Washington Supreme Court Holds Certain Hybrid Occurrence/Claims-Made and Reported Policies May Violate Public Policy

Campbell Stuart | Cozen O’Connor

“We cannot enforce insurance provisions that render coverage so narrow it is illusory.”[1]  The Washington Supreme Court used this reasoning to hold that a contractor’s commercial general liability policy was unenforceable where it required that an “occurrence” occur and a claim be made and reported to the insurer in the same year.

According to the Court, although parties to insurance contracts generally should have the freedom to contract, the Washington Legislature has mandated that contractors must bear financial responsibility for the injuries their negligence may cause, and has further dictated that insurance is the preferable method to comply with its mandate.[2]  Though the Legislature has not required that insurance purchased to comply with its mandate be issued on an occurrence basis, nor required that policies issued on a claims-made basis provide prospective or retroactive coverage, the Court held that “insurers should not issue policies that essentially cause contractors to default on their statutorily mandated financial responsibility.”[3]

On October 31, 2019, an employee of Baker & Son (“Baker”) allegedly dropped a two-by-four on another contractor  during renovations to a Long Beach, Washington motel.  Nearly a year later, on September 23, 2020, Baker received notice of a wrongful death claim.  Two days later, Baker notified its insurer, Preferred Contractors Insurance Company (PCIC), of the claim.  Ms. Cox filed her wrongful death claim in Pacific County Superior Court on November 12, 2020.  After agreeing to defend subject to a reservation of rights, PCIC brought a declaratory judgment action in the United States District Court for the Western District of Washington, which ultimately certified the following question to the Washington Supreme Court:

When a contractor’s liability insurance policy provides only coverage for “occurrences” and resulting “claims-made and reported” that take place within the same one-year policy period, and provides no prospective or retroactive coverage, do these requirements together violate Washington public policy and render either the “occurrence” or “claims-made and reported” provisions unenforceable?[4]

PCIC had issued two consecutive CGL policies to Baker.  Although Baker’s policies contained language “typical of an occurrence policy,” namely an insuring agreement which provided coverage only if “bodily injury” or “property damage” was caused by an “occurrence” that first takes place or begins during the “policy period,” each was also subject to the terms of a “claims-made and reported limitation endorsement,” which restricted coverage to losses that occur and are reported to PCIC within the applicable one-year policy period.[5]  Neither policy contained a provision for retroactive or prospective coverage.

According to PCIC, neither of Baker’s policies provided coverage.  The 2019 policy did not provide coverage because the claim was not first made and reported within that policy period, and the 2020 policy did not provide coverage because both the “occurrence” and the bodily injury giving rise to the claim occurred prior to its inception date.

Nevertheless, the Washington Supreme Court held that such policies — which only provide coverage for “occurrences” and resulting “claims-made and reported” within the same one-year policy period, and which provide no prospective or retroactive coverage — are unenforceable based on Washington’s public policy.  The Court concluded that such “nonretroactive claims made policies combine the worst features of ‘occurrence’ and ‘claims made’ policies and the best of neither by providing neither retroactive nor prospective coverage found in those policies.”[6]

The insurance policies PCIC issued to Baker fail to provide prospective or retroactive coverage and create limited one-year windows for claims to occur and be reported to qualify for coverage.  Such restrictive coverage violates Washington’s public policy.[7]

Although the Supreme Court’s ruling applies to a narrow subset of  policies, it may be beneficial for insurers to consider whether coverage under any policy they issue may run afoul of Washington State’s financial responsibility laws.

[1] Preferred Contractors Ins. Co. v. Baker & Son Constr. Inc., 200 Wash. 2d 128, 143, 514 P.3d 1230, 1237 (2022).

[2] Id. at 143 (citing R.C.W. 18.27.050).

[3] Id.

[4] Id. at 134-5.

[5] Id. at 141.

[6] Id. at 142 (citing Sparks v. St. Paul Ins. Co., 100 N.J. 325, 339, 495 A.2d 406, 414 (1985)) (internal quotations omitted).

