CGL Coverage for Construction Liability Claims

The following items represent a brief summary of court rulings on the never-ending subject of general liability coverage for claims based on faulty construction.

Group Builders, Inc. v. Admiral Insurance Company, 231 P.3d 67 (2010). The Intermediate Court of Appeals of Hawaii held that faulty construction work by a subcontractor did not constitute an occurrence under the CGL policy. The work of a subcontractor contained numerous material defects and these contributed to mold growth. The court held that, like a majority of jurisdictions, claims of poor workmanship, standing alone, are not occurrences that trigger coverage.

Christman Company v. Renaissance Precast Industries, L.L.C., 2011 WL 2462676 (Mich.App.). The damage claim at issue here pertained to damage to the components of a parking structure that the insured erected; there were no damages beyond this work. The Court of Appeals of Michigan ruled that property damage confined to the insured's own work product will not be deemed an occurrence or an accident within the meaning of the general liability policy. The court stated that “the fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship”.

Lexicon, Inc. v. ACE American Insurance Company, 634 F.3d 423 (2011). Lexicon subcontracted the fabrication and erection of new silos to Damus. After months of use, one of the silos collapsed due to Damus's faulty welds. The trial court held that, under governing Arkansas law, property damage resulting from the faulty work of a subcontractor is not an occurrence for purposes of a general liability policy. The United States Court of Appeals, Eighth Circuit, affirmed the decision, noting that the Arkansas Supreme Court had ruled that faulty workmanship is not an accident, but rather is a foreseeable occurrence and so, is not covered by the CGL policy.

Palm Beach Grading, Inc. v. Nautilus Insurance Company, 2011 WL 2749669 (C.A.11, Fla. ). The general contractor brought an action against the insurer seeking reimbursement under the subcontractor's commercial general liability policy for the repair of a defective sewer system pipe. The United States Court of Appeals, Eleventh Circuit, held that the repair costs incurred as a result of the subcontractor's negligence were not covered under the CGL form because the damage did not constitute property damage within the meaning of the policy. The court quoted the Florida Supreme Court in explaining that there is a difference between a claim for the costs of repairing or removing defective work (which is not a claim for property damage) and a claim for the costs of repairing damage caused by the defective work (which is a claim for property damage).

Continental Western Insurance Company v. Shay Construction, Inc., 2011 WL 3236102 (D.Colo.). The United States District Court for Colorado held that, under Colorado law, an exclusion in a CGL form barring coverage for property damage to “that particular part of real property on which you … are performing operations, if the property damage arises out of those operations” would apply to both an insured subcontractor's allegedly defective work and the damages it allegedly caused to the work of other trades when it repaired its own work. The court also noted that, under Colorado law, an exclusion barring coverage for “that particular part of any property that must be restored, repaired, or replaced because your work was incorrectly performed on it” was broad enough to include both an insured subcontractor's defective work and the damage it inflicted directly on other work in its repair of its poor workmanship. (The court also took note of the fact that the Colorado General Assembly enacted a law that, when considering commercial general liability policies issued to construction professionals, a court shall presume that the work of the professional that results in property damage, including damage to the work itself or other work, is an accident unless the damage is intended and expected by the insured. However, this case pertained to a policy that was not in force as of the effective date of the law, so the court disregarded the law.)

Manifestation

The United States District Court in Florida , in a case pertaining to defective construction, offers an opinion as to when manifestation occurs. This case is Mid-Continent Casualty Company v. Sienna Home Corporation, 2011 WL 2784200 (M.D.Fla.).

The court had to answer the question: when does the occurrence of property damage occur, or in other words, what triggers the coverage afforded by the general liability policy in this coverage dispute? Following Florida law, the court stated that the manifestation of the damage, not when the alleged negligence occurred, is the trigger. The court then proceeded to describe “manifestation”.

The court concluded that the manifestation of the occurrence of property damage, for purposes of determining coverage, is the time that such damage was discernible and reasonably discoverable either because it was open and obvious or upon a prudent investigation.

Editor's Note: The majority opinion in jurisdictions today is that property damage occurs when it is discovered or when it manifests itself. CGL forms do not address the meaning of “manifestation” so this court tried to clarify the issue.

Event Data Recorders

The following information comes from our sister publication, Claims magazine.

Thirteen states have enacted laws related to event data recorders (EDRs or black boxes) in vehicles. These devices record a final data picture just before a product fails. EDRs are tamper proof with a read/write memory device that captures a variety and wealth of useful information.

The state regulations have been divided into four groups: regulation 1, 2, 3, and 4. Regulation 1 specifies the vehicle owner as the owner of the EDR data. Regulation 2 restricts access to EDR data, unless procured via a warrant or court order. Regulation 3 restricts insurers' access to and use of EDRs. Regulation 4 requires manufacturers or dealers to provide notice or make certain disclosures to consumers about EDRs consistent with federal law.

