Number of “Occurrences” for Determining Policy Limits in California Construction Defect Cases

Kelly Smith | Snell & Wilmer

Insurance policies generally have different policy limits depending on the number of “occurrences.” For example, the amount of money recoverable under an insurance policy may be $5 million per occurrence with a $20 million aggregate limit. Therefore, when determining policy limits, deductible liability or considering settlement in a construction defect case, the parties should consider two questions. First, what constitutes an occurrence in the construction defect context? Second, how do courts determine the number of occurrences?

First, parties should be aware that what constitutes an occurrence typically will be defined by the applicable policy. In construction defect cases, insurance policies commonly define an occurrence as “an accident, including continuous or repeated exposure to the same or similar harmful conditions” which results in property damage. See, e.g., Safeco Ins. Co. of America v. Fireman’s Fund Ins. Co., 148 Cal.App.4th 620, 631 (Cal. App. 2007); Tidwell Enterprises, Inc. v. Financial Pacific Ins. Co., Inc., 6 Cal.App.5th 100, 107 (Cal. App. 2016). However, parties should look to the definition of an occurrence in the specific policy applicable to their project to determine coverage.

Second, parties should be aware that courts generally determine the number of occurrences under an insurance policy (and thus policy limits) based on the causes of damage, not the type or amount. For example, in Landmark American Ins. Co. v. Liberty Surplus Ins. Co., a subcontractor’s defective work caused water intrusion in several areas of a casino. 2014 WL 12558121, at *1 (C.D. Cal. Apr. 9, 2014). The California court found there were two separate occurrences—(1) improperly installed handrails and (2) defective installation of window systems and sliding doors. Id. at *6. The court explained that if a single injury, like water intrusion, has multiple causes, there have been multiple occurrences under an insurance policy. Id. at *5. If, however, widespread water intrusion had been caused by only the failure to apply sealant, that would likely have constituted a single occurrence. Id. at *6.

Similarly, in Liberty Mutual Fire Ins. Co. v. Bosa Devel. California II, Inc., a developer and insurance company were disputing how many occurrences arose under an insurance policy after defects were discovered in a condominium project. 2020 WL 1864645, at *1 (S.D. Cal. Apr. 13, 2020). The developer argued there was one occurrence—its negligent supervision of multiple subcontractors. Id. at *6. The court disagreed and held there were three occurrences: (1) the negligent installation of concrete flatwork, balconies, and waterproofing, (2) defective plumbing installation, and (3) selection of improper building materials. Id. at *8. The court struck down the developer’s argument, explaining that if a general contractor’s general negligent supervision constituted a single occurrence, “there would never be more than a single occurrence in the course of a single construction project, no matter how disparate the harms.” Id.

Accordingly, parties involved in a construction defect case should pay close attention to the cause of the alleged damages. If all damage arises from a single source or process, that may constitute a single occurrence for purposes of determining policy limits. Conversely, if there is a single type of damage caused by multiple failings, that may constitute more than one occurrence and trigger higher policy limits. Consultation with a knowledgeable insurance coverage attorney may be an appropriate first step.

Engineer Reported ‘Major Error’ in Construction of Condo Tower That Collapsed

Jim Sams | Claims Journal

A 2018 engineering report released by the city of Surfside, Florida on Saturday found a “major error” in the construction of the 12-story condominium building that collapsed on Thursday morning, leading to water infiltration that caused structural damage below the pool deck.

“The main issue with this building structure is that the entrance drive/pool deck/ planter waterproofing is laid on a flat structure,” says the October 2018 report by Morabito Consultants. “Since the reinforced concrete slab is not sloped to drain, the water sits on the waterproofing until it evaporates. This is a major error in the development of the original contract documents prepared by William M. Friedman & Associates Architects Inc. and Breiterman Jurado & Associates, Consulting Engineers.”

The Champlain Towers South homeowners association hired Morabito as it prepared for an inspection required by the Miami-Dade County for multifamily residential buildings that reach 40 years of age. The structural engineering firm recommended $9 million in repairs to the building, but did not say there was any imminent danger.

