Category Archives: Insurance

CGL INSURANCE AND CONSTRUCTION DEFECTS (DUTY TO DEFEND; TRIGGERING OF CGL POLICY; COVERED RESULTING DAMAGE)

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I previously wrote about insurance coverage issues in a construction defect dispute, specifically in the context of the insurer denying coverage outright and refusing to defend its insured.

 

As a sequel to this posting, a noteworthy opinion was issued by the Eleventh Circuit Court of Appeals in Carithers v. Mid-Continent Cas. Co., 2015 WL 1529038 (11th Cir. 2015) in a commercial general liability (CGL) insurance coverage dispute dealing with construction defects to a house.   This opinion discusses central issues to an insurance coverage dispute in a construction defect context: the triggering of a CGL policy, the duty to defend, the duty to indemnify, covered resulting damage stemming from construction defects, and a claimant resolving a dispute with an insured in order to pursue rights against the insured’s CGL carrier (also known as a Coblentz agreement).

 

In this case, the owners hired a general contractor to build their house.  The general contractor had CGL insurance with products completed operations coverage.  Upon discovering construction defects, the owners sued the general contractor.  The general contractor’s insurer refused to defend the general contractor, meaning the insurer denied coverage (which is the last thing the general contractor ever wants to hear).  The insurer denied coverage because the complaint alleged that the damages were not discovered until 2010; however, the general contractor did not have any CGL coverage after 2008.  Thus, if the manifestation theory applied to trigger coverage (discussed below), there would be no coverage under the CGL policy.

 

The general contractor and insurer then entered into a consent judgment in the action for $90,000 in favor of the owners that assigned to the owners the general contractor’s rights under its CGL policy.  (This forms the framework for what is known as a Coblentz agreement.)  The owners then sued the general contractor’s CGL insurer.

 

The issues in this case were (a) the insurer’s duty to defend its general contractor-insured, (b) the triggering of an occurrence under a CGL policy, and (c) resulting damage covered under the CGL policy.

 

(A) Duty to Defend

 

The insurer’s duty to defend is triggered by the allegations in the complaint.  Here, the Eleventh Circuit held that the insurer had a duty to defend because the duty to defend is broader than the insurer’s duty to indemnify and “all doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured.” Carithers, supra, at *4 (quotation and citation omitted). “An insurance company must defend an action where the facts alleged against the insured would give rise to coverage, even if those facts are not ultimately proven at trial.”  Id. 

 

(B) Triggering of an Occurrence Under CGL Policy

 

The insurer wanted the manifestation theory to trigger CGL coverage.  Under this theory, the CGL policy is triggered if the damage is discovered (manifests itself) during the policy period.  

 

The reason the insurer wanted this theory to apply is because the owners admitted that they discovered the damage / defects in 2010 when the general contractor’s CGL policy was no longer in effect.

 

Conversely, the owners wanted the injury-in-fact theory to apply to trigger coverage.  Under this theory, the policy is triggered when the damage occurs even if the damage is not discovered until sometime later.  Here, the trial court found that the damage occurred in 2005 when the general contractor’s CGL carrier was in effect (although the damage was not discovered until 2010).  Because there was evidence and a finding as to when the damage occurred, the Eleventh Circuit held that the injury-in-fact theory was the correct theory to trigger CGL coverage.

 

(C) Resulting Damage Covered Under a CGL Policy

 

The cost of repairing damage to other work resulting from faulty workmanship would be covered under the CGL policy.  In other words, repairing damage to another trade’s work would be covered but repairing / replacing damage to the trade’s own work would not be covered.  The Eleventh Circuit analyzed this application to determine whether the trial court appropriately determined that certain items were resulting damage.

 

(1)  Brick

 

The trial could found that the defective application of exterior brick coating caused resulting damage to the brick itself.  If the exterior brick coating was applied by the subcontractor that installed the brick, then the brick should not be covered since the brick was the subcontractor’s own work as opposed to other work.  However, there was no evidence at the trial level whether the brick coating and installation of the brick was done by the same subcontractor or different subcontractors.  Because the plaintiff owners (who were assigned rights under the policy by the general contractor insured) had the burden of proof on this issue, which they failed to meet, the Eleventh Circuit reversed any damage awarded associated with the brick.

