An Overview of the Insurance Coverage Consequences of the Las Vegas Construction Defect Conspiracy

Transcription

1 An Overview of the Insurance Coverage Consequences of the Las Vegas Construction Defect Conspiracy Andrew B. Downs 1 Bullivant Houser Bailey PC 601 California St., Suite 1800 San Francisco, CA andy.downs@bullivant.com INTRODUCTION It will come as no surprise to most defense attorneys that events such as the Las Vegas Construction Defect Conspiracy have insurance coverage implications. This paper will discuss the exposures of two classes of policyholders, those directly or vicariously implicated in the conspiracy, and those victimized by it. Those directly or vicariously implicated include the attorneys, experts, HOA Directors and Officers, the firms through which the attorneys, experts and directors did business, the property management companies who managed the associations, as well as the Homeowners Associations themselves. The victims include the Homeowners Associations, the individual property owners, the developers, general contractors and subcontractors and other defendants in the underlying construction defect matters and their liability insurers. This paper will provide an overview of the coverage issues for each category of policyholder. Before doing that, however, the general characteristics of the insurance coverages potentially implicated will be discussed. TYPES OF COVERAGE POTENTIALLY IMPLICATED A. Professional Liability Coverage Most Professional Liability policies currently available in the United States are written on a claims made and reported basis, under which the claim must first be made against the policyholder during the policy period and must be reported either during the policy period or during a brief period following expiration. Most provide that defense costs paid are part of the policy s per claim and aggregate limits of liability, what is known colloquially as a self-eroding or defense within limits policy. Unlike personal lines policies and many standard commercial lines policies, there are few standardized policy forms in use in the Professional Liability market. Although the 1 This paper reflects the views of the author only and does not represent the views of his firm, its clients or the Federation of Defense & Corporate Counsel. 1

2 Insurance Services Office has issued policy forms for Attorney s and Medical Professional Liability coverages, those forms are not used as widely as are the ISO commercial property and general liability forms. Despite the variance in policy forms used, there are a number of common features potentially relevant here: The definition of Professional Services. The definition of Wrongful Acts. The inclusion of a Retroactive Date. Consent to Settlement Provisions. The Professional Services definition is important because coverage is provided only for Wrongful Acts committed in the performance of Professional Services. In many instances, the Professional Services must be performed for others and often for a fee (pro bono work by attorneys being a frequent exception. For example, the ISO Lawyer s Professional Liability form, ISO form LW uses the following definition: "Professional services" means services rendered by an "insured" as an attorney, arbitrator, mediator, title agent, notary public, administrator, conservator, receiver, executor, guardian or trustee or in any other fiduciary capacity, provided such services, for which the insured is licensed, are rendered in connection with the "named insured's" practice of law. Another example, for a different profession, of a Professional Services definition is:... only insurance services performed for others for a fee as an insurance agent, insurance broker, managing general agent, general agent, surplus lines broker, wholesale insurance broker or insurance consultant, including notary public, premium financing, claims adjusting and loss control services ; however, the term others cannot include entities affiliated with the insured. Conestoga Services Corp. v. Executive Risk Indemnity, Inc., 312 F.3d 976, (9th Cir. 2002). The definition of Wrongful Act is important because it defines what liability creating conduct is within the scope of the policy s grant of coverage. For example, in Conestoga Services, the definition of Wrongful Act provided: 2

3 ... any actual or alleged act, error, or omission committed solely in the performance of, or failure to perform, Professional Services. Id. at 978. A Retroactive Date is a critical feature of virtually all claims made policies. While those policies are triggered by the making and reporting of a claim during the policy period, there is no coverage unless the Wrongful Act(s) alleged happened after the retroactive date. In most instances the retroactive date is the earliest date of continuous claims made professional liability coverage. B. Directors & Officers Coverage The individual Homeowners Association may have chosen to purchase a Directors & Officers Liability policy (colloquially, a D&O policy) for the benefit of its directors and officers. Often the D&O coverage is included in a more broad management protection policy that also provides Employment Practices Liability Insurance ( EPLI ) and other similar coverages. Like Professional Liability policies, D&O policies are customarily written on a claims made and reported basis with defense costs paid out of the policy s limit of liability. Again, there are no industry standard forms, although many of the forms used contain similar provisions. Once again, wrongful acts are an important concept, as is whether the individual officer or director (who is also an insured) was acting in that capacity when allegedly performing the wrongful act. C. Crime and Fidelity Coverage Crime and fidelity coverage is a first party coverage that covers, among other things, thefts of money and securities by employees (and sometimes non-employee officers and directors). There are a number of standard fidelity forms in use, some issued by ISO, and others by the Surety Association of America. Customarily, these policies are written on either a discovery basis, (where they provide coverage based upon the date of discovery of the loss, not the date of theft) or a loss sustained basis (where coverage is provided when there has been continuous coverage in force by the same insurer under the policy in force when the loss was sustained). Discovery policies are more common. D. Commercial General Liability Coverage Standard form CGL policies include coverage for personal injury and advertising injury. Those coverages include as covered offenses defamation, subject to a number of exclusions. One theory being alleged against the alleged conspirators is that they took over the affected HOA s by defaming other candidates for election to the boards of those associations. 3

