Occurrences in Construction Defects Claims

Occurrences in Construction Defects Claims Navigating Divergent Views on Occurrence Issues to Maximize Coverage or Limit Liability Exposure

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TUESDAY, FEBRUARY 28, 2012

Presenting a live 90-minute webinar with interactive Q&A

Christopher C. French, Partner, K&L Gates, Pittsburgh

Carl A. Salisbury, Partner, Kilpatrick Townsend & Stockton, New York

Jeffrey Bolender, President, Bolender & Associates, Torrence, CA

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Occurrences in Construction Defects Claims

CARL A. SALISBURY

CARL A. SALISBURY [email protected] 212.775.8779 Carl Salisbury is a partner on the Insurance Recovery Team at Kilpatrick Townsend & Stockton. He has more than 20 years of experience in the litigation and trial of complex commercial disputes. In addition to handling general commercial matters, Mr. Salisbury has more than 20 years of courtroom and trial experience in complex commercial insurance cases and has represented the full gamut of companies in disputes involving large insurance claims, from small and middle-market corporations, condominium associations, restaurants, and non-profit institutions, to Fortune 100 companies. He has helped corporate policyholders recover for insurance claims involving environmental pollution, workplace discrimination, bodily injuries and property damage, mold contamination, construction defects, and a variety of other commercial disputes. He received is law degree at Wake Forest University School of Law, where he was Managing Editor of the Wake Forest University Law Review. He also served as a judicial clerk to the Hon. Reynaldo G. Garza on the United States Court of Appeals for the Fifth Circuit. He is admitted to practice in New York; New Jersey; the U.S. District Court for the District of New York; the U.S. District Court for the District of New Jersey; the U.S. Court of Appeals for the Third Circuit; and the Supreme Court of New Jersey.

mailto:[email protected]�

We’re Talking About “Property Damage”

• “Property Damage” means: • “(1) physical injury to or destruction of

tangible property which occurs during the policy period, including loss of use thereof at any time resulting therefrom, or

• (2) loss of use of tangible property that has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.”

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Occurrence Coverage

• What is an “occurrence?” – Typical policy definition: “An accident,

including continuous or repeated exposure to substantially the same general harmful conditions.”

– But what is an “accident”? • Usually undefined, but often considered to be an

event that is “unintended” and “unexpected.” • Is “defective construction” unexpected?

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The Occurrence Issue

• Two main lines of case authority:

– If the damage is the unintended result of faulty workmanship, it is an “accident” and a potentially covered “occurrence.”

– If the damage is construction-related, it is the result of an intentional act and therefore not and “occurrence.”

• What about “mistakes”/ negligent workmanship?

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The Port Imperial Case

• “The accidental nature of an occurrence is determined by analyzing whether the alleged wrongdoer intended or expected to cause an injury. If not, then the injury is accidental, even if the act that caused the injury is intentional.”

Port Imperial Condominium Association, Inc. v. K Hovnanian Port Imperial Urban Renewal, Inc., HUD-L-2054-08.

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The Hathaway Case

– 6-1 decision. Faulty workmanship is an “occurrence.”

Resulting property damage or bodily injury must be neither expected nor intended.

– Court rejected insurer’s argument that faulty workmanship is not an occurrence because the underlying acts were performed intentionally.

– An “occurrence” can arise where faulty workmanship causes unforeseen or unexpected damage.

American Empire Surplus Lines Insurance Co. v. Hathaway Development Co., __ S.E.2d __, 2011 WL 768117 (Ga. Mar. 7, 2011)

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The Business Risks Exclusions

• Three flavors: – Damage to Property – Damage to Your Product – Damage to Your Work

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“Damage to Property” Exclusion • The insurance does not apply: “That particular part of

real property on which you or any contactors or subcontractors working directly or indirectly on your behalf are performing operations.”

• The insurance does not apply: “That particular part of

your property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

• Key exception: The “Damage to Property” exclusion

does not apply to “property damage” included in the “products-completed operations hazard.”

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Products Completed-Operations Hazard

• Appears in “Definitions” section of the CGL policy. • Courts uniformly treat it as an affirmative grant of

coverage for certain kinds of damages arising from a contractor’s product or work.

