Construction Defect Claims: Horizontal vs. Vertical Exhaustion of - - PowerPoint PPT Presentation

Construction Defect Claims: Horizontal vs. Vertical Exhaustion of Insurance Coverage

Navigating Exhaustion of Primary Policies, Triggers for Excess Carriers and Additional Insured Coverage

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TUESDAY, SEPTEMBER 24, 2013

Presenting a live 90-minute webinar with interactive Q&A

Richard B. Friedman, Partner, McKenna Long & Aldridge, New York David G. Jordan, Associate, Saxe Doernberger & Vita, Hamden, Conn. Rebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, Texas

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Ri Richar ard B. . Fried iedman man Mc McKe Kenna nna Lo Long & Ald Aldridg idge e LL LLP, New w Yo York, rk, New w Yo York rk Da Davi vid d G. . Jo Jordan dan Sax axe Do Doernber ernberger er & Vi Vita, a, P.C .C., ., Ham amden, den, Co Connecticut necticut Re Rebecca ecca Di DiMa Masi Van an Os Osselaer elaer & Bu Buchanan, anan, LL LLP, A Austi tin, n, Te Texas as

Strafford Webinar September 24. 2013

Cov Cover erag age Ove Overla rlap

General Contractor

(“GC”)

GC’s Corporate Primary Insurance GC’s Corporate Excess Insurance Sub-Contractor

(“Sub”)

Sub’s Primary Insurance

(GC’s AI Carrier)

Sub’s Excess Insurance

(GC’s AI Excess Insurance)

Promise to Indemnify Promise to Procure Insurance

www.sdvlaw.com

6

Re Rele levant Iss vant Issues ues

• Multiple parties
• Multiple layers of coverage in AI context
• Loss exceeds limits of a single primary

policy

7

Wh Which ich In Insu surer rer Re Resp spon

• nds

ds Fi First? rst?

Typically primary insurer of downstream party (Additional Insured Carrier) has initial

• bligation to defend and indemnify the claim.

Priority is established by “Other Insurance” language commonly found in most CGL Policies e. e.g. . This insurance is excess over: Any other pr prima mary ry insurance available to you covering you for damages … for which you have been added as an additional insured by attachment of an endorsement. When such language is not present, primary carriers of Upstream and Downstream Parties may dispute priority. See e.g. Briarwoods Farm, Inc. v. Cent. Mut. Ins. Co., 22 Misc. 3d 427, 428, 866 N.Y.S.2d 847, 848 (Sup. Ct. 2008).

Wh Which ich In Insu surer rer Re Resp spon

• nds

ds Se Seco cond nd?

The AI Excess carrier OR the corporate primary policy? Disputes arise when, as is often the case, the subcontractor’s primary CGL policy is insufficient to cover the loss to the injured party.

8

Pri Priorit

• rity

y of C

• f Cove
• vera

rage ge

2 schools of thought: 1.Priority determined by provisions of Insurance Policies:

• Review language of competing policies’ “other insurance”

clauses;

2.Priority determined by the provisions of the Trade Contract:

• Determine intent of parties regarding risk transfer by

reviewing the indemnity and insuring provisions of the underlying contract.

9

Pri Priority

• rity of Cov
• f Covera

erage ge

Horizontal Exhaustion

• All available primary policies must

exhaust first

• Focus on policy language, not underlying

contract

• Excess policy is a payer of last resort

10

Pri Priority

• rity of Cov
• f Covera

erage ge

Vertical Exhaustion

• AI policies (primary & excess) exhaust before

upstream party’s primary policy

• Focus on underlying contract’s indemnity
• bligation, not policy language
• Reflects intent of parties
• Avoids circuity of litigation

11

Priori Priority of Cov ty of Coverag erage

12

Horizontal rizontal Cas ases es

• Il

Illin linois

• is
• Cal

alifornia ifornia

• New

ew Yo York rk Ve Verti rtical cal Cas ases es

• 4th

th Circuit

rcuit (V (Virginia) rginia)

• 5th

th Circuit

rcuit (T (Tex exas) as)

• 8th

th Circuit

rcuit (A (Ark rkans ansas) as)

• Missouri

ssouri

• Ken

entucky tucky

12

1. 1. Traditional Ap ditional Approach proach

• Allocation was determined without regard to any indemnification provisions in trade
• contracts. Courts compared the language of each policy to ascertain the priority of

coverage.