 

(2)  The Tile and Mud Base

 

The trial court found that defective adhesive and an inadequate base caused damage to the tile.  The trial court awarded damage to replace the tile and mud base. Similar to the brick, the issue turned on whether the installation of the tile and mud base was done by the same subcontractor or different subcontractors.  And, similar to the brick, no evidence was offered on this point so the Eleventh Circuit reversed any damage awarded associated with the tile and mud base.

 

(3)  Balcony

 

The trial court found that defects in the construction of the balcony resulted in damage to the garage. However, because the balcony had to be rebuilt in order to repair the garage, the trial court held that this work was resulting damage covered by the CGL policy.  The Eleventh Circuit agreed with the trial court holding that the cost of repairing damage resulting from defective work is covered and since repairing the balcony was part of repairing the garage, these costs would be covered.

 

Important take-aways:

  • This case provides strong arguments to an insured when its CGL carrier denies coverage, specifically based on the argument that its policy was never triggered.  Remember, the duty to defend is broader than the duty to indemnify so any doubts must be resolved in favor of the insured.
  • Don’t forget about the injury-in-fact theory to trigger CGL coverage.  If you have evidence, such as an expert opinion, as to when the damage started to occur, this theory can be valuable if the owner discovered the latent defects after the expiration of your CGL policy.  This helps an owner maximize CGL coverage and a general contractor maximize coverage under its CGL policy.
  • Make sure to meet your burden of proof to establish resulting damage or other damage caused by faulty workmanship.  Make sure to prove that the resulting damage was work performed by a different subcontractor and not the subcontractor that performed the faulty workmanship. And, to this point, make sure to include appropriate language in the consent judgment.
  • Make sure you know how to couch your coverage arguments to an insurer in order to maximize insurance coverage.
  • If your insurer denies coverage, consider entering into what is known as a Coblentz agreement with the claimant where a consent judgment is entered against you and rights under your policy are assigned to the claimant.  The benefit is that in consideration of the consent judgment and assignment of rights, the claimant gives up any rights to collect that judgment against you. 

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.

REQUESTING LIABILITY INSURANCE INFORMATION FROM RESPONSIBLE PARTIES FOR CONSTRUCTION OR DESIGN DEFECTS (FLA. STAT. s. 627.4137)

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If you are an owner and discover construction or design defects, you are going to want consult with a lawyer to make sure you know your rights under Florida Statutes Chapter 558.  This includes sending a written notice of the construction or design defects identifying the defects with sufficient detail to the potentially responsible parties.  Likewise, if you are a contractor and receive this written notice, you are going to want to make sure you forward that letter to potentially responsible parties (subcontractors or suppliers). 

 

Coupled with this written notice of defects letter should be a written request on the parties and their known insurance agents and insurers for their liability insurance information.  Start with culling Certificates of Insurance you have on these parties to obtain (some) of this information as to whom to send the request to.  This request can be in a separate letter or the same letter (as the notice of defects letter) and should reference Florida Statute s. 627.4137 and request the information in the below statutory language:

 

(1) Each insurer which does or may provide liability insurance coverage to pay all or a portion of any claim which might be made shall provide, within 30 days of the written request of the claimant, a statement, under oath, of a corporate officer or the insurer’s claims manager or superintendent setting forth the following information with regard to each known policy of insurance, including excess or umbrella insurance:

(a) The name of the insurer.

(b) The name of each insured.

(c) The limits of the liability coverage.

(d) A statement of any policy or coverage defense which such insurer reasonably believes is available to such insurer at the time of filing such statement.

(e) A copy of the policy.

In addition, the insured, or her or his insurance agent, upon written request of the claimant or the claimant’s attorney, shall disclose the name and coverage of each known insurer to the claimant and shall forward such request for information as required by this subsection to all affected insurers. The insurer shall then supply the information required in this subsection to the claimant within 30 days of receipt of such request.

 

As discussed in prior articles, insurance is an important aspect of construction and design defect disputes. 

 

If you are an owner, you want to understand potential insurance coverage so that you know how to best maximize any claim for insurance coverage against potentially liable parties.  This includes knowing the limits of liability in any commercial general liability (CGL) or professional liability / errors & omissions policy, as applicable, and whether there is any umbrella / excess policy.  This also includes understanding the exclusions in the policies and whether there are endorsements that add or modify exclusions in the policy.

