CONSTRUCTION LIABILITY CLAIMS: ARE YOU COVERED? (IND004)

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1 CONSTRUCTION LIABILITY CLAIMS: ARE YOU COVERED? (IND004) Speakers: Edward M. Joyce, Partner, Jones Day Scott Allan, Senior Vice President, Lehman Brothers Holdings Inc.

2 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 session.

3 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 claims

4 Are You Covered?

5 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

6 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 Tracking Evidence of Insurance

7 Know Your Project Know Your Risks Know Your Project Parties to the Construction Project Owner Lenders / Investors Design Professionals General Contractors Subcontractors

8 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

9 Know Your Project Know Your Risks What s Insurable? What s Not? CGL Policy v. Warranty Policy Business Risk Exclusions Contractual Liability Construction Defect vs. Warranty

10 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 Keep it Broad / Don t Speculate

11 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? When is Coverage Counsel Appropriate?

12 Coverage Issues Duty to Defend Legally obligated to pay as damages Occurrence Bodily Injury and Property Damage Known Loss Exclusions Slide 12

13 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. Slide 13

14 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)

15 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. Slide 15

16 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 damages covered? Courts are all over the map.

17 Occurrence Occurrence vs. claims made policies Various trigger of coverage theories Continuous and repeated exposure to conditions Allocation when multiple policies are triggered Number of occurrences

18 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 Preventative costs/loss mitigation

19 Common Exclusions Contractual Liability This insurance does not apply to... 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.

20 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 governs, not the policy.

21 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. Incidental to the work -- not excluded.

22 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 the exclusion applies to completed operations.

23 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 subcontractor exception.

24 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.

25 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 b. Your fulfilling the terms of contract or agreement.

26 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.

27 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.

28 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.

29 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.

30 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?

31 Questions?

32

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