Colorado Court Enforces Statute that Presumes Faulty Workmanship Constitutes an Occurrence

Matthew D. Stockwell | Pillsbury Winthrop Shaw Pittman LLP | March 21, 2017

Is damage resulting from faulty workmanship covered under your CGL policy? In the past, insurers have had success in certain jurisdictions arguing that construction defect cases did not constitute a covered “occurrence” because the damage was purportedly not unintended or unexpected. In recent years, however, courts have shifted course; the majority of courts have found that property damage arising out of faulty workmanship constitutes an “occurrence” under standard-form CGL policies. Additionally, some states enacted legislation requiring CGL policies to define occurrence to include property damage or bodily injury resulting from faulty workmanship, or have made it easier for insureds to obtain coverage for damages as a result of work the insureds performed.

Colorado is one of those states. Colorado Revised Statutes § 13–20–808, which was signed into law on May 21, 2010, states:

In interpreting a liability insurance policy issued to a construction professional, a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured. Nothing in this subsection:

(a) Requires coverage for damage to an insured’s own work unless otherwise provided in the insurance policy; or

(b) Creates insurance coverage that is not included in the insurance policy.

The U.S. District Court for the District of Colorado recently decided a case involving this statute. In Peerless Indemnity Insurance Co. v. Colclasure, the roofing systems on the insured Weed’s residence, barn, and indoor riding arena were damaged due to a hailstorm. Weed’s homeowner’s carrier authorized the repair and replacement of each roof. Subsequently, Weed entered into a contract with Colclasure to remove and replace the damaged roofing systems. Colclasure later subcontracted with D&G Construction Inc. to replace the steel roofing on the riding arena.

Colclasure or his subcontractor allegedly failed to remove and replace the riding arena roof properly, resulting in water leakage, panel alignment problems, and other damage. When Weed sued Colclasure and its subcontractors, Peerless defended under a reservation of rights. At trial, the jury found in favor of Weed and allocated one hundred percent of the fault on the negligence claim to Colclasure.

Peerless subsequently brought a declaratory judgment action against Weed and Colclasure. Weed and Colclasure together filed an answer to the complaint and counterclaimed against Peerless for breach of the insurance agreement and bad faith. At issue was whether the underlying award was for “property damage” caused by an “occurrence.”

The court determined that § 13–20–808 was applicable and resolved the dispute. The court noted that the statute does not mandate that all construction defect claims are covered. It does, however, shift the burden of proof away from the insured specifically as to the meaning of “accident,” and to create a judicial presumption that an “accident” (and therefore an “occurrence”) has been shown, unless or until a policy exclusion eliminates coverage for that type of occurrence. Because Colclasure and its subcontractor did not intend and expect the damage to Weed’s property, the court found that the property damage was an “accident” and, therefore, a covered “occurrence,” due to the presumption contained in the statute.

This court is one of the first to address legislation aimed toward a determination that faulty workmanship constitutes an occurrence under standard CGL policies. This decision broadens coverage for policyholders in construction defect cases (especially in Colorado) and follows the trending nationwide view that CGL policies should cover faulty workmanship. It’s something to build on.

Why Colorado Lawmakers Hope this is the Year to Solve the Affordable Condo Crisis

Marianne Goodland | Colorado Independent | March 22, 2017

For the first time in at least four years, a fix to the state’s construction defects law is finally within reach.

This much perhaps everyone can agree on: Colorado is in an affordable housing crisis, whether you live on the Front Range, Western Slope or the Eastern Plains. Affordable housing is almost a myth, with rents in Denver for a one-bedroom apartment averaging $1,550 per month.

But is a package of legislation tackling “construction defects reform,” which would change the process by which homeowners with defective condos sue developers, the answer to Colorado’s affordable housing crisis?

Some of those who build condos say yes: If you pass it, giving us more protections against lawsuits, we will return to building affordable for-sale condos and townhomes. But some of those who have lived in defective owner-occupied multi-housing units just don’t buy that.

Skeptics, including Jonathan Harris of Build Our Homes Right, a citizens’ group that advocates for homeowners with construction defects, say those who want to weaken homeowner rights  are really just dressing up tort reform as an affordable housing fix.

