Construction Defect Indemnity Obligations Under CGL Policies: - - PowerPoint PPT Presentation

The audio portion of the conference may be accessed via the telephone or by using your computer's

• speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

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

Construction Defect Indemnity Obligations Under CGL Policies: Identifying Covered

• vs. Non-Covered Damages

Leveraging Insurance Coverage Arguments for Contractors, Subcontractors and Insurers

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, AUGUST 23, 2016

David M. Adelstein, Partner, Kirwin Norris, Orlando and Ft. Lauderdale, Fla. Brendan Winslow-Nason, Member, Cozen O'Connor, Seattle

Tips for Optimal Quality

Sound Quality If you are listening via your computer speakers, please note that the quality

• f your sound will vary depending on the speed and quality of your internet

connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-871-8924 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you email that you will receive immediately following the program. For additional information about continuing education, call us at 1-800-926-7926

• ext. 35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

CONSTRUCTION DEFECT INDEMNITY OBLIGATIONS UNDER CGL POLICIES ___________________________ Covered vs. Non-Covered ___________________________

Presented by: Brendan Winslow-Nason, Cozen O’Connor & David Adelstein, Kirwin Norris

August 23, 2016

INITIAL QUESTIONS

Scenario: You are GC, Sub, or Supplier. You have CGL insurance. A construction defect claim is asserted that implicates YOUR WORK.

• 1. Is there CGL insurance coverage?!?
• 2. Is there “property damage” within the

meaning of my CGL policy?

• 3. What was the “occurrence” that triggered CGL

policy(ies)?

• 4. What “property damage” is covered vs. not

covered (excluded) under the CGL policy(ies)…pre-completion...post-completion?

6

CGL IS NOT A PERFORMANCE BOND! “ [A] performance bond is a form of insurance that guarantees the completion of the general contractor’s work on the project. This [5th] Circuit has previously noted the significance of the difference between these two forms of insurance [CGL and performance bond]: A CGL policy generally protects the insured when his work damages someone else’s property. The ‘your work’ exclusion [in the policy] prevents a CGL policy from morphing into a performance bond covering an insured’s

• wn work.”

Carl E. Woodward, L.L.C. v. Acceptance Indemnity Insurance Co., 2014 WL 902575, *7 (5th Cir. 2014)(internal quotations and citations omitted).

7

CGL COVERAGE APPLICABLE TO CONSTRUCTION

Purpose of CGL

1.

Duty to defend insured

2.

Duty to indemnify insured from 3rd party claims *duty to defend broader; triggered by allegations in “suit” **insurers typically defend under reservation of rights to deny coverage / duty to indemnify

8

Coverage  Property damage – triggered by occurrence  bodily injury/death – triggered by

• ccurrence

**Remember, coverage will be subject to exclusions in the applicable CGL policy(ies) CGL COVERAGE APPLICABLE TO CONSTRUCTION

9

What is Covered? What is an occurrence & property damage?

*Remember the Exclusions...

CGL COVERAGE APPLICABLE TO CONSTRUCTION

10

INDEMNIFICATION OBLIGATIONS

CGL Policy

Again, CGL policy to indemnify insured(s) for covered damages

associated with third-party claims (duty to indemnify) Flowing Down Damage

Additional Insured Status – e.g., getting yourself named as insured on

another’s CGL policy so that you can be defended & indemnified for primary insured’s negligence…for pre-completion and post-completion

• perations

Contractual Indemnification- e.g., contractually requiring another /

indemnitor to indemnify you / indemnitee for...