 

If you are a general contractor, you also want to understand potential insurance coverage from subcontractors and other entities you are looking to flow-down an owner’s defect claims (ideally, through contractual indemnification language in your subcontract).  Also, you are going to want to make sure you have additional insured status under these parties’ liability policies so that they contribute to the fees and costs incurred in your defense.  For this reason, you also want to obtain copies of subcontractor insurance polices including all endorsements.  Besides the limits of liability, you want to see the additional insured endorsement in the policy, and any endorsements that add or modify exclusions in the policy. 

 

If you are a subcontractor, if you subcontracted aspects of your scope of work or there is a claim associated with deficient material you furnished, you also want to obtain this insurance information from these potentially liable entities because you are also going to try to flow-down liability (ideally, through contractual indemnification language in your subcontract).

And, if you are a manufacturer, if a claim is asserted against you arising out of the installation of that product, you also want to obtain insurance information from any authorized dealer or installer (perhaps through any agreement you have with that dealer or installer that would require this entity to indemnify you and name you as an additional insured).  

 

One of the underlying reasons for s. 627.4137 is so that parties can obtain insurance coverage information and make reasonably informed decisions about settling a matter.  In other words, you don’t want to settle a dispute for policy limits if you have damages that may exceed policy limits and find out the responsible party has additional or excess insurance to cover the excess damages. See, e.g., Schlosser v. Perez, 832 So.2d 179 (Fla. 2d DCA 2002) (in non-construction case, noncompliance with s. 627.4137 rendered settlement unenforceable). But, this statute does not create a private cause of action by a third-party if an insurer fails to timely provide this information. Any potential recourse the third-party would have, if any, against the insurer would have to be after the third-party obtains a judgment against the underlying insured. Lucente v. State Farm Mut. Auto. Ins. Co., 591 So.2d 1126, 1127-28 (4th DCA 1992) (“[T]he statute does not contain an implicit cause of action for a third-party against an insurance company.”);  see also Brannan v. Geico Indemnity Co., 569 Fed.Appx. 724, 728 (11th Cir. 2014)  (“But Brannan fails to point to any legal authority to show that s. 627.4137 creates a first-party private cause of action against an insurer [for failure to comply with the statute.]”).

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.

 

WORKERS COMPENSATION (PART TWO) — STATUTORY EMPLOYER AND CONTRACTORS

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To follow-up on the article Workers Compensation—Tidbits on Construction Projects, the recent opinion in Roof Painting By Hartzell, Inc./Summit Holdings-Claims Center v. Hernandez, 2015 WL 641199 (Fla. 1st DCA 2015) touches upon the application of a statutory employer in the construction context.

 

Here, a contractor was hired to provide pressure cleaning and related services.  The contractor, in turn, subcontracted the labor to perform the services through another company (e.g., subcontractor).   Both the contractor and subcontractor that provided the labor had workers compensation insurance.  A laborer (retained by the subcontractor) was injured in performing the pressure cleaning services.   The issue was which workers compensation carrier should be responsible: the subcontractor’s carrier or the contractor’s carrier.

 

Florida Statute s. 440.10(1)(b) provides:

 

In case a contractor sublets any part or parts of his or her contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment, and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

 

Since the injured laborer was hired by the subcontractor, the subcontractor’s workers compensation carrier should cover the injured laborer’s claim.

 

Section 440.10 forms what is referred to as the “statutory employer” concept.  For instance, if the subcontractor does not obtain applicable workers compensation insurance, then under this section, the general contractor is liable (as the general contractor is the statutory employer). It is this reason that contractors that subcontract a portion of their services to others need workers compensation coverage!

 

Importantly, contractors that comply with the requirements of section 440.10 are protected by the exclusiveness of liability provisions in Florida Statute s. 440.11. This means the contractor is immune from lawsuits (such as tort-related lawsuits) from injured workers with workers compensation being the exclusive form of liability absent any intentional tort committed by the contractor.  See Fla.Stat. s. 440.11.  “Because section 440.11(1) of the Florida Statutes makes the liability to secure [workers] compensation imposed by section 440.10(1) the exclusive form of liability imposed by Chapter 440 on an employer, once an employer acquires and maintains workers’ compensation insurance for the benefit of its employees, it becomes immune from suit.” VMS, Inc. v. Alfonso, 147 So.3d 1071, 1073 (Fla. 3d DCA 2014).