“Nothing in any of these bills makes a promise for affordable housing,” says the former restaurant manager who fought his Denver home builder in court for years before reaching a settlement. “I think people are so desperate for affordable housing they are willing to throw real-life homeowners under the bus. They are willing to trade the right to go to court for the promise of ‘maybe we could have more condos.’”

Democrats in both the House and Senate have signed on to several reform bills this session, believing builders and developers who say Colorado is not a good place to construct affordable, owner-occupied multi-family housing, condos and townhouses because of the ease with which they might catch a class-action lawsuit if owners find defects.

What constitutes a construction defect is not defined in state law, and lawsuits and settlements claiming such defects include condos with poorly-constructed foundations that shift or crumble, windows and doors that don’t seal properly, and perhaps worst of all, plumbing leaks that can damage a home as well as create health issues.

Under current law, homeowners who discover construction defects must file a claim within two years of discovery. All claims must be filed within six years of the home’s completion.

Nowhere are the consequences of current construction defects law in the state more apparent than in Colorado’s condo market, often a choice for first-time homebuyers or older folks looking to downsize.

The state’s condo market collapsed during the Great Recession of 2009, when condo construction plummeted from about 20 percent of the market to the current 3 percent. But builders and developers say the problems for them really started about two years earlier, in 2007, when lawmakers at the state Capitol changed the construction defects law to be more amenable to homeowners who believed it was too hard to sue when their homes were defective.

Onward to the kill committee

This legislative session, which ends in May, represents the fourth year in a row that builders and developers hope the General Assembly can find a way for them to start building affordable condos again— with affordable being defined as around $200,000 for a new one bedroom.

It’s not that condos aren’t being built, but the ones coming onto the market today start at $400,000, hardly affordable for young professionals or newly-married young couples or anyone carrying student loans.

Last Friday, House lawmakers introduced a new measure they hope will solve at least one part of the construction defect puzzle: how homeowners’ associations (HOAs) handle information about defects lawsuits. The sponsors are Democratic Reps. Alec Garnett of Denver and Speaker of the House Crisanta Duran, also of Denver; Assistant House Minority Leader Rep. Cole Wist of Centennial and Republican Rep. Lori Saine of Firestone.

Current law allows an HOA board to file a claim if as few as five units in an association sign on. They must first notify the homeowners, but the law does not require they obtain permission before proceeding.

The latest bill requires an HOA board to notify all homeowners in an association, as well as the developer, about the potential for a lawsuit. The bill also requires the HOA to allow a developer an opportunity to present relevant facts to homeowners, along with potential costs and benefits from the HOA or its attorney. Finally, the HOA board must obtain permission from a majority of homeowners before proceeding with a lawsuit. The bill also says that if the HOA does not win its lawsuit, the HOA (and its homeowners) will have to cover the legal costs, including, in some circumstances, the legal costs of the opposing side. The impact, supporters say, would be to create a fairer, more transparent process. It would also make it more difficult to bring suits against builders.

Once a construction defect action is underway, a homeowner cannot sell or refinance a home in the development— even if their home is not among those with problems.

Part of the issue in the past, as Wist sees it, is a prohibition on allowing developers to talk to homeowners before they take action, more of a common practice than one set in statute.

“There are those who believe that if lawyers have been retained and are advising the board, that homeowners are included in that attorney-client relationship. I don’t personally agree with that,” Wist said. “I believe the board is the client, and that developers should be able to talk to homeowners” who are the developer’s customers.

The board’s attorneys also should be able to talk to the homeowners to explain the costs, risks and benefits of a lawsuit, and who may be representing the homeowners in court, Wist argues, adding, “We want this to be a balanced and transparent process.”

“With this bill, you have a clear process for sending out a notice, what has to be disclosed, and a meeting where both sides get to present to the homeowners,” Garnett told The Independent Monday. “This is the balance we’re looking for,” which is protecting homeowners who don’t live in defective units but who should have a say in whether to move forward with a lawsuit, as well as protecting those homeowners who have defective units.

Some legislative heavy hitters are pushing this proposed law.

In addition to the House heavy-hitters, in the Senate, the proposal will be carried by Senate Minority Leader Lucia Guzman, a Denver Democrat, and Republican Sen. Jack Tate of Centennial.