Narrow (indemnitor’s sole negligence)



Intermediate (caused wholly or partially by indemnitor’s negligence)



Broad (for indemnitee’s sole negligence) **Indemnification lang. must comply with statutory requirements

Primary & noncontributory lang. - deals with priority of coverage –

e.g., you want another / indemnitor’s liability policy to be primary and noncontributory to insurance coverage provided by add’l insured

11

COVERED DAMAGES

Depends on Jurisdiction…

 Resulting Damage - damage to other work caused by defect  “Rip & Tear” Damages - damage associated with repairing

resulting damage

 Loss of Use Damages - loss of use of property

 Big-D Const. Corp. v. Take it for Granite Too, 917 F

.Supp.2d 1096 (D.Nev. 2013) – loss of use of front entrance door due to defective exterior stone tile (that had fallen) was covered; damaged to be determined at trial

 Lyerla v. AMCO Ins. Co., 536 F

.3d 684 (7th Cir. 2008) –LDs and

• wner’s storage fees associated with delay not covered loss of

use as they aren’t result of loss of use of tangible property but damages due to delay

 National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v.

Structural Systems Technology, Inc., 756 F .Supp. 1232 (E.D.Mo. 1991) -radio tower collapsed and owner sued for lost profits / diminution in value of radio station; court held this is this is covered damage if determined insurer has duty to indemnify

12

COVERED DAMAGES

Depends on Jurisdiction

 Diminution in Value – diminished value of property  American Mercury Ins. Group v. Urban, 2001

WL 1723734 (D.Kan. 2001) - CGL does not cover diminution in value damages to owner’s facility

 Pavarini Construction Co (Se) Inc. v. Ace

American Ins. Co., 2015 WL 9686009 (S.D.Fla. 2015) – CGL policies do not cover damages purely economic in nature; therefore, no coverage to GC for delay costs, lost profits, diminution in value, or other economic losses flowing from injury to property

 Missouri Terazzo Co. v. Iowa Nat. Mut. Ins. Co.,

740 F .2d 647 (8th Cir. 1984)- diminished value of supermarket building due to damage to terrazzo floor (cracking and discoloration) and connecting structures was covered since it was means to measure damage sustains as the result of property damage

13

THE METHODOLOGY

Consider the underlying exposure Consider what law applies Consider the scope

• f

Additional Insured coverage Consider the impact

• f anti-

indemnity statutes Know the applicable jurisdiction’s laws on key coverage issues Involve experts in the complex cases

Extracontractual Considerations End Product

14

THE METHODOLOGY Step One – Consider the Underlying Exposure

• Job files
• Contracts
• Discovery
• Expert reports
• Scopes of repair
• Repair estimates
• Defense counsel reports / liability analysis

15

THE METHODOLOGY Step Two – Consider What Law Applies

16

THE METHODOLOGY Step Three – Consider the Scope of Additional Insured Coverage

17

Pre-2013: 2013 Additions:

THE METHODOLOGY Step Four – Consider Impact of Anti-Indemnity Statutes

“Sole Negligence” States Arizona California Colorado Connecticut Delaware Florida Illinois Iowa Kansas Kentucky Louisiana Minnesota Mississippi Missouri Montana Nebraska New Hampshire New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Rhode Island Texas “Any Negligence” States Alaska Arkansas Georgia Hawaii Idaho Indiana Maryland Massachusetts Michigan New Jersey Pennsylvania South Carolina South Dakota Tennessee Utah Virginia Washington West Virginia

18

THE METHODOLOGY Step Five – Know the Applicable Jurisdiction’s Laws

• n Key Coverage Issues

“Property Damage” and “Occurrence” “Trigger Theory” “Work” exclusions “Rip and tear” Loss of use and impaired property “Contractual Liability” exclusion Modification of coverage by endorsement

19

THE METHODOLOGY

Step Six – Involve Experts if Warranted

20

THE END PRODUCT

Covered Non-Covered

• Resultant damage to other

contractor’s work caused by the insured’s defective work

• “Rip and tear” that is

necessary to repair physical damage to other contractor’s work

• Repair and replacement of

just the defective work itself

Create a chart like this one identifying what damages are covered vs. not covered…

21

THE END PRODUCT

Now take the expert reports, scopes of repair, and repair estimates, and any other damage documentation, and create a spreadsheet like this one breaking out the covered and non-covered damages…