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.

 

WORKERS COMPENSATION — TIDBITS ON CONSTRUCTION PROJECTS

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Workers compensation is a “must have” insurance in the construction industry. 

 

Certain officers are entitled to be statutorily exempt from workers compensation (pursuant to Florida Statutes Chapter 440).  See Fla.Stat. s. 440.02(15).  But, if exempt, these officers are not entitled to receive workers compensation benefits.  The reason to obtain an exemption is to avoid paying premium for these officers.

 

For an applicant to receive a statutory exemption for a corporation:

-The corporation must be registered as an active Florida company (with Florida’s Division of Corporations).

-The applicant must be identified as an officer (with Florida’s Division of Corporations).

-The officer must own at least 10% of the corporation.

-No more than three officers can be exempt.

-The exemption is valid for 2 years.

 

For an applicant to receive a statutory exemption for a limited liability company, the above requirements pertaining to a corporation are applicable except for the applicant being required to be identified as an officer.

 

An applicant that satisfies the exemption requirements will receive a Certificate of Election to be Exempt that will identify the dates the exemption is in effect.

 

Notably, sole proprietors, independent contractors, and partners may also receive a Certificate of Election to be Exempt and not recover workers compensation benefits. See Fla.Stat. s. 440.05.

 

While there is a statutory exemption for the officer/owner-employee, there is not one for the nonofficer/nonowner-employee.  Thus, if the construction company relies on full time or part time nonofficer-employees, workers compensation is required for these employees.

 

Additionally, general contractors need to ensure that every subcontractor it hires has workers compensation or a valid Certificate of Election to be Exempt.

 

Florida Statute s. 440.10(1)(b) states:

 

In case a contractor sublets any part or parts of his contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment; and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

 

As also explained in Barrs v. LMF Construction, OJCC Case No. 10-002222KAS, 2010 WL 4270050 (Fl.Off.Judge Comp.Cl. 2010):

 

Under a statutory employer analysis a contractor is protected from workers’ compensation liability for the employees of a subcontractor, an independent contractor, or sole proprietor if an officer of a corporation or the subcontractor validly elects exemption from coverage by filing a written notice pursuant to Section 440.05 Fla. Statutes, 2009; or has otherwise secured the payment of compensation coverage as a subcontractor for the work performed by the subcontractor. This is a vertical analysis starting with the general contractor on top. The general is responsible unless those in the vertical chain below have either secured workers’ compensation coverage or are under a valid exemption.

  

For instance, in Smith v. Larry Rice Construction, 730 So.2d 336 (Fla. 1st DCA 1999), a general contractor was building a Taco Bell.  The general contractor subcontracted the framing to a subcontractor.  The subcontractor did not independently secure workers compensation benefits; rather, it leased employees from a labor leasing company that secured workers compensation for these laborers.  The subcontractor then engaged a sub-subcontractor –really, a sole proprietor and his crew as additional labor–to perform a portion of its framing scope of work. The sole proprietor / sub-subcontractor was injured on the project. While the sole proprietor / sub-subcontractor had a Certificate of Election to be Exempt, the exemption had expired at the time he was hurt. The sole proprietor sought workers compensation benefits but these benefits were denied. He argued that the general contractor constituted his statutory employer (per Fla.Stat. s. 440.10) and is liable for his workers compensation benefits.  The First District Court of Appeal agreed and found that the injured sole proprietor was a statutory employee of the general contractor and entitled to receive workers compensation benefits.

 

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.

 

GENERAL UNDERSTANDING OF THIRD-PARTY AND FIRST-PARTY BAD FAITH INSURANCE ACTIONS

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Insurance is a large part of the construction industry.  Whether you are a contractor, subcontractor, design professional, supplier, or owner, you (should) have insurance to cover risks inherent in the industry and the particulars of a project. 

 

There are instances in a dispute involving insurance coverage that either an insured or third-party claimant will become frustrated with an insurer.  The frustration may stem from the insurer not considering or initiating settlement opportunities to resolve the dispute.  When this occurs, the insured and/or third-party claimant consider preserving rights to what is known as a bad faith action largely based on the insurer “[n]ot attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and  honestly toward its insured and with due regard for her or his interests.”  See Fla. Stat. s. 624.155(1)(b)(1).

