FIRST-PARTY STATUTORY BAD FAITH – 60 DAYS TO CURE MEANS 60 DAYS TO CURE

In a first party bad-faith lawsuit, such as a bad faith claim against an insured’s property insurer, there are three requirements that must be met before the bad faith lawsuit is filed: “‘(1) determination of the insurer’s liability for coverage; (2) determination of the extent of the insured’s damages; and (3) the required notice must be filed under section 624.155(3)(a).’” Fortune v. First Protective Ins. Co., 45 Fla. L. Weekly D2092a (Fla. 2d DCA 2020) (citation omitted).

The third requirement is for the insured to file a Civil Remedy Notice (known as a “CRN”) as a condition precedent to filing a statutory bad faith lawsuit giving the insurer 60 days’ notice of the bad faith violation and to cure the violation, i.e., pay the claim if the violation is payment.

A very common bad faith payment violation is the assertion that the insurer did NOT attempt “in good faith to settle claims when, under the circumstances, it could and should have done so, had it acted fairly and honestly towards its insured and with due regard for his or her interests.”  Fla. Stat. s. 624.155(1)(b)(1).

Can a statutory bad faith action still be triggered if the insurer invokes the appraisal process per the insurance policy BEFORE the insured files its CRN?   The answer is yes!

In Fortune, an insured suffered a loss stemming from a hurricane.  The insurer adjusted the loss, after applying the deductible and depreciation, at approximately $3,000 and paid that money to the insured.  The insured disputed this was a final amount for the loss and the insurer demanded appraisal per the policy.  The insured then filed a CRN to start the statutory bad faith process.  The insurer did NOT cure the violation—pay the claim—within the required 60-day period.  The parties went through appraisal and the umpire determined the loss to be approximately $120,000.  The insurer paid what it owed per the umpire’s award.  The insured then filed his bad faith lawsuit.  The trial court granted summary judgment in favor of the insurer finding there was no bad faith because the insurer instituted the appraisal process before the insured filed a CRN and then paid the award.

The Second District Court of Appeals reversed the summary judgment.

An insured is not precluded from filing a CRN prior to a determination of the insurer’s liability for coverage (requirement 1 above) or a determination of the extent of the insured’s damages (requirement 2 above).  Thus, the insured was within his rights to file a CRN after the insurer instituted the appraisal process.  See Fortune, supra (“Even if a policy requires the mediation or appraisal process to occur prior to suit being filed, an appraisal is not a condition precedent to the insurer fulfilling its obligation to fairly evaluate the claim and to either deny coverage or to offer an appropriate amount based on that fair evaluation.”).

Moreover, “an alleged payment violation [by the insurer] would require payment within the sixty-day cure period.”  Fortune, supraThis means that the insurer invoking the appraisal process and then paying the umpire’s award AFTER the 60-day cure period expired does not cure a bad faith payment violation.

If you are dealing with a property insurance coverage claim or dispute, it is imperative that you work with counsel to ensure your rights are preserved.  In this case, the insured’s bad faith rights were preserved against the insurer by the insured filing a CRN even after the insurer instituted the appraisal process.

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.

 

AVOID THE HEADACHE – SUBMIT THE SWORN PROOF OF LOSS TO PROPERTY INSURER

Property insurance policies (first party insurance policies) contain post-loss obligations that an insured must (and should) comply with otherwise they risk forfeiting insurance coverage.   One post-loss obligation is the insurer’s right to request the insured to submit a sworn proof of loss.  Not complying with a post-loss obligation such as submitting a sworn proof of loss can lead to unnecessary headaches for the insured.  Most of the times the headache can be avoided.  Even with a sworn proof of loss, there is a way to disclaim the finality of damages and amounts included by couching information as estimates or by affirming that the final and complete loss is still unknown while you work with an adjuster to quantify the loss.  The point is, ignoring the obligation altogether will result in a headache that you will have to deal with down the road because the property insurer will use it against you and is a headache that is easily avoidable.  And, it will result in an added burden to you, as the insured, to demonstrate the failure to comply did not actually cause any prejudice to the insurer.

