CONSTRUCTION LIABILITY CLAIMS: ARE YOU COVERED? (IND004)

CONSTRUCTION LIABILITY CLAIMS:

ARE YOU COVERED?

(IND004) Speakers:

Edward M. Joyce, Partner, Jones Day

The views expressed by the speakers are not

those of the speaker’s employer, firm, clients, or

any other organization.

The opinions expressed do not constitute legal or

risk management advice.

The views discussed are for educational purposes

only, and provided only for use during this

Learning Objectives

At the end of this session, you will:

• Understand your insurance policy provisions in the context of

construction liability claims

• Decipher the complex balance of policy definitions within the

work and product exclusions

• Identify and address common pitfalls when presenting your

Construction Liability Insurance

Overview

• Basic Insurance Policy Coverage

• Commercial General Liability Broad Form Coverage • Owner Controlled Insurance Program (OCIP)

• Contractor Controlled Insurance Policy (CCIP)

• Who Should Buy Insurance?

• Non-Delegable Responsibility

• How Much Insurance Should I Purchase? Require? • Coverage Gaps / Overlap

Claim Management Starts At

Project Inception

• Know Your Project - Know Your Risk

• Understand the Project and the Participants • Design Risk Allocation

• Structure Contracts Accordingly

• Indemnification

• Insurance Requirements • Policy Prioritization

• Cost Sharing

• Read the Entire Agreement

• Proper Additional Insured Coverage

• Review Critical Aspects of Insurance Placed by Third Parties

Know Your Project

Know Your Risks

• Know Your Project

• Parties to the Construction Project

• Owner

• Lenders / Investors • Design Professionals • General Contractors • Subcontractors

Know Your Project

Know Your Risks

• Potential Sources of Loss

• Design Defect

• Design Professionals

• Design / Build Contractors

• Construction Defect

• Materials

• Workmanship

• Earth Movement / Settlement • Patent Defects vs. Latent Defects • Consequential Loss

Know Your Project

Know Your Risks

• What’s Insurable? What’s Not?

• CGL Policy v. Warranty Policy • Business Risk Exclusions

• Contractual Liability

Presenting Your Claim

• Identify Potential Parties

• Understand Applicable Indemnification Provisions and Available Insurance

• Obtain Certified Copies of Potentially Applicable Policies • Notice All Potential Insurance Companies

• Named Insured / Additional Insured • Primary / Excess

• Coverage May Depend On Perspective

• Proper and Timely Notice of Claims

• Initial Notice

Presenting Your Claim

• Establish Effective Relationship with Your Insurer

• Be a Proactive Participant

• Establish Effective Communication • Selection of Defense Counsel

• Signs of Trouble

• Who is the Client?

Coverage Issues

• Duty to Defend

• “Legally obligated to pay as damages”

• Occurrence

• Bodily Injury and Property Damage

• Known Loss

• Exclusions

CGL Insuring Agreements

• A typical CGL insuring agreement provides in part:

• a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. . . .

This insurance applies only to “bodily injury” and “property damage” which occurs during the policy period.

CGL Insuring Agreements

• A typical CGL insuring agreement provides in part:

• The “bodily injury” or “property damage” must be

caused by an “occurrence.” The “occurrence” must take place in the “coverage territory.”

• “We will have the right and duty to defend any ‘suit’ seeking those damages.”

(NOTE: payment of defense costs does not erode policy limits)

“Legally Obligated To Pay As

Damages”

• Encompasses two distinct concepts:

• “Legally obligated” which would include liability for breach of contract; and

• “As damages” which includes all monetary sums awarded in judgment to a third party.

“Legally Obligated To Pay As

Damages” (Continued)

POTENTIAL ISSUES:

• Do actions in equity (injunction, mandamus)

which seek monetary damages fall within the “as

damages” definition? Current tide is that they are

covered.

• Do costs incurred in complying with an injunction

constitute damages? Traditionally no, but tide is

turning.

• Are costs incurred to prevent or mitigate property

Occurrence

• Occurrence vs. claims made policies

• Various trigger of coverage theories

• “Continuous and repeated exposure to conditions”

• Allocation when multiple policies are triggered

Property Damage

Definition of “property damage”:

“a. Physical Injury to tangible property, including all

resulting loss of use of that property; or b. Loss of use

of tangible property that is not physically injured.”

