NO COVERAGE UNDER INSTALLATION POLICY WHEN READ TOGETHER WITH INSURANCE APPLICATION

Posted on January 7, 2024January 14, 2024 by David Adelstein

A recent case out of the Eleventh Circuit denied an underground contractor’s claim under what appears to be a commercial property installation floater policy (inland marine coverage) that covers the contractor’s materials. Whereas a builder’s risk policy is more expansive, an installation floater is narrower and can provide protection to a contractor for materials and equipment in transit, stored, or being installed subject to the terms of the installation floater policy. It can provide coverage to a trade subcontractor for materials that aren’t covered by builder’s risk.

In Travelers Property Casualty Company of America v. Talcon Group, LLC, 2023 WL 8798053 (11^th Cir. 2023), an underground utility contractor that had a general contractor’s license had an installation policy that provided coverage “only for underground utility operations and the site development work tied to those operations.” Talcon Group, supra, at *1. The utility contractor was constructing two residential homes that was on land owned by an affiliated family entity. During construction of the residential homes, a wildfire destroyed the homes prior to the issuance of certificates of occupancy. The utility contractor submitted a notice of loss to its insurance carrier that provided the installation policy. The carrier denied the claim because the construction of the homes was NOT the same type of work as the installation of underground utilities which was covered. An insurance coverage lawsuit ensued.

In analyzing the issue, the court look at the insurance application. Under the “Installation/Builder’s Risk Section,” the contractor selected “Installation,” did not identify any value for residential projects, and was accompanied with an email identifying it predominantly performed water and sewer line work. It identified that 98%-99% of its work was underground utility and 1%-2% was site development, and 0% was residential.

The insurance application is important because “[e]very insurance contract shall be construed according to the entirety of its terms and conditions as set forth in the policy and as amplified, extended, or modified by an application therefore….” Talcon Group, supra, at *4 quoting Fla. Stat. s. 627.419(1). This means “[t]he application becomes a part of the agreement between the parties and the policy together with the application form the contract of insurance.” Id. (citation and quotation omitted).

The insurance policy itself defined the term “Installation” as “[p]roperty described in the Declarations under ‘Installation’ owned by you or property of others for which you are legally liable, that you or your subcontractors will install, erect or fabricate at the ‘job site.’” Talcon Group, supra, at *3. In the Declaration, nothing identified the residential homes or that it was performing work at the job site of the residential homes. The insurance carrier moved for summary judgment and prevailed that there was no coverage under the installation policy for the residential homes.

The Eleventh Circuit Court of Appeals agreed: “When the Policy is read together with [the utility contractor’s] renewal application, the only reasonable interpretation is that the scope of coverage did not extend to the construction of the two residential homes.” Talcon Group, supra, at *5. Moreover, the Eleventh Circuit found that the utility contractor’s reading of the installation policy was unreasonable:

[The utility contractor’s] reading would simply require [the insurer] to cover any one-off construction project wholly unrelated to [the contractor’s] underground utility or site development work – again, the only types of work disclosed or provided in the renewal application and Policy. … Coverage would follow if [the contractor] decided to install a skylight at a mall, repair the roof of a church, or construct a skyscraper from the ground up. [The insurer] would be on the hook for any number of such projects, even though they were not disclosed in [the contractor’s] application, contemplated by [the insurer], or provided for in the Policy. Taken as a whole, the Policy [and the contractor’s] renewal application do not support such a reading.

Indeed, the only reasonable reading of the Policy and the renewal application is that [the insurer] provided coverage for [the contractor’s] underground utility and site development work. The construction of the two residential homes is neither of those items and is not covered by the Policy.

Talcon Group, supra, at *6.

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.

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AN OCCURRENCE UNDER BUILDER’S RISK INSURANCE POLICY IS BASED ON THE LANGUAGE IN THE POLICY

Posted on March 18, 2023March 18, 2023 by David Adelstein

Builder’s risk insurance coverage is a vital property insurance coverage during the course of construction. Builder’s risk insurance is not a one-size-fits-all product so please make sure you are working with your insurance broker to procure this product that factors in and covers risk associated with the project.