By way of example, in Prem v. Universal Property & Casualty Ins. Co., 45 Fla. L. Weekly D2044a (Fla. 3d DCA 2020), the insured notified their property insurer of a plumbing leak in the bathroom.  The insurer requested for the insured to submit a sworn proof of loss per the terms of the insured’s property insurance policy. The insurer follow-up with its request for a sworn proof of loss on a few occasions. None was provided and the insured filed a lawsuit without ever furnishing a sworn proof of loss.  The insurer moved for summary judgment due the insured’s failure to comply with the post-loss obligations, specifically by not submitting a sworn proof of loss, and the trial court granted the insurer’s motion.  Even at the time of the summary judgment hearing, the insured still did not submit a sworn proof of loss.

On appeal, the appellate court affirmed that the insured failed to comply with its post-loss obligation by not submitting a sworn proof of loss.  That decision seemed easy.  However, it remanded back to the trial court to determine whether the insurer was prejudiced by the insured’s failure to comply with the post-loss obligation in accordance with case law putting a burden on an insured to establish the insurer was not prejudiced by the failure to comply:

By failing to submit a sworn proof of loss to [the property insurer], the Insureds deprived [the property insurer] of the “opportunity to make a timely investigation, and to prevent fraud and imposition upon it.”  Not only did the Insureds fail to provide the information required under the policy, but they also objected to [the property insurer] obtaining information from their public adjuster via subpoena and failed to coordinate any depositions prior to the filing of and hearing on the motion for summary judgment.

As a result of the Insureds’ failure to submit a sworn proof of loss at any point in time prior to the trial court’s entry of summary judgment, the trial court correctly found, based on this record, that the Insureds materially breached a post-loss contractual condition precedent to the commencement of a lawsuit against [the property insurer]. We affirm the trial court’s finding on the Insureds’ lack of compliance with their post-loss obligations because the Insureds failed to provide [the property insurer] with a sworn proof of loss prior to filing suit and failed to provide any evidence sufficient for a jury to find that they had substantially complied with that requirement.

A panel of this Court recently held, “when an insurer has alleged, as an affirmative defense to coverage, and thereafter has subsequently established, that an insured has failed to substantially comply with a contractually mandated post-loss obligation, prejudice to the insurer from the insured’s material breach is presumed, and the burden then shifts to the insured to show that any breach of post-loss obligations did not prejudice the insurer.” Estrada, 276 So. 3d at 916 (certifying conflict with Rodrigo v. State Farm Fla. Ins. Co., 144 So. 3d 690 (Fla. 4th DCA 2014) and Goldman v. State, 660 So. 2d 300 (Fla. 4th DCA 1995)). We are bound by that decision.

At the time the trial court heard and ruled on [the property insurer’s] motion for summary judgment, this Court had not issued its opinion in Estrada. The record on appeal, therefore, does not contain any discussion of the shifting burden of proof and whether [the property insurer] was prejudiced by the Insureds’ failure to submit any sworn proof of loss.

Lacking the subsequently provided analysis in Estrada, the trial court cannot be faulted for ending its analysis at summary judgment as to whether the insured complied or substantially complied with the post-loss obligations. Under Estrada — applicable to this appeal, which was pending at the time of Estrada‘s release — trial courts are required to analyze whether the insurer was prejudiced by the insured’s failure to comply prior to determining that the insured forfeited coverage by the breach. Thus, we reverse and remand to permit the parties to make supplemental filings and for the trial court to consider and analyze the question of prejudice, as set forth in Estrada.

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.

ALLEGING PROPERTY DAMAGE IN CONSTRUCTION DEFECT LAWSUIT

When there is a construction defect lawsuit, there is an insurance coverage issue or consideration.  As I have said repeatedly in other articles, it is all about maximizing insurance coverage regardless of whether you are the plaintiff prosecuting the construction defect claim or the contractor(s) alleged to have committed the construction defect and property damage.  It is about triggering first, the insurer’s duty to defend, and second, the insurer’s duty to indemnify its insured for the property damage.   

The construction defect claim and lawsuit begins with how the claim and, then, lawsuit is couched knowing that the duty to defend is triggered by allegations in the lawsuit (complaint).  Thus, preparing the lawsuit (complaint) is vital to maximize the insurer’s duty to defend its insured.