Item Description Total Covered “Rip and Tear” and resultant damage to non- defective property Non-covered damage to defective work Demolition of drywall to access defective piping $20,000 $20,000 $0 Repair electrical system damaged by pipe leaks $50,000 $50,000 $0 Repair defective pipes $30,000 $0 $30,000 Repair Sub Totals $100,000 $70,000 (70% of repairs) $30,000 (30% of repairs) General conditions $15,000 $10,500 (70%) $4,500 (30%) Contingency $10,000 $7,000 (70%) $3,000 (30%) Permit $1,000 $700 (70%) $300 (30%) Bond $1,000 $700 (70%) $300 (30%) Totals $127,000 $88,900 (covered) $38,100 (not covered) 22

EXTRA-CONTRACTUAL CONSIDERATIONS

23

CASE STUDY #1

The Small Project - “Stucco Gone Wrong”

24

“Stucco Gone Wrong”

Facts:

Insured is a siding subcontractor

that installed defective stucco siding.

Resulted in water intrusion causing

damage and impairment to another contractor’s work beneath the siding.

Experts conclude that though not all

• f the siding was failing, all of the

siding does need to be replaced.

25

“Stucco Gone Wrong”

Jurisdictional Rules:

Construction defects are “property

damage” and an “occurrence;”

The “Your Work” exclusion does not

bar coverage for resultant damage to

• ther contractors’ work; and

There is coverage for “rip and tear.”

26

“Stucco Gone Wrong”

Covered Non-Covered

• Resultant damage to other

contractor’s work caused by the insured’s stucco siding

• “Rip and tear” to stucco-

siding that is necessary to repair physical damage to

• ther contractor’s work
• “Rip and tear” to stucco

siding to address “impairment” to other contractor’s work

• Repair and replacement of

stucco siding where there is no resultant damage or “impairment” to other contractor’s work

• Damage arising from

“impairment” to other contractor’s work (e.g. damage for loss of use or value to the impaired property)

27

CASE STUDY #2

The Mega Project - “Oil Refinery”

28

“Oil Refinery”

Facts:

Insured is a “pipe spool” manufacturer

based in Louisiana.

Insured’s defective pipe spools were

installed into a Washington oil refinery.

Defects were discovered and corrected

before refinery came on-line.

29

“Oil Refinery”

Scope of Repairs:

 Insulation, paint, field welds, gaskets, and some

supporting structures were damaged or destroyed in order to access and repair the defective pipes.

 Pipes were then repaired or replaced onsite.

Damages:

 $20 million for repair and replacement costs to

the pipes.

 $30 million in lost income to refinery owner

caused by delay in bringing facility on-line in

• rder to repair and replace the pipes.

30

“Oil Refinery”

Jurisdictional Rules:

Unintentional construction defects are “property

damage” and an “occurrence;”

The policy is endorsed to exclude damages to “pipe

spools;”

It is unclear whether “rip and tear” damages are

covered – depends on what law applies; and

The “Impaired Property” exclusion bars coverage if

the insured’s defective product impairs the use of

• ther property (i.e., impairs the oil refinery).

31

“Oil Refinery”

Expert Opinion:

The pipes were merely defective and

did not cause damage to other property.

All of the damages claimed by the

refinery owner are the direct result of the repair and replacement to the defective pipes.

Expert has quantified “rip and tear”

damages of $7 million.

32

“Oil Refinery”

(Potentially?) Covered Non-Covered

• “Rip and tear” to the

insulation, paint, field welds, gaskets, and supporting structures that were damaged

• r destroyed in order to

access and repair the defective pipes

• The “pipe spools”
• Impairment to the oil refinery

(delay damages)

33

Contact Information

Brendan Winslow-Nason Cozen O'Connor 999 Third Avenue, Suite 1900 Seattle, WA 98104 P: 206-373-7252 Bwinslow-Nason@Cozen.com David Adelstein Kirwin Norris 110 E. Broward Boulevard, Suite 1570

• Ft. Lauderdale, FL 33301

P: 954-759-0026 dma@kirwinnorris.com

34