HANDLING COMPLEX CONSTRUCTION DEFECT CLAIMS INVOLVING MULTIPLE CARRIERS AND MULTIPLE POLICIES
Complex Construction Claims
In many cases we had to assist the insurers or the insureds with damages to multiple homes in a subdivision or in a high rise building(s). The presence of multiple buildings or units, the significant amounts of money at stake, and the presence of numerous other carriers who advocate their separate, conflicting viewpoints makes the handling of such construction defect cases very challenging.
The level of complexity in defective construction claims may result in especially complicated issues for a variety of reasons:
- Carriers have been developing special policy formats for this market, including wholly new concepts such as "wrap-up coverage."
- Some carriers have new contractual provisions - such as policy limitations, which, in effect, provide CGL coverage on a "claims made" basis or preclude application of a "continuous trigger" - in effect which may be difficult to coordinate with traditional formats used by other carriers.
- Other policy provisions which apply generally-- such as deductibles, SIRs, and the definition of a "claim"— require special analysis in the context of demands being made by a large group of homeowners and insurance carriers with competing interests and policy formats.
What is a CONSTRUCTION defect?
According to the Insurance and Risk Management Institute, a construction defect is generally speaking, a deficiency in the design or construction of a building or structure resulting from a failure to design or construct in a reasonably workmanlike manner, and/or in accordance with a buyer's reasonable expectation. The most dangerous defects have the capacity to fail, resulting in physical injury or damage to people or property. However, many defects present no increased risk of injury or damage to other property but nevertheless cause harm to the property owner in the form of loss of use, diminution in value, and extra expenses incurred while defects are corrected. This latter type of defect is often referred to as a passive defect.
Many states have more specifically defined the term "construction defect" for purposes of applying statutes that dictate processes for remedying and litigating construction defect claims. These statutory definitions vary by state. Nevada, for example, uses the term constructional defects and defines it as follows:
“Constructional defect” means a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance and includes, without limitation, the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance:
1. Which is done in violation of law, including, without limitation, in violation of local codes or ordinances;
2. Which proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed;
3. Which is not completed in a good and workmanlike manner in accordance with the generally accepted standard of care in the industry for that type of design, construction, manufacture, repair or landscaping; or
4. Which presents an unreasonable risk of injury to a person or property.
Whether, and to what to extent, coverage applies in liability policies for claims alleging construction defects is a matter of serious debate both in insurance circles and in the courts. We wrote few weeks ago about some earthshaking decisions reached by the majority of the jurisdictions during 2013 and 2014, finding construction defect coverage under a contractors’ CGL policy. These policies, however, are subject to numerous exclusions and Anti-Indemnification Statutes, Right to Repair/Cure and Statutes of Limitations and Repose. In fact, the defendants in many of these cases have been successful in defeating claims using the defenses of the statutes of limitations and repose.
Among the more frequently addressed exclusions are the so-called “business risk” exclusions, which include the “damage to property”; “damage to your property”, and “damage to your work” exclusions. Other potentially applicable exclusions concern prior work; contractual liability; EIFS; mold; owned property; earth movement, and known or continuing injury or damage. Claims for damages resulting from defective drywall began to appear in about 2005, and courts have frequently addressed whether the standard pollution exclusion, in addition to the above-mentioned exclusions, bars coverage for such claims.
The subtleties of each claim, different facts and precise policy language all contribute to the disparity. And, in some cases, the decisions are simply not reconcilable. Legislation enacted by various states concerning the right to repair/cure, statutes of limitations and repose, and anti-indemnity statutes, are pertinent to the institution of a construction defect lawsuit.
IS THERE AN OCCURRENCE AND PROPERTY DAMAGE WITHIN THE POLICY PERIOD?
Is There An Occurrence?
The first step in any coverage analysis is to determine whether the underlying claim or suit comes within the scope of the insuring agreement of the policy including, under a commercial general liability policy, whether the injury or property damage was caused by an occurrence. “Occurrence” is generally defined as an accident, including continuous or repeated exposure to the same or similar general harmful conditions. Despite what may be similar policy language and fact patterns involved in these claims, the interpretation of what constitutes an occurrence in the context of a construction defect claim often varies widely from one jurisdiction to the next.
Is There Property Damage?
In order to trigger coverage under a commercial general liability policy, the insured’s liability must be based on actual physical injury to tangible property or an actual loss of use of such property. Where the construction claim against the contractor does not involve tangible, physical injury, courts have found no covered property damage. Most courts have also held that claims limited to fixing or replacing all or part of defective construction and/or claims of diminution in value, because of defective construction work or materials with no physical injury, are not claims for property damage. Defective work or materials in and of themselves do not constitute property damage.