In a recent opinion out of the Eleventh Circuit, Southern-Owners Ins. Co. v. MAC Contractors of Florida, LLC, 2020 WL 4345199 (11th Cir. 2020), a general contractor was sued for construction defects in the construction of a custom home.  A dispute arose pre-completion and the owner hired another contractor to complete the house and remediate construction defects.   The contractor’s CGL insurer originally provided a defense to the general contractor but then withdrew the defense and filed an action for declaratory relief asking for the declaration that it had no duty to defend the contractor because the underlying lawsuit did NOT allege property damage.  The trial court agreed with the contractor and granted summary judgment in its favor finding that the underlying complaint did not allege property damage beyond defective work.  But, on appeal, the Eleventh Circuit reversed.

Among other allegations, the owner’s underlying complaint against the contractor asserted that the contractor committed defects through chipped pavers in the driveways and walkways, inconsistent paint finish, marks on ceilings, damage to exterior doors, damage to the top stair tread, damage to hardwood floors, metal roof dents, scratches in granite, holes in ceilings, etc.  The owner sought its costs to repair and remediate the defects and damage from the contractor.  In looking at whether the  contractor’s CGL insurer had a duty to defend the contractor–the insured–the Eleventh Circuit (focusing on precedent out of the Eleventh Circuit) stated:

The operative amended complaint alleged that [the contractor] used subcontractors for work on the residence and that the residence was “replete with construction defects” and various damage. It did not further allege which subcontractors performed which work or how the damage occurred. Given these ambiguities, the complaint’s allegations are broad enough to allow [the contractor] to prove that one subcontractor negligently damaged nondefective work performed by another subcontractor.  If [the contractxor] could establish that at least some of the damage arose in this way, there would be “damage apart from the defective work itself” and therefore “property damage.”

***

For these reasons, we conclude that the underlying operative complaint can fairly be construed to allege “property damage” within the meaning of the CGL policy and Florida law. Accordingly, the district court erred in granting summary judgment to [the CLG insurer] on this basis.

MAC Contractors of Florida, 2020 WL at *4 (internal citations omitted).

 

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.

 

SEPARATION OF INSUREDS PROVISION IN CGL POLICIES

CGL policies contain a “Separation of Insureds” provision.  This provision oftentimes states:

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned this Coverage Part to the first Named Insured, this insurance applies:

1. As if each named insured were the only Named Insured; and

2. Separately to each insured against whom claim is made or “suit” is brought.

This provision is designed to “create separate insurable interests in each individual insured under a policy, such that the conduct of one insured will not necessarily exclude coverage for all other insured.”  Evanson Ins. Co. v. Design Build Interamerican, Inc., 569 Fed.Appx. 739 (11th Cir. 2014).  This provision also allows one insured under the policy (e.g., additional insured) to sue another (e.g., named insured) without violating potential coverage because there are separate insurable interests.   This is a valuable provision in CGL policies.

The case of Taylor v. Admiral Ins. Co., 187 So.3d 258 (Fla. 3d DCA 2016) exemplifies the application of the Separation of Insureds provision, particularly when there is an additional insured.  In this case, a person attended an event at a location owned by Miami-Dade County that was hosted by her employer.  As she was leaving the event, she slipped and injured herself.   Her employer had a CGL policy that had a blanket additional insured endorsement that made the County an additional insured.  The employee, through a Coblentz agreement entered into with the County (since the CGL carrier refused to tender a defense to the County) sued her employer’s CGL policy for coverage as an assignee of the County.   The CGL carrier argued that the employer’s liability exclusion precluded CGL coverage.  The employer’s liability exclusion, in a nutshell, precludes coverage for bodily injury claims from the insured’s employees, subcontractors, etc.  This exclusion can be modified by endorsement that expands the scope so keep an eye out on this endorsement.

The Third District Court of Appeal held that the Separation of Insureds provision precluded the application of the employer’s liability exclusion as to the additional insured. The Separation of Insureds provision allowed coverage for the employee’s claim against the County (an additional insured) since the County had a separate insurable interest under the policy.  Since the County was not the employee’s employer, and under the Separation of Insureds provision the County was separately insured under the policy, the employer’s liability exclusion did not apply to the County as an additional insured.

Notably, other cases around the country, that have modified the employer’s liability exclusion through endorsement, have come up with a different conclusion.

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.

