Monthly Archives: April 2018

Policyholders Bear the Risk When Insurance Was Unavailable on the Market

Posted on by
Reply

Alexis P. Joachim | Phelps Dunbar | April 26, 2018

On March 27, 2018, in a matter of first impression, the New York Court of Appeals ruled that under a “pro rata time-on-the-risk” allocation method, a policyholder bears the risk of uninsured years.  In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., et al., the court was faced with determining whether in a long-tail environmental claim and under a “pro rata time on the risk allocation” an insurer is liable to its insured for years outside its policy periods when no applicable coverage was available on the market.  2018 WL 1472635.

The insurer’s expert opined that pollution coverage was not available to utility companies until 1925 and that a “sudden and accidental pollution exclusion” was adopted by the insurance industry after the 1970s.  Thus, KeySpan argued that allocation should not take into account those years prior to the availability of pollution coverage or after the unavailability of pollution coverage.

The court therefore was faced with how to allocate time on the risk to “gap years” or years in which no coverage existed.  The court recognized that courts in other jurisdictions generally require the policyholder to participate in the allocation for periods of non-coverage, but are “divided with regard to whether a policyholder should be held responsible for those periods of time when the relevant coverage was not offered for sale on the market.”

Some jurisdictions do not put the policyholder “on the risk” if insurance was unavailable – i.e. “the unavailability rule.”  Other courts have rejected this rule and held that the policyholder is on the risk for periods of non-coverage, regardless of whether the absence of coverage was voluntary or due to the inability to obtain coverage.

The court held that the unavailability rule was inconsistent with the policy language that requires the application of the pro rata approach – i.e. “during the policy period” limitation.  The court explained that allowing an insurer to be responsible for risks outside the policy period provides the policyholder with coverage for years where no premiums were paid and is beyond the reasonable expectation of the average insured, who would expect to receive coverage for risks during the policy period and nothing more.

Choosing a Damages Methodology for Certain Construction Claims

Posted on by
Reply

Daniel B. Swaja | Kilpatrick Townsend & Stockton LLP | April 18, 2018

In any construction dispute resolution process, not only does a claimant have to prove liability of the other party, but the claimant must also prove damages to prevail on its claim.  The proof of damages element to prevailing on a claim is often overlooked and its importance can be underestimated.  Many times a claimant will focus its case on the facts supporting entitlement, but fail to take the time to meet all requirements establishing a particular damages claim.  While a jury may be more forgiving of such an approach, a court on a bench trial or an experienced construction arbitrator may not be so forgiving.

A common example of a construction claim requiring specific elements of proof occurs when a party seeks recovery of extended, or unabsorbed, home office overhead costs for a delay claim.  Delays are common in the construction industry and will impact home office overhead costs. Extended home office overhead costs can include management salaries, administrative staff salaries, rent, supplies, home office equipment, and insurance, among others.  Construction delay claims are regarded as being among the most difficult types of claims in the industry and often times require the engagement of an expert.  This can be due in large part to the difficulty in analyzing the home office overhead costs associated with a specific project in conjunction with the percentage of the total amount of these costs for the company.  Typically, home office overhead costs are not directly allocable to a specific construction project. As a result, it is important for a contractor to select a recognized methodology for calculating allocable home office overhead costs and ensure all elements tied to such damages methodology are satisfied.

A common methodology for determining the extended home office overhead attributable to a specific project delay is the Eichleay Formula.  The Eichleay Formula’s foundation is in the government contracting arena and more specifically in the Armed Services Board of Contract Appeals case, Eichleay Corporation, ASBCA No. 5183, 60-2 BCA 2688.  The methodology can be summarized as requiring the following steps to prove an extended home office overheard claim:

  1. (Total billings for the contract/Total billing for the Company during the original contract period) X Company Total Overhead During Contract Period = Home Office Overhead Allocable to the Contract.
  2. (Overhead Allocable to the Contract)/(Days of Contract Performance) = Daily Home Office Overhead Rate
  3. (Daily Contract Overhead Rate) X (Days of Compensable Delay) = Recoverable Home Office Overhead

In doing this calculation, there are certain other legal thresholds that may be required in order to prove the claim.  For example, in Ohio, these elements include (1) proof that the contractor was on standby; and (2) the contractor must prove that it was unable to take on other work while on standby. The Court of Appeals of Ohio recently addressed whether these elements must be met on a claim for extended home office overhead costs, using a slight variation of the Eichleay Formula, in Wood Electric, Inc. v. Ohio Facilities Construction Commission, 90 N.E.3d 371 (10th Dist. 2017).