[7] Id. at 143.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

CGL Coverage Dispute Regarding the (J)(6) and (J)(7) Property Damage Exclusions

David Adelstein | Florida Construction Legal Updates

A new insurance coverage opinion dealing with a commercial general liability’s (CGL) duty to defend involved exclusions commonly known as the (j)(6) and (j)(7) property damage exclusions (and in certain policies known as the (j)(5) and (j)(6) exclusions). These are the exclusions that apply during ongoing operations.  Exclusion (l), or the “your work” exclusion, applies post-completion, i.e., it is an exclusion for “property damage” to “your work” included in the “products-completed operations hazard.

Exclusions (j)(6) and (j)(7) in the policy at-issue exclude coverage for property damage to:

(j)(6) That particular part of real property on which any insured or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations;

(j)(7) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

In this coverage dispute, Southern-Owners Ins. Co. v. MAC Contractors of Florida, LLC, 2023 WL 2709389 (M.D.Fla. 2023), a CGL carrier denied coverage and the duty to defend in a residential construction defect lawsuit. The underlying dispute pertained to a contractor (insured) not finishing its construction due to a dispute with the homeowners. The homeowners claimed the work was defective and alleged various defects:

“[r]epair loose, broken or chipped pavers in driveway and walkways and install edge restraints”; “[r]epair underside of lap siding – inconsistent paint finish at bottom of boards”; “[r]epair chatter marks on T&G ceilings”; “repair damage to all exterior doors” and “[r]epair all pocket doors”; “[r]eplace damaged top stair tread”; “[r]emedy damage to hardwood floors, includ[ing] damage resulting from use of blue tape and dirt”; “[r]epair metal roof dents, scratches and hems”; “[c]lean wall and ceiling paint on cabinets”; “[r]emove paint spots on baseboards throughout the house”; “[r]emedy scratches in granite”; and “[p]atch and paint all holes in ceilings and walls and twin holes in exterior hardi plank.”

The contractor resolved the underlying lawsuit with the homeowners, but the issue was whether the carrier should have defended the contractor in this underlying lawsuit and incurred the defense fees and costs. If so, the carrier would need to reimburse its insured.  There are times where the main focus of the coverage dispute is on the duty to defend and less about the duty to indemnify. The duty to defend is a critical duty and should NOT be overlooked or cast aside.

Initially, the trial court granted summary judgment in favor of the insurer based on the “your work” exclusion in exclusion (l). However, this was reversed by the Eleventh Circuit finding that the “underlying complaint could fairly be construed to allege damages that fell outside the exclusion.” Southern-Owners Ins. Co., supra, at *2.

On remand, the trial court again entered summary judgment for the insurer finding that the underlying complaint “did not allege ‘property damage’ within the meaning of the CGL policy…did not allege any damage beyond the faulty workmanship or defective work….”  Id.  The Eleventh Circuit again reversed finding “that the underlying operative complaint can be fairly construed to allege ‘property damage’ within the meaning of the CGL policy and Florida law.” Id.  The Eleventh Circuit also previously held that, regardless, the completion-operations hazard exclusion would also NOT eliminate the carrier’s duty to defend. Id.  “The Eleventh Circuit held: ‘Construing the Your Work exclusion narrowly and resolving all doubts in favor of [the contractor], we conclude that the underlying allegations can fairly be construed to allege damage during ongoing operations.” Id. at *4.

So, back to the trial court on more summary judgments.  Is the third time the charm here for the insurer?  No! The trial court, this time, granted summary judgment for the insured finding the carrier had a duty to defend.

Since it was previously held that the completed-operations hazard exclusion would not eliminate the carrier’s duty to defend, the primary focus was on the (j)(6) and (j)(7) exclusions. The carrier’s fundamental argument was that the phrase, “That particular part of” (as underlined above) refers to the entire project. The contractor argued these exclusions don’t apply “to property damage that occurred during operations on the property as a whole ‘but at a moment in time whether neither [the contractor] nor its subcontractors specifically worked on’ the ‘particular part of [the] property’ that was damaged or must be restored, repaired, or replaced.’”  Southern-Owners Ins. Co., supra, at *2.