Wist is also the House sponsor of another construction defects measure, which passed the state Senate two weeks ago with strong bipartisan support, only to see Duran send it to a House “kill” committee where majority Democrats are expected to shoot it down.

Duran also sent the latest bipartisan measure to that same committee. A spokesperson for Duran says the State Affairs committee is best able to handle any construction defects legislation since that’s been its bailiwick for the past several years. This year, that committee has already dispatched a Republican-sponsored proposal giving builders a right to repair defects or to offer a settlement before a lawsuit is filed. The same committee in 2015 killed the only bill offered that year on construction defects, which included a requirement for binding arbitration, a provision that Democrats refuse to even consider.

This year it could be the courts rather than the General Assembly that is likely to resolve at least part of that issue.

‘The balance we’re looking for’

There are three legs of the stool in construction defects laws that builders and developers want to change.

The first is the HOA legislation. The second is liability insurance costs, and the third is alternate dispute resolution, commonly known as arbitration or mediation.

Builders and developers claim the cost of carrying liability insurance to pay for defects lawsuits adds thousands of dollars to the cost of building condos, shrinking the profit margin beyond what’s reasonable.

So a second bipartisan bill awaiting action from the Senate Appropriations Committee would spread the pain, so to speak, among all insurers in a construction defects lawsuit. Under the measure, which is sponsored by Duran and Republican Senate President Kevin Grantham of Cañon City, defense costs in a defects lawsuit would be divied up among insurers, who pay for either the settlement or the damage award.

Wist argues that changing the law will provide predictability for insurers, which he and other supporters believe will lower insurance costs. He says an insurer applies a price to a liability policy based on past lawsuit experience. A construction defects lawsuit may include not only the general contractor, but all the subcontractors from a roofer to a plumber, to an electrician, and more.

This particular proposed law would require all defendants to agree about how they would apportion costs and fees in the lawsuit. Wist said that would allow insurance companies, which cover those lawsuit costs under the liability policies, to better understand the risks involved. And  that, in turn, would inform their policy underwriting in the future. And downstream from that, the real goal: Lower insurance costs.

A lot of insurance carriers have left Colorado because they’re unwilling to underwrite the liability insurance, Wist says. Testimony on the insurance bill in the Senate revealed the cost of liability insurance for a contractor can be $100,000 higher for condo projects than apartment buildings. Such costs steer contractors to choose work on apartment buildings rather than condo developments, Wist said.

The third leg – arbitration

This has been the major sticking point for legislation for the past four years.

Homeowners say requiring mediation or arbitration prevents them from filing a lawsuit if they don’t agree with the results. A bill addressing this also requires HOAs to stick to the arbitration or mediation language in original bylaws or other governing documents of HOAs. In mediation, the parties are allowed to decide whether to accept a settlement; in arbitration, the parties give the arbitrator the authority to decide the dispute.

But both Democrats and Republicans say this issue is likely to play out elsewhere: in the Colorado Supreme Court, which last week heard arguments in Vallagio at Inverness Residential Condo Association v. Metropolitan Homes.

The case is an appeal of a 2015 Colorado Court of Appeals decision that said if arbitration or mediation is included in an HOA’s original governing documents, it cannot be removed. In the Vallagio case, the arbitration language was included in the original documents when the association was still owned by Metropolitan Homes. Once the last unit was sold, however, a new HOA board decided to take that arbitration language out of the bylaws, in anticipation of filing a construction defects lawsuit. Metropolitan Homes sued in Denver District Court and lost, and then appealed to the Colorado Court of Appeals, which sided with Metropolitan Homes and its co-defendants.

A decision from the state Supreme Court is not expected until after the legislative session ends in May.

Consensus has it that the arbitration issue will sink Wist’s other bill – the one sent to the “kill” committee last week. The bill is backed by a who’s who of companies and organizations that want to see changes in the state’s construction defects laws: builders, developers, bankers, insurance companies, realtors, subcontractors, cities like Fort Collins, and chambers of commerce across the state. The bill cleared the Senate with five Democrats and 18 Republicans voting in favor, the most bipartisan support a construction defects bill has ever gotten.

Wist initially reacted angrily last week to Duran’s decision to sent it to House State Affairs, saying the decision “sends a mixed message regarding the Speaker’s willingness to meaningfully discuss affordable, attainable housing for Coloradans – and that’s very disappointing.”

