Rather Than Limit Decision to “That Particular Part” of Developer’s Policy Necessary to Bar Coverage, 10th Circuit Renders Questionable Decision on Exclusion j(6)

William S. Bennett | SDV Insights

The 10th Circuit Court of Appeals, applying Colorado law, recently extended Colorado’s broad application of the phrase “arising out of” in insurance interpretation, barring an insured real estate developer from receiving a defense to a suit alleging liability for construction of a defective retaining wall and associated resulting damage.1  The decision also included a questionable analysis of the commercial general liability (“CGL”) policy’s exclusion j(6), contradicting both the plain meaning of the exclusion as well as existing 10th Circuit case law.

The underlying dispute concerned a land developer, HT Services, LLC, who was sued by the homeowner’s association (“HOA”) of one of its developments. The HOA alleged that HT Services negligently designed and constructed a retaining wall in the community. HT Services had CGL policies from Western Heritage Insurance Company in place from 2010 to 2013 that insured it for liability associated with four acres of land that the community was built upon.

HT Services tendered the HOA’s lawsuit to Western Heritage, which declined to defend and indemnify HT Services. After that matter settled, HT Services sued Western Heritage, alleging breach of contract and bad faith. Western Heritage moved for summary judgment, asserting two exclusions, and the District Court granted the motion in Western Heritage’s favor. In upholding the District Court’s decision, the 10th Circuit discussed two exclusions that the District Court determined precluded coverage.

The first was a “habitational new construction” exclusion present in the policies, comparable to many residential construction exclusions common across the industry. In pertinent part, the exclusion applied to bar coverage “arising out of, relating to or in any way connected with … the development, construction, conversion and/or demolition of [residential structures].”

Seeking to avoid this exclusion, HT Services argued that the retaining wall in question must be within a certain proximity of a residence to qualify as a “residential structure.” The court disagreed, and explained that the phrase “arising out of, relating to or in any way connected with” clearly encompassed the damages associated with the allegedly defective retaining wall, which “was constructed as a part of the development of the Willow Creek residential community.” This result was unsurprising.

However, the court next turned to and discussed exclusion j(6), which the court found “squarely applied” to the allegations of the HOA’s complaint, “including that it suffered damages resulting from HT Services’ defectively … constructed retaining walls.” Quoting another 10th Circuit case from 2006, Advantage Homebuilding LLC v. Maryland Cas. Co., the court stated that, in Colorado, this exclusion “was intended to exclude ‘property damage’ that directly or consequentially occurs from the faulty workmanship of the insured and its contractors/subcontractors … while the work is ongoing.”2

The court’s assertion that j(6) precludes coverage for HT Services contradicts the plain language of the j(6) exclusion and fails to cite the Advantage Homebuilding decision in full context.

Exclusion j(6) bars coverage for damage to “that particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.” The plain language of the exclusion contradicts the statement from Advantage Homebuilding that the court selectively quotes. The exclusion only applies to that particular part of any property that must be restored, repaired, or replaced due to faulty work. Consequential damage caused by the failure of that particular part faultily constructed is not barred from coverage by j(6). Accordingly, the Advantage Homebuilding court explained that “the express exception to exclusion j(6), though, allows an insured to recover consequential damages that arise out of his or her faulty workmanship after the completion of the work.”

The court here indicated that the HOA “suffered damages resulting from HT Services’ defectively constructed retaining walls.”3  Because j(6) does not apply to consequential damage to other parts of the broader project which are not defective, it is unclear why the court extended its application here, when it did not need to address the exclusion in the first instance.

Another issue with the j(6) analysis is its failure to discuss the “products-completed operations hazard.” A standard CGL provides that the j(6) exclusion does not apply to property damage included in the “products-completed operations hazard.” Given that the retaining wall was completed in February 2012, and the HOA sued HT Services in 2016, it is hard to reconcile the court’s failure to address this exception, especially in a duty to defend case with allegations stating that there was consequential, resulting damage when a court need only find a single allegation that could potentially be covered in order to extend the insured a defense.

The policies held by HT Services also contained a CG 21 04 exclusion, which bars coverage for all property damage included within the products completed operations hazard.4 The presence of this exclusion makes the court’s reliance on j(6) all the more surprising, as this exclusion would have been a far more appropriate basis for the court’s decision than j(6).

The impact of this case is uncertain, as it is not entirely clear that the court understood its statements about j(6) seemed to undermine j(6)’s exception for completed operations liability. However, policyholders should be prepared for this case to be cited by insurers in Colorado construction defect situations. Fortunately, the case casts Advantage Homebuilding, which seems to properly outline the framework for application of j(6) and coverage for damage resulting from faulty work, in a positive light. In any construction defect claim in Colorado, the policyholder’s focus should continue to be identifying and focusing on the components of the claim that constitute damage resulting from faulty work and the “rip and tear” amounts necessarily incurred to access and fix such work. 