For example, the plaintiff must allege that the buildings experienced cracks in the walls, settling of the slabs, soil subsidence, and separation in floor and walkways, just to name few damages that courts have found that they constitute damage within the meaning of the policy. Costs
Theories of Trigger of Coverage
After an occurrence and property damage is determined, the next question is how many policies and how many insurers will be liable for the damages or for coverage for the damages, i.e., who pays? This is accomplished by applying several theories of trigger of coverage. Trigger of coverage relates to when injury or damage is deemed to have taken place, so as to implicate a particular policy period. Construction defect claims typically do not concern a discrete catastrophic event, but more frequently, latent or progressive damage that may take place over an extended period of time. As a result, the determination of when property damage occurred and which policies must respond in the context of a construction defect claim often results in thorny disputes between insurers and policyholders.
Because comprehensive general liability policies insure against damage or injury that occurs during the policy period, courts generally hold that the time the construction defect-related injury or damage occurs is the time the complaining party is actually damaged, not the time when the faulty work was performed. Courts have adopted several different theories for determining when a coverage-triggering event occurred and which policies may have to respond. The five trigger theories that typically apply to construction defect losses include:
1. The Manifestation Trigger: The policies in effect at the time the property damage becomes apparent or is discovered provides coverage. This theory allows for a single policy to be put “on the risk” and “triggered”, with a duty to defend and be held liable for when the injury is manifested or “discovered”. This theory is much in use in the United States.
2. The Exposure Trigger: The policies in effect at the time of actual exposure to the damage causing substance or event provides coverage. This theory also results in multiple policy periods being triggered where an exposure may take place over several years. The exposure trigger theory has been applied to a variety of insurance decisions including asbestos, silica, pharmaceuticals, and chemicals.
3. The Actual Injury or Injury-In-Fact Trigger: The injury-in-fact trigger theory holds that coverage is triggered by the existence of bodily injury or property damage during the policy period. Each insurance policy “on the risk” during the time period when damage actually occurs is triggered. Based on the evidence submitted, injury-in-fact may be determined as occurring at any time from exposure through manifestation. The actual injury/injury-in-fact theory requires the policy holder to prove the discrete injury or damage during the insurance contract period. Nine states use this theory for CGL insurance liability. They include: Minnesota, Hawaii, Arkansas, Alabama, Nevada, Oregon, Texas, Washington, and North Carolina.
4. The Continuous Loss Trigger Theory: carriers on the risk from the initial exposure through manifestation are considered to be triggered. All policies in effect over a span of time, beginning from the first exposure to injurious conditions, continuing through any period of latency while the resulting damage remains undiscovered and is progressing, and ending at the time the injury manifests itself to the insured, are implicated. See Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal.4th. 645, 1995. The Court said that there is limitation on potential indemnity, where the damage must occur during the policy period and as a result from the accident or continuous or repeated exposure or conditions. The policy on the risk at the time the policyholder first obtains knowledge of “bodily injury” or “property damage” is the last policyholder that can be triggered. Many states follow this continuous loss trigger model in CGL third party liability claims as well. Including: Colorado, New Jersey, Pennsylvania, Indiana, Illinois, Massachusetts, Georgia, Kansas, South Carolina, Wisconsin, Missouri, and Tennessee.
5. The Double Trigger Theory. A variation on the continuous or “triple” trigger theory is the “double” trigger theory, applied by at least one court. Zurich Ins. Co. v. Raymark Indus., Inc., 118 Ill.2d 23, 112 Ill.Dec. 684, 514 N.E.2d 150 (1987), aff'ing 145 Ill.App.3d 175, 98 Ill.Dec. 512, 494 N.E.2d 634 (1986). Interpreting an earlier version of the uniform CGL policy that defined “bodily injury” as “bodily injury, sickness, or disease,” the Illinois Supreme Court found adequate medical evidence in the record that “bodily injury” in the form of lung tissue damage occurs at the time of exposure, “disease” exists when the condition is manifest or reasonably capable of clinical detection, and “sickness” includes the claimant's disordered, weakened, or unsound state before clinical manifestation.
ALLOCATION OF LOSS
After all the contributing insurers and policies are determined, the final question is how much each insurer and each insurance policy will pay. Because construction defect claims often implicate consecutive policy periods, the total amount of coverage available to respond to a claim may exceed the total amount of damages. In such circumstances, the damages must be allocated among the triggered policies or policy years. The issue of how a loss should be allocated in a construction defect claim is closely tied to the applicable trigger of coverage, and the resolution of one typically compels consideration of the other.
Courts have applied two main methods for determining how policies will contribute to the damages: the pro-rata allocation and the all sums allocation method.
Pro Rata– Policies respond in a particular policy period in proportion to the “time on the risk” and the total number of years triggered by the loss. Under this approach, each triggered policy is responsible for a portion of damages based on the years it was on the risk in comparison to the total number of years triggered by the loss. This approach is tied to policy language limiting exposure to those damages that take place during the policy period. For this approach to apply, the damage must be continuous and indivisible.
Complex construction defect cases typically involve multiple parties, often with overlapping responsibilities, whose actions are alleged potential causes of some or all of a claimant’s damages. If the case is decided by a jury, then the common law negligence procedure guides the percentage contribution from each defendant. For example, pursuant to Colorado’s Pro Rata Act, each party’s damages liability is determined by multiplying the damages attributable to an indivisible injury to which that party contributed by the percentage fault the jury allocates to that party.