Builder’s risk insurance is typically an occurrence-based policy. No different than other occurrence-based policies (such as commercial general liability), a dispute may arise as to the occurrence. This could be due to the triggering of the actual policy during the coverage period or it could be due deductible obligations, as in the case discussed below. When dealing with a builder’s risk insurance policy–again, no different than any policy–the language in the policy matters. Definitions used in the policy to define specific terms matter and, in numerous cases, the ordinary dictionary meanings of terms matter. But it all starts with the policy language.

In KT State & Lemon, LLP v. Westchester Fire Insurance Co., 2023 WL 2456499 (M.D.Fla. 2023), a builder’s risk policy provided coverage from April 2018 through the end of November 2019. There was a $50,000 per occurrence deductible for loss caused by or from water damage. An extension to the builder’s risk policy was negotiated through the end of January 2020 that increased this water damage deductible to $250,000 per occurrence. During construction and the testing of the fire suppression (sprinkler) system, leaks started to occur resulting in water damage. Two leaks occurred in September 2019, one leak in October 2019, one leak in November 2019, and two leaks in December 2019 (during the extension and higher water damage deductible period).

The plaintiff-insured argued that all of the leaks in the fire sprinkler system should constitute one single occurrence. Naturally, it did so because one occurrence would be a $50,000 deductible since the initial leak occurred prior to the extension period. The insurer took a contrary position and argued that each leak was a separate occurrence meaning there were four leaks with a $50,000 per occurrence deductible and two leaks in December 2019 each with a $250,000 deductible. This is a big deal from a dollar’s perspective as it means each leak would have to have damages in excess of the per occurrence deductible and the insured would potentially be responsible for the first $700,000 in water damage based on the six leaks.

“In Florida, the [insurance] contract should be ‘construed according to the plain language of the policy,’ and any ambiguities must be ‘construed against the insurer and in favor of coverage.’ KT State, supra, at *2 (citations omitted).

The Court looked at the policy language, specifically how the builder’s risk policy defined the term “occurrence” as it would be this definition in the policy that shed light on whether there would be one occurrence or multiple occurrences:

All LOSS attributable directly or indirectly to [1] one originating cause, event, incident or repeated exposure to the same originating cause, event or incident, or [2] to one series of similar originating causes, events, incidents or repeated exposures to the same originating cause, event or incident first occurring in the Policy period. All such LOSS will be treated as one OCCURRENCE, unless a specified period of time is included in this Policy. The most the Company will pay for LOSS in any one OCCURRENCE is the applicable Limit of Insurance shown on the Declarations.

As to the underlined above, the policy did not define the terms “series” or “similar.” Yet, these terms are not technical terms so the Court looked at the ordinary dictionary definitions. “The dictionary meaning of ‘series” is ‘[a] number of things of one kind (freq. abstract, as events, actions, conditions, periods of time) following one another in time or in logical order.’ The dictionary meaning of ‘similar’ is ‘alike in substance’ or ‘having characteristics in common.’” KT State, supra, at *3 (citations omitted). Based on the definition of “occurrence” in the policy, and the ordinary dictionary definitions of “series” and “similar,” the Court found the six fire sprinkler leaks constituted only one occurrence:

Reading the policy language from the standpoint of an ordinary person, in light of the common meaning of the terms used, and in a common-sense and natural manner produces only one reasonable conclusion. Plaintiffs’ claimed loss was attributable, directly, or indirectly, to a “series of similar originating causes, events, [or] incidents,” and therefore resulted from one occurrence. The loss resulted from leaks in the same sprinkler system, due in whole or part to improper installation by the same [subcontractor] crew under the same contract, in the same general location in the same building, and occurred one after the other in a relatively short span of time from late September to December 2019.

KT State, supra, at *4.

Yet, despite there being one occurrence, the Court applied a caveat to the benefit of the insurer since there were two leak incidents during the extension of the policy with an increased $250,000 per occurrence deductible:

Accordingly, under the Policies’ definition of “occurrence,” the leaks at issue together constituted one occurrence. For damage from leaks that occurred prior November 30, 2019, therefore, a single deductible of $50,000 applies. The result is different, however, for leaks after that date, because the parties expressly modified the Policies at that point. The original policy term ended on November 30, 2019. Plaintiffs were only entitled to purchase an extension of coverage beyond that date on the same terms as before if no “risk aggravating situation” was present at the time of the extension. But such a situation was present, because Plaintiffs had reported multiple leaks, and that was obviously the reason the parties changed the water damage deductible to $250,000 when they extended coverage to January 30, 2020. It is clear that the increased deductible was intended to apply to similar water damage events occurring during the extended policy period. Therefore, the increased deductible applies to water damage from leaks occurring after November 30, 2019, notwithstanding the definition of “one occurrence.”

