Is it One ‘Occurrence’ or Many?

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.

Emerging trend

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:

    1. 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.
    2. “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.

Construction Mediation Presents Unique Challenges and Opportunities

William J. Cea | Daily Business Review | November 17, 2016

Construction mediation presents unique challenges and opportunities that can determine the outcome. Here is some practical guidance based on our experience.

Proper preparation and participation in mediations requires an understanding of the pyramid of parties, how the timing affects potential settlement options and whether experts will participate. Depending upon the number of issues presented, it also may be necessary to segregate the parties into submediations by trade or discipline. To facilitate a settlement, it is critical for the parties to recognize the legal and practical obstacles that a mediator will have to address. In the realm of construction cases, preparation by all parties is the key to success.

Unlike a typical lawsuit, a construction mediation routinely involves a large number of parties and participants. For example, in a construction defects case, there is usually one or more property owners on one side and a developer or general contractor on the other. The property owner may choose to bring direct claims against any surety, design professionals, subcontractors and suppliers, or the primary defendant or defendants may assert third-party claims.

Either way, the cast of characters can lead to what feels like a three-ring circus at mediation. The resulting pyramid of parties also means that the causes of action and theories of relief could include direct warranty or building code claims as well as claims for negligence and indemnification. Looking beyond the parties, there is the issue of whether any of the parties have defense and/or indemnity insurance coverage. If so, insurance adjusters for those parties with coverage will play a critical role at the mediation.

It also is worth noting that the parties, particularly the plaintiff, must fully explore insurance coverage and verify that adequate information is provided to the insurer well in advance of the mediation. The failure to do so will likely result in an adjuster coming to mediation without ample information and/or authority to settle the claim. Unlike individual parties or even corporations, insurance companies make decisions as to the value of a claim and settlement authority in advance.

A party, whether the plaintiff or the insured defendant, should not expect that an adjuster will come to mediation with the ability to evaluate a claim and have carte blanche authority to negotiate. Even if the mediator is armed with all of the plaintiff’s facts and arguments in support of its demand, if the insurer was not provided that information well in advance of the mediation, then the mediator may have little success in procuring an acceptable offer.


As to the timing of the mediation, several key questions should be asked before parties schedule the mediation. For example, has there been sufficient discovery and inspections of the property? Have repairs already been made? Are the defendant contractors still in business? The answers to these questions will impact whether the case is truly ripe for mediation and what the options for resolution may be.

For example, if repairs have not yet been made, there may be an opportunity for the mediator to bring the parties and their experts together in an effort to see if they can agree upon the extent of repairs and, if so, the scope and method of the repairs.

Considering that Florida provides for a mediation privilege, it is a fantastic opportunity to bring experts together to meaningfully discuss the issues. Alternatively, if they cannot agree because they dispute the conditions in the field, the parties could agree upon a test and inspection protocol as part of the mediation process and resume negotiations after the process has been completed.

On the other hand, if repairs have already been made or if the case is a pay dispute or lien foreclosure, there may not be as many options. In that case, the negotiations may focus on the reasonableness of the amounts incurred or value of work performed and whether there are any covered claims.

Generally speaking, liability insurance covers property damage or consequential loss and not the direct repair costs. While there are exceptional circumstances, the mediator will need to navigate through the pyramid of parties and determine who has coverage for what. Further, depending on the number of parties, the mechanics of such a negotiation can be complicated.

Thus, whether serving as a mediator or participating as a party, construction cases present unique issues. Identification of the role of the parties in the project, status of the project and insurance coverage issues all have a significant impact on the chances of success.

In order to aid the mediator and give the parties the greatest chance of success, it is imperative to adequately prepare and make sure opposing parties have sufficient information and time for their experts and insurance carriers to prepare. Failure to pay attention to all of the issues may lead to a premature impasse and frustration for the parties who have oftentimes waited for months for the mediation.

Determining Depreciation: The Definition of Actual Cash Value Varies Widely Between States

Chip Merlin | Property Insurance Coverage Law Blog | November 22, 2016

In yesterday’s post, Determining Depreciation–Are Policyholders Getting Ripped Off, I promised to discuss issues of actual cash value and depreciation. The article I am critiquing giving rise to this discussion cited California law regarding actual cash value and then made this statement:

In states in which condition is not included in the definition of actual cash value, actual cash value is generally defined as replacement cost less depreciation.

Is this true?

