“IS THE DEFECTIVE WORK COVERED BY INSURANCE?”

shutterstock_81862846I have been asked this question quite a bit from owners, in particular:  “The contractor committed defective work, but it has insurance.  Doesn’t the insurance cover this defective work?”    Ugh, NO!    There is this misconception that liability insurance, specifically, is the be-all-and-end-all when it comes to defective work.  This could not be further from the truth.  Don’t get me wrong – liability insurance is important; it is very, very important.   However, liability insurance does not cover the risk of an insured’s defective work.  Rather, liability insurance is designed to cover the risk of resulting damage:  damage resulting from defective work.  This is a significant distinction and one that is often overlooked.  This is also why anyone encountering defective work should be working with an attorney to maximize insurance coverage or realize that the issue is not covered by insurance. 

 

Let’s give easy examples to summarize this application:

 

Example 1 – My windows are defectively installed.   They all need to be removed and replaced.   Insurance should cover this defective installation, right?  Ugh, NO!   Remember, insurance does not cover the risk of an insured’s defective work.   Removing and replacing the windows would not be covered by insurance.

 

Example 2- My windows are defectively installed and this defective installation has resulted in water intrusion and extensive water damage.  Insurance should cover the defective installation and water damage, right?  Yes and No.  As mentioned, insurance is still not going to cover the defective work.  But, the insurance should cover the water damage resulting from the defective work. 

 

Example 3 -  A spalling piece of concrete that was defectively installed fell  and substantially damaged a vehicle.  Insurance should cover the damage to the vehicle, right?  Insurance should cover this damage because the third-party damage was the result of the defective work.

 

Example 4 – The balcony waterproofing was defectively installed resulting in water getting into the balcony system.  In order to fix this defective waterproofing, the balcony concrete topping needs to be ripped out.  Insurance covers remediating the waterproofing, right?  Yes and no, perhaps.    Again, insurance is not going to cover the defective waterproofing.  But, there may be an argument that insurance should cover the removing and replacing of the concrete topping since this work had to be ripped out in order to repair the underlying defective waterproofing.

 

 

These are just easy examples to illustrate the application of insurance in different contexts.   Of course, these are not all of the contexts and most contexts are more challenging.  But, the point is that insurance, contrary to what many may believe, is not designed to insure defective work.   Insurance is more complex than it may seem and, again, it is important to consult with a practitioner that understands insurance, how to maximize insurance, and to to advise you when the issue in reality is not an insurance-coverage issue. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

INTERACTION BETWEEN CGL INSURANCE, OCIP, AND SUBCONTRACTOR DEFAULT INSURANCE

imagesHere is a great opinion and insurance coverage dispute about the interaction between a CGL policy, and particularly one provided under an Owner’s Controlled Insurance Program, and a subcontractor default insurance policy / subguard policy. 

 

In Pavarani Construction Co. v. Ace American Insurance Co., 2015 WL 6555434 (S.D.Fla. 2015), a general contractor constructed a high-rise condominium project.  The general contractor and subcontractors were enrolled in the Owner’s Controlled Insurance Program (“OCIP”).  This meant the general contractor and the subcontractors had the same CGL insurer.   In addition, and outside of OCIP, the general contractor had subcontractor default insurance which is insurance a general contractor maintains to insure the risk of subcontractor default (and, really, catastrophic subcontractor default).

 

Post-construction, it was discovered that that the structural shell subcontractors the general contractor hired to (a) install the concrete masonry units and (b) the cast-in-place concrete, performed their work defectively.  Specifically, reinforcing steel required to be installed within the concrete masonry units or cast-in-place concrete was omitted or improperly installed.    These deficiencies resulted in excessive movement of building components.  This movement caused stucco to debond, cracking in the walls, cracking of cast-in-place columns, beams, and shearwalls, and cracking in the mechanical penthouse enclosure on the roof that then resulted in water intrusion.

 

Upon discovering the deficiencies and/or resulting damage, the owner of the Project put the general contractor on notice.  The general contractor notified its subcontractors.  The general contractor (and subcontractors) sought indemnification under the CGL policy within OCIP. (Remember, with an OCIP policy, it is the same CGL insurer that covers all enrolled entities.)  The CGL carrier, however, denied coverage.  This resulted, applicable to the case, in the concrete masonry unit subcontractor defaulting on its subcontract because it was unable to perform repairs to its deficient work and cover the resulting damage without the CGL insurance proceeds.  As a consequence, the general contractor submitted a claim to its subcontractor default insurance policy to recover money to fund the repairs that were in excess of $25 Million.  The general contractor also worked out a deal with its subcontractor default insurance policy that it would pursue the CGL carrier for reimbursement.