KT State, supra, at *5.

INSURANCE FOR LARGE CONSTRUCTION EQUIPMENT SUCH AS A CRANE

Posted on July 13, 2018April 27, 2020 by Edward Garber

Many, many projects require the use of a crane. The skyline is oftentimes filled with the sight of cranes—one after the other. Most of the time, the cranes are leased from an equipment supplier. What happens if the crane (or any large, leased equipment) gets damaged?

I wrote an article regarding a builder’s risk carrier NOT covering damage to a crane from a storm based on a common exclusion. Another case, Ajax Bldg. Corp. v. Hartford Fire Ins. Co., 358 F.3d 795 (11^th Cir. 2004), had a similar result.

In this case, a prime contractor leased a crane from an equipment supplier. The crane was used by the structural concrete subcontractor. The crane collapsed during the subcontractor’s work. The supplier sued both the contractor and subcontractor. The prime contractor was defended under a contractor’s equipment liability policy and the subcontractor was defended under a general liability policy it procured for its work on the project. Ultimately, a settlement was reached where the subcontractor’s liability insurer paid a bulk of the damage.

However, the subcontractor’s insurer, through subrogation rights, pursued a claim against the builder’s risk carrier for the project arguing that the damage to the crane was an insured risk under the builder’s risk policy and its difference-in-conditions (DIC) supplemental endorsement to the builder’s risk policy. The insurer argued that coverage was excluded per the following exclusion:

Coverage

a. Structures … fixtures, equipment, machinery and similar property which will become a permanent part of the structure …

Property NOT Covered [Exclusion]

a. Machinery, tools, equipment, or other property which will not become a permanent part of the structure(s) described in the Declarations or Schedule unless the replacement cost of such property is included in the contract price and reported to us;

The builder’s risk policy did not cover damage to the crane because the crane was equipment which will NOT become a permanent part of the structure. The Eleventh Circuit agreed:

In addition to insuring the structure itself, these policies also typically include building materials, machinery, and equipment on the premises that are awaiting installation. This kind of machinery and equipment is clearly different from a contractor’s machinery and equipment that is used in the construction process, such as the damaged crane. The type of machinery and equipment intended to fall under the definition of “covered property” in a builder’s risk policy is that which will become a permanent part of the structure—this includes materials such as elevators, doors, windows, electrical equipment, and water pumps. However, since these materials are generally delivered to the site before they are required in order to avoid delays in construction, ownership of the property may not yet belong to the owner of the building. It is these materials that the DIC [builder’s risk] policy is referring to when it provides coverage for “property of others.” Although Kelley’s [supplier’s] damaged crane technically falls within the category “property of others,” it is not the type of property to become a part of the building and covered under a builder’s risk policy; consequently, it is expressly excluded in the DIC policy by the provision requiring covered property to be that which will become a permanent part of the structure.

Ajax Bldg., 358 F.3d at 799-800 (internal citations omitted).

Cranes are expensive so it is important to insure potential damage to cranes (and any equipment used for purposes of construction). Noteworthy insurance considerations to consult with your insurance broker about include, but are not limited to:

Contractor’s equipment insurance– you want to confirm any sublimit for any leased equipment, whether it is based on replacement cost or actual cash value, and whether you need to report such leased equipment to your insurer per the policy in advance of using the equipment
Equipment liability coverage– you want to ensure your liability policy insures equipment you rent or you have an endorsement that provides coverage for equipment rented or leased from others
Builder’s Risk – the exclusion in the builder’s risk policy discussed above for equipment that will not become a permanent part of the structure is a common exclusion, so you want other insurance to cover this risk and/or confirm whether there is an endorsement modifying that exclusion

CONTRACTORS: REVISIT YOUR FORCE MAJEURE PROVISIONS TO ACCOUNT FOR HURRICANES

Posted on September 12, 2017September 12, 2017 by Edward Garber

We now know and can appreciate the threat of hurricanes. Not that we did not appreciate the reality of hurricanes–of course we did–but Hurricane Harvey and Hurricane Irma created the type of actual devastation we fear because they hit close to home. The fear came to life, creating panic, anxiety, and uncertainty. It is hard to plan for a force majeure event such as a hurricane because of the capriciousness of Mother Nature. But, we need to do so from this point forward. No exception! And, I mean no exception!!