Most property insurance adjusters have heard of the Broad Evidence Rule. IRMI provides a fairly straightforward definition of this approach:

A valuation rule that has evolved in some states and does not adhere to the principle that the traditional measure of actual cash value (ACV) (replacement cost less depreciation) is the sole measure of value at the time of loss. This rule provides for the examination of every standard of value having a bearing on the property under consideration, such as the age of the property, the profit likely to accrue on the property, and the property’s tax value. Ultimately, it calls for the selection of that “value,” which, in the event of a total loss, will provide complete indemnification and no more.

In Being In The Minority – The Broad Evidence Rule, the Tomoney Knox law firm stated the following:

Property insurance policies often value claims based on “actual cash value.” The term is defined differently in different states and in various policies. When confronted with an interpretation issue, courts typically calculate actual cash value (ACV) as: (1) fair market value; (2) replacement cost less depreciation; or, (3) under the “broad evidence rule.” The majority of states, including New York and New Jersey, follow the broad evidence rule. Pennsylvania, our home state, does not.

As the name suggests, the broad evidence rule is an inclusive valuation method. It allows any evidence/factor that tends to establish the correct estimated property value of a building or personal property. Some permissible valuation factors may include:

original cost;
replacement value;
wholesale value;
market value;
economic and functional obsolescence;
condition and physical deterioration;
use; or
sales and purchase offers.

Given the flexible nature of the broad evidence rule, this list isn’t exhaustive. However, the price of flexibility precludes a bright-line test for determining exactly how much weight should be assigned to each potential factor affecting valuation. For this reason, each ACV valuation under the broad evidence rule must be determined on a claim-by-claim basis.” (Emphasis added)

So, when determining actual cash value, the first rule for all adjusters is to determine what rule is to be applied. Analyze the policy language and state law. Nobody should assume Actual Cash Value equals Replacement Cost Value less Depreciation. In the majority of losses, it does not.


Determining Depreciation–Are Policyholders Getting Ripped Off?

Chip Merlin | Property Insurance Coverage Law Blog | November 21. 2016

Many property insurance company adjusters are required by their companies to determine the amount of depreciation to be taken when arriving at amounts of actual cash value. Many are told to determine this amount by determining the replacement cost and then subtracting depreciation. The question is: How are property insurance adjusters trained to determine depreciation so the insurance customer is not “ripped off” by taking too much depreciation?

I was thinking about this issue while reading an article on PropertyCasualty 360°“A look at Replacement Cost Value vs. Actual Cash Value,” written by Enservio’s Scott Lacourse. My overriding thought was that this is an important topic about depreciation because so many insurance companies require taking depreciation in virtually every property insurance loss. Yet, the rules often cited of how a person accurately determines the depreciation to be taken seems unusually vague or simply wrong.

The topic is also very much on the mind of insurance companies, as I noted in Do Not Gamble on Being Ignorant About Depreciation of Labor–The MERLIN Las Vegas Public Adjuster Conference Will Make You a Winner! where I stated:

Some insurance companies seem to be in a race to the bottom by searching and questioning every possible way to pay their customers less following a loss. Taking depreciation on labor charges is a fairly new method for these companies.

As a result, there has been more litigation on the topic. Examples are noted in Depreciation of Property to Determine Actual Cash Value is Different in California and Age as a Factor in Determining Depreciation Used to Calculate Actual Cash Value.

I will write more about the Lacourse article this week. He is to be congratulated for writing about this very important topic, but I suggest that determining actual cash value and depreciation is not as simple as he indicates.

All property loss adjusters should ask themselves whether they may be making mistakes when determining actual cash value when depreciation is an element of the equation.


Pre-Litigation Requirements For Condo Associations

C. Todd Hewes | Lewis Brisbois Bisgaard & Smith LLP | November 21, 2016

When general contractors, subcontractors, and design professionals face claims or lawsuits arising from original construction or remediation of condominium projects, one of the most important—and also sometimes one of the most difficult tasks—has always been to catalog, usually by unit number, every item of claimed damage by Plaintiff. This can be a challenge when individual unit owners do not personally live in the units and rent them to others. Owners must advise the condo association about their damages. The association may or may not compile the damage information. Often times, this work is not performed until after suit has been filed, which means that defense counsel’s ability to evaluate the claim quickly may be hampered.

In Texas litigation, the burden to assemble all of the individual condominium unit damage information was recently shifted to the condo association, for projects consisting of eight or more units. In late 2015, the Texas legislature enacted Section 82.119 of the Texas Property Code, which itemizes the requirements a condo association must meet before filing suit. Under the law, a condominium association (comprised of at least eight units) which is interested in filing a lawsuit or initiating arbitration proceedings related to either the construction or design of a condo unit or common elements, must take certain specific steps before it can enact legal proceedings. Section 82.119 specifically provides:

(a)        This section does not apply to an association with less than eight units.

