Another Record Wildfire Season: Check Your CGL Policy

Matthew R. Divelbiss and Peter D. Laun | Jones Day

With election season dominating the news cycle, it’s easy to miss the headlines from California and other Western states. “Record Wildfires on the West Coast Are Capping a Disastrous Decade.” “Global warming driving California wildfire trends – study.” “As wildfires rage, climate experts warn: The future we were worried about is here.” And the issue is not limited to the West: “Climate change could shift Pennsylvania’s wildfire season.”

But even before this record-breaking fire season (which is still underway), there was an ominous warning for policyholders: “As Wildfires Get Worse, Insurers Pull Back From Riskiest Areas.” That pullback includes attempts to restrict coverage under commercial general liability (“CGL”) policies, a central part of most companies’ insurance and risk management programs. 

CGL policies provide coverage when a policyholder accidentally causes bodily injury or property damage to a third party. Simply put, if a policyholder accidentally starts a fire that burns down someone’s house, the policyholder would look to its CGL insurer for coverage. But the new concern is that an accidental fire burns thousands of homes and businesses.      

Insurers are running from that risk in the form of “wildfire” exclusions, added as endorsements to both primary and excess CGL policies. For example, one exclusion filed with an insurance commissioner intended for use in policies issued to energy companies states: “This policy does not apply to damages, losses, costs, or expenses arising out of, resulting from or in connection with ‘wildfire’ or ‘wildfire injury’, including any cost the insured becomes legally obligated to pay as reimbursement for fighting, suppressing or bringing under control any ‘wildfire’.”

Here are three issues to think about when faced with a wildfire exclusion:

1. What is your company’s wildfire risk? Insurers are concerned about both products and operations. Do you sell products that could start a wildfire, including products that may be installed in locations that present wildfire risk? Do you perform work (such as power line or pipeline maintenance, railroad maintenance, energy development, or construction) that could somehow cause a wildfire? If a policyholder has limited risk, it may be able to negotiate to remove the exclusion. But if a policyholder’s activities pose risk, getting rid of the exclusion may be difficult. In such a circumstance, the policyholder may need to look to other insurers or insurance markets to obtain coverage, or may have to accept high deductibles and/or sublimated wildfire coverage. Alternatively, companies may need to consider more creative methods of providing for this risk, such as captives. Ultimately, policyholders may need to join together to demand federal and/or state legislative solutions to this problem.

2. Even if your company is stuck with the exclusion, should the exclusion be clarified? As written, the exclusion above purports to apply to any losses “in connection with” a wildfire. Insurers will argue that this is very broad. For example, if a policyholder were sued because its product failed while being used to fight a wildfire, the insurers may point to “in connection with” to deny coverage. Policyholders should negotiate with their insurers to clarify any exclusion and leave no doubt that any exclusion is limited to circumstances where the policyholder is allegedly responsible for causing a wildfire. That’s the risk insurers are trying to avoid. 

3. What about contractual obligations to provide wildfire insurance? Many contracts—for example, for companies that provide right-of-way services to utilities—require that the contractor maintain insurance against wildfires. Whether you’re the “contractor” or the “utility” in this or any analogous scenario, the lack of wildfire insurance presents a problem. For the “contractor,” it could be in breach of its contractual obligations if it cannot provide the agreed upon insurance. For the “utility,” it may not have the financial protection it is counting on the contractor to provide in the event of a wildfire, but the contractor’s work may very well be key to limiting wildfire risk. In such circumstances, the parties will need to work cooperatively to find a solution that protects both parties.

Insurance issues surrounding wildfires will continue to evolve in the years ahead. As they undoubtedly arise in future policy renewals, policyholders should look to their coverage counsel and brokers to navigate this area and make sure that wildfire exclusions, if they can’t be avoided, are both clear and limited. 

Michigan Supreme Court Finds Faulty Subcontractor Work That Damages Insured’s Work Product May Constitute an “Occurrence” Under CGL Policy

Jason Taylor | Traub Lieberman Straus & Shrewsberry

In Skanska USA Bldg. Inc. v. M.A.P. Mech. Contractors, Inc., 2020 WL 3527909 (Mich. June 29, 2020), the Michigan Supreme Court addressed whether unintentionally faulty subcontractor work that damages an insured’s work product constitutes an “accident” under a commercial general liability insurance policy. In aligning itself with a growing number of jurisdictions, the Michigan Supreme Court answered, “yes.” In Skanska, a construction manager brought an action against a commercial general liability (CGL) insurer seeking coverage as additional insured for the cost of repairs to correct faulty work performed by its subcontractor in renovation of medical center. In 2009, the construction manager hired MAP to install a steam boiler and related piping for the medical center’s heating system. MAP’s installation included several expansion joints, which it was later discovered, were installed backward. Significant damage to concrete, steel, and the heating system occurred as a result. The construction manager performed the work of repairing and replacing the damaged property to the tune of $1.4 million, and submitted a claim to MAP’s CGL insurer, Amerisure, seeking coverage as an additional insured.

