Key Builder s Risk Insurance Issues for Construction Lawyers Presented By: Daniel F. McLennon McLennon Law Corporation 275 Battery Street, Suite 1300 San Francisco, CA 94111 (415) 394-6688 (o) (415) 394-6687 (f) dmclennon@mclennonlaw.com www.mclennonlaw.com Counsel to the Construction Industry Gregory R. Shaughnessy THE LAW OFFICES OF GREGORY R. SHAUGHNESSY 55 Main Street Tiburon, CA 94920 Tel: (415) 435-2409 (o) Fax: (415) 435-2459 (f) grs@grs-law.com www.grs-law.com 2015 All Rights Reserved. This presentation is intended for general discussion of the subject, and should not be mistaken for legal advice. Viewers are cautioned to consult appropriate advisors for advice applicable to their individual circumstances. 1
Agenda Construction risks A little history and types of policies Evaluating and negotiating coverage Claims issues 2
Construction Risks Poor workmanship Not Insured Damage to others, whenever caused CGL Damage to project after construction CGL Damage to project during construction Course of Construction "Direct physical loss or damage to covered property caused by covered cause" 3
Construction Risks Damage to own work? Tough luck - still obligated to provide the completed work per contract COC may provide funds to demo and replace damaged work Ensure contract excuses performance if COC not provided 4
A Little History 5
A Little History Traditionally, marine insurers such as underwriters at Lloyd's of London covered cargo in the course of international commercial voyages by sea Coverage on an "all risk" basis: physical loss or damage from any cause was covered unless the policy specifically excluded that clause 6
A Little History After the Great Fire of London in 1666 a market for fire insurance arose. Fire insurance companies typically provided narrower coverage, where the policies specifically listed the only perils covered, and excluded all losses from any other causes. 7
A Little History Ultimately, marine insurers started competing with fire insurance companies, providing the broader all risk forms Called inland marine Despite the word marine, most inland marine coverages are for property on land, with property transported by water insured under ocean marine. 8
Jargon COC = Course of Construction BR = Builder s Risk CAR = Contractor s All Risk 9
Evaluating Inland Marine Policies Where are the leaks? 10
Coverage Forms Two coverage forms - policies - contracts of insurance Most common: "All Risk" or "All Peril" Includes all direct physical loss or damage covered property unless EXCLUDED "Named Peril" or "Specified Peril" Excludes all causes unless specifically INCLUDED 11
Coverage Forms Policy forms are not uniform, and policy language must be reviewed to determine what is included or excluded Cheaper policy: broader exclusions and less coverage 12
Evaluating COC Policies Questions/tools for evaluating these policies 13
Limits Sufficient? Full cost of project Escalation clauses Effect of change orders Notice to carrier required? Effect of cost increases and changes in laws during construction? 14
Sublimits Sublimits and increased deductibles for higher risk losses Offsite or in transit Named storms Earthquake Scaffolding Temporary structures 15
Named Insureds Who is an insured? Owner GC Subs or sup? Specifically named, or GC as fiduciary? If named, no need for waivers of subrogation 16
Coverage Period? Start date? End date? Completion? Substantial v. actual Fuzziness =conflict between BR and Property insurer Stated date? If stated, need extensions as changes extend date Testing and startup? Maintenance period? Breach of Warranty? 17
Covered Property Location, location, location Typically only property onsite Extension available for "in transit" or at dedicated fabrication site When does risk of loss transfer? If at factory, need coverage! Laydown or staging location? Temporary storage? Subcontractor or rental equipment? 18
Covered Property? Foundations Underground piping and trenches Fixtures and machinery Equipment, such as cranes Building materials and supplies stored onsite Temporary structures Materials in transit Materials stored off-site (identified to the job, not supplier inventory) Property of others, e.g. rental equipment Job site office trailers 19
Covered Causes Covered causes - what will trigger coverage, or not? Natural calamity Fire Wind Rain Hail 20