 

FUNDING THE SELF-INSURED RETENTION (SIR)

Unlike a deductible, a self-insured retention (referred to an “SIR”) is, as the name suggests, a self-insured obligation of the insured before its insurer picks up coverage.  The SIR needs to be exhausted by the insured (as the primary self-insurance component) before the carrier’s excess defense and indemnification obligations kick-in under the terms of the policy.  However, an insured can generally exhaust an SIR by paying legal fees and costs associated with a claim.

Oftentimes, the language in the policy requires the SIR to be paid for by the named insured or an insured under the policy.    This was an issue addressed by the Florida Supreme Court in Intervest Const. of Jax, Inc. v. General Fidelity Ins. Co., 133 So.3d 494 (Fla. 2014).

In this matter, a personal injury claimant asserted a claim against the contractor dealing with a residential home.  The contractor hired a subcontractor to install attic stairs and the subcontract required the contractor to indemnify it.  The owner of the house injured herself on the attic stairs and sued the contractor.  The contractor, in turn, sought indemnification against the subcontractor that installed the attic stairs.

The contractor’s general liability policy had a $1 Million SIR (meaning it was self-insured for the first million that needed to be exhausted before its general liability policy applied).

The matter was mediated and a $1.6 Million settlement was reached.  The subcontractor’s carrier was paying the contractor $1 Million to resolve the indemnification claim.   This left a remaining $600,000 to fund the settlement.  A dispute arose between the contractor and its carrier as to this money because the contractor claimed its SIR was paid for by virtue of the $1M it received through its indemnification action so the $600,000 should come from the carrier.  The insurer claimed it was not as the SIR had to be paid by the insured.  As a result, both the contractor and its insurer each paid $300,000 to settle the personal injury action and reserved rights to seek reimbursement from the other in a separate lawsuit.

In this separate lawsuit, and during the appellate process, the question was posed to Florida’s Supreme Court whether indemnification payments received from the insured can be used to satisfy the contractor’s $1M SIR.  The policy provided that the SIR “will only be reduced by payments made by the insured” and that payment of the SIR “is a condition precedent for our [insurer’s] obligation to pay any sums either in defense or indemnity and shall not pay any such sums until and unless the insured has satisfied” its SIR.

The Florida Supreme Court held that the indemnification payment received by the subcontractor could be used to satisfy the contractor’s $1M SIR.

First, the policy did not contain a provision expressly stating “that regardless of other insurance the insured would continue to be responsible for the full SIR before the limits of the policy applied.Intervest Const. of Jax, 133 So.3d at 502.   Likewise, the policy did not contain a provision  that stated “[p]ayment by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.”  Id.

Second, there was nothing in the policy that required the insured “to pay all amounts within the retained amount [SIR] ‘from its own account.’”  Id.   Other policies have included this language with specific language that states that the SIR “‘is the responsibility of the Insured and is to be paid from the Insured’s own account.’” Id.   Based on this, the Florida Supreme Court found that while the payment must come from the insured, it does not specify where the funds to pay the SIR must originate. Id.

If you are working with a policy with a SIR, it is important to work with counsel to understand your obligations when it comes to a SIR and, importantly, how the SIR operates.

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.FUN

 

INSURED’S CLAIM FOR DECLARATORY RELIEF IN COVERAGE DISPUTE

In an insurance coverage dispute, it is common for the insured or the insurer to file a lawsuit that includes a claim for declaratory relief — asking the court to render a ruling as to the coverage issue.  This claim is proper if an insurer denied coverage or a part of coverage relating to an exclusion or endorsement in the policy, or even if there is the argument that the loss or occurrence did not take place within the policy period.    An insurer or insured pursuing an action for declaratory relief must allege:

[1] there is a bona fide dispute between the parties, [2] that the moving party has a justiciable question as to the existence or non-existence of some right, status, immunity, power or privilege, or as to some fact upon which the existence of such right, status, immunity, power or privilege does or may de[p]end, [3] that plaintiff is in doubt as to the right, status, immunity, power or privilege, and [4] that there is a bona fide, actual, present need for the declaration.

Security First Ins. Co. v. Phillips, 45 Fla. L. Weekly D1426b (Fla. 5th DCA 2020) (citation omitted).

An action for declaratory relief is appropriate in an insurance coverage dispute even if it requires a determination of certain facts under which the obligations under the insurance policy at-issue depends.   Id.