In Wood Electric, Inc., an electrical contractor on a multi-prime school construction project run by a construction manager brought suit against the Ohio Facilities Construction Commission (“Owner”). Among other issues in dispute were the damages suffered by the electrical contractor as a result of delays in the construction allegedly caused by the Owner and other contractors. The electrical contractor sought a claim for extended home office overhead and, instead of using the Eichleay Formula, it used a variant called the HOOP formula. The HOOP formula is a methodology adopted by the Ohio Department of Transportation, and essentially involved the use of elements two and three of the EichleayFormula. Thus, it was a similar, but not identical methodology. The electrical subcontractor prevailed on this claim in the Court of Claims, but the Owner appealed arguing that the trial court’s decision was contrary to Ohio Supreme Court precedent requiring a prima facie showing of two elements for a home office overhead claim: (1) the contractor was on standby; and (2) the contractor was unable to take on work while on standby. Id. at 379-380 (citing Complete Gen. Constr. Co. v. Ohio Dept. of Transp., 760 N.E.2d 264 (Oh. 2002). Specifically, the Owner argued that the electrical contractor was not entitled to recovery on this claim because it failed to establish these two additional elements.

In evaluating this argument, the Court of Appeals stated that the electrical contractor never sought to use the Eichleay Formula, but instead expressly relied on the ODOT adopted HOOP formula. The Court noted that the parties’ contract neither forbade the HOOP formula nor mandated the use of the Eichleay Formula. Further, and importantly, the Court noted that Complete Gen. Constr. Co. expressly stated that “we do not find that the Eichleay Formula is the exclusive manner of determining unabsorbed home office overhead.” Id. at 381 (citing the similar case J&H Reinforcing & Structural Erectors, Inc. v. Ohio School Facilities Comm., 2013 WL 4779008 (Ohio 2013). Because the Court concluded that the two elements of prima facie proof do not necessarily apply to other formulas for calculations of home office and adhered to the recent J&H ruling, the Court of Appeals concluded that the trial court did not err in failing to require proof of the Complete Gen. Constr. Co. elements. Based on this ruling, and there are other factors that may come into play, it appears contractors – at least in Ohio – seeking extended home office overhead claims may want to consider using a formula other than Eichleay to potentially lessen their burden in proving such a claim.

Compliance with Contractual Provisions to Procure Insurance: The Illusion of Coverage Provided by Certificates of Insurance

Posted on by
Reply

Micalann Pepe and Nate Meyer | Jaburg Wilik

Commercial contracts often require the party with less bargaining power to procure insurance for the party with more bargaining power as a way to shift risk and potential liability. General Contractors often require a Subcontractor’s policy to name the General Contractor as an “Additional Insured.” Lenders often require a Borrower’s policy to name the Lender as a “Loss Payee.”  Landlords sometimes require a Tenant’s policy to name the Landlord as an “Additional Insured.”  A Retailer or Distributor may require a Manufacturer’s policy to name the Retailer or Distributor as an “Additional Insured.” Many parties obtain and rely on “Certificates of Insurance” to demonstrate compliance with such obligations to procure insurance. When a personal injury occurs, property is damaged, a claim is made, and/or a lawsuit is filed, however, parties are shocked when they realize that the Certificate of Insurance actually states: “This certificate is issued as a matter of information only and confers no rights upon the certificate holder.” The Parties are even more shocked when they learn the insurance policy does not provide coverage because the insurer never endorsed the policy to add the contractually required coverage.

This article explains contractual insurance requirements, the illusory coverage provided by Certificates of Insurance, and best practices for a party to ensure compliance with a contractual obligation to procure insurance.

Contractual Insurance Requirements: What are They?

Contractual requirements to procure insurance coverage, which are standard in most commercial contracts, aim to contain and shift liability for risks associated with doing business with others. These provisions often require the party performing services, providing goods, or incurring debt under a contract to procure coverage for the other party, i.e. the General Contractor, Lessor, or Distributor. [i]Associated contractual provisions outline the type and limit of coverage required.