But Wist, a co-sponsor of the more recent bipartisan House measure introduced last Friday, told The Independent this week he believes the part of the bill that deals with trying to remove arbitration from bylaws is premature and he instead wants to see how the the state Supreme Court decides that issue. That still leaves the question of whether to require HOAs to enter into mediation or arbitration before filing a lawsuit. That issue is unlikely to be resolved during this legislative session.

The big question for Democrats remains whether these reforms will be enough to spur affordable condo and other multi-family housing development in Colorado.

Colorado’s affordable housing crisis

Colorado is a fast-growing state where housing, particularly along the Front Range, is pricey and getting pricier. Stories about sticker shock in Denver, Boulder, and Fort Collins are the norm. Meanwhile, apartment rents are on the rise— if you can even find an affordable apartment where you want to live.

Look at the newspaper front pages across Colorado on a given week and there are stories about affordable housing issues from Aspen to Fort Collins and places in between.

In mid-February, residents of Steamboat Springs arrived at 3 a.m. for a chance to live in one of 48 affordable housing units they hope will open in the spring. Denver approved its first affordable housing fund in 2016. But it’s so bad service providers are handing out talking point guides that break the bad news to those hoping for affordable housing.

In order to keep good teachers, some school districts in Colorado are becoming developers and landlords. In Vail, there is even a movement afoot to create a tiny home village where teachers can afford to live.

At least one lawmaker isn’t waiting for a fix to the state’s construction defects laws: Republican Rep. Jim Wilson of Salida is sponsoring a bill this session that would use tax credits to build affordable housing for employees in rural communities who struggle to find somewhere close by to live.

According to a 2013 study by the Denver Regional Council of Governments, the great recession of 2009 led to a near-halt of construction of new homes in the Denver area. In the past five years, the market has begun to rebound, according to a Legislative Council report in 2015, although the vast majority of new construction has been for apartments, not owner-occupied condos.

The reason for more apartments rather than condos: the cost of fending off lawsuits. The Legislative Council report stated that every new condo built comes with an additional $15,000 in costs compared to the cost of building an apartment unit.

How did we get here?

Colorado’s construction defects law has been on the books since 2001. That law required homeowners to create a list of property defects, file it with the court, and then provide it to the defendant/builder within 60 days of filing the lawsuit. It allowed an HOA to file a defect claim for five or more units, and to notify the homeowners of the action.

Builders complained the law led to too many class action lawsuits, and wanted more protection. So in 2003, lawmakers revised the 2001 law, limiting damages to $250,000 and allowing the builder the right of inspection.

Homeowners then complained the 2003 law was too restrictive on their right to sue, and it was back to the drawing board. A 2007 revision eliminated an earlier requirement that homeowners waive their rights in dealing with builders, and with that law, condo construction in Colorado, especially in the Denver metro area, went from about 25 percent of new construction to where it is today, at about 3 percent.

Those who have first-hand experience with shoddy construction believe the effort to change the state’s construction defects law is little more than an effort to enact tort reform, which they say would cut off their ability to sue and fix their homes.

Take the example of Jonathan Harris of Five Points, who leads Build Our Homes Right, a group fighting some of the construction defects laws proposed at the state Capitol.

Harris managed restaurants all his life. Now, disabled with epilepsy, he works a part-time job doing payroll. In 2004, he bought a new condo in Denver’s Five Points. The builders, he believes, were trying to save money. It was built as mixed housing — condos, low income housing, and retail.

The four-story building isn’t sloped properly, so water ran into the units. “We’ve had a lot of water damage, a lot of mold inside walls,” Harris said. Doors and windows were not installed properly. “We have sills that were done so instead of the water running down away from the windows it runs towards the units. It just was not done well… They cut a lot of corners.”

The HOA board, which included Harris, sued the developer, who also owned 51 percent of the building. After six years, the lawsuit was settled, a month before it was due to go to court. The developer took care of some of the smaller issues, primarily dealing with the water damage. Harris said the homeowners aren’t happy with the settlement but it was the best they could do.

“If you sell substandard housing as affordable housing you’re doing [potential buyers] a disservice because they can’t afford to maintain it. You get to a point where you either pay the mortgage or you fix your unit.”