A force majeure event is an uncontrollable event that cannot be anticipated with any degree of definitiveness. The force majeure event will excusably delay or hinder performance obligations under a contract. One type of force majeure event is a hurricane—an uncontrollable and unforeseen act of Mother Nature.

Standard construction contracts will contain some type of force majeure language. The language will entitle the contractor to an extension of time to perform since the force majeure event will have excusably delayed the contractor’s performance. I am not going to rehash that standard language because this language needs to be modified and tailored to address the major risk of a hurricane. Not only is time impacted, but money is impacted too. We need to consider the total impact of a hurricane versus considering the impact in isolation or in a vacuum.

Take a look at your present construction contracts. Revisit the force majeure language. Does this language adequately address the time and monetary impacts associated with a hurricane? If it does, great! If it does not, or can be written much better, now is the time to make this language a MUST-INCLUDED provision in your construction contracts because this risk is real. It is not illusory and it will be a real risk during hurricane season. If you do not know or are unsure as to the language, please engage a construction attorney to review your contracts or propose standard language for you catered to your business needs. Even if you feel comfortable with the language, I would still encourage you to have a construction attorney review the language and provide constructive feedback on the language. At this point, there is no excuse to neglect this risk or minimize the potential of a devastating time and cost impact. Regardless of the type of construction work you perform, this risk needs to be addressed. Any owner should appreciate this risk because it is a reasonable risk that needs to be accounted for with certainty in your construction contract. Is this a risk you completely want to assume from a cost standpoint?

I have drafted numerous force majeure provisions tailored to the risks of a project and business objectives of a client. I have drafted specific provisions or negotiated provisions dealing with the risk of a hurricane. Based on this experience, here are my suggestions when considering the risk of a hurricane and the potential time and monetary impacts associated with the risk:

1) Make sure there is builder’s risk insurance covering property damage during construction. Builder’s risk insurance policies are specialized property insurance policies for construction projects. Make sure the policy does not exclude hurricanes. In other words, you do not want hurricanes to be an excluded peril, particularly if there is the chance your work will take place during the hurricane season and/or you are performing work where storm surge or flooding caused by a hurricane can be an issue. If there is a sub-limit for hurricane-caused damage, know what that sub-limit is. You want to know a) what property and materials will be covered for hurricane-caused damage, b) whether costs to protect the property and materials from the hurricane are covered, c) whether the policy covers repair costs, and 3) whether the policy covers delay-type damage caused by the hurricane. Get a copy of the builder’s risk policy in advance. This way you know whether or not you need to supplement the policy accordingly or, alternatively, you want specific perils covered before that policy is bound. In fact, you will likely want to supplement this with a construction equipment / inland marine insurance policy. Work with an insurance broker that has experience with construction projects to ensure you have the right insurance in place for the project and your business.

2) Make sure your contract specifically identifies a named storm such as a hurricane as a force majeure event. Make sure your contract specifically identifies a hurricane as a force majeure event. Be specific. A hurricane should be an event that entitles you to additional time to perform since time will be spent protecting the work and tying down equipment and materials, time will be spent dealing with the actual hurricane, and time will be spent assessing the damage, remediating the damage, and ramping back up.

3) Make sure your contact entitles you to delay-related compensation associated with a hurricane such as a force majeure event. A time extension for a hurricane is a given. But, what about compensation for the impact? Your project schedule is not going to include the risk of a hurricane, as there is no reasonable way to include that time in a project schedule. Hence, the time extension. As we know though, time is money. You want to include a provision that entitles you to compensation for the time impact. The provision should entitle you to utilize contingency money for any delay or, perhaps more appropriately, entitle you to a change order for the time-related costs. (I have even drafted provisions that include a specific force majeure contingency to address associated costs for a force majeure event.) You can even stipulate to a daily rate for such time-impact costs (which I have also done) caused by a hurricane or force majeure event. A hurricane will not only prevent you from performing, but it will shift your performance to essential activities (that will not be included in your schedule). It is reasonable for impact-related costs to be recoverable for such a force majeure issue. It is unreasonable for the risk to be entirely shifted to the contractor because Mother Nature is certainly a risk that a contractor cannot control.