The following are two examples of specific contractual insurance requirements.  A construction contract may require the subcontractor to add: “[General Contractor] as Additional Insured, including products and completed operations (Form CG 20 10 11 85 or equivalent must be attached to certificate).”  A promissory note may require the borrower to name “Secured Party as (i) loss payee for the property damage coverage.”

Certificates of Insurance: I Have One, What Does It Mean?

A Certificate of Insurance is intended to verify basic facts regarding a Named Insured’s available insurance coverage, such as the effective dates of the policy, coverages provided, and limits. A Certificate of Insurance, however, is not part of the insurance contract, cannot contradict the terms of the actual insurance policy,[2] and does not create a contractual relationship between the insurer and any alleged Additional Insured or Loss Payee.[3] Most importantly, an entity is not an Additional Insured simply because a Certificate of Insurance identifies the entity as such. Rather, the policy, or an Endorsement thereto, must identify an entity as an Additional Insured or Loss Payee.[4]

Specifically, the most recent Certificate of Insurance[5] form issued by ISO[6] includes the following statements:

  • This certificate is issued as a matter of information only and confers no rights upon the certificate holder.
  • This certificate does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below.
  • This certificate of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.
  • IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed…[a] statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s).

In no uncertain terms, the Certificate of Insurance does not actually add any entity listed therein as an Additional Insured or Loss Payee, or change the policy in any way.

Entity’s Insured Status: How Do I Confirm Whether an Entity Has Been Added to an Insurance Policy?

An entity is covered under a policy only if an insurer issues an Endorsement that adds the entity as an Additional Insured or Loss Payee. An insurance policy is comprised of the declarations, forms, and endorsements.  The Declarations list the forms and endorsements that comprise the policy.  The forms are often standard forms issued by ISO, such as “Commercial Property,” “Commercial General Liability,” and “Common Policy Conditions.”  And, the Endorsements often add other entities as Additional Insureds. Any coverage form or endorsement not listed in the Declarations is not part of the policy.

There are two primary ways an entity may be added as an insured to an insurance policy:  (1) a blanket endorsement, or (2) a specific endorsement.[7]

A blanket endorsement automatically grants insured status to the category of entities outlined in the Endorsement.[8] For example, a blanket endorsement may provide that all entities that the Named Insured is contractually obligated to add as an Additional Insured are automatically Additional Insureds.[9] The potential drawback of relying upon a blanket endorsement is that the language of the blanket endorsement is open to the interpretation of the insurer and may, for a reason unforeseen at the time of contracting, lead to a denial of coverage for the purported Additional Insured.[10]

A specific Additional Insured endorsement is used to add coverage for specific Additional Insureds by name.[11] Again, however, the coverage afforded to the specifically-named Additional Insured depends upon the language of the endorsement itself.  If an Additional Insured is added to the policy because of a contractual requirement, then the language of the contract requiring coverage should guide the language of the endorsement. Unfortunately, this is not always the case.

Contractual Compliance: If the Certificate of Insurance Does Not Confirm Coverage, Then How Can I Confirm Coverage and Contractual Compliance?

Whether you are the party obligated to procure additional insurance or the party entitled to be named as an Additional Insured or Loss Payee, it is in the best interests of all parties to ensure compliance with the insurance requirement. Failure to procure the required insurance exposes the breaching party to a breach-of-contract action and exposes the expectant insured to either no or less insurance coverage.

You may ensure compliance with insurance requirements by implementing the following three steps as best practices:

  1. Never accept or rely upon a Certificate of Insurance as proof of Additional Insured or Loss Payee status.
  2. Always demand two documents to verify compliance and coverage:
    1. the Endorsement that ostensibly provides coverage to the expectant insured; and
    2. the Declarations to confirm the Endorsement was actually added to the policy.
  3. Ask an attorney to analyze the insurance required by the contract or lease, and all pertinent insurance policy provisions to confirm compliance with the contractual insurance requirements.

[i] Often, but not always, this is the party with more bargaining power requiring the party with less bargaining power to procure specific coverage.

[2] See Cont’l Cas. Co. v. Signal Ins. Co., 119 Ariz. 234, 580 P.2d 372, 376 (App. 1978) (a Certificate “cannot contradict the terms of a policy; it only provides information as to the policy’s contents.”).

[3] 3 Couch on Ins. § 40:31(June 2016 Update). Indeed, some courts have noted that Certificates of Insurance are so unreliable that some commentators have coined the term “fictitious insured syndrome” to refer to the many problems created by Certificates.