Morabito’s report said that failed waterproofing is causing major structural damage to the concrete structural slab below the pool deck. The report said “where the slab had been epoxy-injected, new cracks were radiating from the originally repaired cracks.”

“Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially,” the report said.

Morabito said repairs to the waterproofing around the pool deck would be “disruptive and create a major disturbance to the occupants of this condominium building.”

About half of the condominium building, containing 136 units, collapsed early Thursday morning. Rescue teams continued digging through the rubble on Sunday after recovering nine bodies among the debris.

The Miami Herald reported that Surfside Town Commissioner Eliana Salzhauer said residents of the building expressed concern about water leaking from the pool deck and collecting in the basement parking garage before the disaster.

Steel rebar laced into concrete forms to increase tensile strength can expand when water infiltrates the structure, causing cracks in the surrounding concrete in a process called spalling. Engineers speculated even before the city released the inspection report that corrosion of reinforcing steel may have been a factor leading to the collapse.

Gregg Schlesinger, a former construction project engineer who is now a lawyer handling construction defect cases, said another area of concern in the report is cracks that were discovered in the tower’s stucco facade, the Associated Press reported. Schlesinger said that could indicate structural problems inside the exterior that could have been critical in the collapse.

“The building speaks to us. It is telling us we have a serious problem,” Schlesinger said in a phone interview with an AP reporter on Saturday.

He added that there are frequently “telltale signs” on oceanfront buildings indicating problems structurally largely from saltwater and salty air intrusion.

“This is a wakeup call for folks on the beach. Investigate and repair. This should be done every five years,” Schlesinger added. “The scary portion is the other buildings. You think this is unique? No.”

Abi Aghayere, a Drexel University engineering researcher, said the extent of the damage shown in the engineering report was notable. In addition to possible problems under the pool, he said several areas above the entrance drive showing signs of deterioration were worrisome and should have been repaired immediately because access issues prevented a closer inspection.

“Were the supporting members deteriorated to the extent that a critical structural element or their connections failed leading to progressive collapse?” he wrote in an email to the AP after reviewing the report. “Were there other areas in the structure that were badly deteriorated and unnoticed?”

Engineer John Pistorino told WUSF News that concern about corrosion caused by South Florida’s humid and salty ocean air led Miami-Dade County to require recertification of multiple-family structures once they reach 40 years of age.

Pistorino was a consulting engineer for the county in 1974 when the federal Drug Enforcement Agency building in downtown Miami collapsed, killing seven employees, WUSF reported. He told the news service that aggregate rock used in concrete can contain salt that when combined with humidity can corrode reinforcing steel.

Pistorino told WUSF that it is far too soon to make guesses about what caused the Surfside building to collapse. However, he also said corrosion in older buildings prompted Miami-Dade and other Florida jurisdictions to require recertification after 40 years and every 10 years thereafter. The DEA building was about 40 years old when it collapsed.

Champlain Towers South happened to be going through its recertification process when disaster struck. Mark Direktor, an attorney who represents the condominium’s homeowner’s association, told the New York Times that the association had hired an engineering firm to begin the inspection. The engineers have a good idea where the building needed restoration, but the extent of the corrosion is often not clear until the work is underway, he told the Times.

According to the Times and other media reports, a resident filed suit against the homeowners association in 2015, alleging that poor maintenance of the building allowed water to damage her unit after entering cracks through the outside wall.

Researchers know that the land under the Champlain Towers South building was sinking before the building partially collapsed, but engineers said some other factor must have triggered the catastrophic structural failure.

Florida International University professor Shimon Wdowinski and colleagues noted in a paper published in April 2020 that land subsidence— or settling — had occurred at the location of the condominium complex from 1993 to 1999. Using satellite radar data, the researchers measured a 12mm drop over the six year period. That’s about half an inch.

Wdowsinski told the Miami Herald that the sinkage was not significant, but stood out because most of the surrounding area was stable. He said that subsidence alone, however, could not have caused the collapse.

