CGL COVERAGE FOR RIP AND TEAR COSTS

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Workshop W2

Workshop W2

Wednesday, November 14

9:00–10:15 a.m. and 10:45 a.m.–noon

CGL COVERAGE FOR RIP AND TEAR COSTS

Presented by

Jeffrey D. Masters

Partner

Cox, Castle & Nicholson LLP

Claims involving damage to the work often raise the complex issue of CGL coverage for rip and tear costs. Sometimes referred to as "access costs," rip and tear costs refer to costs incurred in tearing out, and then replacing, nondefective work to get to and repair damaged work. These costs can be a substantial portion of the loss, especially in major construction defect cases, and coverage for these costs in the CGL policy can be difficult to determine. Using examples of real claims, this session will explain the coverage questions surrounding rip and tear costs, synthesize the differing conclusions reached by courts, and provide both buyers and sellers of CGL insurance with the legal and practical analytical tools they need to successfully handle rip and tear coverage issues.

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Call us today at 800.476.2211 or visit www.mcgriff.com.

a f o u n d at i o n f o r s u c c e s s

As one of the largest construction insurance and surety brokers in the U.S., our mission is to deliver information, innovation and knowledge to help our clients achieve success. That’s why we’re here—it’s what drives us, and it’s what ultimately drives your profits. With an impressive team of dedicated construction and surety professionals, we’re poised to address the challenges that risk will inevitably place on your desk today and tomorrow.

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Workshop W2

Jeff Masters

Partner

Cox, Castle & Nicholson LLP

Mr. Masters is presenting Workshop W2, “CGL Coverage for Rip and Tear Costs,” on Wednesday morning. Mr. Masters is a partner in the Litigation Department and co-chair of the Development Risk Management Practice Group at Cox, Castle & Nicholson LLP in Los Angeles. He represents owners, investors, developers, home builders, and contractors in complex insurance coverage claims and litigation involving CGL, umbrella, excess, pollution liability, builders risk, and per-manent property policies. He has served as coverage counsel for insureds in numerous con-struction defect cases and other concon-struction litigation matters.

He also has an extensive transactional risk management practice, where he counsels clients on contractual risk transfer issues in design and construction contracts, leases, purchase and sale agreements, loan documents, and other real estate contracts. He has served as coverage counsel for owners, developers, and home builders in the structuring and implementation of dozens of OCIPs, both project-specific and rolling.

Mr. Masters is a frequent lecturer for real estate and construction industry groups such as IRMI, the Building Industry Association (BIA), the National Association of Home Builders (NAHB), and Urban Land Institute (ULI). He was coauthor of the educational materials and coinstructor for IRMI’s seminar series, “Construction Defect Risk Management and Insurance”(2008, 2007) and “Advanced Risk Management and Insurance Strategies for Residential Developers and Contrac-tors” (2006), and for NAHB’s educational course, “Risk Management and Insurance for Building Professionals” (2003).

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Notes

This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex.

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Workshop W2 1

Presented by: Jeffrey D. Masters

Partner

Cox, Castle & Nicholson LLP

CGL Coverage for

Rip and Tear Costs

What this Session Will Cover

• What are rip and tear costs?

• How are rip and tear costs covered under

the CGL policy?

• How have courts approached CGL

coverage for rip and tear costs?

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Rip and Tear Costs Defined

Costs attributable to damaging or

destroying nondefective work to obtain

access to repair defective work or resulting

damage

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“Legally Obligated To Pay”

• Focus is on what the claimant is legally

entitled to recover

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Workshop W2 5

“As Damages Because of Property

Damage”

• “Because of” = “by reason of”; “on account

of”

• The policy coverage is not limited to

“property damage”

• Coverage for consequential damages

“Property Damage” Defined

“Property damage” means:

a. Physical injury to tangible property, including all

resulting loss of use of that property. All such

loss of use shall be deemed to occur at the time

of the physical injury that caused it; or

b.Loss of use of tangible property that is not

physically injured. All such loss of use shall be

deemed to occur at the time of the “occurrence"

that caused it.

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How Have Courts Approached

Coverage for Rip and Tear Costs?

• Traditional View

• Rip and tear costs are covered

• Coverage is not precluded by “your product,” “your work,” or “impaired property” exclusions

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How Have Courts Approached

Coverage for Rip and Tear Costs?

• Bundy Tubing Co. v. Royal Indemnity Co.,

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Workshop W2 9

How Have Courts Approached

Coverage for Rip and Tear Costs?

• Baugh Construction Co. v. Mission

Insurance Co., 836 F.2d 1164 (9th Cir.

1988)

How Have Courts Approached

Coverage for Rip and Tear Costs?

• Current Trends

• Less predictability of results

• Differing views of whether defective construction is an “occurrence” and whether it involves “property damage”

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How Have Courts Approached

Coverage for Rip and Tear Costs?

• Current Trends

• Reluctance to apply the coverage as written

• Misunderstanding Exclusion L (PD to “your work”) and the subcontractor exception

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How Have Courts Approached

Coverage for Rip and Tear Costs?

• Five Analytical Tools for Handling Rip and

Tear Coverage Issues

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Workshop W2 13

Question 1: Is There Existing PD or

Is the Rip and Tear Itself the PD?

