But what if one of the carriers provides a defense to the lawsuit, but the other refuses? Under One Beacon the carrier that provides a defense can sue the carrier that doesn't. Time will tell the effect of that. One danger might be that carriers become reluctant to settle with insureds in a continuous loss case because of the risk of later being sued for more money by a co-insurer. Alternatively, it may - as the New Jersey Supreme Court believes - promote early settlement, as an insurer that anticipates paying an allocated portion of defense costs may factor those costs into a potential resolution of the underlying claim and will be incentivized to seek earlier settlement.
A recent decision by the First Circuit Court of Appeals illustrates the importance of clearly articulating the efficient proximate cause of any insurance loss and the narrow interpretation applied by courts to exclusionary clauses. In Fidelity Co-op. Bank v. Nova Cas. Co., Nos. 12-1572, 12-2150, 2013 WL 4016361 (1st Cir. August 7, 2013), the court ruled that damages to the interior of a building caused by the pooling of water on the building's roof, which resulted from excessive rain during Tropical Storm Hanna, did not constitute damage "caused by rain" excluded by the insured's all risk insurance policy. Rather, the court held that the damages were caused by the failure of a drain that resulted in a "flood," which peril was expressly covered under the policy.
The Florida Supreme Court gave insureds a Fourth of July present one day early -- July 3 -- by ruling that property policies providing replacement cost coverage include the cost of a contractor's overhead and profit, even if the insured does not actually pay a contractor overhead and profit to replace the damaged property. We'll explain the decision, Trinidad v. Florida Peninsula Insurance Company, in detail after the jump, but first some commentary.
We've often seen this issue in the "no good deed goes unpunished" situation where a contractor steps in to perform repair work on a builders risk policy and the carrier refuses to pay the contractor's overhead and profit. If the contractor did not perform the repairs, either the owner or the carrier would have to hire a different contractor who was not already on site to mobilize to the site and perform the repair work. The carrier would obviously have to pay that contractor overhead and profit. And that contractor would be much less efficient and more expensive. But the carrier tries to take advantage of the original contractor's willingness to step in by carving overhead and profit off the payout.
This Florida Supreme Court decision validates our position: A carrier must pay the overhead and profit whether or not the insured actually pays a contractor to do the work. Now, for the details.
Last month New York's Supreme Court, Appellate Division 1st Department affirmed the Supreme Court, New York County's decision granting partial summary judgment in favor of an insured freezer manufacturer, I.J White Corp., which sought defense and indemnity under a CGL policy for claims against it brought by Hill Country Bakery for breach of contract, breach of warranties, and fraudulent inducement. See I.J. White v. Columbia Casualty Co., 2013 N.Y. Slip Op 02500 (NY A.D., 1st Dept., April 16, 2013). The court held that Hill Country's underlying complaint against I.J. White seeking damages because of a defect in its freezer system alleged both an "occurrence "and "property damage" within the meaning of the policy, triggering the insurer's duty to defend.
Hill Country, a maker and distributor of baked goods, bought a spiral freezer system from I.J. White which was to freeze freshly baked goods within 150 minutes to a temperature necessary for proper handling and packaging. Once installed, however, the freezer failed to freeze the cakes as required, which became evident when workers cut into the cakes as part of the packaging process.
A few weeks ago I posted about an Eighth Circuit case that once again illustrated how, despite the drafter's precision carrying the day most of the time, sometimes a litigator's creativity can trump it. Well, it's happened again. And again the issue is whether a dispute between and insured and a carrier is subject to arbitration. And again, the carrier wanted to arbitrate but the court kept the case. This time it's the Second District California Court of Appeal, in Diamond Blue Enterprises v. Gemini Insurance Company. Before I say more, let me caution all the lawyers preparing to cite the case that it's unpublished.
I occasionally give a presentation called "That's not what I meant!" which is subtitled "Usually the drafter's precision carries the day, but sometimes the litigator's creativity trumps it." Our legal system generates seemingly endless material for this presentation and last week the Eighth Circuit gave us more in Union Electric v. AEGIS Energy Syndicate. The policy had a mandatory arbitration provision, but an endorsement specified that Missouri law governed and a Missouri statute prohibits mandatory arbitration of insurance disputes, so while the carrier wanted to compel arbitration, Judge Jean Hamilton refused and the Eighth Circuit affirmed her decision. So, the drafters may have intended that any disputes would be arbitrated, but if so, they should have done some more homework.