2. 2. Traditional Con ditional Conclu clusion sion

• Courts almost always applied Horizontal Exhaustion resulting in the exhaustion of the

subcontractors’, general contractors’, and owners’ primary CGL policies prior to the triggering of any excess or umbrella coverage.

3. 3. Le Leadi ding ng Ca Case: e: Sta tate te Farm arm Fire ire & Ca & Casual sualty y Co Company mpany v.

• v. Li

LiMaur auro,

• , 65

65 N. N.Y.2d Y.2d 369 69 (1 (198 985) 5)

• New York Court of Appeals held that insurers have the right to rely upon the terms
• f their contracts with their insureds and that the terms of such contracts dictate the

priority of coverage.

• In most subsequent New York Appellate Division cases, when determinations of

coverage have involved primary and excess insurance, the result has been Horizontal Exhaustion of all primary policies prior to the triggering of the subcontractor’s excess

• policies. See the following First Department cases:

Bovi vis s Lend Lease se LMB, Inc. . v. . Great Americ ican Ins.

• s. Co

Co., ., 53 A.D .D.3d .3d 140 (N (N.Y .Y. . App pp. . Div iv. . 1st st Dept.

• pt. 2008

08) Tis ishman Co Const structio ion Co Corp.

• p. v.

. Great Americ ican Ins.

• s. Co

Co., ., 53 A.D .D.3d .3d 416 6 (N (N.Y .Y. . App pp. . 1st st Dept Dept. . 2008 08)

Hor Horizo izontal ntal Ex Exha haust ustion ion Lo Long ng Es Estab tablished New Yor lished New York View k View

13

Horizontal Exhaustion - Bovis

Elevato evator r Sub. b. (AJ AJ MCN CNUL ULTY TY) Gr Great eat Am American rican De Decedent edent Con

• nst
• st. Mgr

gr. (BOVIS) OVIS) Il Illinois linois $1M 1M Primary imary Policy

• licy

Ge Gen.

• n. Ctr

tr. (STON ONEWA EWALL) LL) Liberty berty $1M 1M Primary imary Policy

• licy

Westchest tchester er $10M 10M Umb mbrell rella Con

• ncrete

crete Sub. b. (J&A) &A) QB QBE E $1M 1M Prima imary ry United ited $5M 5M Umb mbrell rella Steel eel Ctr tr. (SMI SMI-OWEN OWEN) Ow Owner er (DA DASNY) SNY)

Ho Horiz rizon

• ntal

tal Ex Exha haustion: ustion: Th The e Bov Bovis is Ca Case se

14

Ho Horizontal rizontal Ex Exhaustion: haustion: The The Bo Bovis vis Cas Case

Trial Court Apportionment of AI Coverage for Bovis

QB QBE $1,000,000 ,000,000 J&A &A Primary imary IL ILLIN INOIS OIS $1,000,000 ,000,000 BOVI OVIS S Primary rimary WESTCHE TCHESTER STER $10,000,000 0,000,000 Ston

• newal

ewall l Umb mbrell rella UNI NITED ED $5,000,000 ,000,000 J&A &A Umb mbrel ella LIB IBER ERTY TY $1,000,000 ,000,000 Ston

• newal

ewall l Primary imary

15

Appellate Court Apportionment of AI Coverage for Bovis

QB QBE $1,000,000 ,000,000 J&A &A Primary imary LIB IBER ERTY TY $1,000,000 ,000,000 Ston

• newal

ewall l Primary imary IL ILLIN INOIS OIS $1,000,000 ,000,000 BOVI OVIS S Primary rimary UNI NITED ED $5,000 ,000,00 000 J&A &A Umb mbrel ella WESTCHE TCHESTER STER $10,000 0,000,00 000 Ston

• newal

ewall l Umb mbrell rella

aring g pro pro rat ata

Ho Horizontal Exh rizontal Exhaustion: austion: The The Bo Bovis vis Cas Case

16

Ver Vertical tical Exh Exhaustio austion

Indemnity/Circuity of Litigation

• Wal-Mart Stores, Inc. v RLI Ins. Co., 292

F.3d 583 (8th Cir 2002)

• American Indemnity Lloyds v Travelers

Property Casualty Ins. Co., 335 F.3d 429 (5th Cir 2003)

17

Ve Vertic rtical al Exh Exhaus austion: The tion: The Wa Wal-Mart Mart Ca Case se

National Union $10M Primary Wal-Mart Retailer RLI $10M Excess Cheyenne - Manuf.