• New Hampshire Ins. Co. v. Vieira, 930

F.2d 696 (9th Cir. 1991)

Question 1: Is There Existing PD or

Is the Rip and Tear Itself the PD?

• Mutual of Enumclaw Ins. Co. v. T&G

Construction, Inc., 165 Wash.2d 255

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Question 1: Is There Existing PD or

Is the Rip and Tear Itself the PD?

• Riverfront Landing Phase II Owners’

Association v. Assurance Co. of America,

2009 WL 1952002 (W.D. Wash. 2009)

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Question 1: Is There Existing PD or

Is the Rip and Tear Itself the PD?

• Indian Harbor Ins. Co. v. Transform LLC,

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Workshop W2 17

Question 1: Is There Existing PD or

Is the Rip and Tear Itself the PD?

• DeWitt Construction Inc. v. Charter Oak

Fire Ins. Co., 307 F.3d 1127 (9th Cir.

2002)

Question 2: Are the Rip and Tear

Costs Caused by an “Occurrence”?

• Bright Wood Corp. v. Bankers Standard

Ins. Co., 665 N.W.2d 544 (Ct.App.Minn.

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Question 2: Are the Rip and Tear

Costs Caused by an “Occurrence”?

• OneBeacon Ins. v. Metro Ready-Mix, Inc.,

427 F.Supp.2d 574 (D.Md. 2006)

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Question 2: Are the Rip and Tear

Costs Caused by an “Occurrence”?

• Employers Mutual Cas. Co. v. Grayson,

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Workshop W2 21

Question 2: Are the Rip and Tear

Costs Caused by an “Occurrence”?

• Indian Harbor Ins. Co. v. Transform LLC,

2010 WL 3584412 (W.D.Wash. 2010)

Question 3: Are the Rip and Tear

Costs Attributable to Repair of the

Defective Work Itself?

• Desert Mountain Properties Limited

Partnership v. Liberty Mutual Fire Ins. Co.,

225 Ariz. 194 (Ct. App. 2010), aff’d, 226

Ariz. 419 (2011)

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Question 3: Are the Rip and Tear

Costs Attributable to Repair of the

Defective Work Itself?

• OneBeacon Ins. v. Metro Ready-Mix, Inc.,

427 F.Supp.2d 574 (D.Md. 2006)

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Question 3: Are the Rip and Tear

Costs Attributable to Repair of the

Defective Work Itself?

• Nas Surety Group v. Precision Wood

Products, Inc., 271 F.Supp.2d 776

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Workshop W2 25

Question 4: Will the Rip and Tear

Costs Be Incurred after Expiration

of the Policy Period?

• Baugh Construction Co. v. Mission Ins.

Co., 836 F.2d 1164 (9th Cir. 1988)

Question 4: Will the Rip and Tear

Costs Be Incurred after Expiration

of the Policy Period?

• General Acc. Ins. Co. of America v.

American National Fireproofing, Inc., 716

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Question 5: Does an Exclusion Bar

Coverage?

• “Your product”

• Employers Mut. Cas. Co. v. Grayson,

2008 WL 2278593 (W.D.Okla. 2008)

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Question 5: Does an Exclusion Bar

Coverage?

• “Your product”

• Columbia Mut. Ins. Co. v. Epstein, 239

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Workshop W2 29

Question 5: Does an Exclusion Bar

Coverage?

• “Your product”

• Int’l Environmental Corp. v. National Union

Fire Ins. Co. of Pittsburgh, PA., 843

F.Supp. 1218 (N.D.Ill. 1993)

Question 5: Does an Exclusion Bar

Coverage?

• “Your product”

• Bright Wood Corp. v. Bankers Standard

Ins. Co., 665 N.W.2d 544 (Ct.App.Minn.

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Question 5: Does an Exclusion Bar

Coverage?

• “Your work”

• Employers Mut. Cas. Co. v. Grayson,

2008 WL 2278593 (W.D.Okla. 2008)

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Question 5: Does an Exclusion Bar

Coverage?

• “Your work”

• Limbach Co. LLC v. Zurich American Ins.

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Workshop W2 33

Question 5: Does an Exclusion Bar

Coverage?

• “Your work”

• H.E. Davis & Sons, Inc. v. North Pacific

Ins. Co., 248 F.Supp.2d 1079 (D.Utah

2002)

Question 5: Does an Exclusion Bar

Coverage?

• “Impaired property”

• Standard Fire Ins. Co. v.

Chester-O’Donley & Associates, Inc., 972 S.W.2d 1

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Question 5: Does an Exclusion Bar

Coverage?

• “Impaired property”

• Indian Harbor Ins. Co. v. Transform LLC,

2010 WL 3584412 (W.D.Wash. 2010)

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Question 5: Does an Exclusion Bar

Coverage?

• “Impaired property”

• Employers Mut. Cas. Co. v. Grayson,

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Workshop W2 37

Question 5: Does an Exclusion Bar

Coverage?

• “Impaired property”

• H.E. Davis & Sons, Inc. v. North Pacific

Ins. Co., 248 F.Supp.2d 1079 (D.Utah

2002)

Practical Tips

• Know the applicable state law

• Begin and end with the policy language

• Use persuasive authorities from other

jurisdictions

• Be educative

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