Amerisure denied the claim contending that MAP’s defective construction was not a covered “occurrence” within the CGL policy. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” but did not define the term “accident.” The trial court looked to the Court of Appeal’s decision in Hawkeye-Sec. Ins. Co. v. Vector Const. Co., 185 Mich. App. 369 (1990), which defined “accident” as “…a result which is not anticipated and…takes place without the insured’s foresight or expectation and without design or intentional causation on his part.” But, again citing Hawkeye, the trial court concluded that “[d]efective workmanship, standing alone, is not an occurrence within the meaning of a[ ] general liability insurance contract[;] an occurrence exists where the insured’s faulty work product damages the property of another.”

The trial court held that an “occurrence” may have happened because the damage caused by MAP’s defective installation of the expansion joints may have gone beyond the scope of the work required by the contract between the plaintiff and the medical center. On appeal, however, the Court of Appeals reversed the trial court and ordered that summary disposition be granted to Amerisure reasoning that there was no “occurrence” under the CGL policy because the only damage was to the insured’s own work product.

The Michigan Supreme Court reversed again holding that faulty work by a subcontractor may fall within the plain meaning of an “occurrence,” or “accident.” The Michigan Supreme Court rejected the carrier’s argument that faulty workmanship to the insured’s product was not an “occurrence” because it lacked “fortuity.” According to the court, fortuity is one way to show that an incident is an accident, but it is not the only way. Rather, appropriate focus of the term “accident” must be on both the injury-causing act or event and its relation to the resulting property damage or injury, which must be analyzed from the subjective standpoint of the insured. Thus, even if an insured acts intentionally, the act may still be an “accident” under policy so long as the injury or damage was not specifically intended by the insured. The Michigan Supreme Court also noted that the policy did not limit the definition of “occurrence” by reference to the owner of the damaged property, which might otherwise preclude a finding of an “occurrence” for damage to the insured’s own work product.

The court, referencing other similar rulings in other jurisdictions, resorted to its reading the contract as a whole to confirm its conclusion. For example, the court reasoned that the policy contained an exclusion precluding coverage for damage to an insured’s own work product (the “Your Work” exclusion), but that the exclusion contains an exception for work performed by a subcontractor on the insured’s behalf. Thus, “[i]f faulty workmanship by a subcontractor could never constitute an ‘accident’ and therefore never be an ‘occurrence’ triggering coverage in the first place, the subcontractor exception would be nugatory.” Skanska, 2020 WL 3527909 at *6 (citing cases). Put another way, if the insuring agreement does not confer an initial grant of coverage for injury or damage to the insured’s own faulty work, then there would be no reason for the “your work” exclusion (and the subcontractor exception).

The Skanska Court also reviewed the context and history of CGL policies, including policy language changes from the 1973 policy forms to those adopted in 1986 in support of its conclusion that an “accident” may include damage to an insured’s own work product, and referred to cases holding otherwise as an “outdated view” of the insurance industry. While this history is interesting, it is beyond the scope of this post. Suffice it to say, the Michigan Supreme Court found that “the 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of “accident”—that faulty subcontractor work may fall within the policy’s coverage. Id. at *10.

In sum, the Michigan Supreme Court’s holding in Skanska aligned Michigan with the growing body of jurisdiction to hold that an “accident” may include unintentionally faulty subcontractor work that damages an insured’s work product. Of course, the next logical inquiry is whether one or more of the CGL policy’s “business risk” exclusion might apply. (Notably, the Court did not address application of the “your work” policy exclusion. Specifically, Amerisure argued that because MAP was a named insured under the CGL policy, the subcontractor exception to the “your work” exclusion did not apply, and the exclusion barred coverage. The Court merely remanded this question, among others, to the Court of Appeals to address, depending on whether it determines they are properly presented and preserved for its review.)

Michigan Supreme Court Opens Door to CGL Claims for Construction Defects

Jeffrey L. Hamera | Duane Morris

The Michigan Supreme Court overturned precedent and joined the jurisdictions that allow damages arising from construction defects to be the basis of a claim against a subcontractor’s comprehensive general liability (“CGL”) policy written on a 1986 ISO form. This decision opens the door to CGL claims for construction defects that had been shut in Michigan since Hawkeye-Security Ins Co v Vector Constr Co, 185 Mich App 369; 460 NW2d 329 (1990).

