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

Performance Bonds and CGL Insurance in Construction Projects: Navigating the Interplay Between Insurance and Surety

Minimizing Risks and Maximizing Recovery for Defective Workmanship and Property Damage

Today’s faculty features:

1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific

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TUES DAY, APRIL 1, 2014

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

David M. Adelstein, Partner, Kirwin Norris, Orlando, Fla. James C. Washburn, Pohl & Short, Winter Park, Fla.

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P R E S E N T E D B Y : J A M E S C. W A S H B U R N , E S Q . P O H L & S H O R T , P . A . W A S H B U R N @ P O H L S H O R T . CO M 4 0 7 - 6 4 7 - 7 6 4 5 A P R I L 1, 2 0 14

PERFORMANCE BONDS

• n

CONSTRUCTION PROJECTS

AGEN D A

• N a t u r e o f t h e S u r e t y s h i p R e l a t i o n s h i p
• P e r f o r m a n c e B o n d Co v e r a g e
• S u r e t y ’s D e f e n s e s
• S u r e t y ’s R e m e d i e s

PERFORMANCE BONDS

• n

CONSTRUCTION PROJECTS

6

“S U R E TYS H I P I S N OT I N S U R AN CE ”

P e a r l m a n v . R e l i a n c e I n s u r a n c e C o . , 3 7 1 U . S . 13 2 , 14 0 n . 19 , 8 3 S . Ct . 2 3 2 , 9 L . E d . 2 d 19 0 ( 19 6 2 )

NATURE OF THE SURETYSHIP RELATIONSHIP

7

D I S TI N CTI O N S B E TW E E N S U R E TY B O N D S A N D I N S U R A N CE :

1 .

T h r e e - P a r t y A g r e e m e n t v . T w o - P a r t y A g r e e m e n t

2 .

S u r e t y ’s R i g h t o f I n d e m n i t y

3 .

P r e m i u m s

4 .

S c o p e o f C o v e r a g e

5 .

R i g h t s a n d R e m e d i e s

NATURE OF THE SURETYSHIP RELATIONSHIP

8

TH R E E P A R TY A GR E E M E N T

1 .

S u r e t y

2 .

O b l i g e e

3 .

P r i n c i p a l

NATURE OF THE SURETYSHIP RELATIONSHIP

9

R I GH T O F I N D E M N I TY :

1 .

Co m m o n L a w R i g h t o f I n d e m n i f i c a t i o n

2 .

C o n t r a c t u a l I n d e m n i t y

NATURE OF THE SURETYSHIP RELATIONSHIP

10

P R E M I U M S :

1 .

P o o l o f R e s e r v e s t o C o v e r L o s s e s o f N u m e r o u s I n s u r e d s

2 .

Ca s e - b y - Ca s e C a l c u l a t i o n o f E c o n o m i c R i s k

NATURE OF THE SURETYSHIP RELATIONSHIP

11

• Co s t o f Co m p l e t i o n
• D e f e c t i v e W o r k
• D e l a y D a m a g e s
• P e n a l S u m Li m i t a t i o n

PERFORMANCE BOND COVERAGE

12

P R O J E CT CO M P LE TI O N

• F i n a n c i n g t h e D e f a u l t e d P r i n c i p a l
• S e c u r e a Co m p l e t i o n Co n t r a c t o r
• Ca s h P a y o u t t o O b l i g e e

PERFORMANCE BOND COVERAGE

13

D E F E CTI V E W O R K

• D e f e c t s

D i s c o v e r e d P r i o r t o Co m p l e t i o n

• W a r r a n t y W o r k
• La t e n t D e f e c t s

PERFORMANCE BOND COVERAGE

14

D e l a y D a m a g e s

• Lo s s o f U s e / L o s t P r o f i t s / F i n a n c i n g

Ch a r g e s

• I n c r e a s e d La b o r a n d M a t e r i a l Co s t s d u e
• t o D e f a u l t
• Li q u i d a t e d D a m a g e s

PERFORMANCE BOND COVERAGE

15

P E N AL S U M LI M I TATI ON

• P r i n c i p a l / Co v e r e d D a m a g e s
• L i t i g a t i o n A t t o r n e y ’s F e e s