POTENTIAL ISSUES:

• Breach of contract

• Diminution in value

• Delay and impact damages

Common Exclusions

Contractual Liability

“bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.

This exclusion does not apply to liability for damages:

1) that the insured would have in the absence of contact or agreement; or

2) Assumed in a contract or agreement that is an “insured contract” . . . “Insured Contract” can include a lease, an easement, an

agreement pertaining to your business to assume the tort liability of another party.

Common Exclusions

Owned Property

• Most policies exclude damage to property

owned by the insured.

• Usually does not arise in the construction

context except for developers.

• When does the property transfer -- contract

Common Exclusions

Care, Custody and Control

Excludes property damage to property in the care,

custody or control of any named or additional

insured.

• Damage to “other property” not excluded.

• Necessary part of the work -- excluded.

Common Exclusions

Faulty Workmanship

Excludes property damage for which “the restoration,

repair or replacement of which has been made

necessary by reason of faulty workmanship thereon by

or on behalf of the insured.”

POTENTIAL ISSUES INCLUDE:

• Can be interpreted as ambiguous because it could

apply to either flawed quality of finished product or

flawed process during construction (not both). Courts

have gone both ways.

• Some courts have held, despite drafting intent, that

Common Exclusions

Completed Operations

CGL insurance policies usually exclude “property

damage” arising out of “your work.” The exclusion

does not apply, however, if the work was performed

on your behalf by a subcontractor.

POTENTIAL ISSUES INCLUDE:

• When was the policyholder’s work “completed”?

• When did the property damage occur?

• Endorsements either eliminate or limit the

Common Exclusions

Impaired Property Exclusion

Exclusion states that insurance does not apply to:

“Property damage” to “impaired property” or property

that has not been physically injured, arising out of:

• A defect, deficiency, inadequacy or dangerous

condition in “your product” or “your work;” or

• A delay or failure by you or anyone acting on your

behalf to perform a contract or agreement in

accordance with its terms.

This exclusion does not apply to the loss of use of other

property arising out of sudden and accidental physical

injury to “your product” or “your work” after it has

been put to its intended use.

Common Exclusions

Impaired Property Exclusion (Continued)

“Impaired property” means tangible property, other than “your product” or “your work,” that cannot be used or is less useful because:

a. It incorporates “your product” or “your work” that is known or thought to be defective, deficient, inadequate or dangerous; or

b. You have failed to fulfill the terms of a contract or agreement;

If such property can be restored to use by:

a. The repair, replacement, adjustment or removal of “your product” or “your work;” or

Common Exclusions

Impaired Property Exclusion (Continued)

POTENTIAL ISSUES INCLUDE:

• Some courts have interpreted as ambiguous and

refused to apply it in its entirety.

• Exclusion can not apply to physically injured

property, only “loss of use” property damage.

• Exclusion should not apply where the

incorporation of the defective work to tangible

property results in no actual physical damage to

tangible property but where the removal of that

defective work has or will injure other property.

Common Exclusions

Alienated Premises

Excludes property damage to any premises the

policyholder sells, gives away, or abandons, if the

property damage arises out of any part of those

premises.

POTENTIAL ISSUES INCLUDE:

• Damage to other property is not excluded.

• Some courts interpret the “arises out of” limitation as

requiring a proximate causal relationship. Other

courts are satisfied with some lesser causal link.

Common Exclusions

Business Risk/Your Work

Excludes property damage to “That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

"Your work" means:

a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with

such work or operations.

“Your work” includes warranties or representations made at any time with respect to fitness, quality, durability or performance of any of the items included in a. or b. above.

Common Exclusions

Business Risk/Your Work (Continued)

POTENTIAL ISSUES INCLUDE:

• Does not apply to the “property damage” included

in the products-completed operations hazard.

• Applies to work performed “on it,” meaning the

property must pre-exist. Examples include

remodeling or service work.

Additional Insured Issues

• Does the additional insured have evidence of the

insurance policy/certificate of insurance?

• Have the policy limits have been exhausted by other

claims?

• Has the insurance policy been cancelled for failure to

pay premiums?

• Is there “Other Insurance”?

• Are there allocation issues?