Skanska USA Building Inc. (“Skanska”) incurred costs correcting the defective work of its subcontractor, M.A.P. Mechanical Contractors, Inc. (“MAP”), on a medical center renovation project. Skanska was an additional insured on MAP’s CGL policy. MAPs installed expansion joints backwards, which resulted in damage to concrete, steel and the heating system. Skanska repaired the damage and sent the bill to MAP and a claim to the CGL insurer.

The insurer, Amerisure, asserted that MAP’s defective work was not an “occurrence” as defined in the policy: “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. “Accident” was not defined in the policy. The trial court applied the definition of “accident” in Hawkeye-Security Ins Co v Vector Constr Co, 185 Mich App 369 (1990), and denied Amerisure’s motion, without determining whether an “accident” had occurred. The appellate court reversed, reasoning that Skanska could recover only for damage to a third-party’s property and not its “own work”. However, as the Supreme Court noted, work by a subcontractor was excepted from the “own work” exclusion in the policy.

The Michigan Supreme Court, in a unanimous decision, held that an insured can recover under MAP’s CGL policy, which has standard “post-1986” language, for damages to the insured’s work that is caused by unintentionally faulty work. The Court interpreted language changed from the 1973 version of standard CGL polices to the 1986 revisions to affect the meaning of accident” and allow it to include business risks related to faulty workmanship. Also, the CGL policy did not tie “occurrence” to the ownership of the damaged property. Regarding the definition of “accident” the Court rejected the argument that an accident must be linked to the common law concept of “fortuity” and accepted that a deliberate act performed negligently can be an “accident”.

This case provides a precedent in Michigan for overcoming restrictions on recovering the costs of correct defective work resulting from a subcontractor’s negligence.

Enhancing The Prospects For Contractors To Have Insurance Coverage For Their Subcontractors’ Defective Work

Gregory P. Parsons and J.P. Stilz | Stites & Harbison

I. INTRODUCTION.

When a construction contractor engages in a construction project, it generally purchases a commercial general liability policy (“CGL”) to broadly cover it and, frequently, the property owner for claims that might arise during the course of construction. These insurance contracts are standard forms issued by the Insurance Services Office (“ISO”) that cover accidental property damage and personal injury claims asserted by third parties. There are also circumstances under which CGL policies may provide coverage for a subcontractor’s defective workmanship and this article identifies optional endorsements and policy language that may enhance the likelihood that such insurance coverage exists. Contractors should be aware of these options that they can explore with their insurance agents or brokers.

CGL insurance covers property damage caused by an “occurrence,” which the standard policy defines as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, the CGL policy does not define “accident” and the courts have rendered differing interpretations of that term as it relates to coverage issues. State supreme courts are split as to whether property damage to a contractor’s work product that results from poor workmanship constitutes an accidental occurrence for the purposes of a CGL policy.

II. A majority of state supreme courts to have considered the issue have not found insurance coverage for damage to contractors’ work product caused by poor workmanship, therefore, it may be advisable to obtain certain endorsements when insuring projects in those states.

The majority of state appellate courts to have considered the issue agree that “claims of faulty workmanship, standing alone, are not ‘occurrences’ under CGL policies.” Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 73 (Ky. 2010). A typical CGL policy conditions its coverage of property damage on being “caused by an ‘occurrence.'” Id. at 72. The policy further defines an occurrence “‘as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.'” Id.

To determine the meaning of an accident, these courts apply the doctrine of fortuity, which consists of two elements: intent and control. Id. at 74. Intent is not at issue as these courts accept that contractors do not desire their work product to be substandard. Id. Because contractors do have the direct ability to influence the quality of their work, however, a substandard result is within their control and not an accident. Id. at 76. These courts also assert an underlying policy argument that, by requiring contractors to be liable for the quality of their work, the law encourages them to do better work and to select better subcontractors. Id. at 75.

Applying that rationale, the majority of state courts have held that CGL’s do not cover a contractor’s faulty work as “[s]imply put, ‘[f]aulty workmanship is not an accident . . . .'” Id. at 76. State supreme courts adhering to the majority rule include Alabama, Arkansas (since superseded by statute), Kentucky, New Hampshire, Ohio, Oregon, Pennsylvania, and South Carolina (since superseded by statute). Nat’l Sur. Corp., LLC v Westlake Invs., LLC., 880 N.W.2d 724, 747 (Waterman, J., dissenting) (collecting cases).