PERFORMANCE BOND COVERAGE

16

• P r i n c i p a l ’s D e f e n s e s a n d Cl a i m s
• S e t - o f f

f o r a m o u n t s

• w e d
• n

a s e p a r a t e P r o je c t

• O b l i g e e ’s I m p r o p e r P a y m e n t
• I n a d e q u a t e
• r

U n t i m e l y N o t i c e

• f

D e f a u l t

SURETY’S DEFENSES

17

• Ca r d i n a l Ch a n g e s
• S t a t u t e o f Li m i t a t i o n s
• La c k
• f

S t a n d i n g

• f

t h e P e r f o r m a n c e B o n d Cl a i m a n t

SURETY’S DEFENSES

18

• R i g h t o f S u b r o g a t i o n
• Co m m o n La w I n d e m n i t y
• Co n t r a c t u a l I n d e m n i t y

SURETY’S REMEDIES

19

• R i g h t t o S e t t l e Ob l i g e e ’s Cl a i m s

a g a i n s t t h e P r i n c i p a l / B o n d

• R i g h t t o S e t t l e P r i n c i p a l ’s Cl a i m s

a g a i n s t t h e Ob l i g e e

• Co l l a t e r a l D e p o s i t s

SURETY’S REMEDIES

20

• As s i g n m e n t t o p r o c e e d s o n o t h e r

P r o je c t s n o t i n d e f a u l t

• E x o n e r a t i o n
• At t o r n e y F e e s

SURETY’S REMEDIES

21

CGL Coverage in Construction Projects

Presented by:

David M. Adelstein, Esq. Kirwin Norris

dma@kirwinnorris.com 954-759-0026

April 1, 2014

• A. CGL BASICS

(1) PURPOSE OF CGL (THIRD PARTY LIABILITY) POLICY: 2 main purposes or duties: 1) defend insured 2) indemnify insured from 3rd party claims *duty to defend broader than duty to indemnify & triggered by allegations of complaint that would give rise to “potential” coverage **This is why if insurer provides defense, it is often under a reservation of rights to deny coverage / duty to indemnify

23

CGL (Commercial General Liability) COVERAGE

CGL IS NOT A PERFORMANCE BOND! “ [A] performance bond is a form of insurance that guarantees the completion of the general contractor’s work

• n 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 own work.”

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

24

• A. CGL BASICS

(2) COVERAGE APPLICABLE TO CONSTRUCTION

• PROPERTY DAMAGE- TRIGGERED BY AN

“OCCURRENCE”

• Bodily injury/death – SAME TRIGGER

25

• A. CGL BASICS

26

• A. CGL BASICS

(3) WHAT IS AN OCCURRENCE THAT TRIGGERS POTENTIAL COVERAGE

SECTION V- DEFINITIONS

27

An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id., § V 12. The term “accident” is not defined. “[W]here the term ‘accident’ in a liability policy is not defined, the term ... encompasses not only ‘accidental events,’ but also injuries or damage neither expected nor intended from the standpoint of the insured Assurance Co. of America v. Lucas Waterproofing Co., Inc., 581 F.Supp.2d 1201, 1208 (S.D.Fla. 2008)

• A. CGL BASICS

28

• A. CGL BASICS

“Under Section V of the Policies, the term occurrence is defined to mean “an accident which takes place during the policy period, or that portion of a policy period of a continuous or repeated exposure to conditions, which causes personal injury, property damage or advertising liability neither expected nor intended by the insured.”

Canal Ins. Co. v. Montello, Inc., 2013 WL 6732658, *8 (N.D.Okla. 2013)

29

What is completed operations?

• Coverage for bodily injury / property damage

that “occurs” post-completion

• A. CGL BASICS

30

• A. CGL BASICS

NOW, THE CONFUSION!?!?!?! EXCLUSIONS & EXCEPTIONS TO EXCLUSIONS

31

TORT INDEMNITY

• A. CGL BASICS

32

*This is why indemnification / hold harmless provisions are important in construction contracts as insured “assumes the tort liability of another [GC / Owner] to pay for bodily injury

• r property damage to a third person [GC / Owner].”
• A. CGL BASICS

33

• III. CGL BASICS-FAULTY WORKMANSHIP

 No coverage during construction for damage to “your work”  CGL not designed to pay for repair damages to your scope, but resulting damage or damage caused by your scope