(b)        In addition to any preconditions…in the declaration, an association, before filing suit or initiating…arbitration…to resolve a claim pertaining to the construction or design of a unit or the common elements, must:

(1)        obtain an inspection and a written independent third-party report from a licensed professional engineer that:

(A)       identifies the specific units or common elements subject to the claim;

(B)        describes the present physical condition of the units or common elements subject to the claim; and

(C)       describes any modifications, maintenance, or repairs to the units or common elements performed by the unit owners or the association; and

(2)        obtain approval from…more than 50 percent of the total votes allocated under the declaration…at a regular, annual, or special meeting…

(c)        The association must provide written notice of the inspection…to each party subject to a claim [at least 10 days] before the…inspection occurs…

(d)        Each party subject to a claim may attend the inspection…either personally or through an agent.

(e)        Before providing the notice of the meeting under Subsection (f), an association must:

(1)        …provide the report to each unit owner and each party subject to a claim; and

(2)        allow each party subject to a claim at least 90 days after the date of completion of the report to inspect and correct any condition identified in the report.

(f)         Not later than the 30th day before…the meeting described by Subsection (b)(2) is held, the association must provide each unit owner with written notice of the date, time, and location of the meeting…

(g)        The notice required by Subsection (f) must be prepared and signed by a person who is not:

(1)        the attorney who represents or will represent the association in the claim;

(2)        a member of the law firm of the attorney who represents or will represent the association in the claim; or

(3)        employed by or otherwise affiliated with the law firm of the attorney who represents or will represent the association in the claim.

(h)        The period of limitations…for a claim described by Subsection (b) is tolled until the first anniversary of the date the procedures are initiated by the association under that subsection if the procedures are initiated during the final year of the applicable period of limitation.

Defendants benefit from this statute because, under sections (c) and (d), they are provided notice of the inspection and the opportunity to be a part of the inspection performed by the engineer. Further, before the condo association can file suit, under section (e)(2), it must allow the potential defendants “90 days after the date of completion of the report to inspect and correct any condition identified in the report.” While it would be expected that there may be disagreements about the cause of the damages noted in the engineer’s report, this 90 day window can provide time for a dialogue between the parties (and their consulting experts) about how to best approach the situation.

Most attorneys who routinely handle construction cases (as well as the insurer’s representatives) can recount stories of cases where the cost of replacing or repairing damage related to their client’s scope of work was eclipsed by litigation costs incurred in attempting to compel a counsel for the homeowner or association to articulate precisely what they claim is wrong with the property, who is alleged to be responsible, and the extent to which defects have caused damage. By requiring plaintiffs to become more organized as to their claims prior to filing suit, the law should provide defendants with an opportunity to more quickly evaluate a plaintiff’s and to formulate a reasonable response. This can potentially lead to the early resolution of cases with limited issues, or for cases with more significant damages, earlier involvement of consulting experts.

What is not clear from the text of the statute is whether an insurer, who has subrogated to the rights of a condo association, must comply with these requirements. Unlike the Texas “Right to Repair” statute, section 82.119 does not say whether it applies to a party acting on behalf of a condo association. Clarification of this issue by the legislature or courts is need. In such a scenario, it is possible that a condo association may seek the recovery of its deductible or other damages which are not covered by its policy of insurance in an action which is joined with the insurer’s subrogation claim. In that situation, it appears that the association, if not the insurer, must comply with the requirements of the statute.

In addition to the requirements noted in section 82.119, both a condo association and an insurer seeking a subrogation recovery must still comply with the Residential Construction Liability Act (Chapter 27 of the Texas Property Code). There is also nothing in section 82.119 that waives a plaintiff’s requirement of attaching a Certificate of Merit to its petition when filing suit against design professionals. Section 150.002 of the Texas Civil Practice and Remedies Code, which articulates the requirements of the Certificate of Merit, also provides a procedure pursuant to which a defendant may seek dismissal of the case due to the plaintiff’s failure to file a Certificate. Section 82.119 does not contain a similar remedy for a defendant. The question remains, therefore, as to how a defendant should advise the court of a condo association’s failure to comply with the section’s pre-filing requirements.

As with any new piece of legislation, it will be up to the courts to interpret the implementation of this new law. As of the writing of this article, there are no reported cases on this issue. We will continue to monitor the application of this statute and any relevant cases and will report on them in future issues.