There are two types of bad faith actions: (1) third-party bad faith actions and (2) first-party bad faith actions.

 Third-Party Bad Faith Actions

A third-party bad faith action arises when a third-party asserts a claim against the insured and the insured is exposed to damage exceeding the coverage / policy limits of its insurance policy.  Naturally, the insured would be responsible for any judgment that exceeds the policy limits of its insurance policy.  

But, what if the insurer had the opportunity to settle the claim for the policy limits or under the policy limits but did not and exposed the insured to a monetary judgment exceeding the policy limits?  It is this opportunity to settle a covered claim within coverage limits but refusing to do so that triggers the bad faith action.  To this point, the Florida Supreme Court stated that “the essence of a third party bad faith cause of action is to remedy a situation in which an insured is exposed to an excess judgment because of the insurer’s failure to properly or promptly defend the claim.”  Macola v. Government Employees Ins. Co., 953 So.2d 451, 458 (Fla. 2006) (internal citations omitted).

On the other hand, if the insurer effectuates a resolution with the third-party that includes a release of the insured, there is no third-party bad faith action considering the insured would not be exposed to a judgment in excess of the policy limits. See Fidelity and Cas. Co. of New York v. Cope, 462 So.2d 459 (Fla. 1985).

 

A third-party can bring a third-party bad faith action directly against the insured’s insurer only if it obtains a judgment against the insured in excess of the policy limits. State Farm Fire & Cas. Co. v. Zebrowski, 706 So.2d 275 (Fla. 1997).

 

A third-party bad faith action can be based on Florida Statute s. 624.155 or the common law.  A difference is that a statutory bad faith action under s. 624.155 requires what is known as a civil remedy notice identifying the insurer’s violation to be submitted to the Florida Department of Financial Services as a condition precedent to initiating the bad faith action.  See Fla.Stat. s. 624.155(3)(a).  The insurer is given 60 days to cure the violation before the bad faith action can be initiated.

 

A common law third-party bad faith action does not require the civil remedy notice.  See Macola 953 So.2d 451 (insurer tendering policy limits to insured in response to civil remedy notice and in accordance with Florida Statute s. 624.155 which did not eliminate underlying third-party action would not eliminate a common law third-party bad faith action.) 

 

However, it is important to understand that a party (whether the insured or third party) initiating a third-party bad faith action will not be able to obtain a judgment for both the common law and statutory bad faith causes of action and will ultimately have to choose the cause of action it wants to pursue.  Fla. Stat. s. 624.155(8). The statutory third-party bad faith action is probably more commonly pursued and parties should serve the civil remedy notice before initiating the bad faith action.

 

 First-Party Bad Faith Actions

A first-party bad faith action is not based on a third-party action but based on the insured’s own claim against its insurer (such as with a first-party property insurance policy or for uninsured motorist coverage). This may occur when the insured submits a claim against its own insurance policy and the insurer denies the claim or otherwise refuses or delays in paying the full covered amount of the claim. Unlike the third-party bad faith action, a first-party bad faith action has nothing to do with an insurer exposing an insured to a judgment in a third-party claim in excess of the policy limits.

 

A first-party bad faith claim is a statutory action under s. 624.155 that requires the civil remedy notice as a condition precedent to initiating the bad faith action.  However, unlike a third-party bad faith action, there is no common law first-party bad faith action.   QBE Ins. Corp. v. Chalfonte Condominium Apartment Ass’n, Inc., 94 So.3d 541, 545 (Fla. 2012).

Before a bad faith action can be initiated in a first-party action, there needs to be a determination that there is coverage, i.e., that the insurer is liable to the insured under the insurance contract, and what the covered damages are. See Liberty Mut. Ins. Co. v. Farm, Inc., 754 So.2d 865 (Fla. 3d DCA 2000) (first-party bad faith action was premature prior to coverage dispute); see also State Farm Florida Ins. Co. v. Seville Place Condominium Ass’n, Inc., 74 So.3d 105 (Fla. 3d DCA 2011) (first-party bad faith action was premature until both coverage and extent of insured’s loss has been adjudicated).

(Notably, there is no statutory bad faith action against a surety issuing a payment or performance bond in Florida.  Fla.Stat. s. 624.155(9).)