• If bodily injury or property damage occurs away from premises the contractor owns or rents and arises from the contractor’s faulty workmanship or product, then the damage is covered under the “products-completed operations hazard.”

• Covers damage caused by a contractor’s faulty construction or workmanship once the work is complete, e.g., after the contractor delivers the fully constructed building to the owner.

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“Damage to Your Product” and “Damage to Your Work” Exclusions

• “Damage to Your Product”: Insurance does not cover “‘Property damage’ to ‘your product’ arising out of it or any part of it.”

• “Damage to Your Work”: Insurance does not cover “‘Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”

• Key Exception: Exclusion does not apply if the damage or the work out of which the damage arises was performed by a subcontractor.

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Fitting the Pieces of the Puzzle Together

• “The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable.”

• Questions to answer to determine if there is coverage:

– Is the damage an “accident” from the standpoint of the insured?

– Has the building been delivered to the Owner or put to its intended use?

– Was the defective construction the fault of a subcontractor?

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Weedo and the New Jersey Federal Courts

• Pennsylvania National Mutual Casualty Ins. Co. v. Parkshore Development Corp., et al., No. 09-3821 (3rd Cir., Dec. 10, 2010)

• Relied on Weedo in holding “While other courts have permitted an ‘occurrence’ where faulty construction damages only the insured’s own work, New Jersey courts foreclose such a possibility.”

• Does not discuss the “Damage to Your Own Work” exclusion, which has an exception for work performed by a subcontractor.

• In a footnote, the Court observed that “Subcontractors did all of the work at the condominium project.”

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Copyright © 2010 by K&L Gates LLP. All rights reserved.

Occurrences in Construction Defects Claims: Navigating Divergent Views on Occurrence Issues to Maximize Coverage or Limit Liability Exposure

Webinar February 28, 2012

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Christopher French

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Christopher French

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Christopher French

Courts’ Determinations of Whether Construction Defects Are “Occurrences”

• Christopher French, Construction Defects: Are They Occurrences? 47 Gonz. L. Rev 1 (2011)

• Extensive discussion of the issue, arguments and case law

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Christopher French

The Weedo Case

• Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979)

• Subcontractor applied Stucco to a house poorly

• Cracked and had to be replaced

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Christopher French

The Weedo Case

• Policy at issue contained 1973 standard form “business risk” exclusions

• Court held no coverage

• Court viewed claims essentially as breach of warranty claims

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Christopher French

The Weedo Case

• Court reasoned that the policyholder/contractor should be responsible for satisfying customers

• Court relied upon a 1971 law review article by Roger Henderson

• Professor Henderson’s law review article was based upon the 1966 business risk exclusions, not the definitions of “occurrence” or “property damage”

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Christopher French

The Weedo Case

• Court never discussed whether faulty workmanship was an occurrence

• Court never analyzed whether faulty workmanship constituted property damage or caused property damage

• Business risk exclusions were redrafted in 1986 to reduce their scope

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Christopher French

The Case Law Since Weedo

• Majority rule is that construction defects are occurrences

• Supreme Courts of Alaska, Florida, Georgia, Indiana, Kansas, Minnesota, Mississippi, South Carolina, South Dakota, Tennessee, Texas and Wisconsin have held in favor of policyholder - See Gonzaga article, pp. 26-27 for list of cases

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Christopher French

The Case Law Since Weedo • At least four states have passed statutes that

effectively mandate that construction defects are occurrences. See Ark. Code Ann. § 23-79-155(9) (Supp. 2011); Colo. Rev. Stat. § 13-20-808(3) (2010); Haw. Rev. Stat. § 431-1 (2011); Act of May 17, 2011, No. 26, § 1, 2011 S.C. Acts at 88-89.

