CYBER SECURITY INSURANCE AND DESIGN PROFESSIONALS

Posted on March 26, 2017March 26, 2017 by Edward Garber

Cyber security insurance is a relatively new insurance product that has probably become more popular and important in today’s digital age. Think about it. Almost everything is created, transmitted, shared, and stored digitally. Companies utilize cloud-based platforms to store documents, share documents, and transmit documents. Documents are transmitted via e-mail. Documents are created electronically with various software programs. And, finally, technology has made it convenient to create, access, store, share, and transmit documentation digitally through smartphones, tablets, or laptops (and various applications) – so technology enables things to be done remotely in the moment to maximize efficiency and production.

I recently did a presentation relating to design professional’s liability exposure in today’s digital age that includes more collaborative and sophisticated project delivery methods. One of the topics mentioned was, of course, cyber security insurance as a means to insure an important risk for design professionals (particularly, engineering and architectural firms). Depending on the insurer, cyber security insurance can be added as an endorsement to a professional liability / errors and omissions policy.

From a design professional’s standpoint, there are numerous reasons to consider this insurance based on how documentation is created, stored, and transmitted and it is an insurance product that should NOT be overlooked:

Losses due to the mismanagement or failure to protect confidential business information and proprietary information the design professional receives;

Losses due to inadvertently transmitting malware (a virus) through digital transmission;

Data breaches (or theft) and the losses and costs associated with such breaches including the response, restoration, and remediation of the breach (which can be costly); and

Losses due to violating any laws/regulations relating to a data breach.

Notably, cyber security insurance is becoming an important insurance product for many, many industries. Design Professionals, for purposes of this article, would be remiss not to explore and seriously consider cyber security insurance in today’s digital age. As a design professional, consult your insurance broker as there are insurers that are insuring this important risk based on your business’ needs.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

“IS THE DEFECTIVE WORK COVERED BY INSURANCE?”

Posted on March 12, 2017November 8, 2024 by Edward Garber

I have been asked this question quite a bit from owners, in particular: “The contractor committed defective work, but it has insurance. Doesn’t the insurance cover this defective work?” Ugh, NO! There is this misconception that liability insurance, specifically, is the be-all-and-end-all when it comes to defective work. This could not be further from the truth. Don’t get me wrong – liability insurance is important; it is very, very important. However, liability insurance does not cover the risk of an insured’s defective work. Rather, liability insurance is designed to cover the risk of resulting damage: damage resulting from defective work. This is a significant distinction and one that is often overlooked. This is also why anyone encountering defective work should be working with an attorney to maximize insurance coverage or realize that the issue is not covered by insurance.

Let’s give easy examples to summarize this application:

Example 1 – My windows are defectively installed. They all need to be removed and replaced. Insurance should cover this defective installation, right? Ugh, NO! Remember, insurance does not cover the risk of an insured’s defective work. Removing and replacing the windows would not be covered by insurance.

Example 2– My windows are defectively installed and this defective installation has resulted in water intrusion and extensive water damage. Insurance should cover the defective installation and water damage, right? Yes and No. As mentioned, insurance is still not going to cover the defective work. But, the insurance should cover the water damage resulting from the defective work.

Example 3 – A spalling piece of concrete that was defectively installed fell and substantially damaged a vehicle. Insurance should cover the damage to the vehicle, right? Insurance should cover this damage because the third-party damage was the result of the defective work.

Example 4 – The balcony waterproofing was defectively installed resulting in water getting into the balcony system. In order to fix this defective waterproofing, the balcony concrete topping needs to be ripped out. Insurance covers remediating the waterproofing, right? Yes and no, perhaps. Again, insurance is not going to cover the defective waterproofing. But, there may be an argument that insurance should cover the removing and replacing of the concrete topping since this work had to be ripped out in order to repair the underlying defective waterproofing.

These are just easy examples to illustrate the application of insurance in different contexts. Of course, these are not all of the contexts and most contexts are more challenging. But, the point is that insurance, contrary to what many may believe, is not designed to insure defective work. Insurance is more complex than it may seem and, again, it is important to consult with a practitioner that understands insurance, how to maximize insurance, and to to advise you when the issue in reality is not an insurance-coverage issue.