 

The general contractor then sued the CGL insurer for indemnification by asserting a breach of contract claim and a declaratory relief claim against the insurer. 

 

RESULTING DAMAGE

 

The insurer argued that there was no coverage because there is no coverage under the CGL policy for the general contractor repairing defective work.   This is true, BUT “if the defective work causes damage to otherwise nondefective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the [mechanical] penthouse enclosure, and cracking in the critical concrete structural elements…[the general contractor] is entitled to coverage for the repair of that non-defective work.”  Pavarani, supra, at *4.   In other words, while repairing the defective work would NOT be covered, repairing damage resulting from the defective work WOULD be covered.

 

In discussing coverage for resulting damage, the court relied on a recent Eleventh Circuit Court of Appeals case, Carithers v. Mid-Continent Casualty Co., 782 F.3d 1240 (11th Cir. 2015).   This case is actually a very important case because it held “the complete replacement of defective subcontractor work may be covered when necessary to effective repair ongoing damage to otherwise non-defective work.”  Pavarani, supra, at *4.   (Please review the specifics of this case here).  Basically, if replacement of potentially defective work is necessary to repair resulting damage, then such replacement of the defective work would be covered under the policy. For instance, if you had to remove (or rip-and-tear out) defective work in order to fix the resulting damage, then such removal would be covered.

 

Here, it was clear that the defective work caused resulting damage triggering the CGL policy’s obligation to indemnify the general contractor and applicable subcontractors.

 

“OTHER INSURANCE” PROVISION

 

The CGL policy contained an “Other Insurance” provision.  This provision means that the policy will operate as excess (not primary) insurance over any other available insurance.  This provision is in virtually every CGL policy and in many other types of insurance policies such as a subcontractor default insurance policy.  The “Other Insurance” provision applies “when two or more insurance policies are on the same subject matter, risk and interest.”  Pavarani, supra, at *5.

 

The CGL insurer argued that based on this “Other Insurance” provision, the general contractor’s subcontractor default insurance should operate as the primary insurance with it serving as any excess insurance.  The court correctly dismissed this argument since a CGL policy and subcontractor default insurance policy insure completely different business risks.   Besides, the subcontractor default insurance policy insures the general contractor for a subcontractor default and does not insure a subcontractor for its default. 

 

Furthermore, the court held:

 

Courts disregard ‘Other Insurance’ provisions where, as here, there is a contractual right of indemnification between the parties insured by the relevant policy.  Here, AWS [concrete masonry subcontractor] contracted to indemnify Plaintiff [general contractor] for damages resulting from its work and Defendant [CGL insurer] insured AWS [per OCIP] for claims of property damage.  Therefore, Defendant cannot utilize the ‘Other Insurance’ provision to shift the loss.

Pavarani, supra, at *5 (internal citation omitted).

 

ATTORNEY’S FEES

 

Florida Statute s. 627.428 authorizes attorney’s fees against an insurer in an insurance coverage case.  Since the general contractor (insured) prevailed, it was entitled to its reasonable attorney’s fees.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CGL INSURANCE AND CONSTRUCTION DEFECTS (DUTY TO DEFEND; TRIGGERING OF CGL POLICY; COVERED RESULTING DAMAGE)

imagesI previously wrote about insurance coverage issues in a construction defect dispute, specifically in the context of the insurer denying coverage outright and refusing to defend its insured.

 

As a sequel to this posting, a noteworthy opinion was issued by the Eleventh Circuit Court of Appeals in Carithers v. Mid-Continent Cas. Co., 2015 WL 1529038 (11th Cir. 2015) in a commercial general liability (CGL) insurance coverage dispute dealing with construction defects to a house.   This opinion discusses central issues to an insurance coverage dispute in a construction defect context: the triggering of a CGL policy, the duty to defend, the duty to indemnify, covered resulting damage stemming from construction defects, and a claimant resolving a dispute with an insured in order to pursue rights against the insured’s CGL carrier (also known as a Coblentz agreement).

 

In this case, the owners hired a general contractor to build their house.  The general contractor had CGL insurance with products completed operations coverage.  Upon discovering construction defects, the owners sued the general contractor.  The general contractor’s insurer refused to defend the general contractor, meaning the insurer denied coverage (which is the last thing the general contractor ever wants to hear).  The insurer denied coverage because the complaint alleged that the damages were not discovered until 2010; however, the general contractor did not have any CGL coverage after 2008.  Thus, if the manifestation theory applied to trigger coverage (discussed below), there would be no coverage under the CGL policy.