For construction projects in states that follow the majority rule, contractors should question their insurance brokers about policy endorsements that can be obtained for an additional charge that modify or eliminate certain exclusions. One such endorsement supplements the definition of “occurrence” to include damage to the contractor’s work caused by a subcontractor’s act or omission that was “neither expected or intended” by the insured. See Traveler’s Form CG D6 12 11 10.

III. A minority of state supreme courts have found CGL policies cover property claims relating to a contractor’s work product that are caused by subcontractor’s negligence or poor workmanship.

On June 29, 2020, the Michigan Supreme Court joined the minority jurisdictions when it issued an opinion that reached a result similar to the effect of the above described policy endorsement. The Court found “unintentionally faulty subcontractor work that damages an insured’s work product is an ‘accident’ under a commercial general liability policy”. Skanska v M.A.P. Mechanical Contractors, Inc. and Amerisure Mutual Insurance Company, Case No. 159510-159511, 2020 WL 3527909, at*3 (Mich. June 29, 2020). Skanska was the construction manager for a medical center renovation and its mechanical subcontractor, MAP, installed some expansion joints in the heating system backward, causing damage to concrete, steel and the heating system. Skanska spent $1.4 million to repair the damaged work and submitted a claim to MAP’s insurer to cover that loss. Although Skanska was listed as an additional named insured under MAP’s policy, the insurer denied coverage asserting that the defective work was not an “occurrence” because it was not an accident. The Michigan Supreme Court disagreed and found that faulty work by a subcontractor that damaged the contractor’s work was not anticipated or expected by the contractor and can be considered an accident. The Michigan Court also relied upon a reading of the insurance contract as a whole.

Unlike the majority courts which apply the doctrine of fortuity to define an accident for the purposes of a CGL, courts in the minority interpret the meaning of an accident from the context of the contractual language as a whole, giving meaning to all of its terms. Nat’l Sur. Corp. at 735. Because standard CGL contracts exclude coverage for property damage that is “‘expected or intended from the standpoint of the insured,'” courts infer that an accident “means ‘an unexpected and unintended event.'” Id. These courts still hold that CGL policies do not cover damage to the work product resulting from the contractor’s own defective workmanship. Id. at 737. But, they conclude that a subcontractor’s defective workmanship is unexpected and unintended by the contractor and, therefore, accidental. Id. at 739. Accordingly, these courts interpret the term “occurrence” broadly to include damage to contractors’ work product caused by negligent work performed by their subcontractors. Id.

Additionally, courts that find coverage for property damage caused by subcontractors rely upon language in a CGL policy’s “your work” exclusion. Id. at 740. This exclusion generally prevents the policy from being applicable to a contractor’s work product. Id. It also contains an exception to this exclusion that restores coverage to the contractor’s work product if it is caused by a subcontractor. Id. Because it would be illogical for a contract to explicitly restore coverage to damage caused by a subcontractor if the intended definition of an accident already precluded such coverage, these courts interpret the “your work” exclusion as additional evidence that damage to a contractor’s work product caused by poor workmanship by a subcontractor is a covered occurrence. Id.

In addition to Michigan, jurisdictions adhering to the minority approach include Utah, Florida, Kansas, Tennessee, Texas, Wisconsin, Indiana, and Iowa. See Id. at 742-43 (assessing the decisions of other state supreme courts). See also Gen. Sec. Indem. Co. v. Mt. States Mut. Cas. Co., 205 P.3d 529, 535 (Colo. App. 2009) (collecting cases).

IV. An Alabama supreme court decision highlights the importance of a contractor bargaining for coverage against claims for damage to a contractor’s work product that occurs after completion of the project.

Standard CGL policies cover a contractor for claims that arise from an accident that occurs while the contractor is working on the project; and exclude claims arising from the contactor’s completed work. However, a contractor can purchase additional coverage for claims that arise from the completed work to insure against the “completed operations hazard.”

This bargained for supplemental coverage in a CGL policy resulted in a finding of coverage for defective work by a homebuilder’s subcontractors in Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 157 So. 3d 148, 157 (Ala. 2014). In that case the plaintiff homeowner had won a $600,000 judgment against its builder at arbitration for its subcontractors’ faulty workmanship in constructing a new home. Id. at 151. Before the Supreme Court of Alabama, the insurer, citing Alabama precedent, sought dismissal on the grounds that faulty workmanship resulting in damage to the builder’s work product does not constitute an “occurrence” for the purposes of a CGL. Id. at 154. While the Court largely agreed with the insurer’s assessment of its precedent on the definition of an occurrence, it nonetheless considered whether the CGL’s terms involving its “your work” exclusion could be read to require coverage. Id. at 156. Agreeing with the homeowners, the court determined that the “your work” exclusion was worded such that it “appli[ed] if and only if the Policy’s declarations fail to show any coverage for ‘products-completed operations.'” Id. at 157.