All Sums– Policies in a particular policy period may respond in full, subject to their limits. This approach is based on the “all sums” language in policies and allows an insured to pick which policy years that will respond to a loss. This method is also called “joint and several liability” method and allows an insured to chose the insurance to which the losses are allocated and the deductible which must be paid.
Anti-Indemnification Statutes, Right to Repair/Cure and Statutes of Limitations and Repose
Outside the case law which impacts the analysis of insurance coverage for construction defect claims, many states have also enacted legislation which further defines, creates or restricts rights among owners, developers, and contractors. This statutory framework may include ant indemnity statutes, “right-to-repair” or “right-to-cure” statutes, and statutes of limitation and repose.
Transfer of risk by contract, via indemnity or hold-harmless agreements, is a common practice in the construction industry. In response to such contractual arrangements, many states have case law or statutory regulations that set up anti-indemnity rules for construction projects, to strictly regulate and in some cases prohibit contractual risk transfer.
Several states have passed legislation, known as “right-to-repair” or “right-to-cure” statutes.
The intent of these statutes is to protect the construction trade and offer an alternative to immediately proceeding to costly litigation. Key provisions of these statutes include:
1. Requiring written notice regarding alleged defects from homeowners to builder, with such notice usually required up to 90 days prior to proceeding with filing a suit.
2. Allowing the builder to inspect the premises.
3. Providing for a response to the homeowner’s claim, including an offer to repair, pay a monetary compromise, or decline the claim.
4. Limitations for the “reasonable” cost of repairs and possible reimbursement of legal fees.
5. Requirement that the right-to-repair provisions are stated in the sales contract.
A “statute of limitations” is a period of time in which a claim may be brought, beginning from the time of discovery of an injury. A “statute of repose” acts as a bar on any claims, and usually starts on a certain date, such as the close of escrow, transfer of title or occupancy, varying by state. Where the periods of time differ, the statute of limitations may be tolled or extended for reasons set forth in the statute. Most states have many, often overlapping statutes of limitations.
September 16, 2014
Equitable Garnishment Judgment Against CGL Insurer Upheld
In the recently decided Village at Deer Creek Homeowners Association, Inc. v. Mid-Continent Casualty Co., 432 S.W.3d 231 (Mo.App. 2014) , the court decided that a judgment awarded to a homeowners association against the CGL insurer of its contractor was for property damage caused by an “occurrence” as defined in the insurance policies and accordingly upheld the judgment in excess of $4,000,000.
The declarations of a homeowners association (HOA) required the HOA to “maintain, repair and replace . . . the exterior portions of all [townhome] Units” subject to exceptions not applicable in this case. The declarations further permitted the developer (who was also the builder/general contractor) to control the HOA until such time as it was required to be turned over to the control of the homeowners.
Prior to the time of the turnover, homeowners complained about water leaks to the developer, who then tried to fix them with funds of the HOA. After the turnover, the HOA and 47 homeowners sued the developer/contractor in Kansas for the water leaks, including damage to both the interior and exterior of their townhomes. The developer/contractor notified its CGL insurers of the lawsuit, both of whom accepted the defense under a reservation of rights.
Prior to trial, the plaintiffs indicated their willingness to settle all claims against the developer/ contractor within the limits of the CGL policies. The insurers, however, would not agree to a settlement and would not agree to their insured’s subsequent demand to withdraw their reservation of rights. As a result, the insured terminated the insurers’ defense and then reached an agreement with the plaintiffs that any recovery obtained would be collected solely from the CGL insurers. In exchange, the developer/contractor agreed not to offer evidence at trial or cross-examine witnesses. Not surprisingly, the Kansas court found in favor of the plaintiffs and entered a judgment against the developer/contractor in excess of $7,000,000.
Following the judgment, the plaintiffs filed an equitable garnishment action against the CGL insurers in state court in Missouri. The developer/contractor also asserted claims for bad faith failure to settle, breach of fiduciary duty and breach of contract. After a trial of the equitable garnishment action, the Missouri court found in favor of the HOA and entered a total judgment commensurate with the underlying Kansas judgment in excess of $7,000,000. One of the CGL insurers reached a settlement with the HOA, while the other insurer moved forward with an appeal.
The remaining insurer/appellant made several arguments on appeal: (1) the underlying Kansas judgment against the contractor/insured was not for “property damage” but rather the cost to repair defective construction; (2) the underlying judgment did not property allocate the association’s damages between covered property damage and uncovered costs to repair defective construction; (3) the Missouri trial court should have permitted the insurer to amend its Answer to include a “your work” exclusion; and (4) damage to the townhomes was not an occurrence as defined by the CGL policy.
The court of appeals decided that the Kansas judgment was for property damage that was the result of an occurrence as defined by the CGL policy. Specifically, the court found that the installed exterior cladding system failed, which permitted water intrusion that not only damaged the exterior but also other components of the exteriors of each townhome. It was not contested that there was also water intrusion into each of the 137 townhomes as a result of defective construction by the insured.
This case is interesting because it contributes to the continuing evolution of the application of CGL policies to defective construction as to what is and is not covered.
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