Wdowsinki told FIU News that he has seen far more dramatic subsidence in other locations. Mexico City, for example, is sinking at a rate of 15 inches per year, he told the university’s news service.

David Peraza, a principal engineer with Exponent in New York City, told the Claims Journal in an email that the land subsidence noted in the FIU report would not have raised any concerns about potential structural damage. He said most times buildings are not affected when land subsides unless the settling is differential, meaning much greater on one side of a structure. Nothing in the research noted any differential subsidence, he said.

Peraza said something else must have caused the collapse.

“It is highly unusual for a building that has stood for 40 years to collapse spontaneously, without an apparent trigger,” he said. “By ‘trigger’ I mean an added load, like an impact, explosion, hurricane, snow, etc. Or a trigger can be a significant reduction in strength, as might be caused by the removal of a major structural element, or severe deterioration.”

Peraza said the owners of the building or perhaps the city of Surfside will likely retain structural engineers to conduct a forensic investigation to determine what went wrong, and also assess the safety of the portion of the structure that remains standing.

“Initially, a structural engineer will develop a list of hypotheses and he or she will then attempt to whittle those down by process of elimination,” he said. “This is easier said than done.”

The investigation will be complicated by the intense rescue and recovery effort at the site of the collapsed building. The removal of debris to search for survivors will take precedence over evidence preservation.

And the rescue operations may be underway for sometime. Peraza said the rescue/recovery effort took eight days after the 16-story L’Ambiance Plaza collapsed in Bridgeport, Connecticut in 1987 while under construction, killing 28 workers.

Some aren’t waiting for a full investigation before assigning blame. On Thursday, Champlain Towers South homeowner Manuel Drezner filed a purported class-action lawsuit in Miami-Dade Circuit Court alleging that the association had failed to take adequate and reasonable measures to ensure the safety of residents and their property.

“Defendant knew, or should have known, of the risks inherent in its activities or involving Champlain Towers South, as well as the importance of adequate safety measures,” says the lawsuit, filed by the Brad Sohn law firm.

Florida Appellate Court Affirms Statute of Limitations for Latent Construction Defects

Johnathan T. Ayers | Bilzin Sumberg

The Cottages at Stoney Creek Condominium Association, Inc. et al v. JDR Construction, LLC et al, No. 1D20-956, 2021 WL 2209851 (June 1, 2021) aff’d per curiam.

Construction defect litigation often surrounds a dispute over timeliness in bringing the claim for purposes of surviving a statute of limitations defense. In the case of latent defects, Florida Statutes § 95.11(3)(c) bars an action “founded on the design, planning, or construction of an improvement to real property” if it is not commenced within four years of the date the latent defect “is discovered or should have been discovered with the exercise of due diligence.” Success on this defense acts as a complete bar to liability for the developer, designer, or contractor. A long line of Florida cases hold that the limitations period begins to run once there is an obvious manifestation of the defect, regardless of whether the claimant knew the exact nature of the defect. More often, the dispute centers on whether the manifestation is “obvious” or could be due to causes other than an actionable defect, in which case a factual issue remains.

Recently, the First District Court of Appeal, in The Cottages at Stoney Creek, affirmed without opinion a trial court’s final order enforcing the statute of limitations defense to bar a condominium association’s construction defect claim against a general contractor. The trial court’s order1 focused on whether the evidence established, for purposes of summary judgment, that the association knew or should have known of certain defects it sued upon, based on a 2011 Building Evaluation Report and other contemporaneous evidence issued six (6) or more years earlier. According to the Order, the 2011 Report identified certain stucco cracks and water intrusion. In 2017, the association produced a separate report, which, according to the Order, identified the “same claims” that were in the 2011 Report. The trial court concluded that the defects asserted in the lawsuit were discovered or readily discoverable four years prior to the lawsuit and, thus, the lawsuit was precluded by the statute of limitations.