As to the (j)(6) and (j)(7) exclusions, the trial court reasoned (relying on various case citations):

[I]f a subcontractor is hired to install a project component and, by virtue of his faulty workmanship, installs a defective component, then the cost to repair the defective component is not property damage. On the other hand, a claim for the costs of repairing damage to other property caused by defective work does qualify as a claim for property damage.

Property damage occurs when the damage happens, not when the damage is discovered or discoverable. And where the underlying allegations, even though silent as to the timing of damages, can be reasonably construed to allege property damage that occurred during the policy period, there is potential for coverage.

The[se] exclusions are triggered only when the faulty work and the damage are to the same part of the property. The potential for coverage is triggered when an occurrence results in property damage. There is not requirement that the damages manifest themselves during the policy period. Here, although the underlying allegations are silent as to the timing of the damages, the allegations can be reasonably construed to allege damages that occurred during ongoing operations. Under paragraph j7, property damage to that particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it is excluded from coverage.  Paragraph 7 does not apply to property damage included in the products-completed operations hazard, which excludes work that has not yet been completed or abandoned.

Southern-Owners Ins. Co., supra, at *5-6 (internal citations and quotations omitted).

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

California Appeals Court Says No Duty to Defend Where Policy Exclusion Applies

Alex Purvis, Emily M. Ruzic and Amandeep S. Kahlon | Build Smart

In Ali Heidari v. Golden Bear Insurance, a California appeals court recently affirmed a lower court’s decision to deny relief under a CGL policy, where the policy excluded from coverage work performed by subcontractors under the contractor’s warranty exclusion. Specifically, the appellate court upheld the trial court’s determination that the insurer did not have a duty to defend the insured. The case involved construction defect claims brought by a homeowner against a contractor for a residence in Monte Sereno, California.

The warranty exclusion under the policy provided that coverage would not apply to occurrences arising out of operations performed by subcontractors. The initial complaint by the homeowner did not allege or disclose which entities completed the work on the property. When the contractor tendered its defense to its insurer, the insurer denied coverage based, in part, on the warranty exclusion.

After the contractor and homeowner settled, the homeowner (as assignee of the contractor’s claim) pursued a declaratory and bad faith action against the insurer. Evidence at trial included the contractor’s application for insurance, which indicated that 90% of its work was to be performed by subcontractors and that “all trades are subbed out.” The trial court was persuaded by the insurer’s representative’s testimony that she understood the application to mean that the contractor only provided supervision on the project. The actual work was all performed by subcontractors.

Conversely, the court found the contractor’s representative’s contrary testimony was not credible. The judge reached this finding based on the representative’s demeanor during his testimony and on the knowledge that the contractor had intentionally destroyed its project files after completing the project.

In upholding the trial court’s decision, the appellate court noted that the homeowner’s initial complaint against the contractor did not establish any potential for coverage, which would trigger a duty to defend. The appellate court also determined that the trial court’s findings of fact regarding the application of the warranty exclusion also extinguished any such duty and distinguished the Heidari facts from other California coverage cases. 

The Heidari case underscores how a more detailed complaint may be useful in the context of securing coverage from an insurer. Had the Heidari plaintiff included allegations in the complaint regarding the contractor performing some or all of the work, that might have persuaded the insurer to provide a defense based on the potential for coverage. However, by failing to include such allegations and ultimately having the judge find against it on this factual dispute and the applicability of the warranty exclusion, the plaintiff allowed the insurer to avoid any potential liability.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

What if the “Your Work” Exclusion is Inapplicable? ISO Classification and Construction Defect Claims

David Humphreys | Carson Law Group

One of the risks faced by a residential builder is that, following completion of construction, the homeowner may assert a claim against the builder for damage to the home caused by an alleged construction defect. One of the ways a builder manages the risk of such construction defect claims is by purchasing commercial general liability (“CGL”) insurance.