QUICK NOTE: IMPORTANCE OF EQUIPMENT FLOATER INSURANCE

Posted on February 23, 2017February 23, 2017 by Edward Garber

A recent case out of New York held that damage to a tower crane from a storm during construction is excluded from a builder’s risk policy because a tower crane is a machine that fits within the contractor’s tools exclusion, a common exclusion in builder’s risk policies. (Check out this article for a discussion on this case.) This case exemplifies the importance of a contractor that owns or leases equipment, such as a crane, to obtain equipment floater insurance (or inland marine insurance coverage). But, it is important that the contractor discuss the type of equipment it needs insured for purposes of its operations to ensure there is coverage under the floater insurance. Such floater insurance is not universally the same so the contractor needs to ensure the insurance covers the risks and types of owned, leased, and loaned equipment utilized. (For more information on insurance applicable to construction projects, check out this chart.)

GENERAL CONTRACTORS: CONSIDER IMPORTANCE OF “PRIMARY AND NONCONTRIBUTORY” LANGUAGE

Posted on February 5, 2017November 8, 2024 by Edward Garber

In prior articles, I reinforced the importance of general contractors including “primary and noncontributory” language in subcontracts and requiring the subcontractor to provide an analogous “primary and noncontributory” endorsement. As a general contractor this is important, particularly since you are going to require the subcontractor to (i) indemnify you for claims relating to personal injury, property damage, or death, and (ii) identify you as an additional insured under its commercial general liability (CGL) policy for claims arising out of the subcontractor’s scope of work. The “primary and noncontributory” language in your subcontracts allows you to maximize the value of your additional insured status.

A recent opinion explains why I reinforced the importance of this language.

The case of Zurich American Insurance Co. v. Amerisure Ins. Co., 2017 WL 366232 (S.D. Fla. 2017) involved an underlying construction defect lawsuit where a condominium association sued a general contractor. The general contractor hired subcontractors and required them to identify the general contractor as an additional insured. This is all routine, right? A few of the subcontractors had CGL policies issued from the same insurer (Amerisure). They contained the same additional insured endorsement that included the following “other insurance” clause:

Any coverage provided in this endorsement is excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent, or on any other basis unless the written contract, agreement, or certificate of insurance requires that this insurance be primary, in which case this insurance will be primary without contribution from such other insurance available to the additional insured.

When the general contractor was sued it, as it should, tendered the defense of the lawsuit to the responsible subcontractors as an additional insured under their policies demanding both a defense and indemnification from the association’s claims. The insurer, however, refused to defend the general contractor. The general contractor’s insurer (Zurich) defended the general contractor in the action.

Thereafter, the general contractor’s CGL insurer sued the subcontractors’ CGL insurer. (The general contractor had also assigned its additional insured rights under the policies to its CGL insurer.) The general contractor’s CGL insurer was seeking reimbursement for the attorney’s fees and costs expended in the defense of the general contractor in the underlying construction defect lawsuit. The subcontractors’ CGL insurer moved to dismiss the claims based on the clause above—that the subcontractors’ CGL insurance operated as excess insurance over the general contractor’s CGL insurance. In other words, the subcontractors’ CGL insurance was not primary and noncontributory. There was no allegation that the subcontract included language requiring the subcontractor’s CGL insurer to be primary and noncontributory.

The first reason this is an important point is because “when an insurance policy defines its coverage as secondary or “excess” to a primary policy, the excess insurer has no duty to defend the insured—so long as the primary policy provides for a defense and its coverage has not been exhausted.” Zurich American Ins. Co., supra, at *4. If the subcontractors’ CGL policy is excess, then than their CGL insurer does not have a duty to defend if the primary policy is not exhausted. This means they have no duty to defend the additional insured – not very helpful to a general contractor tendering the defense of the claim to responsible subcontractors.

The second reason this is an important point is because of what is known between liability insurers as the anti-contribution rule:

Florida courts have consistently held that, once the duty to defend is activated, every subject insurer assumes it on a personal and indivisible basis. That means that when an insured tenders a claim to multiple insurance providers, the entity that actually engages in the defense and incurs the fees and costs associated with it cannot subsequently seek contribution or equitable subrogation from the fellow insurer who “lagg[ed] behind.”

Zurich American Ins., Co., supra, at *5 (internal citations omitted).

Since the general contractor’s CGL insurer bore the costs of the general contractor’s defense in the construction defect lawsuit, it cannot now divvy up the defense fees and costs to other insurers that may have had a similar obligation unless an exception to this rule applies (see below).

The third reason this is an important point is because there is an exception to this anti-contribution rule:

A “responsive” insurer who complied with its insured’s tender for defense can extract reimbursement from the “nonresponsive” insurer when the insured had separately contracted with another entity, itself an insured of the nonresponsive carrier, to indemnify the first insured. The logic of the exception is that the insured parties’ express decision to “shift[ ] exposure” from one to the other is imputed to the insurer relationship and overcomes the general anti-contribution principle.