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1HT Services, LLC v. Western Heritage Ins. Co., 2021 WL 2206323 (10th Cir. 2021).
2Advantage Homebuilding LLC v. Md. Cas. Co., 470 F.3d 1003, 1012 (10th Cir. 2006).
3(Emphasis added).
4Letter from Nationwide/Western Heritage, Pl’s. Mot. For Partial Summ. J., Ex. 10 at 13, ECF No. 26-11

Delaware District Court Finds CGL Insurer Owes Condo Builder a Duty to Defend Faulty Workmanship Claims — Based on the Subcontractor Exception to the Your Work Exclusion

Anthony Miscioscia and Laura Rossi | White and Williams

On September 7, 2021, in one of the few decisions addressing the scope of coverage for faulty workmanship under Delaware law, the Delaware District Court denied an insurer’s motion seeking a declaration that it neither needed to defend nor indemnify an insured-builder under a commercial general liability policy.

In this declaratory judgment action, Pennsylvania National Mutual Casualty Insurance Company v. Zonko Builders, the insurer argued that the ongoing underlying action failed to properly plead an “occurrence” in a case alleging damages to a condominium caused by faulty workmanship involving subcontractors.* Zonko Builders (Zonko) served as the general contractor, supervising subcontractors. The Condominium Association sued Zonko for damages allegedly resulting from design and construction deficiencies. The motion was opposed by the Condominium Association, which cross-moved for partial judgment on the pleadings.

In AE-Newark Associates, L.P. v. CNA Insurance Companies2001 Del. Super. LEXIS 370 (Del. Super. Ct. Oct. 2, 2001), the Delaware Superior Court found that an insured was entitled to coverage for damages arising from a faulty roof system installed by a subcontractor on behalf of the insured general contractor.

Although the CGL policy at issue defined an “occurrence” as an accident, the policy also contained an endorsement providing that damages because of property damage to “your work” shall be deemed to be caused by an “occurrence” if the damage was performed on the insured’s behalf by a subcontractor. Nonetheless, the insurer argued that it owed no coverage because faulty workmanship is not an occurrence.

Relying on the 20-year old holding in AE-Newark Associates, as well as a number of out-of-state opinions, the Delaware District court in Zonko noted:“[w]hile we are mindful Delaware Courts have rejected a definition of ‘occurrence’ which includes faulty workmanship, we note no Delaware court analyzed the interplay of subcontractor exceptions and the term ‘occurrence.’” The court went on to explain that “if the Policy does not cover subcontractors’ faulty work, the Policy’s Your Work Exclusion need not specifically except subcontractors’ work. Such an interpretation contravenes Delaware law by rendering the Subcontractor Exception mere surplusage.” Thus, the court found that the Policy’s endorsement provided support to the fact that the definition of “occurrence” included subcontractors’ faulty work.

The court denied the motion as to the insurer’s duty to indemnify and dismissed the Condominium Association’s counterclaims, concluding that the Association lacked standing and the duty to indemnity issue was still unripe.

The Zonko opinion provides insurers with cautionary guidance that, in drafting an exclusion, an insurer may unwittingly provide an insured or court with ammunition to argue/find that the insuring agreement is otherwise broader than the insurer perhaps intended.

In Brief: Commercial General Liability Policies in USA

Bryce L. Friedman and Mary Beth Forshaw | Simpson Thacher & Bartlett

Standard commercial general liability policies

Bodily injury

What constitutes bodily injury under a standard CGL policy?

CGL policies generally provide coverage for bodily injury or property damage sustained by third parties (rather than the policyholder) as a result of an occurrence.

Insurance coverage litigation frequently centres on whether the underlying claims against the policyholder allege bodily injury or property damage within the meaning of the applicable insurance policy, and whether the events giving rise to the injury or damage were caused by an occurrence.

The phrase ‘bodily injury’ in insurance contracts generally connotes a physical problem. However, a number of courts have ruled that the term also encompasses non-physical or emotional distress, either standing alone or accompanied by physical manifestations.

The question of whether bodily injury exists may also arise where an underlying complaint alleges non-traditional or quasi-physical harm, such as biological or cellular level injury or medical monitoring claims. Courts addressing these and other analogous bodily injury questions have arrived at mixed decisions. Bodily injury determinations are often case-specific, turning on the particular factual record presented.

Property damage

What constitutes property damage under a standard CGL policy?