On appeal, many of the questions at oral argument2  focused on whether the identification of stucco cracks in the 2011 Report constituted sufficient evidence to bar the assertion of the alleged latent defects concerning the stucco system identified in the 2017 Report. Compare Performing Arts Ctr. Auth. v. Clark Constr. Grp., Inc., 789 So.2d 392, 394 (Fla. 4th DCA 2001) (“[W]here there is an obvious manifestation of a defect, notice will be inferred at the time of manifestation regardless of whether the plaintiff has knowledge of the exact nature of the defect. However, … where the manifestation is not obvious but could be due to causes other than an actionable defect, notice as a matter of law may not be inferred.”). During oral argument, the panel and the contractor’s counsel echoed the trial court’s citation of certain correspondence among the association’s board of directors in 2011-2012 discussing the existence and extent of the stucco cracks. Although the appellate court’s opinion is of no precedential value, the record and oral argument demonstrate that the defense remains an important—and sometimes case-dispositive—defense that may be available to defendants in construction defect lawsuits. Moreover, the record highlights the type and extent of evidence, including contemporaneous communication, that the trial court may look to in determining whether a party discovered or should have discovered a defect under the strictures of section 95.11(3)(c).

[1] The trial court’s order can be accessed here.
[2] The link to the appellate oral argument can be accessed here.

Contractor Prevails on Summary Judgment To Establish Coverage under Subcontractor’s Policy

Tred R. Eyerly | Insurance Law Hawaii

   When sued for construction defects caused by the subcontractor, the general contractor was granted summary judgment on the issue of coverage under the subcontractor’s policy. Meritage Homes of Ga. v. Grange Ins. Co., 2021 U.S. Dist. LEXIS 84591 (N.D. Ga. March 23, 2021). 

    Meritage built a home for the owners. Easterwood Excavating, Inc. was the subcontractor for excavation and grading work. Meritage was named an additional insured under Easterwood’s policy with Grange.

    After construction was completed, the owners were experiencing severe flooding after rain storms purportedly due to defects in the grading, site preparation and excavation. The owners filed an arbitration against Meritage for damages. The owners alleged that Meritage improperly excavated and graded their lot, causing water to collect and pool in their yard. Meritage denied all liability and looked to Easterwood and Grange for defense and indemnification. Grange denied coverage, contending there was no occurrence which resulted in property damage. The arbitrator found that the folding of water was caused by Meritage’s improper grading of the lot. A Final Award in the amount of $129,530.93 was issued against Meritage. 

    Meritage filed suit against Grange. On cross motions for summary judgment, Grange argued the dispositive issues were whether Meritage’s claims constituted “property damage” under the policy, and if so, whether Meritage’s claims fell within the exclusions under the policy. Under Georgia law, coverage for faulty workmanship was limited to cases where the faulty workmanship damage was to other non-defective property or work. Here, the parties agreed that the owners alleged that the defective grading ruined the landscaping at the property. Additionally, the owners alleged that they suffered the loss of use and enjoyment of their home. Therefore, there was a claim for property damage beyond the defective work done by Easterbrook. 

    Nevertheless, Grange argued that the owners’ allegations fell with the business risk exclusions because as the general contractor, Meritage was responsible for the entire project, and it was Meritage’s scope of work that was to be considered in deterring whether there were allegations of property damage beyond faulty workmanship, not Easterbrook’s scope of work. The court agreed that Easterbrook, not Meritage, was the named insured under the policy. Therefore, the policy would not cover Easterbrook’s faulty workmanship if Easterbrook sought coverage. But there would have been coverage for claims raised by Easterbrook for damage to property other than the defective grading and excavating. It was this coverage the Additional Insured was entitled, nothing more. Grange had a duty to defend Meritage in the underlying arbitration and Heritage was entitled to summary judgment on this issued.

    Turning to the duty to indemnify, some portion of the Final Award was for damage to property other than that which fell within Easterbrook’s scope of work This meant Grange had a duty to indemnify as to at least some of the damages awarded against Meritage. Therefore, Meritage was also entitled to summary judgment on the duty to indemnify. 