Zurich American Ins., Co., supra, at *8 (internal citations omitted).

SOMETIMES YOU NEED TO CONSIDER THE COBLENTZ AGREEMENT

Posted on January 19, 2017November 8, 2024 by Edward Garber

Since insurance, particularly liability insurance, is such an important component when it comes a construction project, understanding certain nuances such as a Coblentz Agreement (a what kind of agreement agreement?!?—keep reading) becomes helpful.

If there is a construction defect claim / lawsuit, the implicated parties (e.g., contractor, design professional, subcontractor, sub-consultants) are going to tender the claim / lawsuit to their respective liability insurer. This is what they should be doing – notifying the insurer so that the insurer can defend them from the claim / lawsuit and indemnify them from covered damages associated with the claim / lawsuit.

And, if a contractor is an additional insured under an implicated subcontractor’s liability policy, it is going to demand that the insurer defend it (or share in the defense costs with other implicated subcontractors) and indemnify it based on the negligence of the primary insured-subcontractor.

This is all par for the course in a construction defect lawsuit–really, any construction defect lawsuit.

But, there may come a point where a liability insurer denies coverage meaning they are declining to defend their insured in connection with the claim / lawsuit. In this situation, the claimant may consider entering into a Coblentz agreement with the insured. This was the topic in a recent non-construction case in In Re: The Estate of Jorge Luis Arroyo, Jr. v. Infinity Indemnity Insurance Co., 42 Fla. L. Weekly D192a (Fla. 3d DCA 2017), when a personal injury negligence lawsuit was brought against an Estate as the result of a deadly car accident. The Estate tendered the defense of the negligence lawsuit to the decedent’s insurer, but the insurer declined to defend the Estate of the insured. The Estate and the personal injury claimant then entered into a Coblentz agreement where the Estate (1) agreed to a consent judgment entered against it, (2) assigned its rights under its liability policy to the claimant, and (3) the claimant agreed not to pursue the consent judgment against the insured. The Coblentz agreement and consent judgment gave the claimant a path to sue the insured’s liability insurer based on the liability against the insured as set forth in the consent judgment. (The consent judgment establishes the liability of the insured.)

“In order to enforce a consent judgment entered pursuant to a Coblentz agreement, the assignee [claimant] must bring an action against the insurer and prove: (1) insurance coverage, (2) the insurance company wrongfully refused to defend its insured, and (3) the settlement was reasonable and made in good faith.” In Re: The Estate of Jorge Luis Arroyo, Jr. supra.

“[W]hen an insurer refuses to defend its insured from a lawsuit, and the insured later settles the suit by entering into a Coblentz agreement, the insurer is precluded from relitigating the issue of its insured’s liability in subsequent proceedings.” In Re: The Estate of Jorge Luis Arroyo, Jr. supra. Stated differently, the insurer is precluded from later raising defenses on behalf of its insured that it could have previously raised had it simply defended its insured.

In this case, the insurer ultimately tried to intervene in an underlying lawsuit once it was sued per the Coblentz agreement. Although the trial court permitted this intervention, the appellate court reversed because the insurer couldn’t relitigate issues it could have raised had it not declined to defend its insured– it was this declination that gave rise to the Coblentz agreement in the first place. The consent judgment established the insured’s liability to the claimant; thus, the issues to determine were (1) was there coverage, (2) did the insurer wrongfully refuse to defend the insured; and (3) was the settlement reasonable. As this case shows, sometimes a claimant needs to consider entering into a Coblentz Agreement to pursue recourse against an insurance policy.

TENDER THE DEFENSE OF A LAWSUIT TO YOUR LIABILITY CARRIER

Posted on January 13, 2017November 8, 2024 by Edward Garber

Sometimes you come across a head scratcher. This would be a decision that does not seem to make a whole lot of sense. For instance, if you are sued and you maintain liability insurance that would potentially provide you a defense and indemnification, not notifying your insurance carrier is a head scratcher. You pay substantial dollars towards the premium of that policy. So, not then notifying your carrier about a lawsuit is a head scratcher, and I mean a head scratcher!! If you are sued, not only should the carrier be notified, but the defense of that lawsuit should be tendered to your liability carrier.