Because the declarations page listed “$4,000,000 in coverage for bodily injury and property damage arising out of the insured’s ‘products,” the Court determined that the builder and the insurer had bargained for an exception to the “your work” exclusion clause that allowed for $4,000,000 in coverage to the builder’s work product if the damage occurred after the completion of the project. Id. at 157. Thus, the contractor’s purchase of “completed operations hazard’ coverage resulted in a builder recovering from its insurance company for faulty work product performed by the builder’s subcontractors in a jurisdiction that had previously allowed no such recovery. Id. at 158.

Jurisdictions remain split over whether a subcontractor exception exists to the general prohibition of CGL insurance coverage for claims of damage to a contractor’s work product resulting from poor workmanship. In light of this disparity in the court decisions, contractors should explore with their insurance agent the advisability of purchasing endorsements that change the policy definition of “occurrence” and acquiring “products completed hazard” coverage. Finally, it is critical for contractors and project owners to be listed as additional insureds under subcontractor insurance policies.

First Circuit: No Coverage, No Duty to Investigate Alleged Loss Prior to Policy Period

Eric B. Hermanson and Austin D. Moody | White & Williams

On April 1, 2020, the First Circuit, applying Massachusetts law, issued a potentially useful decision addressing the Montrose “known loss” language in ISO Form CGL policies. In Clarendon National Insurance Company v. Philadelphia Indemnity Insurance Company,[1] the court applied this language to allow denial of defense for claims of recurring water infiltration that began before the insurer’s policy period, and it found an insurer had no duty to investigate whether the course of property damage might have been interrupted, or whether other property damage might have occurred during the policy period, so as to trigger coverage during a later policy.

In the underlying dispute, a condominium owner (Doherty) asserted negligence claims against her association’s property management company (Lundgren) stemming from alleged water infiltration into her condominium. The complaint said leaks developed in 2004 in the roof above Doherty’s unit, and repairs were not made in a timely or appropriate manner. The following year, the complaint said, a Lundgren employee notified Doherty that the threshold leading to her condominium’s deck was rotting. In February 2006, Doherty discovered a mushroom and water infiltration on the threshold and notified Lundgren. At that time, Lundgren asked its maintenance and repair contractor (CBD) to replace the rotting threshold. According to the complaint, CBD did not do this repair in a timely manner and left debris exposed in Doherty’s bedroom.

In March 2006, the complaint said, a mold testing company hired by Lundgren found hazardous mold in Doherty’s unit, caused by water intrusions and chronic dampness. Lundgren’s attempts at remediation were ineffectual. In September 2008, Doherty’s doctor ordered her to leave the condominium and not to return until the leaks were repaired and mold was eliminated.

In February 2009, Doherty filed suit. Lundgren tendered defense to two different insurers: Clarendon, which insured Lundgren from June 24, 2004, to June 24, 2005, and Philadelphia Indemnity (Philadelphia), which insured the company from September 1, 2007, to September 1, 2008. Clarendon agreed to defend under reservation of rights. Philadelphia declined to defend, based on the “known loss” provision in its CGL insuring agreement:

b. This insurance applies to “bodily injury” and “property damage” only if:

. . . .

(3) Prior to the policy period, no insured listed . . . and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

After the underlying case settled, Lundgren assigned its rights to Clarendon, which sued Philadelphia. Clarendon argued that Doherty’s complaint could be read to suggest that leaks prior to Philadelphia’s policy period had been repaired. It argued that new leaks might have arisen during the period of Philadelphia’s policy. At a minimum, Clarendon argued, Philadelphia had an obligation to investigate the underlying allegations before denying defense.

The District of Massachusetts rejected Clarendon’s arguments. Clarendon appealed, and the First Circuit affirmed. It found the underlying complaint unambiguously alleged damage resulting from continuing leaks that began prior to the Philadelphia policy’s inception, and it found nothing in the complaint was “reasonably susceptible” to an interpretation in which the original leaks were resolved prior to Philadelphia’s policy inception.

Finally, and importantly, the First Circuit held that when an underlying complaint does not contain allegations that would implicate coverage, the insurer has no duty to investigate further. An insurer cannot ignore known facts extrinsic to the complaint, but it has no duty to go looking for such facts.

The First Circuit’s decision provides helpful guidance for insurers faced with allegations of property damage prior to policy inception, and clarifies – importantly – that an insurer in this situation has no independent duty to investigate for damage during the policy period.

[1] No. 19-1212, 2020 U.S. App. LEXIS 10257 (1st Cir. Apr. 1, 2020).