• Pro-insurer holdings in Arkansas, Kentucky, Pennsylvania and West Virginia - See Gonzaga article, p. 27 for list of cases

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Christopher French

Courts Holding Construction Defects Are Occurrences

• Unless policyholder expected or intended its work to be defective, construction defects are occurrences

• Supreme Court of Florida’s decision in United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007) is a leading example of a pro-policyholder decision

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• Court rejects the insurer’s arguments one by one

• Does not matter if it is foreseeable that the work was defective

• Damages resulting from a breach of contract can be an accident

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• Allowing recovery does not turn insurance policies into performance bonds - Performance bonds guarantee completion of project - Performance bonds cover owner of property, not contractor

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• Contractors cannot effectively control quality of subcontractor’s work, so allowing insurance recovery does not encourage contractor or subcontractor to do sloppy work

• Definition of “property damage” does not distinguish between damage to the contractor’s or subcontractor’s work versus damage to other property

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• Weedo involved different business risk exclusions

so it is of no precedential value

• The existence of business risk exclusions proves construction defects are occurrences - Exclusions would be unnecessary otherwise

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Courts Holding Construction Defects Are Occurrences if Property Other than the

Work at Issue Was Damaged

• See Gonzaga article, pp. 34-35 for list of cases

• Basic reasoning is that policyholder did not expect or intend for property separate from its work to be damaged

• Poor reasoning because the contractor does not expect or intend its work to be defective

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Courts Holding Construction Defects Are Not Occurrences Because

They Are Not “Accidents” • See Gonzaga article, p. 35 for list of cases

• Pennsylvania Supreme Court decision in Kvaener

Metals Division of Kvaener U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006)

• Coke oven battery contructed defectively

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They Are Not “Accidents”

• Undefined term “accident” means “unexpected”, which implies more fortuity than is present in a construction defect situation

• Court did not explain what evidence, if any, supported a finding that the contractor expected or intended its work to be defective

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They Are Not “Accidents”

• Court relied on Professor Henderson’s 1971 article, which was based upon the 1966 business risk exclusions

• Court did not analyze business risk exclusions at issue

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Courts Holding Construction Defects Are Not Occurrences Because To Hold Otherwise Would Transform Insurance

into Surety or Performance Bonds

• See Gonzaga article, pp. 39-40 for cases

• Very similar reasoning to decisions in which the courts held construction defects are not “accidents”

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into Surety or Performance Bonds • Basically a public policy argument in which courts

want to force contractors to bear the financial responsibility for repairing their own defective work

• Courts that have reached such a conclusion ignore the definition of “occurrence” and do not analyze whether the contractor expected or intended its work to be defective

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into Surety or Performance Bonds

• Such courts are also confused regarding the difference between a performance bond and insurance - One protects the owner, the other protects the contractor against third party claims

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Courts Holding Construction Defects Are Not “Occurrences” Because the Damages

Are the Foreseeable Consequences of Intentional Acts

• See Gonzaga article, p. 41 for cases

• Courts reaching such a holding analyze whether the damage was foreseeable

• Circular reasoning: that damages may result from defective workmanship is obvious

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• The reasoning of such decisions is unsound because it is often foreseeable that damages may result from negligence - That is reason people/companies buy insurance

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• For example, people buy auto insurance because they know that accidents happen and, when they do, damage results - That does not mean they intend to cause the accidents that do occur

Occurrences in Construction Defects Claims

Jeff Bolender

45 INSURANCE COVERAGE COUNSEL

INSURANCE COVERAGE COUNSEL

Rolling Hills Plaza 2601 Airport Drive, Suite 360 Torrance, California 90505

[email protected] 310-784-2443, ext. 106

Jeff Bolender Managing Shareholder of Bolender & Associates, A Professional Law Corporation

Memberships: ₋ California State Bar, 1994 ₋ Hawai’i State Bar, 2006 ₋ District of Columbia Bar, 2007 ₋ Nevada Star Bar, 2008 ₋ LA County Bar Association ₋ Cark County Bar Association ₋ South Bay Bar Association ₋ Defense Research Institute ₋ Construction Law Section, Nevada State Bar ₋ Insurance & Health Law Section, Nevada State Bar ₋ Insurance Litigation Section, Hawai’i State Bar ₋ Benjamin Aranda III – Inns of Court

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Rolling Hills Plaza 2601 Airport Drive, Suite 360 Torrance, California 90505

[email protected]

Jeff Bolender Managing Shareholder of Bolender & Associates, A Professional Law Corporation

Recent Publications: ₋ Meeting the Challenges of Raising Insurance Issues at

Mediation, DRI In-House Defense Quarterly, Autumn 2011

₋ Hot Topics in Construction Defect Litigation and Related Insurance Coverage Issues, Nevada State Bar, October 2011

₋ The Fun Never Ends - Key Insurance Coverage Developments from 2009 to 2010, DRI, September 2010

₋ The ABC’s of Analyzing a Liability Insurance Policy, Nevada State Bar, June 2010

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Overview of Insurer’s Perspective “Occurrence” Related Case Law

Contract Interpretation

Case Comment: Weedo

Case Comment: J.S.U.B.