Bad faith actions are complicated actions and involve a host of issues (such as discovery-related issues, burdens of proof, and damages) that are not discussed in this article.   The point of this article is for parties to understand the difference between third-party bad faith actions and first-party bad faith actions and to ensure their rights are protected if there is an insurance coverage dispute, whether it is a dispute involving an insured’s first-party insurance policy or a third-party claim that triggers an insured’s liability policy.

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.

WRAP-UP INSURANCE ON LARGE CONSTRUCTION PROJECTS: OCIP OR CCIP

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Wrap-up insurance is commonplace on large, complex construction projects.  There are two types of wrap-up insurance programs routinely utilized: (1) Owner’s Controlled Insurance Program (“OCIP”) or (2) Contractor’s Controlled Insurance Program (“CCIP”).  Under either wrap-up program, the objective is that most (if not all) of the construction participants (such as the contractor and subcontractors) are wrapped-up or covered under one insurance coverage program.   

When a construction project has wrap-up insurance, whether OCIP or CCIP, there will be an insurance manual that will explain certain aspects to the construction participants such as (a) what type of insurance is included in the wrap-up program, (b) how premiums are to be determined for the wrap-up program including the required close-out audit, (c) who is responsible for any deductibles for claims, (d) the type of insurance the participant still needs to procure and/or the type of insurance not covered under the program (and, if not in the manual, it should be outlined in the contract), and (e) how to submit and handle claims under the wrap-up program.  The manual will also identify the administrator of the wrap-up program. 

In my experience, wrap-up coverage includes builder’s risk coverage, worker’s compensation coverage, commercial general liability (CGL) coverage, and umbrella coverage.  Insurance not routinely included in a wrap-up program is pollution liability, errors & omissions / professional liability, automobile liability, equipment coverage such as boiler and machinery insurance, and coverage for a contractor’s off-site operations.   This will be applicable insurance the contractor and subcontractors will still need to procure as may be required by the wrap-up program or underlying contracts.

 

The advantage of a wrap-up program is ideally to streamline risk management issues including additional insured status, (higher) limits of liability and excess (umbrella) liability coverage, products completed operations (applicable to CGL coverage so that products completed operations ideally runs through the applicable statute of repose for construction defects), waiver of subrogation concerns, and the claims process since major construction participants will be covered under the same global insurance policies (as opposed to many different carriers).  Another advantage is that there ideally is a cost benefit since the program should reduce overall insurance costs by all of the enrolled participants which corresponds to a reduction in overall construction costs.

 

There are, however, perceived disadvantages to wrap-up programs too.  There is an administrative burden in having to deal with these programs which is why there is often a third party administrator engaged to handle the administrative process associated with ensuring that major construction participants are properly enrolled in the program, insurance costs that are routinely included in bids / proposals are backed-out to avoid duplication in insurance costs, claims are properly and timely handled, and enrolled participants are audited during the close-out of their contracts to determine their final, allocated premium.  Also, as mentioned above, the wrap-up program does not relieve the enrolled participant from obtaining other required insurance coverage not included in the program but required of the participant through the wrap-up program’s manual or contract. And, there is the concern that even if there is an insurable construction defect claim, the claim is still going to flow downstream irrespective of the fact that there is a wrap-up program designed to cover that type of claim. (For example, with OCIP, there is concern that such a claim will be formally asserted against the contractor and then subcontractors instead of perhaps tendering the claim to the OCIP administrator so that the carrier can make a determination as to the claim since the contractor and subcontractors would have the same insurance through OCIP. Thus, any duty to defend obligation would be owed to all from the same OCIP carrier which will hopefully reduce protracted litigation.)  See, e.g., Southeast Wisconsin Professional Baseball Park District v. Mitsubishi Heavy Industries America, Inc., 304 Wis.2d 637 (Wis. Ct. App. 2007) (finding that in a multi-party litigation regarding deficiencies with a retractable roof, the OCIP carrier owed duty to defend obligation to all of the parties).

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.

 

 

SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

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Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured.  Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

 

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government?  In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor?  The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

 

In this case, the government hired a prime contractor to abate asbestos at a post office.  The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

 

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project.  The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused.  The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim.  After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

 

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee.  The thrust of the claim was that the government breached the indemnification provision.  The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government.  The Court of Federal Claims agreed and dismissed the lawsuit.  Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

 

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

 

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

 

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

 

 

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government.  While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

 

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor.  I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any claim.