Un-Covered Causes What causes of damage are not covered or excluded? Defects in design, workmanship, materials Radiation Terrorism or acts of war Dishonest acts of insured Wear and tear, gradual deterioration, corrosion Settling, cracking, expansion Freezing (unless despite precautions) 21
Possible Exclusions Flood, mudslide, sewer backup, seepage of water Earth movement Mechanical breakdown, electrical injury, boiler explosion Loss covered by guarantee, warranty, or obligation of manufacturer or supplier 22
Possible Exclusions Asbestos Release of pollutants, unless resulting from specified perils Delay and consequential damages Increased costs of construction due to enforcement of laws or ordinances 23
Coverage Extensions Buy back" excluded causes and include them within the policy protections Additional premium Separate deductibles 24
Covered Damages Covered damages - what will policy pay? Labor and materials to demolish and remove damaged work Labor and materials to replace damaged work 25
Covered Damages 26
Covered Damages Actual Cash Value vs. Cost of Repair ACV example: existing (and new) construction destroyed by fire--only the depreciated cost to repair the existing exterior envelope (if covered at all) will be included, which could be a 30-50 percent shortfall. Replace negligent contractor's own defective work? Generally not, but... 27
Ensuing Loss Even if a particular cause is not included, loss or damage to other property that results from it may be covered. Not covered: damage to property "which is in a defective condition due to a defect in design, plan specification, materials or workmanship" Covered: other property "which is free of the defective condition but is damaged in consequence thereof" 28
Ensuing Loss Example: Corroded pipe bursts and effluent engulfs basement Cost to replace pipe not covered Cost to clean up basement and replace carpet and drywall may be covered 29
Ensuing Loss Example: Leaking roof due to missing flashing Cost to repair roof not covered Cost to repair water damage in building may be covered 30
Ensuing Loss Overlap with CGL policies Typical CGL other insurance clause: 31
Are "Soft" costs recoverable? Redesign Permitting and other governmental entity fees Expediting? Extended general conditions Storage, demobilization/remobilization, cost increases Carrying costs Interest on loans Insurances Advertising Property taxes Equipment and office lease extensions Commissions 32
Soft Costs Delay damages "Delay in start up" Loss of rents Loss of use Liquidated damages How is delay calculated? What if job was behind anyway? "Elimination period" as deductible/sir? E.g. first 14 days not covered 33
Soft Cost Recovery Test Soft Cost Recovery Test Caused solely by covered physical damage Covered cost must be identified in the policy Proof of actual loss Costs must be necessary and reasonable Costs would not be incurred but for the delay 34
Un-Covered Property? Accounts, bills, currency, money, securities Animals Existing structures and property Land, including fill materials existing at site before construction Landscaping Power lines and equipment Signs Timber and crops Vehicles, including auto, trucks, watercraft, aircraft, drones? Water 35
COC Claims Ensuring Maximum Payment 36
COC Claims Claims Notice to carrier Get counsel in early Advance payments Documentation Covered cause of loss Lawyer creativity may find coverage due to ambiguity Avoid damaging admissions 37
Arguing Causation Faulty, inadequate or defective workmanship excluded. Common causes are contractor caused fires and water intrusion. Claims will typically be denied based on this exclusion, and others. 38
Arguing Causation Issue: How to beat this exclusion? Answer: Efficient Proximate Cause Doctrine Insurance Code Section 530 An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause. 39
Arguing Causation Sabella v. Wisler (1963) 59 Cal. 2d 21; Garvey v. State Farm (1989) 48 Cal. 3d 395 Houses were damaged by land movement Policies excluded settlement and earth movement Held: Damage was covered because efficient proximate cause was the rupture of a negligently constructed sewer line and defective footing. 40
Arguing Causation Sabella: Where there is a concurrence of different causes, the efficient cause the one that sets others in motion is the cause to which the loss is to be attributed, though other causes may follow it, and operate more immediately in producing the disaster. 41