There are a couple of lessons here. First, read the entire policy, including the endorsements. The endorsements are like change orders to construction contracts and until you've read them, you don't know what the policy provides for. Second, just because a policy (or any other contract, for that matter) says something doesn't mean it has to be. Many common contractual clauses are rendered unenforceable by either caselaw or statutes. Third, because insurance policies are governed by state laws, and in light of the differing interpretations and statutory schemes amongst the states, there can be wide variations of the procedural and substantive effect of policies depending on what state's law governs. So, do your homework.
The Second Circuit's recent decision in Scottsdale Insurance Company v. R.I. Pools, Inc., Case No. 11-3529, 2013 WL 1150217 (2d Cir. March 21, 2013) should be welcome news for Connecticut contractors insured under CGL policies with Broad Form Property Damage Coverage, seeking coverage for losses to their work caused by their subcontractors. In RI Pools, the Second Circuit vacated the district court's grant of summary judgment in favor of an insurer, including a ruling that the insurer was entitled to a return of funds it spent on the insured's defense, after concluding that the district court erred when it ruled that a swimming pool contractor's liability for cracked concrete could not be covered by its insurance. The district court relied on the "your work" exclusion, but in doing so, it read the "subcontractor exception" out of the policy. The Second Circuit put it back in.
An insured's duty to cooperate with its insurer in the investigation and potential payment of claims is essential to the insurance relationship and is often a condition precedent to coverage. As the Supreme Court for the State of Washington recently affirmed, however, an insurer's ability to deny coverage based on lack of cooperation is limited. Staples v. Allstate Ins. Co., No. 86413-6 (Wash. Jan. 24. 2013). To do so, the insurer must demonstrate a substantial and material breach by the insured of the cooperation clause that results in actual prejudice to the insurer. In other words, where the insured has substantially complied with the cooperation clause or there has been no prejudice to the insurer, a denial of coverage for breach of cooperation will not stand.
In deciding Westfield Insurance Company v. Custom Agri Systems, Inc., 2012 Ohio 4712, the Ohio Supreme Court recently held that defective construction or workmanship is not a covered "occurrence" under a commercial general liability ("CGL") insurance policy, even if the defective work was performed by a subcontractor of the insured contractor. In that case, a contractor sought defense and indemnity from its insurer related to allegations of damages arising from a steel grain bin which had been defectively constructed by a subcontractor. The insurer argued that the claims against the contractor were not for "property damage" caused by an "occurrence," or, alternatively, that the claims were removed from coverage by the policy's contractual liability exclusion.
In rendering its opinion, the court stated that faulty workmanship was not fortuitous and therefore not an accident or occurrence under a CGL policy. Because it held that defective construction was not an occurrence, the court did not address question of whether such claims were excluded by the contractual liability exclusion. The dissent, however, noted a "strong recent trend in the case law" which interprets the term occurrence to include unanticipated or unintentional damage to non-defective property resulting from faulty work. The dissent went on to criticize the majority opinion as being too broad because it foreclosed the possibility of defective workmanship constituting an occurrence under any circumstance.
Courts throughout the country are split on whether defective workmanship is an occurrence under a CGL policy. Ohio is simply latest state to weigh in on the debate. The Westfield decision will not be well-received by contractors but is likely to be celebrated by insurance companies who may rely on it in refusing to defend claims.
Illinois and California appellate courts recently issued two policy-holder favorable decisions. In both cases, the trial court had granted summary judgment in favor of the insurance company and denying coverage, and in both cases the trial court decisions were reversed.
It is the rule in many jurisdictions that an insurer which assumes defense of its insured without issuing a reservation of rights can be estopped from later denying coverage based on rights or defenses in the insurance contract. This general rule was rejected by the Supreme Court of Wisconsin in Maxwell v. Hartford Union High School District, 814 N.W.2d 484 (Wis. 2012). The court in Maxwell held that an insurer which defends without reserving the right to deny coverage has not waived its ability to rely on coverage clauses in the policy allowing for such a denial.
In Maxwell, the policyholder - a school district facing a wrongful termination suit from an ex-employee - tendered a claim to its liability insurer which defended the school district in the ensuing litigation without issuing a reservation of rights letter. It was not until a judgment in excess of $100,000 was awarded against the school district that the insurer denied coverage based on language in the policy excluding liability for damages due under the employment agreement and for lost benefits or lost wages. That the policy indeed excluded coverage for the damages at issue was not in dispute. The issue presented to the court was whether, because the insurer failed to issue a reservation of rights, it had waived or could be estopped from asserting its defense of no coverage. In rendering its decision, the court held that waiver or estopped could not supply coverage to an insured that was not provided in the policy itself. Ruling otherwise, the court stated, would force an insured to pay for a loss for which it had not received a premium.