“Don’t build crap and the lawyers can’t sue you,” he says. “It will get thrown out of court if it’s not a legitimate lawsuit.”

Those who advocate for more affordable housing in Denver do support changing the construction defects law, in hopes that builders will start putting up owner-occupied condos once again.

That includes Sara Reynolds of Housing Colorado. “No one can deny that we have a housing crisis,” she says.

Reynolds believes condo developers when they tell her they would build more affordable for-sale housing if they could. “When they are the ones who are saying ‘seriously we can’t do it because of this,’ it’s not just tort reform,” she says. Reynolds believes that if the law is changed, builders will still build their $400,000 condos, but they’ll build affordable housing, too.

Christi Smith works for the Urban Land Conservancy, a nonprofit that focuses on affordable housing. The Conservancy buys land for future affordable housing, hoping developers would build condos on the land. “In the last 10 years we have not had one single proposal for a developer to build condos. And that says something,” she says.

There’s no broad mix of housing available for people in search of affordable homes in Denver. “We have such an affordable housing market crisis,” she says. No housing for police, fire workers, teachers, people who work in retail.

Smith is hopeful that a solution can be found in the 2017 session. “Every year we’re hopeful, and I think every year we’re getting closer to something being passed,” she says.

“There are a lot of things that need to happen so that condos are constructed,” she says. “Yes, legislation is a piece of it and I think it’s a catalytic piece of it.” But Smith said it isn’t the only change needed: insurance costs for builders also need to come down, because today the premiums are so high that condo builders will only build the high-end units.

The question remains whether these reforms will bring builders and developers back to Colorado to build affordable for-sale housing. Former state Sen. Mike Kopp is co-chair of the Homeownership Opportunity Alliance, a coalition that includes builders, more than a dozen mayors, business groups, and affordable housing advocates such as Habitat for Humanity.  He said one builder in the coalition told him that the current construction defects laws are “100 percent” the reason he won’t build affordable for-sale multi-family homes in Colorado.

Garnett believes changing the construction defects laws will re-instill confidence in the marketplace, which in turn will bring builders and developers back to building affordable condos and townhomes.

“Developers will be more confident in breaking ground, and insurers will come back to Colorado and offer those cheaper liability policies,” he said this week. And he proudly points out that lawmakers this session, who he said have locked arms and are determined to come up with solutions, have moved the issue further than in any of the previous four years.

Kopp said Monday that his alliance appreciates the work done by the legislative team that has continued to push for construction defects reforms, such as the one included in the newest bill introduced last Friday.

“If the measure provides the substantial consumer protections and opens up building for-sale multifamily products, we’ll be enthusiastic supporters,” he said.

Settling Into Defeat

Irwin R. Krumer and David A. Pisunic | The CLM Magazine | March 2017

Is an Unhealthy Aversion to Risk Keeping Insurers from Punching Back in Court

Civil trials have become a rarity in recent years. The perception that defense costs have increased has placed a premium on settling cases that insurers previously used to defend. Rather than measure the impact of defense efforts on the value of a case, many claims professionals are evaluated on the speed with which they resolve cases and on the size of their “legal spend.”

By placing a premium on fast settlements, however, the insurance industry may unwittingly be settling into defeat. Without taking cases to trial, we have undermined the value of verdict research that mines an insufficient sampling of claims. Left to speculate on the true value of a case, we focus only on that which we can control—legal expenses—and guess about the rest.

We may be avoiding catastrophic losses at trial, but our aversion to litigation also eliminates the benefits of a trial process that may favor carriers in the aggregate. Lacking a sufficient number of verdicts, we also deprive ourselves of the data needed to evaluate these claims on the basis of reliable information. For an industry that relies heavily on actuarial analyses, statistical trends, and projections, the speculation that surrounds claims evaluation and a myopic focus on the expense of defense may pose the biggest risk of all.

THE LITIGATION “EXPLOSION”

Although it is difficult to find credible data on the litigation “explosion,” it isn’t hard to find staggering statistics being cited without attribution. According to one blogger, “50,000 lawsuits are filed in this country every day.” Another laments that “legal woes cost small businesses more than $100 billion a year.”

These observations often end with scathing indictments of the legal profession as an unscrupulous enterprise founded on greed. “Contingency-fee law has made more overnight millionaires than just about any business one could name,” wrote Walter K. Olson in his book The Litigation Explosion: What Happened When America Unleashed the Lawsuit.