4) Make sure your contract entitles you to recover costs associated with preserving and protecting work in-place, materials, and equipment. As mentioned, a hurricane will divert your performance to progressing the work to preserving and protecting work in-place, materials, and equipment. All of this needs to be protected from prolonged, heavy wind activity, torrential rain, and potential surge and flooding. There are costs associated with this and you want to make sure this is performed to minimize the likelihood of any loss. You also want to make sure you have time to perform this work. Be safe, rather than sorry, and do not wait to the last minute to see what direction the hurricane ultimately pursues. Hurricanes, as we know, are unpredictable and take unpredictable paths. We need to make sure we have time to not only preserve and protect the work, materials, and equipment, but that our employees and subcontractors (and their families) safely make the right decisions to protect their homes and families. Similar to the above, make sure your contract specifies how you get paid for this type of work – whether through contingency funds or, perhaps more appropriately, a change order. Notifying the owner in writing in advance of the protective measures being performed is always a good idea. If the owner elects not to implement such measures because it does not want to bear the cost, then the owner is evidently bearing risk.

5) Know your contractual notification requirements. Your contract probably includes notification provisions to address time impacts and costs associated with protecting the work. Make sure these provisions are reasonable in light of a hurricane or force majeure event. Your priorities when dealing with a hurricane, in particular, will be shifted. For this reason, you want to make sure the notification provisions are not unreasonably onerous and are more than reasonable to account for the issues you will be dealing with. Think these issues through. Remember, not only will you be dealing with the issues associated with the construction project, but there will be internal issues dealing with the safety of your employees, their families, and any subcontractors you hire.

Do not panic if your contract currently does not, in your opinion, sufficiently address all of these items. You can address this moving forward. You should address this moving forward. Again, no excuses. And, again, do not be reluctant to hire a construction attorney that can best protect your rights moving forward to account for this risk that we know is REAL.

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.)

BE WATCHFUL FOR THE EXISTING STRUCTURE / BUILDING EXCLUSION IN BUILDER’S RISK POLICY

Posted on July 13, 2016November 8, 2024 by Edward Garber

I previously discussed the importance of builder’s risk coverage for a construction project. Builder’s risk insurance is not a one-size-fits-all policy meaning an owner or contractor–party procuring builder’s risk–needs to work with their insurance broker to ensure that their during-construction risks are properly being insured. Otherwise, a loss may occur during construction only for the owner and contractor to learn that the loss is not covered under the builder’s risk policy.

By way of example, in Gerald H. Phipps, Inc. v. Travelers Property Casualty Co. of America, 2016 WL 97756 (D.Co. 2016), a contractor was hired to renovate and expand a public library. The existing library contained asbestos in elevator shafts and stairwells. The contractor’s intent was to not disturb the asbestos in these locations. However, during construction, snow melted and water seeped into the stairwells and elevator shafts that consequently mandated the mitigation and remediation of the asbestos in the stairwells and shafts (existing structures).

The contractor submitted a builder’s risk claim for the remediation costs. The contractor’s builder’s risk policy provided that builder’s risk coverage does NOT include: “Buildings or structures that existed at the job site prior to the inception of this policy.” This existing building / structures exclusion is common in builder’s risk policies. The builder’s risk insurer denied coverage for the mitigation costs because the policy did not cover damage to existing structures (i.e., the stairwells and shafts). The contractor filed a coverage lawsuit; however, the court entered summary judgment for the builder’s risk insurer stating:

“Because the stairwells and elevator shafts [existing structures] are excluded from the definition of “Builders’ Risk” and GHP [contractor] has not introduced evidence that the water intrusion damaged its own work, GHP has not shown any loss to covered property.”

Gerald H. Phipps, 2016 WL at *5.

Be watchful for the existing structures / buildings exclusion in builder’s risk policies, especially if you are performing renovation work to existing structures.