Regulation 1 applies in the following states: Arkansas, Colorado, Maine, Nevada, New Hampshire, New York, North Dakota, Oregon, Texas, Virginia, and Washington .

Regulation 2 applies in the following states: Arkansas, California, Colorado, Connecticut, Maine, Nevada, New Hampshire, New York, North Dakota, Oregon, Texas, Virginia, and Washington .

Regulation 3 applies in the following states: Arkansas, California, Colorado, Maine, Nevada, New Hampshire, New York, North Dakota, Texas, and Virginia .

Regulation 4 applies in the following states: Arkansas, North Dakota, Oregon, Virginia, and Washington .

Florida does not specifically address EDRs, but there is a computer trespass statute that could cover EDRs. This law does not address who owns or who has access to the data.

Other Insurance, SIRs, and Equitable Subrogation

Warren Hospital brought this action for indemnification and equitable subrogation against American Casualty Company. The cite for this case is Warren Hospital v. American Casualty Company of Reading, 2010 WL 4146160 (C.A.3, NJ). Warren sought to recover the $425,000, plus legal fees and costs, that it expended defending and settling an underlying medical malpractice action brought against Warren and Tracy Lee, a nurse at the hospital.

While providing care to a patient, Lee irrigated the patient's abdominal cavity with an excess amount of fluid, causing him to require a temporary colostomy. The patient then sued the hospital and Lee for negligence and the hospital assumed its own defense and that of Lee. Lee contacted her own insurer, American Casualty, regarding the lawsuit and the hospital's defense. The insurer took the position that its insurance was excess to the hospital's self-insured retention. The hospital disagreed and said that the American Casualty policy was primary and that it expected to be indemnified for its defense of Lee. After settling the underlying lawsuit, Warren filed this action against American Casualty. The district court ruled in favor of the insurer and this appeal followed.

Warren 's primary contention is that the district court focused on the reference to self-insured retentions (SIRs) in the American policy, but failed to consider the qualifying clause in the policy that refers to “any amount payable under this policy”. According to Warren , its SIR does not apply to “any amount payable” under Lee's policy with American. Warren further emphasized that its claims against American involved indemnity and equitable subrogation and not the patient's underlying malpractice claims. Accordingly, the hospital said that its own SIR cannot now apply to bar its claim, particularly as equitable subrogation allows it to step into Lee's shoes and receive the benefits of her coverage.

The circuit court concluded that the policy, which expressly states that it will only pay after “any other … self-insured retentions … that apply to any amount payable under this policy” expressly excludes coverage where, as here, Warren's own SIR also applies to acts of Lee who was an insured under the hospital's policy since she was acting within the scope of her employment. The court noted that the relevant provision of the American policy begins, “if there is any other insurance policy or risk transfer instrument”, and hence includes within its scope any insurance policy or risk transfer instrument that would apply to the underlying incident for which coverage is sought.

The hospital also argued that its own insurance did not cover the same risk as the American policy and that therefore, the excess insurance clause in the policy did not apply. Warren emphasized that it is not required to reimburse or indemnify Lee for her liability due to her own negligence and so, its SIR does not cover the same risk. The court stated that Warren's insurance policy expressly included nurses as insureds for acts committed in performance of their duties for Warren . As such, Warren did insure against the same risks covered by Lee's policy, that is, risks resulting from the negligent acts of Lee.

The judgment of the district court was affirmed.

Editor's Note: The American policy clearly stated that, if there is any other insurance policy or risk transfer instrument, including but not limited to self-insured retentions, deductibles, or other alternative arrangements that applies to any amount payable under the policy, such insurance must pay first. The circuit court found that the hospital's policy clearly applied to an amount that American's policy would pay since Lee was covered by both her own policy with American and by Warren 's policy for her acts of negligence. The plain wording in the American policy made it excess over the hospital's policy and there was no basis for accepting Warren 's arguments in favor of coverage.

Definitions

Several years ago, the Risk and Insurance Management Society (RIMS) offered some interesting definitions of words that are often used in insurance coverage lawsuits. The article presented the term, followed by a lawyer's definition, followed by a practical definition. Here are some examples.

The word is “tort”. The legal definition is “a civil wrong for which the courts will provide a remedy”. The practical definition is “wrongful behavior one can sue on”.

The word is “negligence”. The legal definition is “failure to employ reasonable care to avoid a reasonably foreseeable risk”. The practical definition is “stupid”.

The word is “subrogation”. The legal definition is “the right of one who pays a victim to be reimbursed by the actual wrongdoer”. The practical definition is “I paid your tab; now cough up”.

The word is “indemnity”. The legal definition is “shifting the entire burden of liability from one person to another”. The practical definition is “it was really your fault”.

The word is “contribution”. The legal definition is “sharing of loss between two guilty parties in proportion to their guilt”. The practical definition is “you screwed up too; here is your share of the tab”.