The First Circuit has endorsed key principles that favor policyholders in insurance coverage disputes -- principles that can frequently be used to help insureds in construction cases. So, this new case is worth a look. In Oxford Aviation, Inc. v. Global Aero., Inc., 2012 U.S. App. LEXIS 10101 (1st Cir. 2012), the U.S. Court of Appeals for the First Circuit vacated the district court's decision which found that a carrier had no duty to defend claims involving alleged faulty workmanship. Relying on Maine law, the court held strong to the concept that even the remotest possibility of coverage triggers an insurer's duty to defend.
Under the Texas code, the workers' compensation exclusive remedy bar applies up and down: barring injured employees of subcontractors from bringing common law tort suits against a general contractor which provided workers compensation insurance, and also in reverse, barring injured employees of the general contractor from bringing suit against a subcontractor, even when the employees are covered under separate workers' comp policies. So says the Texas Court of Appeals in Garza v. Zachry Construction Corp., 2012 WL 1864350 (Tex. Ct. App. May 23, 2012).
It's standard fare for contractors and subs to be required to provide certificates of insurance (COI) verifying that the insurance requirements specified in their contracts, e.g., the type of coverage, the coverage policy limits, have been met prior to starting work. According to an April 21, 2011 Administrative Letter issued by Virginia's State Corporation Commission Bureau of Insurance, in Virginia there's a "widespread misunderstanding regarding the proper use of [COIs], as well as intentional misuse of such certificates." In particular, the letter states that "some private and public entitles are requesting insurers and producers to issue certificates of insurance that are inconsistent with the underlying insurance policy or contract." Examples include "indicating that a person is an additional insured contrary to the terms of the policy" and "that a party will be notified if the underlying policy is cancelled if that party is not entitled to notice under the terms of the policy." The Administrative Letter can be found here. Legislation passed in March is designed to address these issues.
The new legislation amends the Unfair Trade Practices chapter in Title 38. Insurance of the Code of Virginia and adds a new section on certificates of insurance, § 38.2-518. Specifically, the new section prohibits a person from (1) issuing or delivering a COI that attempts to confer any rights upon a third party beyond what the referenced policy of insurance expressly provides; 2) issuing or delivering a COI (except when the COI is required by a state or federal agency) unless it contains a statement substantially similar to this: "This certificate of insurance is issued as a matter of information only. It confers no rights upon the third party requesting the certificate beyond what the referenced policy of insurance provides. This certificate of insurance does not extend, amend, alter the coverage, terms, exclusions, or conditions afforded by the policy referenced in this certificate of insurance." It prohibits a person from 3.)knowingly demanding or requiring the issuance of a certificate of insurance from an insurer, producer, or policyholder that contains any false or misleading information concerning the policy; and 4.) knowingly preparing or issuing a COI that contains false or misleading information or that purports to affirmatively or negatively alter, amend, or extend the coverage provided by the policy. Further, 5.) no COI may represent an insurer's obligation to give notice of cancellation or nonrenewal to a third party unless the giving of the notice is required by the policy. These provisions apply to all certificate holders, policy holders, insurers, insurance producers, and COI forms issued as statement or summary of insurance coverages on property, operations, or risks located in Virginia. The new legislation also authorizes the State Corporation Commission to regulate issuers and requesters of COIs for the first time. Click here for the text of the bill as passed.
A federal court in Louisiana denied a subcontractor's coverage action against Ace Insurance because the subcontractor did not enroll in the Contractor Controlled Insurance Program. The case is Williams v. Traylor-Massman-Weeks, LLC, et al., EDLA No. 10-2309 and you can look at the pdf of the opinion here: Williams v. Traylor-Massman-Weeks.pdf
The Corps of Engineers entered into a contract with Shaw, which had a Contractor Controlled Insurance Program (known as a "CCIP" which is a type of "wrap up" because its "wraps up" various types of insurance into one place. Shaw entered into a contract with Eustis and at the time, Shaw planned to sponsor a CCIP, but had not created it yet. So, Shaw's subcontract directed Eustis to enroll -- presumably when the CCIP was created.
The trouble was, Eustis didn't enroll. And wouldn't you know it, of all the projects where they forgot to enroll in the CCIP, that was the one where they had a lawsuit? Eustis came up with several creative theories for coverage, but couldn't escape its fundamental problem: It simply didn't enroll in the CCIP.
Aside from the obvious lesson here -- if you are a potential enrollee on a wrap up, make sure you have actually enrolled -- there are other less obvious lessons. If you sponsor a CCIP, do two things: (a) try to make sure your subs get their paper work in; and (b) structure your contracts so that if they don't, the risk to you is minimized.