4 E. Property Insurance First party property insurance protects the policyholder against physical damage to its own property. One of the allegations made is following settlement of the underlying construction defect suits, co-conspirator contractors were hired who made minimal repairs to the affected projects. If, by making minimal repairs, the contractors inflicted additional damage on the structures themselves, there is a possibility there will be property insurance claims by affected homeowners or associations. PARTICULAR COVERAGE ISSUES FOR DEFENDANTS A. D&O Coverage Grant Directors & Officers policies typically tie coverage for individual officers and directors to acts committed within the course and scope of the individual s position with the organization. Often the policy will require that the alleged wrongful act be committed in the individual s respective capacity as a director or officer. One of the allegations regarding the Las Vegas conspiracy is that the candidates for election as directors is the candidates were straw buyers of individual properties who won election for the sole purpose of steering the HOA to bring construction defect claims through attorney coconspirators. While the courts have not directly addressed this issue, it is likely a court would find conduct in the process of winning election is not in the individual s capacity as a director or officer, distinguishing it from conduct after taking office. B. Intentional and Fraudulent Conduct A common feature in both Professional Liability and D&O policies is an exclusion for some form of intentional, criminal or fraudulent conduct. It is also common, however, for those exclusions to provide expressly for a duty to defend until such time as the intentional, criminal or fraudulent nature of the conduct has been adjudicated. The significance of providing for a duty to defend until the nature of the conduct has been adjudicated is to destroy the insurer s ability to deny a tender of defense based on the fact that there is no non-intentional conduct alleged. Because defense costs are paid out of the policy limits, the practical benefit to the insurer from an intentional and fraudulent conduct exclusion may be minimal. Also, while many jurisdictions prohibit the insuring of punitive damages liability (See e.g., California Insurance Code 533), some professional liability policies expressly provide coverage for punitive damages liability. Some impose a sub-limit on that coverage. Most that do provide this coverage also state that the coverage is provided only if it is legal to do so under the law of the most favorable applicable jurisdiction. 4

5 C. Fidelity Issues While crime or fidelity policies typically cover employee theft (there are multiple potential coverage grants and the applicable ones must be specified in the declarations), thefts by officers and directors raise some additional issues because the officers and directors ordinarily are not payroll employees of the association. That doesn t necessarily eliminate coverage, the employee definition in the ISO form for example, includes: Any of your "managers", directors or trustees while: (a) Performing acts within the scope of the usual duties of an "employee"; or (b) Acting as a member of any committee duly elected or appointed by resolution of your board of directors or board of trustees to perform specific, as distinguished from general, directorial acts on your behalf. But, the type of conduct that the allegedly corrupt directors and officers engaged in as part of the Las Vegas conspiracy is unlikely to involve the performance of acts within the scope of the usual duties of an employee. If the particular HOA set up a special committee to supervise construction defect litigation, then the directors on that committee may be considered employees for purposes of fidelity coverage. Fidelity policies typically cover the theft of money, securities, or other property. All are defined terms. Money and securities are defined consistent with the general understanding of those items. Other property is defined as follows in the ISO policy: "Other property" means any tangible property other than "money" and "securities" that has intrinsic value. "Other property" does not include computer programs, electronic data or any property specifically excluded under this insurance. While the individual circumstances of each HOA will be different, one challenge in establishing coverage under a fidelity policy (if one was purchased) will be proving the theft was of money, securities or other property. D. General Liability Coverage If the associations maintain general liability coverage, individual ex-directors may tender defenses claiming that they are being sued for defamation within the personal injury coverage of a standard form CGL policy. The alleged defamation being either their electioneering tactics or the actions they took to accuse developers and contractors of negligent conduct. 5

6 While the specific allegations will govern, this is not likely to be a productive avenue for an accused director or officer. First, electioneering conduct is that of an individual seeking office, not that of the insured organization. Second, the standard CGL policy contains an exclusion the knowing violation of the rights of another. Third, the standard policy also excludes liability for the publication of material with knowledge of its falsity. Contractor co-defendants face an additional challenge when tendering to their general liability insurers. The claims against them are unlikely to fit within the four categories of covered liability, bodily injury, property damage, advertising injury and personal injury. Few contractors maintain professional liability coverage that might at least provide a defense against some of the claims. OPTIONS FOR THE VICTIMS Unfortunately the victims, be they individual unit owners, developers, general contractors, subcontractors and their insurers are unlikely to find any comfort from their own insurance policies. Their remedies will largely be tort claims against those involved in the conspiracy, a number of whom are likely to be both uninsured and judgment proof. CONCLUSION Ironically, the prospective defendants most likely to have at least some liability insurance coverage are those who were in the best position to know better, the attorneys and the professional management companies entrusted with the day to day operations of the Homeowners Associations. The associations themselves and the allegedly corrupt former directors might have some coverage under D&O policies. The allegedly corrupt contractors and experts are unlikely to find any coverage. 6