A Recent Oregon Court of Appeals Decision Bears on Insurance Coverage for Repair of Construction Defects

Laurie Hager | Snell & Wilmer

In a February 15, 2023 decision in Twigg v. Admiral Insurance Company, the Oregon Court of Appeals held that an insurance company was not required to indemnify its insured based on a claim for breach of a repair agreement that settled underlying construction defect claims.

As background, the Twiggs hired a contractor, Rainier Pacific, to construct a new home. The Twiggs then filed their first arbitration against Rainier Pacific alleging, among other things, that a portion of the work was defective. The first arbitration was resolved through a settlement agreement which the parties referred to as the “Repair Agreement.” Under the Repair Agreement, Rainier Pacific was required to repair certain alleged construction defects.

The Twiggs then filed a second arbitration alleging that Rainier Pacific had breached the Repair Agreement by failing to perform the repairs required under the Repair Agreement. The arbitrator awarded $604,594.80 to the Twiggs for the total cost to perform the repairs that Rainier Pacific had failed to adequately complete under the Repair Agreement.

Rainier Pacific had a commercial general liability insurance policy from Admiral Insurance Company, under which Admiral agreed to cover Rainier Pacific’s liability arising from property damage caused by an occurrence. An occurrence is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” After Admiral denied indemnity coverage, the Twiggs sought to collect on their arbitration award by asserting a claim against Admiral for breach of the general liability insurance policy.

The trial court dismissed the Twiggs’ coverage claim against Admiral, and the Twiggs appealed. The Court of Appeals (“the Court”) affirmed the trial court’s dismissal ruling on appeal.

In its decision, the Court notes that the Twiggs’ written arbitration claim was informal and did not set forth numbered allegations or labeled claims, but was generally framed as a breach of the Repair Agreement. With respect to the arbitrator’s ruling, the Court found that the

“arbitrator concluded that [certain] repairs had been completed, but that the installation was ‘defective’ and contrary to the manufacturer’s specifications. … The arbitrator concluded that Rainier Pacific, ‘through its consistent failure to diligently prosecute the work, and through its defective efforts to repair the garage slab, materially and substantially breached the [Repair] Agreement.’ The arbitrator finally concluded that the Twiggs’ ‘relief is based upon common-law principles of breach of contract.’”

The Court concluded that the claim asserted by the Twiggs in the second arbitration did not allege property damage based on an “occurrence.” Rather, the Court held that the claim was for breach of Rainier Pacific’s contractual obligations under the Repair Agreement, which is not a claim covered under the insurance policy. The Court relied heavily on the fact that the Twiggs’ arbitration claim was presented, defended, and ruled on by the arbitrator as a single claim for breach of contract.

All that being said, the Court acknowledged that “[t]here is no doubt that a repair contractor’s negligent work that accidentally caused damage to physical property could give rise to an occurrence under the policy.”

The Court’s decision allows for different outcomes under distinguishable facts. For example, the Court’s decision suggests that it might have ruled differently had the arbitration claim clearly alleged a distinct claim for negligence that caused resulting property damage. Additionally, if the performance under the Repair Agreement had led to new resulting property damage that was not already required to be repaired under the Repair Agreement, that might have also led the Court to a different conclusion. Additionally, it appears that the Admiral policy did not cover the underlying defects that led to the first arbitration that was resolved through the Repair Agreement and, therefore, the Twiggs could not argue that the underlying defects from the first arbitration constituted resulting property damage that Admiral was required to cover under the policy.

A contractor that enters into separate contract to repair originally defective work should be aware of the Admiral coverage case ruling, as it may affect the contractor’s ability to receive indemnity coverage for related property damage.

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.

The American Rule Stands? Appellate Court Remands for Prevailing Party to Segregate Between Recoverable and Non-Recoverable Fees

John Mark Goodman | BuildSmart

Another week, another fee-shifting case. This ones involves a 28-unit condo project in the Houston Heights neighborhood of Houston (see 2017 Yale Development, LLC v. Steadfast Funding, LLC, 2023 WL 3184028 (Tex. App. May 2, 2023)). The project failed after the developer defaulted on its loans and several contractors filed liens on the property. Litigation ensued.  The developer asserted numerous claims including fraud and breach of contract against the lenders and others, and the lenders countersued for fraud and breach of contract. The trial court rendered summary judgment against the developer on its claims and in favor of the lenders on their breach of contract counterclaim. The case proceeded to a trial on the issue of the lenders’ breach of contract damages.  The trial court awarded the lenders a total of $8.3 million, including $765,000 in attorneys’ fees, which were recoverable under a fee-shifting provision in the promissory note.