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.

THE “PRIMARY AND NONCONTRIBUTORY” INSURANCE REQUIREMENT

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If you were ever involved in a construction defect claim or lawsuit, you may have heard the phrase “primary and noncontributory” when referring to YOUR insurance coverage.  Or, you may have come across this phrase when discussing with your insurance broker the additional insured insurance coverage requirements you need to provide pursuant to your contract.

 

But, what does this mean when referring to YOUR insurance coverage? This phrase refers to the priority of YOUR insurance coverage.

 

For instance, a general contractor will require that that its subcontractors obtain CGL insurance coverage that not only names the general contractor as an additional insured (for both ongoing and completed operations), but also includes an endorsement reflecting that the subcontractor’s policy is “primary and noncontributory.”  (See above picture for example of endorsement)   The subcontract may provide, by way of example, that, “Insurance coverage provided by you [subcontractor] to the additional insured [general contractor] shall be primary and noncontributory with respect to any insurance coverage otherwise available to the additional insured.”  This means that if the general contractor is sued associated with the negligence of its subcontractor, it will tender the claim to the subcontractor’s insurer to defend and indemnify it since it will (hopefully) be an additional insured under the policy.  The subcontractor’s policy is the “primary” policy without contribution from the general contractor’s policy (as the general contractor’s policy will really come into play as excess insurance).

 


The general contractor, to be safe and circumspect, may want the subcontractor to obtain a “primary and noncontributory” endorsement that says that the subcontractor’s insurance will be primary and noncontributory when required by written contract.  The reason this is safe is because most CGL policies already contain a section called “Other Insurance.” In this section (as depicted in part in the adjacent picture), the policy will state that it is primary except when other insurance (specified in the policy) is available in which case it will serve as excess insurance.  One of the other insurance conditions that will deem your policy as excess is when you are identified as an additional insured under another’s policy (e.g., the subcontractor’s policy that identifies the general contractor as an additional insured is the primary policy and the general contractor’s policy will serve as excess insurance). The primary and noncontributory endorsement modifies this “Other Insurance” language.

 

 

Understanding the application of insurance and the interrelationship of potential policies is never easy.  But, this understanding is of the utmost importance for construction risk assessment purposes where risk is inherent in the very nature of construction.

 

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.

DO NOT LET LACK OF NOTICE VOID YOUR INSURANCE COVERAGE

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The Southern District of Florida’s opinion in Pharm. D v. Founders Insurance Co., 2014 WL 32557844 (S.D.Fla. 2014) illustrates that absolute importance of notifying a liability insurer of a claim and a lawsuit; otherwise, coverage that would be afforded to an insured could be voided.  This should never occur!

 

In this matter, a water pipe ruptured and a fire occurred at the insured’s premises.  This resulted in damage to a pharmacy located below the insured’s premises.  Due to this damage, the pharmacy filed a lawsuit against the insured.  The insured failed to take any action in the lawsuit and a default judgment was entered against the insured for in excess of $500,000.

 

Years later, the (third party) pharmacy sued the insured’s CGL (commercial general liability) insurer to recover the amount of its default judgment against the insurer.  The insurer argued that coverage should be voided because its insured violated the terms of the policy.  Specifically, the insured had the obligation to notify the insurer of any claim or suit as soon as practicable and to send copies of any lawsuit to its insurer.  Apparently, the insured never did this and the insurer had no notice of the lawsuit.  The Southern District agreed with the insurer that the lack of notice voided coverage:

 

“The insurance policy in question had a continuing notice obligation for a reason: the insured had the best information on legal action brought against it and, therefore, the insured was required to keep its insurer informed of developments. Accordingly, the insured had two distinct duties: (1) to notify Defendant [insurer] of any claims and (2) to notify Defendant of any lawsuits filed which may implicate the insurance policy.

***

The record shows there is no genuine dispute of material fact that the insured failed to notify Defendant of the state lawsuit and, thus, materially breached the insurance policy. As a matter of law, this breach absolved Defendant of its contractual requirement to defend in the state lawsuit and renders Defendant not liable on the default judgment entered in state court.”

Pharm. D, supra, at *3, *5.