ENSUING LOSS EXCEPTION IN PROPERTY INSURANCE POLICIES

Posted on October 3, 2015November 8, 2024 by Edward Garber

Property insurance policies such as builder’s risk policies contain a design defect / faulty workmanship exclusion (as well as other exclusions for excluded risks or perils). But, certain exclusions such as the design defect / faulty workmanship exclusion may contain what is referred to as the “ensuing loss exception.” Stated differently, a design defect / faulty work is excluded from the insurance policy BUT losses ensuing (or separately resulting) from the design defect / faulty work are excepted from this exclusion and covered under the policy. If your initial reaction as to the application of the ensuing loss exception is “huh?!?,” then that exact sentiment is shared by others. Trust me!

The Florida Supreme Court decision in Swire Pacific Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161 (Fla. 2003) dealt with a design defect exclusion that read:

Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.

This initial part of this exclusion is a design defect exclusion. The underlined part is the ensuing loss exception to this exclusion.

In Swire, errors and omissions with the structural design and, therefore, structural work, of a condominium project halted the issuance of the certificate of occupancy for the condominium. The developer incurred $4.5 million to retain a new structural engineer to modify the plans as well as corrective structural work in the field. The developer then submitted a builder’s risk insurance claim. The builder’s risk insurance carrier denied coverage based on the foregoing design defect exclusion arguing that the developer incurred money to correct a design defect, but there were no covered losses or damages ensuing from the design defect. The Florida Supreme Court agreed with the builder’s risk insurer:

Swire’s [developer’s] sole claim here is an attempt to recover the expenses incurred in repairing a design defect. No ensuing loss resulted [from the design defect] to invoke the exception to the exclusionary provision…. No loss separate from, or as a result of, the design defect occurred. Therefore, we conclude…Swire is not entitled to recover the expenses associated with repairing the design defect. To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion….This [builder’s risk insurance] contract does not operate as a warranty for faulty workmanship and should not be transformed into a guarantee against design and construction defects.

Swire, 845 So.2d at 167-68.

In a more recent case, Peek v. American Integrity Ins. Co. of Florida, 2015 WL 5616294 (Fla. 2d DCA 2015), a property insurance policy contained the following ensuing loss exception:

“We do not insure loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.”

Coverages A and B contained exclusions for latent defects, corrosion, faulty workmanship and pollution. Thus, the property insurance policy did not cover these items but it did cover “any ensuing loss…not excluded or excepted in this policy.”

Peek dealt with homeowners moving into a house with Chinese drywall. The homeowners contended that the Chinese drywall resulted in a noxious smell and corroded air conditioning coils. The homeowners contended that the defective drywall (exclusion) resulted in (a) the loss of use of their house due to the noxious smell and (b) damage in the form of corrosion to air conditioning coils, and that such items should be covered under the ensuing loss exception.

The Second District Court of Appeal disagreed with the homeowners regarding the application of the ensuing loss provision. The court explained:

An ensuing loss follows as a consequence of an excluded loss, and the crux of the ensuing loss provision is that there must be a covered cause of loss that ensues from the excluded cause of loss….Given that American Integrity [property insurer] proved that the Chinese drywall was an excluded defective construction material, it was the Peeks’ [homeowners] burden to demonstrate that the policy covered a loss that occurred subsequent to and as a result of that excluded peril.

First, the evidence below demonstrated that the odor present in the Peeks’ home was a manifestation of the sulfur gases emanating from the Chinese drywall and that the corrosion was caused by the chemicals released by the sulfur gases, which emanated from the Chinese drywall. As such, the losses were not “ensuing.” …

Additionally, both of the claimed ensuing losses are specifically excluded under the policy because an excluded cause of loss—defective Chinese drywall—led directly to another set of exclusions—pollution and corrosion….. Here, the damage to the Peeks’ home and consequently the odors and corrosion of metals and electronics were directly related to the defective Chinese drywall and thus directly stemmed from an excluded risk. Thus coverage was excluded under the express terms of the insurance contract.

Peeks, supra, at *4.

Recovering losses or damage under an insurance policy can be challenging in light of the various exclusions in the policy. Even the ensuing loss exception to exclusions, as demonstrated above, does not except from policy exclusions the types of losses that an insured may seek to recoup.

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

Posted on September 5, 2014November 8, 2024 by Edward Garber

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.