Certificate holders are often listed as [AI]s on certificates without the policy actually being endorsed to reflect that intent.  [One example] that often occurs is for a copy of an [AI] endorsement to be attached to the certificate but not the policy. This practice may not provide [AI] status and, thus, is sometimes called the ‘fictitious insured syndrome.’  Sometimes this problem stems from a lack of communication. The insurance agent, for example, may have the authority to add another party to a policy as an [AI] and may issue a certificate indicating that this has been done while forgetting to ask the insurer to issue the endorsement. When the insured later seeks protection, the insurer denies protection, shifting the blame elsewhere.  This, of course, is really a matter of principal-agency liability and should not detrimentally affect the certificate holder.

Marlin v. Wetzel Cnty. Bd. of Educ., 569 S.E.2d 462, 471 (W.Va. 2002) (quoting Donald S. Malecki, et al., The Additional Insured Book 341 (4th Ed., 2000)).

[4] 3 Couch on Ins. § 40:31(June 2016 Update).

[5] See the attached Sample Certificate of Insurance for one of the most recent forms.

[6] Insurance Services Office, Inc. (“ISO”) is an organization that collects statistical data, promulgates rating information, and develops standard insurance policy forms.

[7] For a general list of the types of additional insured endorsements, please see: Scott P. Pence and Wm. Cary Wright, “Not All Additional Insured Endorsements Are Created Equal: Brief History of ISO’s Additional Insured Endorsements and 2013 Changes,” Under Construction Newsletter, Vol. 15 No. 3, Aug. 2013, http://www.americanbar.org/publications/under_construction/2013/august_2013/iso_additional_insured_endorsements.html

[8] See www.irmi.com/online/insurance-glossary.

[9] See Form CG 20 33 07 04 (providing Additional Insured status when required by a written contract for parties in contractual privity).

[10] See Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 151 P.3d 538 (Ariz. Ct. App. 2007) (finding that general contractor was not an additional insured under subcontractor’s policy because the language of the contract did not specifically require additional insurance); see also KB Home Tucson, Inc. v. Charter Oak Fire Ins. Co., 236 Ariz. 326, 340 P.3d 405 (Ariz. Ct. App. 2014) (examining whether there was an “executed written agreement” such that the contractor qualified for additional insured coverage pursuant to the terms of the blanket additional insured endorsement).

[11] An endorsement naming a specific entity will generally have the same language as a blanket additional insured endorsement. The difference is that the schedule in the endorsement will have the specific entity listed, rather than the blanket category of entities listed.

Claim Handling Requirements by State – Washington

Posted on by
Reply

Julitza Perez | Property Insurance Coverage Law Blog | April 18, 2018

Washington State is not only known as the “Evergreen State” and the only state named after a United States President, but it is also the home of many innovative Internet companies and where the biggest coffee chain in the world was founded: Starbucks. Besides these facts it is also important to know how a claim should be handled in Washington.

First an insured may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs.1 The court may increase the total award of damages to an amount not to exceed three times the actual damages2 or make any other determination regarding an action for an unfair or deceptive practice of an insurer or provide for any other remedy available at law.3

It is important for the first party claimant to provide a written notice of the basis for the cause of action to the insurer and office of the insurance commissioner twenty (20) days prior to filing.4The notice may be provided by regular mail, registered mail, or certified mail with return requested and the insurer and insurance commissioner are deemed to have received notice three (3) business days after the notice is mailed. If a written notice of a claim is served under the time prescribed for filing an action, the statute of limitations for the action is tolled during the twenty (20) day period.5

Washington’s Administrative Code (WAC) defines “Specific Unfair Claims Settlement Practices.”6This definition provides nineteen (19) specific deceptive acts or practices considered as unfair methods of competition and practices of the insurer in the business of insurance. Many of these acts and methods are common to those defined by statutes in other states such as misrepresenting pertinent facts,7 failing to acknowledge and act reasonably promptly upon communication,8 refusing to pay claims without conducting a reasonable investigation,9 and not attempting in good faith to effectuate prompt, fair and equitable settlements.10 WAC also included other specific acts or unfair methods in the business of insurance such as failing to adopt and implement reasonable standards for the processing and payment of claims after the obligation to pay has been established11 and negotiating or settling a claim directly with any claimant known to be represented by an attorney without the attorney’s knowledge and consent.12