A builder’s CGL policy covers those sums the builder is legally obligated to pay as damages because of bodily injury or property damage caused by an “occurrence,” that is, damage that is accidental rather than being expected or intended by the builder, so long as the claim does not fall within any of the policy’s several “exclusions” from coverage.

When faced with a construction defect lawsuit, our builder clients are often surprised—and dismayed—when their CGL insurer denies coverage and refuses to defend the builder. However, builders shouldn’t take their insurer’s denial of coverage at face value. This article discusses a new argument we recently discovered that has been a game-changer for our builder clients who were denied coverage in construction defect cases.

Whether coverage exists always depends on the specific language of the particular CGL policy, and courts generally construe exclusions against insurers. This allows experienced coverage attorneys to, at times, successfully challenge declinations of coverage and, at a minimum, convince insurers to pay for the builder’s defense.

A typical CGL policy provides products-completed operations coverage, which is sought by businesses that face potential liability arising out of the products that they have sold or operations that they have completed. Products-completed operations coverage allows builders to obtain many years of coverage for a completed project. Over the years, insurers have added to their policies modifications and exclusions that limit their exposure for claims that fall under that coverage.

Exclusion (l) or the “your work” exclusion, will often exclude coverage for a latent defect claim against the builder. A standard “your work” exclusion provides:

This insurance does not apply to: . . . “[p]roperty damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”

This “your work” and similar exclusions are designed to limit coverage for business risks that are within the contractor’s own control; e.g., a claim that the contractor caused damage to the contractor’s own work. These exclusions apply both to ongoing and completed projects, which can leave a builder unprotected from lawsuits for years after a project is completed.

However, builders who are classified on the declarations page with Code 91580 Contractors— Executive Supervisors or Executive Superintendents, may not be subject to the “your work” exclusion. 91580 is a common classification assigned to builders during insurance underwriting. This classification falls into what is referred to as “dagger class” or “plus sign class,” which indicates that Products and/or Completed Operations coverage is included as part of and not separate from the Premises/Operations coverage (emphasis added).

It has been noted that dagger” and “plus sign” classifications create confusion because of the seeming contradiction between policy wording and coverage rules.* The CGL policy seems to expressly exclude products and/or completed operations losses for “dagger” or “plus sign” classes. In the definitions section we find the following:

“Products-completed operations hazard”: . . .b. Does not Include “bodily Injury” or “property damage” arising out of:. . . (3) Products or operations for which the classification, listed In the Declarations or in a policy schedule, states that products- completed operations are subject to the General Aggregate Limit.”

This apparent exclusionary language, however, must be read in conjunction with the Insurance Services Office’s (ISO) Rule 25.F.1.:

F. Symbols
1. Plus Sign
A plus sign when shown in the Premium Base column under General Liability insurance in the Classification Table – means that coverage for Products and/or Completed Operations is included in the Premises/Operations coverage at no additional premium charge. When this situation applies, the classification described in the policy schedule or Declarations must state that:

“Products-completed operations are subject to the General Aggregate Limit” to provide Products and/or Completed Operations coverage(s).

When read together then, the exclusionary wording in the policy definition removes any product or operation loss subject to the “dagger” or “plus sign” classification from the definition of Products Completed Operations Hazard. Under the dagger or plus sign classification of Rule 25, coverage for products and/or operations is included in the premises operations coverage. Consequently, a loss can no longer be defined as a product completed loss, and as a result it is no longer subject to the “your work” exclusion.

Recall that the standard “your work” exclusion quoted above excludes coverage for “property damage” to “your work” “arising out of it or any part of it and included in the “products-completed operations hazard”.” Here, we emphasize “and” because the “your work” exclusion applies only to property damage that is also included in the “products-completed operations hazard.” Since property damage claims arising under “plus sign” classifications are expressly excluded from the “products-completed operations hazard” (they are included in the premises/operations coverage) the “your work” exclusion simply does not apply. This means that, if your CGL insurer denies your construction defect claim based on the “your work” exclusion, do what the title of this article suggests: Check your ISO classification! If 91580 “Executive Supervisors or Executive Superintendents” is listed on your Declarations page, you may be in luck.