On appeal, the developer raised 33 issues. The appellate court rejected all but one: the appropriateness of the fee award. On that issue, the appellate court held that the lenders had failed to properly segregate their attorneys’ fees between recoverable and non-recoverable claims as required under Texas law. For example, while the lenders could be entitled to attorneys’ fees on their breach of contract claim, they would not be entitled to recover fees incurred in pursuit of fraud claims. The court therefore remanded the case to the trial court to allow the lenders to properly prove up their recoverable attorneys’ fees. As to what proof would be required on remand, the court cited the following cases as guidance: Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 311, 314 (Tex. 2006) (noting that standard for segregation of attorney’s fees “does not require more precise proof for attorney’s fees than for any other claims or expenses” and stating that attorney’s opinion that a certain percentage “of their drafting time would have been necessary even if there had been no fraud claim” would have sufficed); Hillegeist Fam. Enters., LLP v. Hillegeist, 2022 WL 3162367, at *5 (Tex. App. Aug. 9, 2022) (stating that when segregation is required, attorneys do not have to keep separate time records for each claim).

The Yale Development case serves as another useful lesson on the recoverability of attorneys’ fees. Understanding the requirements and limits to fee awards in a specific state can be important. In this case, early recognition of the requirement to segregate fees incurred on different claims may have allowed lenders the ability to more easily prove up their attorneys’ fees claims at trial and on remand.

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.

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.

Preparing For And Responding To A Large Property Loss

Jason Cables | Ankura Consulting Group

Often, the last thing a company wants to address immediately following a large property loss is an insurance claim. However, the claims preparation process is vital to ensuring that a business survives a large property loss. Throughout my career of measuring and preparing large property losses for insureds, I have learned many lessons to ensure the claims process goes smoothly and efficiently. Below, I outline six critical steps to take prior to and following a loss to increase the chances of a favorable claims outcome.

Prior to a loss:

  • Ensure your reported values are accurate

To place insurance, each year a company reports the annual values of the property, inventory and business interruption risk to insurers. Inaccurate values can lead to several difficult outcomes, including co-insurance penalties, insufficient limits of insurance or inaccurate deductibles.

  • Assemble your claim team prior to a loss

Internally, identify key personnel from risk management, facilities, operations, sales, accounting, insurance broker, etc. Externally, take the opportunity to interview, vet and contract with vendor partners including restoration companies, claim preparation firms and coverage counsel. Following a wide-spread event, these resources quickly become fully utilized and having relationships in place will result in prioritized response and recovery.

  • Fully read and understand the policy language

Work with your insurance broker to understand the policy, coverage and any potential areas of concern. Once a loss has occurred, it is not the time to learn what coverage you have (or don’t have).

Following a loss:

  • Communicate externally and internally

Early on, it is important to provide insurers with a preliminary estimate of total loss so that the insurance reserve can be properly set. This will develop into a well-documented insurance claim submission and be shared with insurers. It is equally important to identify potential recovery issues with internal management, including insurance sublimits, deductibles or potential policy coverage issues.

  • Make decisions in a timely manner

Often after a catastrophic event, the insured may decide to make changes to the building or operations while rebuilding. While most understand the increased cost of upgrading will not be covered by insurance, it is important to also highlight that any extension to the restoration period will be excluded from a business interruption recovery. Of course, the insured may opt to make the change or investment regardless but should understand the implications to their insurance recovery.

  • Establish a claim preparation timeline and communication protocols

Following a loss, it is important to keep regularly scheduled meetings with the team (risk, operations, finance, claim preparer, etc.) and the insurance company’s representatives (adjuster, equipment or building consultants, claim auditor, etc.). Develop communication protocols and assign a point person for such communications. This ensures timely communication and discussion of key decisions and issues. It also keeps the insurance adjustment team focused on your claim, which may be one of many following a wide-spread event.

By following these steps, a business will be in position to maximize insurance recovery in a timely manner, allowing it to get back to running its business.

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.

An Occurrence Under Builder’s Risk Insurance Policy is Based on the Language in the Policy

David Adelstein | Florida Construction Legal Updates

Builder’s risk insurance coverage is a vital property insurance coverage during the course of construction.  Builder’s risk insurance is not a one-size-fits-all product so please make sure you are working with your insurance broker to procure this product that factors in and covers risk associated with the project.

Builder’s risk insurance is typically an occurrence-based policy. No different than other occurrence-based policies (such as commercial general liability), a dispute may arise as to the occurrence. This could be due to the triggering of the actual policy during the coverage period or it could be due deductible obligations, as in the case discussed below. When dealing with a builder’s risk insurance policy–again, no different than any policy–the language in the policy matters.  Definitions used in the policy to define specific terms matter and, in numerous cases, the ordinary dictionary meanings of terms matter. But it all starts with the policy language.