    The portions of the Final Award for the costs of construction work to alleviate the water problems cause by the defensive grading and excavating and the costs of professional engineering expenses required to determine how to correct the deficiencies in the grading and excavation were not part of the amount of indemnification, 

CGL, Builders Risk Coverage and Exclusions When Construction Defects Cause Property Damage

Jeffrey Cavignac | Construction Executive

Direct damage to property under construction caused by faulty or defective work or defective materials has been a coverage issue for decades. Two specific policies, the Commercial General Liability for the contractors building the structure and the Builders Risk Policy on the project both are sources of potential coverage. 

A CGL policy protects the named insured (the contractor in this case) from third party liability arising out of the insured’s operations that results in either bodily injury or property damage. Damage to property caused by poor workmanship or defective materials would qualify as property damage. To understand how the CGL policy might respond to claims such as these, it is necessary to evaluate several exclusions in the CGL policy. 

CGL policies cover “property damage,” defined as physical injury to tangible property, including loss of use of such property, and loss of use of tangible property that has not been physically injured. 

Exclusion M provides that there is no coverage for loss of use of property that has not been physically injured due to a defect in the work. This is significant, because it means that there is no CGL coverage for defective work without physical injury to the work. 

For example, prior to completion on a construction project, inspection revealed that windows were not properly installed, making them prone to leaks. But no leaking had occurred. Removing and reinstalling the windows delayed the project by two weeks. The owner made a claim against the GC for lost revenue for the two weeks. There is no CGL coverage because the loss of use was purely due to defective work, with no physical injury (the CGL only covers liability that results in bodily injury or tangible property damage). 

There are two additional exclusions applicable to property damage in the course of construction, exclusions J.5 and J.6:

  • Exclusion J.5 excludes property damage to that particular part of property on which the insured or its contractors are working if the property damage arises out of their work. This exclusion typically applies where a mistake in performance causes damage. Resultant property damage caused by the mistake would be covered, but damage to “that particular part” that caused the loss would not be covered. For example, an electrical contractor caused a fire while working in the mechanical room that triggered the fire suppression system building-wide, causing widespread water damage. The exclusion applies only to the electrical components in the mechanical room damaged by fire. 
  • Exclusion J.6 excludes property damage to that particular part of property that must be repaired or replaced because the insured’s work was defectively performed on it. For example, a concrete subcontractor improperly mixed a concrete batch, resulting in a section of foundation that cracked, causing a shift in the structure. Structural components supported by the faulty area were damaged. The section needed to be demolished and re-poured with major repairs needed to the rest of the structure. The re-pour is excluded but the damage to the rest of the structure was not.
    Сonfidence in the future

In both cases, the CGL affords coverage for physical damage to the work caused by defects or defective work–basically the ensuing damage. In neither case would the General Liability policy cover that particular part that was either worked on or needed to be repaired or replaced due to defective work. 

Project-Specific CGL Coverage (OCIPs and CCIPs) needs to be considered in a different light. Nearly every OCIP or CCIP will include an exclusion for property damage to the insured project during the course of construction (note, that a small minority of insurers may remove this exclusion if the contractor can provide evidence of a LEG 2 or 3 endorsement). These are often referred to as “Course of Construction” or “Builder’s Risk Exclusions.” These exclusions are added with the expectation that the builder’s risk insurance should provide coverage for damage to the structure during the course of construction. 

Providing coverage under a first party property form is preferred to a third- party liability form because it should eliminate any litigation. The key is negotiating broad and favorable terms under the Builders Risk policy. A well-written Builders Risk policy will include:

  • all stakeholders as insureds;
  • comply with the contractual terms of the contract;
  • possibly include earthquake and flood;
  • include water related damage other than flood; and
  • ideally include not only resultant damage caused by defective work or materials but if available damage to that “particular part” that caused the problem. 

The U.S. builder’s risk market is dominated by manuscript forms. There are some consistencies, but each form must be carefully reviewed. With respect to coverage for property damage during the course of construction caused by defective work, domestic forms generally fall into two categories. 