Property damage typically requires injury to or loss of use of tangible property. Therefore, the mere risk of future damage is generally insufficient to constitute property damage. Similarly, it is generally held that the inclusion of a defective component in a product, standing alone, does not constitute property damage. Numerous other allegations of harm or potential harm to property have generally been deemed to fall outside the scope of covered property damage, including the following:

  • injury to intangible property (such as computer data);
  • injury to goodwill or reputation;
  • pure economic loss; and
  • diminished property value.

However, although economic loss is not equated with property damage, courts may use a policyholder’s economic loss as a measure of damages for property damage where physical damage is found to exist.

Occurrences

What constitutes an occurrence under a standard CGL policy?

Virtually all modern-day general liability insurance policies provide coverage for an occurrence that takes place during the policy period. The insurance term ‘occurrence’ is typically equated with or defined as an accident or an event that results in damage or injury that was unexpected and unintended by the policyholder.

Insurance litigation frequently involves several issues relating to the occurrence requirement:

  • whether intentional conduct that results in unexpected or unintended harm constitutes an occurrence;
  • whether negligent conduct that results in expected or intended harm constitutes an occurrence;
  • whether an event or series of events constitutes a single occurrence or multiple occurrences;
  • whether the occurrence falls within a given policy period (ie, what is the operative event that triggers a policy?); and
  • how insurance obligations should be divided among multiple insurers (or the policyholder) when an occurrence spans multiple policy periods (ie, allocation).

Although it is a widely accepted principle that insurance policies provide coverage only for fortuitous events, and cannot insure against intentional or wilful conduct, it is less clear whether (and under what circumstances) intentional conduct that results in unexpected and unforeseen damage can constitute a covered occurrence. This question has arisen in a multitude of factual contexts, including claims arising out of faulty workmanship, pollution and fax blasting in violation of federal statutes. In evaluating the occurrence issue, some courts focus on the initial conduct of the policyholder, while other courts look to whether the resulting harm was unexpected or unintended.

How is the number of covered occurrences determined?

The determination of whether damage or injury is caused by a single occurrence or by multiple occurrences has significant implications for available coverage. The number of occurrences may impact both the policyholder’s responsibility for deductible payments and the per occurrence policy limits that are available. Thus, it is a hotly contested issue in insurance litigation. Most courts utilise a cause-based analysis to determine the number of occurrences. Under the cause-oriented approach, if there is one proximate cause of the injury, there is one occurrence, regardless of the number of claims or incidents of harm.

In contrast, under an effects-oriented analysis, the focus is on the number of discrete injury-causing events.

A number of occurrences disputes arise in virtually all substantive areas of insurance litigation, including claims arising out of asbestos, environmental harm, natural disasters, and the manufacture or distribution of harmful products.

Coverage

What event or events trigger insurance coverage?

Litigation that centres on whether a given policy period has been implicated by an occurrence is generally referred to as a ‘trigger of coverage’ dispute. ‘Trigger’ describes what must happen within the policy period for an insurer’s coverage obligations to be implicated. In cases involving ongoing or continuous property damage or personal injury, the question of what triggers policy coverage may be complex. From a legal perspective, courts employ several different methods to resolve trigger disputes. For bodily injury claims, the operative trigger event has been held to be:

  • at the time of exposure to a harmful substance;
  • at the time the injury manifests itself;
  • at the time of actual ‘injury in fact’; or
  • a combination or inclusion of all of the above.

Property damage claims have also given rise to multiple trigger approaches, some of which focus on the initial event that set the property damage into motion, while others look to the time that physical damage became evident. From a factual perspective, parties are often required to submit voluminous evidence in support of their position as to when property damage or bodily injury actually occurred. Expert witnesses are often retained to address trigger issues.

How is insurance coverage allocated across multiple insurance policies?

When an occurrence triggers multiple policy periods, disputes frequently arise as to how indemnity costs should be allocated among various insurers. The emerging trend in courts in the United States is a pro rata approach, which apportions loss among triggered policies based on insurers’ proportionate responsibilities. In applying pro rata allocation, courts have considered:

  • the time that each insurer is on the risk;
  • the policy limits of each triggered policy;
  • the proportion of injuries during each policy; or
  • a combination of these and other factors.

Pro rata allocation also typically contemplates policyholder responsibility for periods of no coverage or insufficient coverage. The pro rata allocation approach stems from policy language that limits insurers’ obligations to damage ‘during the policy period’. Some jurisdictions that utilise a pro rata approach recognise an ‘unavailabilty’ exception. The unavailability exception provides that apportionment to the insured for uninsured periods is not warranted if insurance was unavailable in the marketplace during the relevant time frame. If this unavailability is established, losses during the uninsured periods are allocated among the insurers.

A minority of courts endorse a joint and several liability approach, under which a policyholder is entitled to select a single policy from multiple triggered policies from which to seek indemnification. This approach stems from common policy language requiring an insurer to pay ‘all sums’ that the policyholder becomes legally obligated to pay. Notably, even courts that endorse all sums allocation typically allow a targeted insurer to pursue contributions from other triggered insurers.