Both Washington codes provide a wide list for protection against unreasonable denials, payment or unfair settlements of insurance claims. It is important for Washington insureds to know of their rights under these codes and for insurers to comply.
_______________
1 RCWA 48.30.015 (1)
2 RCWA 48.30.015 (2)
3 RCWA 48.30.015 (6)
4 RCWA 48.30.015 (8) (a)
5 RCWA 48.30.015 (8) (d)
6 WAC 284-30-330
7 WAC 284-30-330 (1)
8 WAC 284-30-330 (2)
9 WAC 284-30-330 (4)
10 WAC 284-30-330 (6)
11 WAC 284-30-330 (16)
12 WAC 284-30-330 (19)

Pay IF Paid: It Means What it Says

Posted on by
Reply

Kyle M. Doiron | Bradley | March 2018

Pay when paid clauses are common in the construction industry. A typical pay when paid clause sounds something like this: “Prime Contractor will not pay Subcontractor until Prime Contractor receives payment from Owner.” A lay person might read that and interpret it to mean that if the Prime Contractor is never paid by the Owner, then at no point will the Prime Contractor be liable to pay the Subcontractor for the Subcontractor’s work. But courts generally disfavor conditions precedent (an event that must occur before another party’s performance is due) and will not observe their existence unless they are unambiguously laid out in the contract. Therefore, most courts interpret the above clause as dealing only with the timing of payments rather than shifting the risk of the Owner’s non-payment from the Prime Contractor to the Subcontractor. In other words, a court would likely hold that if the Owner defaulted and was unable to pay the Prime Contractor, then the Prime Contractor would still be contractually obligated to pay the Subcontractor for the work it completed; the clause above would only function to postpone payment by the Prime Contractor for a “reasonable time” after demanded by the Subcontractor.

However, subcontractors and general contractors should be aware that if language in a contract clearly establishes that the prime contractor is only obligated to pay the subcontractor if the owner pays the prime contractor for that work, and the contract states that the subcontractor is taking the risk of the owner’s potential insolvency, then courts are likely to enforce the contract as written—condition precedent and all. This language establishes what is known as a pay if paid clause.

For example, in Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, a Kentucky Supreme Court case, a subcontractor brought suit for non-payment by the general contractor for additional work it completed. The contract between the general contractor and subcontractor stated:

No additional compensation shall be paid by the Contractor to the Subcontractor for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved, or unless by written agreement from the Contractor to the Subcontractor prior to the execution of the Work performed under said claim, which agreement and work order must be signed by an officer of the Contractor.

The contract further stated in a section labeled “Time of Payment” that:

Receipt of payment by the Contractor from the Owner for the Subcontract Work is a condition precedent to payment by the Contractor to the Subcontractor. The subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor for payment of Subcontract Work.”

The court in Superior Steel found the above clauses unambiguous and held that the pay if paid language coupled with the express use of the term “condition precedent” “unequivocally allocate[ed] the risk of nonpayment by the Project owner to [the subcontractor] …” The court was unpersuaded by the subcontractor’s argument that pay if paid clauses are void as against public policy, reasoning that the right to contract is valued in Kentucky (as it is in all states), and if the court held pay if paid clauses void for public policy purposes, it would not only upset the respected right to contract but would be usurping the role of the legislature. Accordingly, because the general contractor had not been paid by the owner for the work, the court joined the majority of other jurisdictions holding that the general contractor was not liable to the subcontractor for the additional work completed.

It is important to be aware, however, that while the above is the majority position, there are states where pay if paid clauses are unenforceable. For example, the Supreme Court of California has deemed pay if paid clauses unenforceable as contrary to public policy. Similarly, South Carolina has statutorily deemed unenforceable any agreement conditioning a subcontractor’s payment on an owner’s payment to a prime contractor. S.C. Code Ann. § 29-6-230.

Therefore, the take-away for general contractors looking to minimize liability and decrease the risk associated with an owner’s default is to consult with counsel about whether it makes sense to add a pay if paid clause to your subcontracts. If you are a subcontractor, lookout for language establishing payment from the owner as a condition precedent for payment and anything discussing shifting the risk of an owner’s non-payment from the general contractor to you. Because if the language is clear and the owner goes bust, chances are you may be left holding the bag.