 

The lesson learned from this matter is that if suing a party in which liability insurance is applicable (such as any case involving property damage or personal injury), take affirmative steps to ensure that the party’s liability insurer (CGL insurer) is notified of a claim and of the lawsuit.  Even if the party does not respond to the lawsuit, send a copy of the lawsuit to the party’s insurer.  Take steps to locate the insurer or the party’s insurance broker to ensure that proper notice is served and so that you are not relying on a potentially silent party to notify its insurer of a lawsuit (especially, when you are relying on insurance to cover your damages).  Clearly, in this matter, the insured-party did nothing despite having CGL coverage that perhaps would have covered some of the pharmacy’s damages.

 

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.

HMM–WAIVER OF SUBROGATION–SHOULD IT STAY OR SHOULD IT GO?!?

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Parties involved in construction are familiar with the phrase “waiver of subrogation” because there is commonly, and virtually always, a waiver of subrogation provision in the construction contract.  For instance, the AIA Document A201 (General Conditions) contains a waiver of subrogation provision for damages or loss covered by builder’s risk property insurance.  A waiver of subrogation provision prevents an insurance company from paying a claim and then stepping in the shoes of the insured (through subrogation) to sue a waived third party responsible for the claim.  To ensure the waiver of subrogation provision does not conflict with any other rights in the contract, the A201’s waiver of subrogation provision provides: “A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.”

 

For example, let’s assume a fire during construction caused substantial damage to an owner’s property.  The owner submitted a builder’s risk claim and it was determined that the damage caused by the fire (peril) was covered.  Let’s assume the fire was attributed to the negligence of the contractor and its electrical subcontractor.  With waiver of subrogation language, the carrier cannot pay the claim to the owner and then subrogate to the interests of the owner to pursue claims directly against the contractor and/or electrical subcontractor to recoup the proceeds it paid to the owner.  This waiver would apply even though the owner’s contract with its contractor required the contractor to indemnify the owner for damage caused by the contractor or the contractor’s subcontractor’s negligence.  Without the waiver of subrogation language, the carrier would not be deprived of this subrogation right.

 

 


In addition to the waiver of subrogation relating to builder’s risk property insurance, parties are requesting waivers of subrogation endorsements for CGL policies and other liability policies.  With CGL policies, the waiver of subrogation endorsement is referred to as the “Waiver of Transfer of Rights of Recovery Against Others to Us” endorsement.  Sometimes parties want a blanket waiver or at least they want to know they are specifically identified in the endorsement to ensure the CGL carrier waives a subrogation claim against it if the carrier pays out insurance proceeds.   This endorsement is important because without it a party could be breaching its insurance policy and voiding applicable coverage by contractually agreeing to waive subrogation that is in conflict with the policy’s subrogation language.  If a carrier is willing to issue this endorsement (and there are times it may not), it will usually come at a cost through a higher premium, etc., since the waiver of subrogation impacts an insurer’s risk assessment.

 

I like contractual waiver of subrogation language relating to builder’s risk property insurance claims.  As long as the insurance broker and carrier are aware of the contractual waiver so that there is not any issue that the waiver impacts policy language / coverage (and, the broker and carrier should inquire since it’s become boilerplate language in construction contracts), the waiver of subrogation allows a covered claim to be paid without an otherwise waived party worried about whether the carrier is going to try to later recoup losses against it.

 

From an owner or contractor’s perspective, I also usually like the idea of the party being hired to provide the waiver of subrogation endorsement / waiver of transfer of rights endorsement in its CGL policy irrespective of the requirement to identify the hiring (or paying) party as an additional insured.  The primary reason is that in the event there is any issue whatsoever with the additional insured status under the hired party’s policy such that it does not apply  to the hiring party (e.g., additional insured status of a general contractor under its hired subcontractor’s policy), with the waiver of subrogation, if the hired party’s policy pays it has at least waived its right to recoup that money against the hiring party through subrogation.

I know there are some parties that do not like waiver of subrogation language, especially with CGL policies, due to underwriting issues that it poses and/or potential increased premium costs associated with the endorsement.  Sure, this is true.  But, a waiver of subrogation does enable a dispute to be streamlined by allocating risk to a party that is in a position to control the risk and has insurance to cover that risk and by reducing continued litigation associated with a claim.

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.