemnify the named insureds and other enrolled contractors under the program.
However, an emerging trend among a small consortium of insurers is the treatment of each alleged defect within a single construction-defect suit as a separate occurrence. This treatment has the narrow potential to benefit policyholders in cases where the aggregate limits of a controlled insurance program are higher than its occurrence limits, but it also has the more debilitating potential effect of the application of the policy deductible or self-insured retention (typically written on a “per occurrence” basis) multiple times for the same construction-defect suit. Obviously the more substantial the deductible or self-insured retention amount on the policy, the more damaging the effect.
As every construction-insurance professional is aware, within the unmodified CG0001 “occurrence” is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. This definition has been used successfully by several attorneys and insurance brokers — including me — to argue the single application of a policy deductible to a single and consistent defect that exists in multiple locations/units within a single building, or within several different buildings in the case of detached residential construction (or other similar cases).
A simple example would be several hundred windows that were flashed improperly in the same manner across multiple units, all resulting in similar water intrusion. Yet this same application of the definition of “occurrence” could result in the undesired effect of several discrete construction defects within a single suit to require the satisfaction of several multiples of the policy deductible or self-insured retention. Clearly, a new solution (or solutions) must be crafted to address this recent development, requiring insurers to clarify their coverage intent in deductible or self-insured retention application, or policyholders must be educated on the topic and their expectations managed.
Myriad solutions possible
Since this development is still within its infancy, so are any proposed solutions to the development that are favorable to policyholders. It’s the author’s experience that most insurers within the controlled insurance program arena have not been asked to address this issue in the past, and several balk initially at a menu of proposed solutions to the issue. However, given the current state of the market and the broad appetite of construction liability risk underwriters, a viable solution is typically found and agreed upon.
As mentioned, myriad solutions could be enacted to rectify this coverage incongruity. It is up to each professional insurance broker to craft a solution befitting his or her client. However, two suggested workable solutions to this issue are as follows:
- Deductible/self-insured retention aggregate stops. This is probably the most simple solution. This caps the policyholder’s out-of-pocket expense for all claims attributable to the policy. The aggregate stop amount can be structured to work within the client’s balance sheet.
- “Per claim” or “Per occurrence” deductible wording: This is a slightly more exotic solution that allows the policyholder to elect which basis on which the deductible applies, on a claim-by-claim basis.
Different carriers have different levels of tolerance in allowing for aggregate stops, but this option is certainly available in the marketplace. The latter solution may be a bit too peculiar for some carriers’ appetites, but the example serves to highlight how creative a broker can be in crafting a workable solution for their client to address this emerging coverage concern.