Contract – required $2M Primary Obtained - $1M Primary/$10M Excess Settlement - $11M: St. Paul $1M/RLI $10M DJ – Wal-Mart and National Union sought to avoid contributing to $10M paid by RLI Result – St. Paul $1M/RLI $10M

2 1

AI Status Indemnity

• St. Paul

$1M Primary 3

18

Ho Horizontal rizontal Ap Appr proach

• ach

GC Sued GC tenders to AI primary and AI Excess carrier AI primary pays but AI Excess asserts GC’s corporate primary must pay next GC’s primary pays AI excess carrier pays (GC corporate limits replenished) Subcontractor tenders indemnity lawsuit to its excess carrier (b/c primary carrier exhausted) GC’s primary subrogates to GC’s interests and sues Subcontractor for indemnity

Circuity of Litigation

Vertical exhaustion avoids “Circuity of Litigation”: un unne neces cessary sary leg legal al st step eps s wh which ich re resu sult lt in in AI AI exc exces ess carri s carrier er pa payi ying for ng for lo loss ss

19

Upstream insurers argue against “circuity of litigation”, i.e., that it is a waste of judicial resources to require them to pay for their portion

• f the allocated loss and then have to recoup, via subrogation, that

payment from the subcontractor’s excess carrier.

Vertical Approach

GC Sued GC tenders to AI primary and AI Excess AI primary pays first, then AI Excess carrier pays

Cir Circui cuity of Li ty of Litigation tigation

20

In Indemnity ity In Insura rance ce Comp

• mpan

any y of

• f North
• rth America

rica v.

• v. S

St.

• t. Pau

aul l Mercu ercury ry In Insura rance ce Comp

• mpan

any, y, 74 A. 4 A.D.

• D. 3

3d 21 (N (N.Y .Y. . App pp Di Div.

• v. 1st

t De Dept

• pt. 20

. 2010) 10) In 2010, the Appellate Division First Department in Manhattan held that a priority determination in a construction case is irrelevant if: 1. a court has found that the upstream additional insured’s, i.e., the

• wner’s or general contractor’s, liability is str

trictly ictly vi vica carious rious to that of the named insured subcontractor, and 2. the subcontractor's insurers agreed to defend and indemnify the upstream party wi with thou

• ut

t re reser serva vation tion or q

• r qual

alification. ification.

Ve Vertic rtical al Exh Exhaus austion: tion: St

• St. Paul

. Paul Me Mercury rcury

21

St

• St. Paul

. Paul Me Mercury rcury

ROMANO (Sub) YONKERS (GC) Excess $10 M Indemnity Ins. Primary $1 M Royal Excess $5 M

• St. Paul

Primary $1 M

• St. Paul

Contractual Indemnity Additional Insured Horizontal Exhaustion

CIRCUITY – Indemnity Ins. can force St. Paul Primary to pay first under principle of horizontal exhaustion but Yonkers could then pass that liability back to Romano via contractual indemnity, which would flow back to Indemnity Ins. Court shortcuts that result by simply holding that horizontal exhaustion does not apply.

22

1. General contractors and owners with contractual indemnity rights against subcontractors should seek to establish as soon as possible their right to contractual indemnity against subcontractors.

• This can be done via a third party claim in the underlying action brought by the

injured party.

• If a right to contractual indemnity is established prior to a determination regarding

the priority of coverage, the upstream insurers should argue that, under St

• St. Paul

Paul Me Mercury rcury, the upstream parties’ liability passes to the subcontractors and its insurer, and thus the priority of coverage is irrelevant.

• 2. Upstream insurers should also be aware that St
• St. Pau

Paul Merc Mercury ury is not binding in New York other than in the First Appellate Department. And, even in the First Department, Bovi vis and Ti Tishman man are still good law.

• 3. Although Horizontal Exhaustion remains generally the law In New York, St
• St. Paul

aul Merc Mercury ury provides insurers with the ammunition to argue for greater use of

Ac Acti tion

• n Po

Point ints s Fo For Ge r Gene nera ral l Co Cont ntra ract ctors

• rs An

And Own d Owner ers s an and Th d Their eir In Insu sure rers rs i in lig n light ht of

• f St
• St. Pa

. Paul ul M Mer ercury cury

23

Cha Changi nging Lands ng Landscape cape

Anti-Indemnity Statutes Impact upon Priority of Coverage

• Statutory limitations upon scope of

indemnity obligation, diminish circuity of litigation argument

• Statutory Limitations upon Additional

Insured Coverage restricts vertical exhaustion

24

Anti Anti-Ind Indemni emnity Sta ty Statut tutes es

• Legislative limitation on contractual indemnity

agreements

• +/- 44 states recognize some form of anti-

indemnity limitation in construction contracts

• Exceptions: AL, DC, ME, NV, ND, PA, WI

Insofar as the claim against the upstream party implicates such party’s own negligence, the argument that the sub’s excess carrier will ultimately pay whether vertical or horizontal exhaustion is applied may not be accurate!