A casual observer would read these headlines as a sign that jurors have gotten too generous with their verdicts, awarding millions of dollars in marginal cases. But most of these astounding contingency fees were paid out of cases that insurance carriers and other large corporations chose to settle.

In truth, the litigation explosion seems to have missed the courtroom. Less than five percent of all cases go to trial; far fewer are resolved by juries. When cases do reach a verdict, the awards often are below pretrial offers.

Does this trend confirm the industry’s wisdom in deciding which cases to defend? Or does it challenge us to take more risks by taking more cases to trial?

TO TRY OR NOT TO TRY?

Although insurers complain of rising litigation costs, the percentage of cases going to trial has sharply declined in recent years. Nationally, studies from sources like the U.S. Department of Justice’s Bureau of Justice Statistics show that more than 90 percent of all civil cases are settled, less than five percent are resolved at trial, and even fewer are decided by juries. When jurors do return verdicts, they rarely reward plaintiffs with more money than they could have settled for. So if fewer cases are going the distance, are litigation costs really rising? If they are not, then how can we explain what many trial lawyers believe is a greater reluctance to take defensible cases to trial? Let’s take a look at three possibilities.

Changing Perspectives. Once part of a hawkish industry undeterred by the inflated demands of their adversaries, insurance carriers often took hard-line stances to develop tough reputations among plaintiffs’ counsel. Such positions were thought to discourage litigation, increase the carrier’s bargaining power, and reduce overall costs.

Exclaiming that “the best defense is a good offense,” claims managers were more apt to take defensible claims to trial. Understanding the risks, litigation managers would tell their counsel that “if you aren’t losing any cases, you aren’t trying enough of them.”

Times have changed. As their front-line soldiers prepare for battle, the generals in the home office now question the cost of ammunition. Where they once refused to pay “a penny for tribute,” claims managers and their counsel must now pinch pennies on legal expenses.

Now that every case has a value, claims professionals are more inclined to pay a tribute on claims that their predecessors would have denied. Increasingly evaluated on the speed with which they resolve their cases, claims professionals may find little reason to celebrate a winning verdict that is the cause of a spike in legal spend.

Legal Costs or Case Investments. As industry attitudes toward litigation shift, the metrics by which carriers measure success have changed, as well. Using a microscope wielded by third-party auditors, the industry focuses intently on legal invoices, the duration of a given case, and other costs incurred in the litigation process. Unlike the savings realized through effective defense strategies, these “objective” factors are much easier to measure. Perhaps for that reason alone, they often command greater attention as a yardstick of a claims department’s performance than the ultimate result achieved.

But viewing legal spend as a line item that ought be slashed may be shortsighted. If, as defense counsel often argue, an effective litigation strategy may eliminate or mitigate the liability of an insured, these same costs may be viewed as an investment in overall savings.

To measure the return on investment, carriers must crunch more numbers than litigation costs alone. They must look at the numbers on the indemnification side of the equation, attempting to correlate legal expenses with litigation outcomes. This requires a data dive to see if there is, in fact, an inverse correlation; whether there is a significant ROI; and, if not, what variables may be adjusted to change the equation in the carrier’s favor.

Impact on Litigation Management Decisions. Figures don’t lie, but they can be deceptive. To determine the true costs and benefits of litigation, we must crunch the numbers with care.

Many carriers fail to do this when reviewing litigation outcomes. Measuring their ROI with defensecost-to-indemnity ratios, some carriers compare their total defense costs with the overall value of a case. That seems sensible if one values the case appropriately. But many carriers take a flawed approach to measuring a case’s value by assuming that the ultimate indemnification cost is the case value.

Take a catastrophic loss for which ABC Insurance set reserves at $250,000. After 10 months of litigation at a cost of $50,000, the case settled on the eve of trial for $75,000. In total, ABC Insurance disposed of this case for a total expenditure of $125,000, or half of the projected exposure.

An outstanding result? Not under a defense-cost-to-indemnity analysis. Legal expenses constituted a whopping 67 percent of the $75,000 “value” of the case. Although the payout was only 30 percent of potential exposure, claims professionals who reserved $250,000 on this claim are more likely to be chastised for reserving too much than they are to be hailed a hero for saving that much.