 

The general contractor and insurer then entered into a consent judgment in the action for $90,000 in favor of the owners that assigned to the owners the general contractor’s rights under its CGL policy.  (This forms the framework for what is known as a Coblentz agreement.)  The owners then sued the general contractor’s CGL insurer.

 

The issues in this case were (a) the insurer’s duty to defend its general contractor-insured, (b) the triggering of an occurrence under a CGL policy, and (c) resulting damage covered under the CGL policy.

 

(A) Duty to Defend

 

The insurer’s duty to defend is triggered by the allegations in the complaint.  Here, the Eleventh Circuit held that the insurer had a duty to defend because the duty to defend is broader than the insurer’s duty to indemnify and “all doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured.” Carithers, supra, at *4 (quotation and citation omitted). “An insurance company must defend an action where the facts alleged against the insured would give rise to coverage, even if those facts are not ultimately proven at trial.”  Id

 

(B) Triggering of an Occurrence Under CGL Policy

 

The insurer wanted the manifestation theory to trigger CGL coverage.  Under this theory, the CGL policy is triggered if the damage is discovered (manifests itself) during the policy period.  

 

The reason the insurer wanted this theory to apply is because the owners admitted that they discovered the damage / defects in 2010 when the general contractor’s CGL policy was no longer in effect.

 

Conversely, the owners wanted the injury-in-fact theory to apply to trigger coverage.  Under this theory, the policy is triggered when the damage occurs even if the damage is not discovered until sometime later.  Here, the trial court found that the damage occurred in 2005 when the general contractor’s CGL carrier was in effect (although the damage was not discovered until 2010).  Because there was evidence and a finding as to when the damage occurred, the Eleventh Circuit held that the injury-in-fact theory was the correct theory to trigger CGL coverage.

 

(C) Resulting Damage Covered Under a CGL Policy

 

The cost of repairing damage to other work resulting from faulty workmanship would be covered under the CGL policy.  In other words, repairing damage to another trade’s work would be covered but repairing / replacing damage to the trade’s own work would not be covered.  The Eleventh Circuit analyzed this application to determine whether the trial court appropriately determined that certain items were resulting damage.

 

(1)  Brick

 

The trial could found that the defective application of exterior brick coating caused resulting damage to the brick itself.  If the exterior brick coating was applied by the subcontractor that installed the brick, then the brick should not be covered since the brick was the subcontractor’s own work as opposed to other work.  However, there was no evidence at the trial level whether the brick coating and installation of the brick was done by the same subcontractor or different subcontractors.  Because the plaintiff owners (who were assigned rights under the policy by the general contractor insured) had the burden of proof on this issue, which they failed to meet, the Eleventh Circuit reversed any damage awarded associated with the brick.

 

(2)  The Tile and Mud Base

 

The trial court found that defective adhesive and an inadequate base caused damage to the tile.  The trial court awarded damage to replace the tile and mud base. Similar to the brick, the issue turned on whether the installation of the tile and mud base was done by the same subcontractor or different subcontractors.  And, similar to the brick, no evidence was offered on this point so the Eleventh Circuit reversed any damage awarded associated with the tile and mud base.

 

(3)  Balcony

 

The trial court found that defects in the construction of the balcony resulted in damage to the garage. However, because the balcony had to be rebuilt in order to repair the garage, the trial court held that this work was resulting damage covered by the CGL policy.  The Eleventh Circuit agreed with the trial court holding that the cost of repairing damage resulting from defective work is covered and since repairing the balcony was part of repairing the garage, these costs would be covered.

 

Important take-aways:

 

  • This case provides strong arguments to an insured when its CGL carrier denies coverage, specifically based on the argument that its policy was never triggered.  Remember, the duty to defend is broader than the duty to indemnify so any doubts must be resolved in favor of the insured.

 

  • Don’t forget about the injury-in-fact theory to trigger CGL coverage.  If you have evidence, such as an expert opinion, as to when the damage started to occur, this theory can be valuable if the owner discovered the latent defects after the expiration of your CGL policy.  This helps an owner maximize CGL coverage and a general contractor maximize coverage under its CGL policy.

 

  • Make sure to meet your burden of proof to establish resulting damage or other damage caused by faulty workmanship.  Make sure to prove that the resulting damage was work performed by a different subcontractor and not the subcontractor that performed the faulty workmanship. And, to this point, make sure to include appropriate language in the consent judgment.

 

  • Make sure you know how to couch your coverage arguments to an insurer in order to maximize insurance coverage.

 

  • If your insurer denies coverage, consider entering into what is known as a Coblentz agreement with the claimant where a consent judgment is entered against you and rights under your policy are assigned to the claimant.  The benefit is that in consideration of the consent judgment and assignment of rights, the claimant gives up any rights to collect that judgment against you. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.