Insuring Construction Risks - Hot Topics Related to Construction Defect Claims

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1 Insuring Construction Risks - Hot Topics Related to Construction Defect Claims Jeffrey J. Vita Saxe Doernberger & Vita, P.C. Michael J. Donnelly Murtha Cullina, LLP Alice Sherman Willis of Massachusetts, Inc. Kathleen D. Monnes Day Pitney, LLP

2 Importance of Insurance and Risk Transfer Construction Projects... Sometimes Things Go Wrong!

3 Pre-Job Insurance Issues From the Owner s Perspective 1. Need to make sure that your project is covered. 2. Need to make sure that you are protected from claims of others: a) Your insurance b) Indemnification/Hold Harmless Clauses c) Additional Insured Clauses

Need to make sure that you are protected from claims of others:

4 Indemnification/Hold Harmless Clauses Typically provide that, to the extent permitted by law, the contractor will indemnify and hold harmless the owner for any loss, damage or claim arising out of the work but frequently exclude damage to the Work itself and caused by the Contractor or anyone working on behalf of the Contractor.

any loss, damage or claim arising out of the work but frequently exclude damage to

5 Indemnification/Hold Harmless Clauses Want to ensure that you require that the coverage extends past the completion date.

6 Additional Insured Clauses Require that the Owner be named as Additional Insured on Comprehensive General Liability Policies. Frequently require that Contractor provide the Owner with a Certificate of Insurance. The Certificate does not mean that your client is covered.

Frequently require that Contractor provide the Owner with a

7 Pre-Job Issues from the Contractor s Perspective 1. The Owner has pushed liability down to you, you want to push it down to subs. 2. Do you need Professional Liability Coverage?

8 As construction work changes, lines are blurring. Contractors are doing design work, and designers are deeply involved in installation. Urge your clients to sit down with you and their insurance professional to discuss how their work is changing to ensure that they have the right coverage.

9 Contractor deals with the subs using the same types of tools as the Owner does with the contractor. This results in a significant amount of redundancy.

10 When the claims arise Give Notice, and then check the policy and give notice again to the letter.

11 Section 11.3 of the A201 refers to the Owner as a fiduciary in connection with a number of scenarios. You will want to negotiate that down to good faith.

12 Additional Insured Status Typically required by contract Contract operates in conjunction with endorsement AI is treated as separate insured with independent rights to policy

13 Insurance recommendations 1) Commercial General Liability (CGL) with limits of Insurance of not less than $1,000,000 each occurrence and $2,000,000 Annual Aggregate. a) If the CGL coverage contains a General Aggregate Limit, such General Aggregate shall apply separately to each project. b) CGL coverage shall be written on ISO Occurrence form CG or a substitute form providing equivalent coverage and shall cover liability arising from premises, operations, independent contractors, products-completed operations, and personal and advertising injury. c) General Contractor, Owner and all other parties required of the General Contractor, shall be included as insureds on the CGL, using ISO Additional Insured Endorsement CG or CG 2010 (10/93) AND CG or CG2033 AND CG2037 or an endorsement providing equivalent coverage to the additional insureds. This insurance for the additional insureds shall be as broad as the coverage provided for the named insured subcontractor. It shall apply as Primary and non-contributing Insurance before any other insurance or self-insurance, including any deductible, maintained by, or provided to, the additional insured. d) Subcontractor shall maintain CGL coverage for itself and all additional insureds for the duration of the project and maintain Completed Operations coverage for itself and each additional insured for at least 3 years after completion of the Work.

b) CGL coverage shall be written on ISO Occurrence form CG 00 01 10 01 or a substitute form providing equivalent coverage and shall cover liability arising from premises, operations, independent

14 2) Automobile Liability a) Business Auto Liability with limits of at least $1,000,000 each accident. b) Business Auto coverage must include coverage for liability arising out of all owned, leased, hired and non-owned automobiles. c) General Contractor, Owner and all other parties required of the General Contractor, shall be included as insureds on the auto policy. 3) Commercial Umbrella a) Umbrella limits must be at least $5,000,000. b) Umbrella coverage must include as insureds all entities that are additional insureds on the CGL. c) Umbrella coverage for such additional insureds shall apply as primary before any other insurance or self-insurance, including any deductible, maintained by, or provided to, the additional insured other than the CGL, Auto Liability and Employers Liability coverages maintained by the Subcontractor. 4) Workers Compensation and Employers Liability a) Employers Liability Insurance limits of at least $500,000 each accident for bodily injury by accident and $500,000 each employee for injury by disease. b) Where applicable, U.S. Longshore and Harborworkers Compensation Act Endorsement shall be attached to the policy. c) Where applicable, the Maritime Coverage Endorsement shall be attached to the policy

c) General Contractor, Owner and all other parties required of the General Contractor, shall be included as insureds on the auto policy.