Arguing Causation Garvey: Efficient proximate cause means predominating cause (Sabella moving cause can be misconstrued to deny coverage erroneously) 42
Arguing Causation State Farm Fire & Casualty Co. v. Von Der Lieth (1991) 54 Cal. 3d 1123 Third party negligence in developing property and in maintaining septic tank systems (covered peril) caused increase in groundwater (excluded peril), which caused earth movement (excluded peril), resulting in loss. When a loss is caused by a combination of covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss, but the loss is not covered if the covered risk was only a remote cause of the loss, or the excluded risk was the efficient proximate, or predominate cause. 43
Arguing Causation If the cause of the damage is the negligence of the contractor or subcontractor, there may be coverage. If the cause of the damage is a combination of factors, and the negligence of the contractor is the efficient proximate cause of the damage, there can be coverage, even if the combined factor is excluded. 44
Case Study Theater in Monterey under construction Interior finishes are installed before roof is completed Rain enters through incomplete roof and causes damage to the interior of the building 45
Case Study Contractor s general liability insurer denies coverage it is all the Contractor s work Builder s risk exclusions Faulty or defective work Rain unless the rain enters the structure as a result of a covered cause of loss 46
Case Study Allstate Ins. Co. v. Smith (9th Cir. 1991) 929 F. 2d 447 and Tento International, Inc. v. State Farm (9th Cir. 2000) 222 F. 3d 660 Both involved roofs that had been removed and rainfall and resulting damage Insurer invoked faulty workmanship exclusion 47
Case Study Court focused on the distinction between a defective product and a defective process Court found nothing defective in the way the work was performed (the product), just defects in the timing and planning of the work. 48
Case Study Courts held that faulty workmanship exclusion did not apply; efficient proximate cause was contractor negligence Rain exclusion did not apply because rain was not the efficient proximate cause 49
Erosion of Efficient Proximate Cause Doctrine Julian v. Harford Underwriters Ins. Co. (2005) 35 Cal. 4th 747 Landslide caused by heavy rain caused damage to a house Policy excluded losses caused by weather conditions, but only where weather conditions contribute in any way with earth movement (e.g. landslide), water damage (e.g. flood), or another excluded peril. 50
Erosion of Efficient Proximate Cause Doctrine Issue as whether the efficient proximate cause test prohibits an insurer from insuring against some manifestations of weather conditions, but not others. Held, it does not. No coverage for damage. 51
Erosion of Efficient Proximate Cause Doctrine De Bruyn v. Superior Court (2008) 158 Cal. App. 4th 1213 Toilet overflow (covered) and mold exclusion (held not covered even though EPC was covered). 52
Erosion of Efficient Proximate Cause Doctrine Freedman v. State Farm Ins. Co. (2009) 173 Cal. App. 4th 957 Contractor drove a nail into a water pipe. Years later, after corrosion, pipe leaked and caused damage. Insurer denied coverage, relying on exclusions for defective construction, corrosion and water damage (including seepage or leakage from a plumbing system). 53
Erosion of Efficient Proximate Cause Doctrine What is left? Sabella, Garvey and State Farm all involved third party negligence (covered) and settlement or land movement clauses. All applied efficient proximate cause test to find coverage 54
Erosion of Efficient Proximate Cause Doctrine Julian issue was exclusions for weather conditions and landslide, not third party negligence. DeBruyn limited scope of Julian 55
Erosion of Efficient Proximate Cause Doctrine Freedman applied Julian to a case involving contractor negligence, but there was also an exclusion for corrosion Freedman did not distinguish between defective process and defective product. Argue that Freedman involved defective product not defective process Contractor negligence is still covered 56
Contrast General Liability Concurrent Cause Garvey v. State Farm (1989) 48 Cal. 3d 395 [W]e believe that coverage under a liability insurance policy is equally available to an insured whenever an insured risk constitutes simply a concurrent proximate cause of the injuries. 57
Key Builder s Risk Insurance Issues for Construction Lawyers Thank you for participating! 58