This new ISO classification-based coverage argument will likely also apply to other exclusions and endorsements that CGL insurers routinely rely on in denying coverage in construction defect cases. We recently successfully challenged a coverage denial based on the following “prior work” exclusionary endorsement:

”This insurance does not apply to ‘your products’ or ‘your work’ completed prior to” a certain date listed in the endorsement. . .

“Specifically, this insurance does not apply to. . . “property damage”. . . included in the ‘products-completed operations hazard’ and arising out of. . . ‘your work’ performed by or on behalf of you prior to the date shown above.”

Again, this endorsement incorporates the “products-completed operations hazard,” which allowed us to successfully argue that the exclusion was inapplicable to a builder classified as a 91580 “Executive Supervisor or Executive Superintendent.”

To our knowledge, this new ISO classification-based coverage argument has not yet been addressed by a court. Our recent successes with it have concluded with favorable settlements for our clients. Accordingly, for now, the ISO classification-based argument is a powerful new tool to challenge denials of coverage in construction defect cases where the builder is classified under 91580 “Executive Supervisors or Executive Superintendents.”

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

What Happens When a “Your Work” Exclusion Collides With a “Product Completed Operations” Clause in a CGL policy?

Petar Angelov | Bradley

A CGL policy typically defines “your work” as the work performed by or on behalf of the insured and the materials, parts, or equipment furnished in connection with such work. “Product-completed operations” coverage usually protects the insured against liability for property damage or bodily injury caused by the insured’s product or work after the work is completed.

In Pavlicek v. American Steel Systems, Inc., JRC installed a concrete floor and floor drain. 970 N.W.2d 171 (N.D. 2022). Another subcontractor installed the in-floor heating system for the concrete floor. Throughout the project, JRC maintained a CGL policy. After JRC completed the floor drain, it failed to properly install the concrete floor, and its attempts to repair the concrete damaged the drain. The Owner sued JRC for the defective work and was awarded the full replacement cost of the concrete floor, drain, and in-floor heating system. JRC, in turn, sued its insurer for indemnification.

As part of its decision, the North Dakota Supreme Court was tasked with determining the outcome of a “your work” exclusion colliding with a “product-completed operations” clause in a CGL policy. The CGL policy contained several exclusions to coverage, including for “Damage To Your Work” which stated the insurance does not apply to: “‘Property Damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”

On the other hand, the declarations page of the CGL policy provided coverage for “Products-Completed Operations” in the aggregate limit of $2,000,000. The policy included an endorsement stating: “The most we will pay for … [a]ll ‘bodily injury’ or ‘property damage’ that is included in the ‘products-completed operations hazard’ arising from all ‘occurrences’ during the policy period is the amount of the Products-Completed Operations Aggregate limit stated in the Declaration.”

Based on those clauses, the Court held that, with respect to the floor drain, the policy can be construed in both ways: it can be construed to provide coverage because the drain was a completed product, and can be construed to exclude from coverage because the drain was JRC’s work. Exclusions from coverage in an insurance policy, however, must be clear and explicit and are strictly construed against the insurer. Consequently, the Court concluded that since the CGL policy can be read both to include and exclude coverage for the damage to the floor drain, it must be construed to provide coverage for the cost to repair and replace the floor drain.

The key takeaway here is that, although the general rule is that CGL policies will not cover faulty workmanship performed by the contractor itself, if part of the contractor’s work has been completed and put to its intended use before being damaged, then coverage may apply if there is completed operations coverage. This has been a hotly contested issue in various states for years. Any contractor/subcontractor purchasing a CGL policy should pay close attention to the wording of both the “your work” exclusion and the “product completed operations” clause as they can be outcome determinative.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.