25

Anti Anti-Ind Indemni emnity Sta ty Statut tutes: es: Ins Insura urance nce Im Implic plications ations

• A number of states preclude GC from Requiring Sub to
• btain AI coverage which protects GC from its own

negligence

• e.g., California, Colorado, Kansas, Louisiana, Michigan, Montana, New

Mexico, Oklahoma, Oregon and Texas

• A few states have given some (but not a clear) indication

that the anti-indemnity prohibition extends to insurance

• e.g., Delaware, Georgia and Ohio
• To the extent claims against the additional insured

implicate its own negligence, the AI Coverage and GC’s

• wn coverage may both be required to provide indemnity

26

Cha Changi nging Lan ng Landsc dscape ape Evo Evolution of IS lution of ISO AI Co O AI Cover verag age

Limitations upon the Scope of AI coverage directly impact the Horizontal / Vertical Exhaustion Debate.

27

Ad Addi dition tional al Ins Insure ured d Cha Change nges Li Limits mits: : No No mo more re th than an co contr ntract act pr provides

• vides

$10 Million $2 Million $5 Million $1 Million $1 Million

Co Contract tract Re Requirements uirements Poli licy cy Li Limi mits

28

Ad Addi dition tional al Ins Insure ured d Cha Change nges Li Limits mits: : No No mo more re th than an co contr ntract act pr provides

• vides

$10 Million $2 Million $5 Million $1 Million $1 Million

Co Contract tract Re Requirements uirements Poli licy cy Li Limi mits

29

$1 Million

$10 Million

Ad Addi dition tional al Ins Insure ured d Cha Change nges Li Limits mits: : No No mo more re th than an co contr ntract act pr provides

• vides

$2 Million $5 Million $1 Million $1 Million $1 Mi Millio llion n GAP

AP

Co Contract tract Re Requirements uirements Poli licy cy Li Limi mits

30

$1 Million

Ad Addi dition tional al Ins Insure ured d Cha Change nges Li Limits mits: : No No mo more re th than an co contr ntract act pr provides

• vides

$10 Million $2 Million $5 Million $1 Million $1 Million $1 Mi Millio llion n GAP

AP

Co Contract tract Re Requirements uirements Poli licy cy Li Limi mits

31

$1 Million

32

Wh What at ha happ ppens ens wh when en th the insur e insured ed se settle ttles s wit with the h the pr prima imary ry car carrie rier r fo for le r less than ss than po policy licy limi limits? ts? It depends on your jurisdiction and policy language . . .

33

Ze Zeig v. ig v. Ma Massachusetts ssachusetts Bon Bonding ding & Ins & Ins. . Co. Co., , 23 F 23 F.2d 665 (2d Cir. 1928 .2d 665 (2d Cir. 1928)

• Settlement by insured with primary carrier did

not eliminate excess coverage

• Excess carrier – no rational interest in whether

insured collected full primary limits

• Public policy: delay, promotion of litigation,

chilling effect on settlements

• But parties could impose conditions precedent if

they chose to do so…

34

Cas Cases es following the following the Zei Zeig g rat rationa ionale: le:

• Koppers Company, Inc. v. Aetna Casualty and Surety Company,

98 F.3d 1440 (3d Cir. 1996) (Pennsylvania law) (court did not focus

• n policy language; settlement with primary carrier “functionally

exhausted” primary policy)

• Trinity Homes, LLC v. Ohio Casualty Insurance Company, 629

F.3d 653 (7th Cir. 2010) (Indiana law) (policy was ambiguous; did not clearly require payment of full CGL limit)

• Rummel v. Lexington Insurance Company, 123 N.M. 752, 945 P.2d

970 (N.M. 1997) (policy language – “liability of the Company under this policy shall not attach unless and until the Insured’s Underlying insurance has been paid or has been held liable to pay the total applicable underlying limits” – did not preclude underlying insurer from settling for less than its limits and being credited for the balance)