Case Comment: Fire Insurance Exchange

Case Comment: Specialty Services

Single versus Multiple Occurrences

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“Occurrence” Related Case Law Case law undeveloped in many states

Existence versus number of occurrences

Fundamental nature of “occurrence” issue

-Per occurrence limit -Deductible/SIR -Coverage determinative

Malleable concept

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Insuring agreement analysis, not exclusionary

Deletion of “expected or intended” language

-Property damage -Occurrence -Trigger of coverage -Known losses

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Insuring agreement analysis, not exclusionary

Deliberate acts, unexpected or unintended losses

“Occurrence” as causative event, e.g., liability-producing act

Negligence not synonymous with “occurrence” or accident

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Contract Interpretation Accident is not ambiguous in CD context

Contra Proferentem: ambiguities interpreted against insurer

Doctrine of Reasonable Expectations

Three-part rule of interpretation:

1. Plain meaning governs: The terms must be read in their “ordinary and popular sense” in the context of the policy as a whole and the circumstances of the case.

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Contra Proferentem: ambiguities interpreted against drafter



2. Objective reasonable expectations: A true ambiguity must be interpreted in the sense the insurance company reasonably believed the policyholder understood the disputed policy language when the policy was issued, i.e., in accordance with the insured’s objectively reasonable expectations.

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Contra Proferentem: ambiguities interpreted against drafter



3. Contra–Insurer Rule: If the previous rule fails to resolve the ambiguity or uncertainty, the ambiguous language is resolved against the insurer as the drafter of the policy. AIU Ins. Co. v. Sup.Ct. (FMC Corp.) (1990) 51 Cal.3d 807, 821–822.

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Case Comment: Weedo 405 A.2d 788 (New Jersey 1979)

“[T]he question is whether th[e] policy indemnifies the insured against damages in an action for breach of contract and faulty workmanship on a project, where the damages claimed are the cost of correcting the work itself.”

“While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting.” Id. at 791.

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Case Comment: Weedo 405 A.2d 788 (New Jersey 1979)

“[T]he question is whether th[e] policy indemnifies the insured against damages in an action for breach of contract and faulty workmanship on a project, where the damages claimed are the cost of correcting the work itself.”

“The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. ” Id.

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Case Comment: J.S.U.B. 979 So.2d 871 (Fla. 2007) Case precedent shows the Court’s holding was based upon

a different definition of “occurrence” Definition of “Occurrence”: “As defined in the policies, an

‘occurrence’ is ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’” U.S. Fire Insurance Co. v. J.S.U.B., Inc., 979 So.2d 871 (2007).

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a different definition of “occurrence”

J.S.U.B.’s Rationale: “The polic[ies] … define ‘occurrence’ as an ‘accident’ but leave ‘accident’ undefined. Thus, under our decision in CTC Development, these policies provide coverage not only for ‘accidental events,’ but also injuries or damage neither expected nor intended from the standpoint of the insured.” J.S.U.B., Inc., 979 So.2d at 883.

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a different definition of “occurrence” CTC Development: “[B]eing susceptible to varying

interpretations, [the undefined term ‘accident’] encompasses not only ‘accidental events,’ but also injuries or damage neither expected nor intended from the standpoint of the insured. This definition comports with the language used in standard comprehensive general liability policies and with the definition of the term ‘accidental’ set forth in Dimmitt as ‘unexpected or unintended.’” State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1076 (Fla. 1998).