In KT State & Lemon, LLP v.  Westchester Fire Insurance Co., 2023 WL 2456499 (M.D.Fla. 2023), a builder’s risk policy provided coverage from April 2018 through the end of November 2019.  There was a $50,000 per occurrence deductible for loss caused by or from water damage.  An extension to the builder’s risk policy was negotiated through the end of January 2020 that increased this water damage deductible to $250,000 per occurrence.  During construction and the testing of the fire suppression (sprinkler) system, leaks started to occur resulting in water damage.  Two leaks occurred in September 2019, one leak in October 2019, one leak in November 2019, and two leaks in December 2019 (during the extension and higher water damage deductible period).

The plaintiff-insured argued that all of the leaks in the fire sprinkler system should constitute one single occurrence.  Naturally, it did so because one occurrence would be a $50,000 deductible since the initial leak occurred prior to the extension period.  The insurer took a contrary position and argued that each leak was a separate occurrence meaning there were four leaks with a $50,000 per occurrence deductible and two leaks in December 2019 each with a $250,000 deductible.  This is a big deal from a dollar’s perspective as it means each leak would have to have damages in excess of the per occurrence deductible and the insured would potentially be responsible for the first $700,000 in water damage based on the six leaks.

“In Florida, the [insurance] contract should be ‘construed according to the plain language of the policy,’ and any ambiguities must be ‘construed against the insurer and in favor of coverage.’ KT State, supra, at *2 (citations omitted).

The Court looked at the policy language, specifically how the builder’s risk policy defined the term “occurrence” as it would be this definition in the policy that shed light on whether there would be one occurrence or multiple occurrences:

All LOSS attributable directly or indirectly to [1] one originating cause, event, incident or repeated exposure to the same originating cause, event or incident, or [2] to one series of similar originating causes, events, incidents or repeated exposures to the same originating cause, event or incident first occurring in the Policy period. All such LOSS will be treated as one OCCURRENCE, unless a specified period of time is included in this Policy. The most the Company will pay for LOSS in any one OCCURRENCE is the applicable Limit of Insurance shown on the Declarations.

As to the underlined above, the policy did not define the terms “series” or “similar.” Yet, these terms are not technical terms so the Court looked at the ordinary dictionary definitions. “The dictionary meaning of ‘series” is ‘[a] number of things of one kind (freq. abstract, as events, actions, conditions, periods of time) following one another in time or in logical order.’ The dictionary meaning of ‘similar’ is ‘alike in substance’ or ‘having characteristics in common.’” KT State, supra, at *3 (citations omitted).  Based on the definition of “occurrence” in the policy, and the ordinary dictionary definitions of “series” and “similar,” the Court found the six fire sprinkler leaks constituted only one occurrence:

Reading the policy language from the standpoint of an ordinary person, in light of the common meaning of the terms used, and in a common-sense and natural manner produces only one reasonable conclusion. Plaintiffs’ claimed loss was attributable, directly, or indirectly, to a “series of similar originating causes, events, [or] incidents,” and therefore resulted from one occurrenceThe loss resulted from leaks in the same sprinkler system, due in whole or part to improper installation by the same [subcontractor] crew under the same contract, in the same general location in the same building, and occurred one after the other in a relatively short span of time from late September to December 2019.

KT State, supra, at *4.

Yet, despite there being one occurrence, the Court applied a caveat to the benefit of the insurer since there were two leak incidents during the extension of the policy with an increased $250,000 per occurrence deductible:

Accordingly, under the Policies’ definition of “occurrence,” the leaks at issue together constituted one occurrence. For damage from leaks that occurred prior November 30, 2019, therefore, a single deductible of $50,000 applies. The result is different, however, for leaks after that date, because the parties expressly modified the Policies at that point. The original policy term ended on November 30, 2019. Plaintiffs were only entitled to purchase an extension of coverage beyond that date on the same terms as before if no “risk aggravating situation” was present at the time of the extension. But such a situation was present, because Plaintiffs had reported multiple leaks, and that was obviously the reason the parties changed the water damage deductible to $250,000 when they extended coverage to January 30, 2020. It is clear that the increased deductible was intended to apply to similar water damage events occurring during the extended policy period. Therefore, the increased deductible applies to water damage from leaks occurring after November 30, 2019, notwithstanding the definition of “one occurrence.”

KT State, supra, at *5.

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.