This madness is exactly what occurred in Embroidme.com, Inc. v. Travelers Property Casualty Co. of America, 2017 WL 74694 (11^th Cir. 2017) where an insured was sued and incurred over $400,000 in legal fees (yes, I said that amount right!) before notifying its liability carrier and tendering the defense of the lawsuit to its carrier. The liability carrier, upon notification, picked up the defense of its insured but refused to reimburse the insured for the pre-tender legal fees the insured incurred. Although the court gives a lengthy discussion on Florida’s Claim Administration Statute (Florida Statute s. 627.426) based on a very crafty argument by the insured, the bottom line is that the insurer was not liable to the insured for pre-tender litigation fees the insured incurred prior to tendering the claim to its insurer. See Embroidme.com, Inc., supra, at *13 (finding that the Claims Administration Statute “does not apply to prevent Travelers [insurer] from enforcing a provision of the liability insurance policy that excludes EmbroidMe [insured] from obtaining reimbursement for attorney’s fees it chose to incur prior to requesting Travelers to defend and indemnify it in its pending litigation.”).

Again, if you have liability insurance and a claim / lawsuit is asserted against you, there is generally no reason not to notify the insurer of the lawsuit and tender the defense of that lawsuit to the insurer. If you don’t you can wind up like the insured in this case which is to expend over $400,000 in legal fees (when the carrier owes you a defense) that is not reimbursable. This doesn’t make sense—a head scratcher—considering the premium you pay to your insurer.

BAD FAITH IN THE FIRST-PARTY INSURANCE CONTEXT

Posted on December 10, 2016November 8, 2024 by Edward Garber

In a previous article I discussed bad faith when it comes to an insurance claim. Recently, in Barton v. Capitol Preferred Insurance Co., Inc., 41 Fla. L. Weekly D2736b (Fla. 5^th DCA 2016), the court discussed bad faith in the first-party insurance context (i.e., a property / homeowners insurance policy).

In this case, homeowners, as the insured, sued their homeowners insurance carrier for sinkhole coverage. The homeowner filed a Civil Remedy Notice of Insurer Violation (also known as a Civil Remedy Notice) against their insurer with the Florida Department of Insurance in accordance with Florida Statute s. 624.155. This Civil Remedy Notice is a prerequisite to initiating such a bad faith claim; the notice specifies the statutory violations committed by the insurer and gives the insurer 60 days to cure the violation.

The insurer denied the assertions in the Civil Remedy Notice. Thereafter, the homeowners served a proposal for settlement / offer of judgment trying to settle the claim for $65,000. The insurer paid $65,000 and the lawsuit was dismissed. But, the proposal for settlement did not require the homeowners to release the insurer. In other words, there was no release of any bad faith insurance claim. So, naturally, the homeowners refiled a lawsuit against their homeowners insurance carrier for bad faith.

“[A] bad-faith action is premature until there is a determination of liability [coverage] and extent of damages owed on the first-party insurance contract.” Barton, supra. citing Vest v. Travelers Ins. Co., 753 So.2d 1270, 1276 (Fla. 2000). An insured can obtain a determination of liability through an agreed settlement, arbitration, or stipulation—the determination of liability / coverage does not have to be made through trial. Id. quoting Fridman v. Safeco Ins. Co. of Ill., 185 So.3d 1214, 1224 (Fla. 2016).

Here, the court held that there was a determination of liability because the insurer paying the insured-homeowners $65,000 was a favorable resolution to the homeowners. It did not matter that the $65,000 was less than the insured’s original demand or less than the policy limits for sinkhole coverage. Why? Because the settlement operated as a determination of liability and extent of the homeowners’ damages, thereby satisfying the condition precedent to filing a bad faith claim.

This was a clever move by the homeowners not to give the insurer a release in consideration of the $65,000 (and not to condition the proposal for settlement on giving the insurer a release). From an insurer’s standpoint, after it receives a Civil Remedy Notice and, then, a proposal for settlement, it should try to obtain such a release. Perhaps the insurer tried hard to get that release but the homeowners were unwilling to give such a release. This may have forced the insurer to pay the $65,000 pursuant to the proposal for settlement to minimize its exposure in the underlying insurance coverage dispute. The fact that accepting a proposal for settlement can satisfy the determination of liability and extent of damages requirement (even if the proposal for settlement amount is less than any original demand) before initiating a bad faith claim may motivate insurers to negotiate and pay for a release that protects them from such bad faith claims.