A BUILDER’S RISK INSURANCE TIDBIT

Posted on August 29, 2014November 8, 2024 by Edward Garber

Builder’s risk insurance is a form of all-risk property insurance that protects an owner’s property / project from perils during the course of construction subject to the exclusions identified in the policy. Sometimes there is the question when negotiating a contract between an owner and general contractor whether to name the contractor as an additional named insured (along with the owner) and/or a loss payee under the builder’s risk insurance policy procured by the owner. A contractor prefers, and should prefer, to be included as a named insured and/or loss payee to ensure it is protected and paid for a covered loss during construction. In reality, it is much better for the contractor to be identified as a named insured; being identified as a loss payee simply means the contractor can be paid insurance proceeds (it can be named on the check), but it is not an insured under the policy.

Each of the standard form construction agreements contain slightly different language regarding a contractor’s interest under a builder’s risk policy procured by the owner. For example, the AIA would require the builder’s risk insurance to include the interests of the owner, the general contractor, subcontractors, and sub-subcontractors. Ok; this makes sense but it does not specifically require the owner to name these entities as named insureds under the policy and/or loss payees. Rather, the AIA contains language that allows the owner to adjust the claim as a fiduciary with the payment made to the owner as a fiduciary. The ConsensusDOCS provide better language for the contractor that would require the owner to name the contractor as a named insured. Again, being identified as a named insured is preferable as it allows the contractor to assert a builder’s risk claim directly against the policy as an insured. And, from an owner’s perspective, sometimes it is preferable to allow the contractor to assert a claim for a loss associated with a peril that may be covered even if the peril is due to the negligence of the contractor. While the standard form contracts require the owner to bear the cost of the deductible, an owner may want to shift that deductible to the contractor if the contractor is seeking to recoup losses under the policy for a peril due to its negligence.

Finally, the standard form contracts do contain a waiver of subrogation for losses against the owner, contractor, subcontractors, etc. to the extent covered by property insurance. This means that the property insurer is waiving rights to recoup insurance proceeds it paid associated with a claim against a third party included in the waiver of subrogation provision. This provision should not be deleted as the contractual waiver of subrogation benefits both the owner and contractor.

COMPLYING WITH POST-LOSS POLICY CONDITIONS UNDER AN INSURANCE POLICY

Posted on June 16, 2011November 8, 2024 by Edward Garber

Insurance policies, particularly property insurance policies, contain post-loss obligations (that serve as conditions precedent to payment). This essentially means that when an insured submits a claim to an insurer, an insurer can demand obligations from the insured, and the insured is required to comply with these obligations. These obligations could be requiring the insured to submit a sworn proof of loss, allowing the insurer to inspect the damaged property, submitting all applicable documentation to the insurer, and allowing the insurer to take an examination under oath of the insured. An examination under oath is simply a pre-suit deposition where the insured answers the insurer’s questions under oath about the insurance claim with a court reporter memorializing the questions and answers. While these post-loss obligations can pose an inconvenience to the insured, they are obligations under the policy (the insurance contract) and refusing to comply with these obligations will allow the insurer to easily argue that the insured forfeited insurance coverage. Thus, an insured could be in a position where they are denied coverage for failure to comply with post-loss obligations in an insurance policy when, had they complied, there would have been coverage and payment.

To briefly illustrate, recently, in Edwards v. State Farm Florida Insurance Company, 37 Fla. L. Weekly D1269a (Fla. 3d DCA 2011), a homeowner, through a public adjuster, submitted a claim to its property insurer for reimbursement for the costs to fix roof damage from a hurricane. The insurer made numerous efforts to obtain documentation of expenses that the homeowner incurred to fix the roof, but was never provided this documentation. The insurer also scheduled an examination under oath of the insured, which was cancelled prior to the scheduled date. The insured providing documentation to reflect the amount of the claim and submitting to an examination under oath were post-loss conditions in the insurance policy. Because the insured did not comply with these policy conditions, the Third District Court of Appeal held that the insured forfeited coverage: “Failure to comply with a condition precedent to payment relieves the insurer of its duty to make payment.” See Edwards.

Accordingly, an insured that submits a property insurance claim (or any insurance claim, for that matter) should ensure they are complying with post-loss policy conditions that are being requested by the insurer.