In this example, comparing legal spend with the ultimate cost of indemnification would make sense only if ABC Insurance could have settled early for less than $125,000. But the real world is not that simple. In most cases, one must invest in litigation and case investigation to obtain the leverage required for outstanding results.

When carriers attend to the wrong metrics or crunch numbers without understanding the litigation process, they undervalue the work of claims professionals and their counsel. Ignoring their impact on the value of claims that would cost significantly more without them, these carriers second-guess the litigation management decisions of their staff and foster an unhealthy aversion to risk.

SETTLING INTO DEFEAT?

In an industry that is built on the calculus of risk, are we calculating risk correctly?

The trial process puts our risk tolerance to the test. The only certainty in taking a case to trial lies in the legal fees and costs incurred to get there. Few cases may be characterized as “slam dunks,” and those that are often may be dismissed on preliminary or pretrial motions.

By avoiding protracted litigation, carriers may spare expenses and avoid unpleasant surprises. Their claims managers will not be taken to task for exercising the courage to litigate cases that ultimately fail to produce the desired outcome.

That’s a safe approach to litigation and claims management. But is it a wise approach? Are we tolerating enough risks to achieve optimal results for policyholders and for shareholders?

If carriers engage in a trend of overpaying claims, then using settlement costs as a measure of value will only perpetuate a flawed formula. Yet if we are not sending a sufficient sampling of cases to trial, verdict research will not accurately reflect the value of these cases, either.

To be sure, trying more cases will create a statistical increase in awards at trial. But it may be the only way to gain a true measure of value. The problem now is that we have insufficient trial data on which to do any more than speculate as to the real value of cases.

The lack of reliable data contrasts sharply with the approach of an industry that relies so heavily on statistical analyses and actuarial studies. With all the industry discussion about the importance of big data, where are the statistics to confirm the litigation explosion, the runaway verdicts, or the increase in litigation expense? If we only measure defense costs and do nothing to obtain an accurate evaluation of claims exposure, then do we continue to assume that defense costs are the crux of the problem?

If there is a trend toward defense friendly verdicts, then perhaps we should try more cases. Others may disagree and argue that this “trend” reflects the wisdom of claims managers in determining with which cases to go the distance. With less than five percent of civil cases going to verdict, we lack a sufficient sample size to resolve this debate.

Devoid of data, a statistics-oriented industry must set reserves and settle cases on the basis of fear rather than fact. Are we evaluating cases as jurors would? Or are we settling cases and setting reserves based on a fear of what they might do?

Unless we try, we may never know.

Seventh Circuit Finds Faulty Work Not a Covered “Occurrence”

Traub Lieberman Straus & Shrewsberry LLP | March 21, 2017

In Allied Prop. & Cas. Ins. Co. v. Metro North Condo. Ass’n, No. 16-1868, 2017 U.S. App. LEXIS 4107 (7th Cir. Mar. 8, 2017), the Seventh Circuit had occasion to consider whether claims of faulty workmanship could constitute “property damage” caused by an “occurrence” as required by the insuring agreement of a CGL policy.

Metro North Condominium Association (“Metro North”) hired a developer to build a condominium in Chicago. The developer hired a subcontractor, CSC, to install the building’s windows, and CSC allegedly installed the windows defectively. As a result, common elements of the building purportedly suffered significant water damage and individual condominium owners allegedly suffered damage to their personal property.

Metro North sued the developer, which was insolvent. Metro North then amended its complaint and added a claim against CSC for the breach of the implied warranty of habitability. Metro North also brought a negligence claim, which was untimely and subsequently dismissed with prejudice.  The suit proceeded with only the implied warranty claim pending against CSC.  CSC tendered the suit to its CGL carrier, Allied Property & Casualty Insurance Company (“Allied”), but Allied denied coverage.

In 2015, CSC and Metro North reached a settlement agreement. The agreement required Metro North to dismiss its pending lawsuit against CSC. In return, CSC assigned to Metro North all of its rights to payment of insurance coverage from Allied. The language of the agreement specified that the right to payment had to “arise out of the claims asserted against CSC” in the underlying suit. At the time of the settlement, the only count pending against CSC was a claim for breach of implied warranty of habitability.