35

Co Come mercia rcia In

• Inc. v. Zu
• c. v. Zurich

rich Ame American rican In Insurance surance Co Co., , 49 498 8 F. F.Su Supp. pp.2d 1019 2d 1019 (E (E.D .D. M . Mich

• ich. 20

. 2007 07)

• Distinguished Zeig - lack of specificity in excess

policy language

• Different result with specific policy language
• Public policy favors settlements, but can not

supersede unambiguous policy language

• Policy required “actual payment of losses” by the

underlying insurer

36

Ca Case ses follow s following the ing the Come Comercia rcia ra ration tionale: ale:

• Citigroup, Inc. v. Federal Insurance Company, 649 F.3d

367 (5th Cir. 2011) (excess policies not ambiguous; plain language dictated primary carrier pay full limits before excess coverage was triggered)

• Qualcomm, Incorporated v. Certain Underwriters at

Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770 (Cal.

• Ct. App. 2008) (policy language was not ambiguous;

did not apply Zeig because it placed policy considerations above plain language, employed a strained interpretation of “payment,” and stated that parties could use express language)

37

Pol Policy icy lan language guage sup support porting no exce ing no excess cove ss covera rage: ge:

Citi Citigr group

• up, Inc
• Inc. v. Federal

Federal Ins

• Ins. Co

Co., 649 649 F.3d 367 367, 372 372-73 73 (5th

th Cir

Cir. 2011 2011) (e (emp mphasis hasis add added ed)

• “(a) all Underlying Insurance carriers have paid in cash the full

amount of their respective liabilities, (b) the full amount of the Underlying Insurance policies have been collected by the plaintiffs, the Insureds or the Insureds’ counsel, and (c) all Underlying Insurance has been exhausted.”

• “The insurer shall only be liable to make payment under this policy

after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance.”

• “only after any Insurer subscribing to any Underlying Policy shall

have agreed to pay or have been held liable to pay the full amount

• f its respective limits . . .”
• “in the event of the exhaustion of all of the limit(s) of liability of

such ‘Underlying Insurance’ solely as a result of payment of loss thereunder.”

Po Policy lan licy language guage su suppo pport rting no ex ing no exce cess ss cov cover erage: age:

Qua Qualco lcomm, mm, Inc

• Inc. v. Certain

Certain Underwriters Underwriters at at Lloyd’s, 161 161 Cal Cal.App App.4th

th 184

184, 73 73 Cal Cal.Rptr Rptr.3d 770 770 (Cal (Cal. Ct

• Ct. App

App. 20 2008 08)

• “Underwriters shall be liable only after the insurers

under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability.”

Co Comercia mercia Inc

• Inc. v. Zurich

Zurich Americ American an Insu Insuran rance ce Co Co., 498 498 F.Su Supp pp.2d 10 1019 19 (E (E.D. Mi Mich

• ch. 20

2007 07)

• Policy required “actual payment of losses” by

underlying insurer, and stated that the “policy does not provide coverage for any loss not covered by the ‘Underlying Insurance’ ‘Underlying Insurance’ ”

38

CGL Ins. Emerging Issue - Allocation

When Losses Span Multiple Policy Periods

“Joint and Several” Approach – Insurer responsible for complete defense / indemnity up to policy limits “Pro-Rata” Approach – Insurer only responsible for time on the risk

39

Con Consoli solidate dated d Ins

• Ins. Progra

. Programs: ms: A.K.A “Wrap Ups”

• Helps avoid much of the finger pointing and

allocation arguments involved when projects are insured by traditional programs

40

• Review all relevant policies to assess scope, limits, and “other

insurance” provisions

• Determine applicable state/jurisdiction that may govern the

policies and the trade contract(s)

• Upstream Parties (e.g., General Contractors and Owners) should

insist upon “primary and non-contributory” language in downstream parties’ (e.g., Subcontractors’) insurance policies

• Upstream Parties should seek to include a vertical exhaustion

provision in their own insurance policies

• Consider whether a consolidated insurance (a/k/a “wrap-up”)

program is cost-effective and otherwise appropriate for your project

TAK TAKE E AWA AWAYS YS

41

Con Contact tact Us Us

Rebecca DiMasi rdimasi@vbllp.com David Jordan dgj@sdvlaw.com Rich Friedman rfriedman@mlalaw.com

42