The first type, which is less common, excludes all damage caused by, or arising out of faulty workmanship. This removes coverage for repairing defective work as well as for any damage to the project resulting from the defective work. These forms offer less coverage than the ISO CGL policy and should be avoided. 

The second, more common, domestic form excludes loss or damage caused by faulty work, unless the damage is caused by a covered cause of loss. These are commonly referred to as “ensuing loss exceptions.” Taking the example of the concrete subcontractor who improperly mixed the concrete that resulted in structural damage, in this case the re-pour is excluded but the damage to the rest of the structure is not because collapse is a covered peril. 

Most domestic builder’s risk policies with ensuring loss exceptions provide roughly the same scope of coverage for property damage during the course of construction as an ISO CGL policy. Neither policy provides coverage for the cost of replacing defective work, but both policies cover direct damage to the rest of the project caused by the defective work. In the case of a Builders Risk policy this ensuing loss must be caused by a covered peril. 

An underwriting syndicate in London came up with proposed endorsements that specifically address the faulty workmanship issue. Authored by the London Engineering Group, these have come to be known as LEG1, LEG2 and LEG3: 

  • LEG1 is the most restrictive. It excludes coverage for all loss or damage “due to defects of material workmanship, design plan or specification,” whether damage to other property has occurred or not. LEG1 is the basic equivalent of the first category of US market forms that exclude all damage caused by defective work, without the “ensuing loss exception.” 
  • LEG2 excludes coverage for all loss or damage “due to defects of material workmanship, design plan or specification,” but maintains coverage for insured property damaged by the defect, except for the cost that would have been incurred if the replacement or rectification had been done before the damage. LEG2 is roughly equivalent to the U.S. market form with the “ensuing loss exception.” It covers resulting property damage to the project, but not damage to the part causing the problem. This makes LEG2 also roughly equivalent to an ISO CGL policy in terms of the scope of coverage for property damage during the course of construction. 
  • LEG3 provides the broadest coverage. This endorsement extends coverage to not only the ensuing damage, but damage to that “particular part” that caused the damage. Coverage does not extend to costs “incurred to improve the original material workmanship, design plan or specification.” As long as there is resulting property damage, the LEG3 form covers all repair costs, including the cost of repairing or replacing the defective work. 

LEG2 and LEG3 each contain an additional provision stating that “it is understood and agreed” that insured property shall not be considered damaged “notes solely by virtue of the existence of any defect of material workmanship, etc…”. In other words, there must be a covered cause of loss to trigger coverage. In simple terms, LEG3 coverage excludes the cost to repair a defect where there is no resulting damage, and the cost of improvements over and above the original work.

Here, in the example of the concrete subcontractor who improperly mixed the concrete that resulted in structural damage, the re-pour is covered along with damage to the rest of the structure. If, as an added safety precaution, the foundation was reinforced with metal rods, the cost of adding the metal rods would not be covered. The LEG3 form provides broader coverage for damage caused by defective work than the ISO CGL policy. The ISO CGL policy does not cover the cost of repairing or replacing defective work whereas LEG3 does. It should also be pointed out that LEG3 Endorsements are usually not available on smaller projects or frame construction.

Insuring construction projects are complex. There are numerous stakeholders as well as significant exposures, General Liability, property under construction, pollution, workers compensation, professional liability, etc. 

 Here are a few things to keep in mind: 

  • It is always better to have a loss covered by a property policy than a liability policy to avoid the litigation costs, ill will and time litigation can take. 
  • Negotiate the most favorable Builders Risk terms available. All Builders Risk policies are different and all are negotiable. 
  • Understand how construction defects caused by faulty workmanship or defective products will be treated. Whenever possible a LEG3 type endorsement should be sought. 
  • Communicate the coverage provided, or lack thereof to the named insureds. Just because the broker knows it, doesn’t mean the insured knows it. 

There is no substitute for taking the time to understand the risks of a project and negotiating favorable terms for all stakeholders. A well written and coordinated insurance program is a critical piece to a successful project.