BENEFIT TO INSURED UNDER PROPERTY INSURANCE POLICY – CONCURRENT CAUSE DOCTRINE

Posted on December 2, 2016November 8, 2024 by Edward Garber

The Florida Supreme Court in Sebo v. American Home Assurance Co., Inc., 41 Fla. L. Weekly S582a (Fla. 2016) gave really good news to claimants seeking recovery under a first-party all-risk property insurance policy. The Court held that the concurrent cause doctrine and not the efficient proximate cause doctrine was the proper theory of recovery to apply when multiple perils—an excluded peril and a covered peril-combined to create a property loss. (The facts of this case can be located here.)

In this case, there really was not a dispute that defective construction (an excluded peril) and rain and wind (covered perils) combined to create the asserted property loss. The issue was whether the loss should be covered when both an excluded peril combines with a covered peril to cause the loss.

There are two different trigger theories to determine whether coverage applies.

The first is the efficient proximate cause doctrine which states that when there are concurrent perils that caused a loss, the peril which set the other peril in motion (the primary peril) is the peril to which the loss is attributable. So, if the primary peril is an excluded peril, there is no coverage.

The second is the concurrent cause doctrine which states that when concurrent perils cause a loss there is coverage, even when one of the perils is an excluded peril. This is a much more favorable doctrine to an insured!

Here, there was no reasonable way to determine the efficient proximate cause of the loss since the facts reveals that rain and wind combined with defective construction to cause the loss. For this reason, the Supreme Court held that concurrent cause doctrine applied meaning there was coverage even though defective construction was an excluded peril.

If you have a first-party property insurance claim, make sure to utilize the services of counsel that maximizes your ability to argue coverage under the policy.

ADDITIONAL INSURED OBLIGATIONS AND THE UNDERLYING LAWSUIT

Posted on October 2, 2016November 8, 2024 by Edward Garber

As a general contractor, you understand the importance of being named an additional insured under your subcontractors’ commercial general liability (CGL) policies. Not only do you want your subcontract to express that a subcontractor’s CGL policy is primary and noncontributory to your policy, but you want it to express that the subcontractor must identify you as an additional insured for ongoing and completed operations. Even with this language, you want the subcontractor to provide you with their additional insured endorsement and, preferably, a primary and noncontributory endorsement. These additional insured obligations are important to any general contractor that has been sued in a construction defect / property damage lawsuit.

In the recent decision in Core Construction Services Southeast, Inc. v. Crum & Forster Ins. Co., 2016 WL 5403578 (11^th Cir. 2016), a general contractor built a residential development. The general contractor required its roofing subcontractor to identify it as an additional insured under the roofer’s CGL policy. The general contractor was sued with the lawsuit asserting that the roofs were installed incorrectly. The general contractor tendered the defense of the claim to the roofer’s CGL insurer and the insurer refused to provide the defense because there was no “property damage” within the definition of the CGL policy (“physical injury to tangible property…”). The general contractor then filed a lawsuit against the subcontractor’s insurer arguing that the insurer was obligated to defend and indemnify it since the general contractor was an additional insured under the subcontractor’s CGL policy. The trial court, and as affirmed by the Eleventh Circuit Court of Appeal, held that the insurer owed no duty to defend or indemnity the general contractor because there was NO asserted property damage within the meaning of the policy. If there was no property damage then there was no obligation for the roofing subcontractor’s insurer to defend the general contractor as an additional insured under the subcontractor’s CGL policy.

The underlying lawsuit only claimed that the roofs had been damaged but did NOT claim that the defective roofs had caused damage to other property (other components of the building). The omission of this assertion was important because the complaint was not pled to trigger insurance duties, such as additional insured obligations, since the cost to repair or replace the damaged roof would not be covered by the subcontractor’s CGL insurer. Rather, costs to replace or repair damage caused by the subcontractor’s defective roofing installation would be covered; however, such damage was not pled in the underlying complaint. Remember, the insurer’s duty to defend is only triggered based on allegations in the underlying complaint so without such allegations, there is no duty.

CONSTRUCTION DEFECT INDEMNITY OBLIGATIONS – COVERED VS. NON-COVERED CGL CLAIMS

Posted on August 28, 2016August 28, 2016 by Edward Garber

If you are a contractor or subcontractor and a construction defect claim is asserted against you, then you have tendered such claim to your commercial general liability (CGL) insurer. No doubt about it. In doing so, you have wondered whether your CGL insurer will indemnify you for the damages asserted against you by the third-party. You have wondered whether the damages asserted against you are covered by your CGL policy. If you have not wondered and asked these questions, then you should! Below is a portion of a presentation I recently put on regarding construction defect indemnity obligations under CGL policies and, particularly, covered claims versus non-covered claims.

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