34

• III. CGL BASICS-FAULTY WORKMANSHIP

Wilshire Insurance Co. v. Birch Crest Apartments, Inc., 2011 WL 3586228 (4th DCA 2011)- Painter during construction spattered paint on glass windows and doors; it tried to remove spatter and, in doing so, damaged glass Issue: Is the damage to the glass covered under CGL? NO! Since damage was to property that painter was performing its operations, and it arose

• ut of the natural and intended scope of the operations (since cleaning paint spatter is

natural scope of painter’s operations), this exclusion to coverage applied

35

• III. CGL BASICS-FAULTY WORKMANSHIP

Since the painter’s incorrect work was on the glass windows and doors (within its scope) this exclusion to coverage applied

36

• III. CGL BASICS-FAULTY WORKMANSHIP

37

• III. CGL BASICS-FAULTY WORKMANSHIP

Liberty Mut. Fire Ins. Co. v. MI Windows & Doors, 131 So.3d 15 (Fla. 2d DCA 2013) - Sub purchased sliding glass doors from

• mfg. to install in condo. Sub added transoms to doors. Doors

were defective. Issue: Is there coverage to mfg. for defective doors? No. Barred by “your product” exclusion. The defective doors was mfg.’s product. Mfg. argued that by the sub adding transoms to the doors, the sub materially changed the doors so they were no longer mfg.’s product. Court found that if alchemy completely alters original product, then “your product” exclusion may not apply, but adding transoms does not materially alter doors to negate exclusion

38

• III. CGL BASICS-FAULTY WORKMANSHIP

Exception to Exclusion

39

• III. CGL BASICS-FAULTY WORKMANSHIP

U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007)- sub’s defective soil compaction caused damage to home (foundations and drywall, etc.) post-completion

Issue: Is there coverage to GC based on subcontractor exception to your work exclusion for completed operations? YES!

* Since sub’s damage caused resulting damage to

• ther work, GC’s insurer responsible for coverage

40

• III. CGL BASICS-FAULTY WORKMANSHIP

Note: **Endorsements have been issued that eliminated the subcontractor exception to the “your work” exclusion

“[T]he court finds that the “your work” exclusion and the endorsement removing the subcontractor's exception from the “your work” exclusion preclude coverage for the underlying claims of property damage in this case”

Builders Mut. Ins. Co. v. Kalman, 2009 WL 4807003, *5 (D.S.C. 2009) (Owner of multi- million dollar home noticed water damage post-completion; GC’s insurer issued endorsement eliminating subcontractor exception to the your work exclusion)

41

• III. CGL BASICS-FAULTY WORKMANSHIP

But, other jurisdictions disagree with FL law: Westfield Ins. Co. v. Sheehan Const. Co., Inc., 580 F. Supp.2d 701 (S.D.Ind. 2008)- GC built home and used subs; post-completion owner experienced water damage Issue: Under Indiana law, is there coverage for resulting damage under GC’s CGL since sub’s performed work? NO! “[W]hen Subcontractor A's faulty workmanship damages Subcontractor B's undamaged work, “any costs associated with the repair of any ‘component’ of the houses built by [Subcontractor B], whether existing of faulty construction or non- defective work, are not ‘property damage’ under the CGL policy and Indiana law.” This is so because under Indiana law, a general contractor's product is the entire project or house which he built and sold, including all component work done by

• subcontractors. Therefore, in this case, any repair costs by Sheehan due to the

faulty workmanship of its subcontractors is not ‘property damage.’ Id. (internal quotations & citations omitted)

42

• III. CGL BASICS-FAULTY WORKMANSHIP

Other exclusions to consider issued through endorsements:  Mold & Dry/Wet Rot

Note: Consider water damage claims

Residential Exclusion (Applies to condos / apartments)

Note: Consider sub working on condo or apartment with this endorsement

43

• III. CGL BASICS-FAULTY WORKMANSHIP

Additional Insured Coverage (see endorsement to policy as not all endorsements are equal)

• Most endorsements only provide additional

insured coverage for ongoing operations NOT COMPLETED OPERATIONS

• You want additional insured status for

completed operations

44

• III. CGL BASICS-FAULTY WORKMANSHIP

45