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a different definition of “occurrence” Policy Definition in Dimmitt: “[A]n accident including

continuous or repeated exposure to conditions, which result in BODILY INJURY or PROPERTY DAMAGE neither expected nor intended from the standpoint of the INSURED...” Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Corp. (Fla. 1993) 636 So.2d 700, 702

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a different definition of “occurrence” Faulty legal reasoning, unpersuasive precedent

- J.S.U.B. relied on holding in CT Development

- CT Development relied upon holding in Dimmett

- Dimmett interpreted different policy language

- CT Development’s facts show no accident happened

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Case Comment: Fire Insurance Exchange 104 Cal.Rptr.3d 534 (Cal. Ct. App. 2010)

Homeowners mistakenly built on their neighbor’s property

Focus upon the act: “Where the insured intended all of the acts that resulted in the victim's injury, the event may not be deemed an ‘accident’ merely because the insured did not intend to cause injury. Indeed, it is well established in California that the term ‘accident’ refers to the nature of the act giving rise to liability; not to the insured's intent to cause harm.” Id. at 537.

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Case Comment: Fire Insurance Exchange 104 Cal.Rptr.3d 534 (Cal. Ct. App. 2010)

Homeowners mistakenly built on their neighbor’s property

Court’s Rationale: “[The homeowners] intended to build the house where they built it. Accepting their contention that they believed they owned the five and one-half foot strip of land and had the legal right to build on it, the act of construction was intentional and not an accident even though they acted under a mistaken belief that they had the right to do so.” Id. at 540.

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Case Comment: Specialty Services (3rd Cir. 2010) 609 F.3d 223 (Penn. law)

Installation of outdoor synthetic turf with splits in the subsurface impermeable membrane

Defects caused drainage system to fail leading to the settlement of the subgrade and an uneven, unstable field surface

Holding: Pennsylvania law interprets “occurrence” such that “in order for a claim to trigger coverage, there must be a causal nexus between the property damage and an ‘occurrence,’ i.e., a fortuitous event. Faulty workmanship, even when cast as a negligence claim, does not constitute such an event; nor do natural and foreseeable events like rainfall.” Id. at 231.

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Single versus Multiple Occurrences Developing nature of related case law

- Earlier cases favored policyholders re: deductibles - Two lines of case law developed: cause vs. effect - Carriers employed earlier holdings to enforce per occurrence limit - Application to Self-Insured Retentions Endorsements

Statement of the two rules:

Effects Test: The determinative factor is the effect of an accident or event, with each resulting injury or instance of damage constituting a separate occurrence. Nicor, Inc. v. Associated Elec. & Gas Ins. Services Ltd., 223 Ill. 2d 407, 418-20, 860 N.E.2d 280, 287-88 (2006).

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Single versus Multiple Occurrences Developing nature of related case law

- Earlier cases favored policyholders re: deductibles - Two lines of case law developed: cause vs. effect - Carriers employed earlier holdings to enforce per occurrence limit - Application to Self-Insured Retentions Endorsements

Statement of the two rules:

Cause Test: The majority of jurisdictions have adopted the “cause test” wherein the courts look to the cause of injury rather than its injurious effects to determine the number of occurrences. Chemstar, Inc. v. Liberty Mut. Ins. Co., 797 F. Supp. 1541, 1545-47 (C.D. Cal. 1992) aff'd, 41 F.3d 429 (9th Cir. 1994).

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Single versus Multiple Occurrences Whittaker Corp. v. Allianz Underwriters, Inc. (1992) 11

Cal.App.4th 1236 (Cal. law) - Defective panels sold and installed in 1,400 vehicles - One $5,000 deductible chargeable despite multiple injuries

Chemstar, Inc. v. Liberty Mut. Ins. Co. (9th Cir. 1994) 41 F3d 429, 433 (Calif. law)

- Manufacturer sued for defective plaster in 28 homes - One deductible because all damages resulted from same cause, i.e.,

failure to provide warning U.E. Texas One-Barrington, Ltd. V General Star Indemnity Co.,

(5th Cir. 2003) 332 F.3d 274 (Texas law) - 19 apartment buildings sustained damage from leaking pipes - 19 deductibles owed because focus on event giving rise to liability

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Multiple Occurrences • The Problem:

– Defects in the installation of windows, the construction of balconies, and the sealing of seams where different materials meet all cause water intrusion and damage. The carrier argues that each defect is a separate “occurrence” requiring a separate deductible or SIR to apply to each.

• The Analysis: – The “occurrence” is typically the “cause.” – The policy defines “occurrence” as including

“continuous or repeated exposure to substantially the same general harmful conditions.”

– The reasonable expectations of the insured.

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Documents

Occurrences in Construction Defects Claims