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18 November 2020

Are You Getting Your Money’s Worth in Additional Insured Coverage?

John P. Fischer | Barnes & Thornburg

Many commercial contracts require that one of the parties be included as an “additional insured” on the general liability policies of its contracting partner (which is the “named insured” on those policies). General contractors typically require subcontractors to include them as additional insureds on the subcontractors’ policies. Lessors often require the same from their lessees, and manufacturers from their suppliers. 

From the perspective of the party seeking to be an additional insured, the reason is to shift some or all of the burden of providing coverage onto the other party’s insurers for liabilities with some connection to that other party. This preserves the limits of the general contractor’s, lessor’s, or manufacturer’s own policies for claims that have no connection to the other party.

Not all additional insured coverage is created equal, however. Depending on the language of the additional insured endorsement, courts frequently interpret some kinds of additional insured coverage to apply more broadly than others. The following types of additional insured language, for example, have subtle (or not so subtle) differences in wording that could, depending on the jurisdiction and facts, result in different outcomes on the question of whether coverage is available for the additional insured. The key differences in the policy language are italicized:

  • liability arising out of the named insured’s ongoing operations performed for the additional insured
  • liability caused, in whole or in part, by the named insured’s ongoing operations performed for the additional insured
  • liability caused, in whole or in part, by the named insured’s acts or omissions in the performance of the named insured’s ongoing operations for the additional insured
  • liability caused by the named insured’s negligent acts or omissions at or from the named insured’s ongoing operations performed for the additional insured

In the last example, coverage for the additional insured is available, on the face of the policy, if the liability is “caused by the named insured’s negligent acts or omissions.” The other three examples are not limited, on their face, to the named insured’s negligence. Courts frequently find additional insured coverage to exist under this broader language even when the named insured was not negligent, as long as there is some connection between the named insured and the liability. 

For example, there may be coverage for the additional insured’s negligence if the plaintiff was injured in the course of their employment with the named insured, or if the plaintiff was injured in an area where the named insured was doing its work—even if the named insured itself was not negligent.

Because some types of additional insured coverage are potentially broader than others, entities seeking additional insured coverage from their contracting partners frequently specify the precise type of coverage the other party must obtain, often by identifying the exact policy form to be used. It’s important to understand the nuances in language for additional insured coverage and how that language can be interpreted by insurers and courts. 

Are Untimely Repairs an “Occurrence” Triggering CGL Coverage?

Christopher G. Hill | Construction Law Musings

All Class A commercial contractors in Virginia are required to have a minimum level of Commercial General Liability (CGL) coverage.  As a general rule, this insurance is there for damage to property or persons arising from an “occurrence” that is covered by the policy.  Many cases that are litigated relating to coverage for certain events under a CGL policy turn on the definition of “occurrence” and whether the event leading to a request for coverage constitutes an “occurrence.”

A recent case in Fairfax County, Virginia, Erie Insurance Exchange v. Spalding Enterprises, et al., is just such a case.  In the Spalding Enterprises case, the Court considered the following scenario.  A homeowner, Mr. Yen contracted with Spalding Enterprises to fix some fire damage at his home.  Spalding promised the repairs would be complete in October of 2019.  However, after Mr. Yen paid a $300,000.00 deposit, Spalding Enterprises stated that the work would not be completed until November of 2019.  Yen then fired Spalding Enterprises and sued for breach of contract, constructive fraud, and violation of the Virginia Consumer Protection Act.  Spalding Enterprises sought coverage from Erie Insurance for the claim and Erie denied coverage and sought a declaratory judgment that the events alleged in the Complaint by Mr. Yen did not fall under the definition of “occurrence” in the CGL policy held by Spalding Enterprises.

After discussing the definition of occurrence in the policy and the law in Virginia that generally precludes intentional acts from that definition where the result of the intentional act is a natural or probable consequence of that intentional act, the Court stated:

Here, Mr. Yen’s detrimental reliance is unquestionably a natural or probable consequence of the misrepresentations made upon which Mr. Yen was intended to rely. It follows that any alleged constructive fraud in the complaint is not an occurrence under Spaulding Enterprise’s CGL policy with Erie.

Because the fraud allegations (set out in more detail in the opinion) stated that the damages directly arose from the actions of Spalding Enterprises, the Court agreed with Erie and stated that the allegations in the factual allegations found in the Complaint did not constitute an “occurrence” under the policy.

The takeaways (aside from having an experienced Virginia construction attorney assist with any of these tricky issues) are 1. CGL policies do not cover everything and 2. be sure to carefully read any policy documents because the Virginia courts will look at the specific language very carefully in determining if coverage applies.