15 Waiver of Subrogation To the fullest extent permitted by law, subcontractor waives all rights against Contractor, Owner and Architect and their agents, officers, directors and employees for recovery of damages to the extent these damages are covered by commercial general liability, commercial umbrella liability, business auto liability or workers compensation and employers liability insurance maintained per requirements stated above

to the extent these damages are covered by commercial general liability, commercial umbrella liability,

16 Evolution of the AI Endorsement CG Arising out of CG Excludes coverage for completed operations CG Reinstates completed operations coverage CG Replaces arising out of with caused in whole or in part. Excludes completed operations CG Reinstates completed operations coverage

operations coverage CG 20 10 07 04 Replaces arising out of with caused in whole or in

17 AI Insurance Primary v. Excess As AI, GC is entitled to same protection as named insured (sub) Make sure contract and policy are clear that sub s insurance (primary and excess) will act as primary with GC s insurance as excess

18 Comprehensive Coverage is Critical Essential Insurance for Constr. Projects A. Third Party Coverage CGL Primary, Umbrella, AI, Wrap-ups Professional Liability A&E, CM, OPPI, CPPI, Wrap-ups B. First Party Coverage Builders Risk Physical Loss and Business Interruption

19 Coverage Deficiencies All insurance programs have holes! Coverage Grant Restrictions Exclusions Deductibles/SIRs Sublimits Time Limits Waiting Periods Valuation Conditions Disputes arise over the application and meaning of such policy limitations.

Sublimits Time Limits Waiting Periods Valuation Conditions

20 Occurrence DEFECTIVE CONSTRUCTION AS AN OCCURRENCE Highest Court has found defective construction to be an occurrence (or by state statute). Tending towards coverage; only lower state court or federal court authority exists. Highest Court has found defective construction not to be an occurrence. Tending against coverage; only lower state court or federal court authority exists. Defective construction only an occurrence when there is damage to third-party property. Unclear, cases/legislation conflict. No decision

Highest Court has found defective construction not to be an occurrence.

21 Recent Cases Re: Occurrence Yes Coverage Architex Association, Inc. v. Scottsdale Ins. Co., 27 So.3d 1148 (Miss. 2010) American Empire Surplus Lines Ins. Co. v. Hathaway Devel. Co. 707 S.E.2d 369 (Ga. 2011) No Coverage Cincinnati Ins. Co. v. Motorists Ins. Co., 306 S.W.3d 69 (Ky. 2010) Stanley Martin Cos., Inc. v. Ohio Cas. Group, 313 Fed. Appx. 609 (4 th Cir. 2009) Connecticut law is not established (lower courts divided)

22 Legislating the Meaning of Occurrence Recent State Legislatures Have Entered the Debate Colorado: C.R.S.A a court shall presume that the work of a construction professional that results in property damage is an accident. Arkansas: A.C.A Requires CGL policies to contain a definition of occurrence that includes property damage or bodily injury resulting from faulty workmanship South Carolina: S.C. Code Ann Definition of occurrence must include property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself. Hawaii: H.R.S Meaning of occurrence shall be construed in accordance with the law as it existed at the time the insurance policy was issued.

23 Risk Transfer 3 rd Party Liability Insurance 1 st Party Insurance CGL Professional Pollution Additional Insured Coverage Builders Risk Commercial Property Subcontractor Indemnity Subcontractor Default Insurance Contractual Rights

24 Risk Transfer through Contract Owner/GC, GC/subcontractor, side agreement Specific paragraphs for indemnity/insurance May shift payment of loss/damage and defense Limited by anti-indemnity laws

25 Contractual Indemnity v. AI Coverage AI coverage and indemnity operate independently AI coverage determined by policy and AI endorsement AI coverage not limited by states antiindemnity laws (exceptions)

26 CGL Ins. Emerging Issue Allocation Horizontal Exhaustion Primary Policies Pays First Vertical Exhaustion Sub s Policies Pay First GC s Corporate Excess Insurance Sub s Excess Insurance (GC s AI Excess Insurance) GC s Corporate Primary Insurance Sub s Primary Insurance (GC s AI Carrier) General Contractor ( GC ) Promise to Indemnify Promise to Procure Insurance Sub-Contractor ( Sub )

27 Questions Jeffrey J. Vita Saxe Doernberger & Vita, P.C. (203) Michael J. Donnelly Murtha Cullina, LLP (860) Alice Sherman Willis of Massachusetts, Inc. (860) Kathleen D. Monnes Day Pitney, LLP (860)

Gordon L. Mountjoy & Associates, Inc.

Gordon L. Mountjoy & Associates, Inc. INSURANCE REQUIREMENTS CHECKLIST Submit an Acord 25 form and the endorsements as required below. Your insurance must be in compliance immediately after you sign your subcontract and before you start work.