Upon learning of the settlement agreement, Allied brought a declaratory judgment action against Metro North seeking a judgment that it was not liable for the damages claimed in the settlement agreement.  The U.S District Court for the Northern District of Illinois granted judgment in favor of Allied, and Metro North appealed to the U.S. Circuit Court of Appeals for the Seventh Circuit.

In its opinion, the Seventh Circuit stated that Allied would only be liable if the legally recoverable damages stemming from Metro North’s claim were covered by the policy. The court, in affirming the District Court’s decision, found that the measure of damages for a breach of implied warranty of habitability claim is the cost of repairing the “defective conditions.” Under Illinois law, CGL policies do not cover the cost of repairing the insured’s defectively completed work.  As such, the insuring agreement of the policies was not satisfied.

Additionally, the Seventh Circuit held that Metro North did not have standing to assert a right on behalf of unit owners for the loss of their personal property. The court held that the Illinois Condominium Property Act only allows a condominium association to act on behalf of its unit owners when the claim involves common elements or more than one unit – not personal property. Thus, the court held, Metro North did not have standing to seek recovery for its unit owners’ loss of personal property.

New Report Gives Insight into Increased Fire Claim Figures

Nicole Vinson | Property Insurance Coverage Law Blog | March 22, 2017

One of the most terrifying and devastating perils insured against is fire. A wildfire outbreak is one news alert that can have a massive impact on our property and lives. A new research study has exposed some of the data on the insurance claim side of this catastrophe.

For many years, the amount of claim dollars that carriers were spending on wildfire losses accounted for only 1.8 percent of total dollars.

Research coming from a CoreLogic study shows that the danger and the quantity of these claims is on the rise- with Colorado, California, and Texas having the most risk. However, the report cautions that 38 states should be on high alert for wildfire damage.

What is causing the increase in wildfire devastation? Sadly, the Department of Interior linked as many as 90% of the wildfires to a human starting the fire in some fashion. Now, this calculation includes intentionally set fires that are considered arson, but also includes unattended campfires, debris burns, and improperly discarded cigarettes. Other causes of wildfire include lightning strikes and even lava flow.

What was interesting from the report was that the link has been made that another familiar phenomenon, wind, is the culprit. Wind-blown embers can allow for significant fire spread impacting surrounding buildings and residences. Homes in close proximity are more likely to burn in clusters, especially if there is only 15 feet between the residences with combustible forces. This data was supplied by the Institute for Business & Home Safety.

The hot-off-the-presses data from January 1, 2017, to February 3, 2017, reported 2,459 wildfires, an increase compared to the 723 wildfires counted in the same period in 2016. With the increase in the number of fires already counted this year, the area impacted is almost three times the land mass from last year.

But 2015 and 2016 also had incredibly devastating fires, and a wildfire that originated in Alberta, Canada, impacted homeowners as far south as Iowa.

Harvard School of Engineering and Applied Science has forecast that by the year 2050, the number of the wildfires in the West could rise by 50%.

As policyholder advocates, our concern is that the data collected and included in the research may not have contemplated some covered damages that policyholders did not fully collect. Insured property owners in the path of the fires filed claims with their carriers. Fire and wildfire losses should not be a heavily contested peril but even when coverage and causation is clear, that does not always mean every claim is paid in full. Issues with wildfire claims can include inadequate scopes, failure of the insurance company to indemnify for all the covered losses—including dwelling extensions and ordinance and law issues—and rejection of loss of rents or additional living expenses claims.

The insurance claim dollars and number of claims also doesn’t account for the damages that are not paid—or not claimed because the policyholder assumed because the fire did not catch their home on fire, there was no damage. However, many times homes and properties in the vicinity may have been damaged by smoke or heat. The damages may be more subtle on the property but can be submitted as direct, physical loss caused by the wildfire. Some insurance companies try to also dodge paying these claims arguing the lack of damage, or below the deductible damages. It is worth having a second opinion on these smoke claims because damage evaluations by an expert may show intense impact on building components and carcinogens may have seeped into your home and the damage needs to be properly remediated.

United Policyholders has some great resources for wildfire survivors. United Policyholders is an incredible non-profit organization that helps insureds across the country in a major way. The resource materials and amicus briefs by United Policyholders can make an enormous difference for those experiencing property loss.