If you are involved in an insurance coverage dispute with your insurer, consult with counsel.  Please contact me if I can be of assistance.  Do NOT try to navigate these waters by yourself.  There will be complicated factual and legal issues at stake that will be specifically tied to a coverage determination.  You want to make sure the facts are best positioned under the law to maximize an argument for insurance coverage.

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.

 

ORDINARY USE OF TERM IN INSURANCE POLICY PREVAILED

There are cases where you feel for the plaintiff, but understand why they did not prevail, despite the creative efforts of their counsel.  The case of Robinson v. Liberty Mutual Ins. Co., 958 F.3d 1137 (11th Cir. 2020) is one of these cases.

In Robinson, the plaintiff moved into a home that turned out to be infested with a highly venomous spider.  Efforts to eradicate the spider proved unsuccessful and the spider apparently infested the entire home.  The plaintiff made a claim under their homeowner’s property insurance policy arguing that their home suffered a physical loss caused by the spider infestation as the spider presented an irreparable condition that rendered the home unsafe for occupancy.  (It probably did!). The property insurer denied coverage because the policy had an insurance exclusion for loss caused by birds, vermin, rodents, or insects.

The insurer claimed the spider is an insect or vermin and, therefore, there is no coverage based on the exclusion.  The insured creatively argued that “scientifically speaking” a spider is an arachnid and not an insect.  Neither the trial court nor the Eleventh Circuit found this argument persuasive.

Under the ordinary dictionary meaning of the term “insect,” a spider fits into this meaning any many dictionaries even list a spider as an example of an insect.  Moreover, vermin include “small common harmful or objectionable animals (as lice or fleas) that are difficult to control.”  A highly venomous spider that cannot be eradicated fits within this meaning based on the allegations of the plaintiff’s claims.

Sure, you feel for the homeowner that moved into a home that cannot be occupied based on the infestation of a highly venomous spider.  And the homeowner’s lawyers made a creative argument by stepping away from ordinary uses of terms by focusing on the technical scientific definition of a spider.  But, the ordinary meanings and uses of terms in an insurance policy prevailed. And, they probably should prevail.   This does not mean the creative arguments should not have been pursued.  They probably should have in this scenario where efforts to eradicate the spider were not successful and the home could not be occupied.  However, ordinary dictionary meanings and uses should not be ignored when interpreting a contract, which is what an insurance policy is.

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.

 

QUICK NOTE: BEWARE OF AN ANTI-CONCURRENT CAUSE PROVISION IN YOUR PROPERTY INSURANCE POLICY

Paying the lowest premium for property insurance is oftentimes not a great thing because, as with everything else, “you get what you pay for.”   If you are paying a lower premium, it is for a reason.  You likely have a restrictive policy that excludes more coverage (and, perhaps, all coverage) than you’d actually like in the event your property sustains a loss.   Think about the coverage you are looking for before deciding to get the policy with the lowest premium.

For instance, there are policies with an exclusion that precludes coverage for water penetration “through the roof system or exterior walls or windows.”  Think about this exclusion.  Water penetration will undoubtedly come from one or a combination of these places, meaning this exclusion totally restricts coverage for water intrusion claims.  Moreover, property insurance policies are also including anti-concurrent cause language in the policy, which is language that says, “Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.”  “‘An anti-concurrent cause provision is a provision in a first-party insurance policy that provides that when a covered cause and non-covered cause combine to cause a loss, all losses directly and indirectly caused by those events are excluded from coverage.” Security First Ins. Co. v.   Czelusniak, 45 Fla. L. Weekly D1151b, n.1 (Fla. 3d DCA 2020).

In Czelusniak, an insured had an all-risk property insurance policy with this water penetration exclusion and an anti-concurrent cause provision. The insured sustained water penetration through windows, the walls, and doors, resulting in water damage.   The exclusion bars water penetration through windows and walls but mentions nothing about doors.  But, it did not matter because of the anti-concurrent cause provision:

While there is no provision in the policy expressly excluding damage from water penetrating through the doors of the dwelling, the policy expressly excluded damage from water penetrating through the “roof system or exterior walls or windows . . . .” Because evidence of water entering through the exterior walls and windows was undisputed and is expressly excluded by the policy, the entire loss is excluded from coverage due to the anti-concurrent cause provision regardless of any other cause or event contributing concurrently or in any sequence to the loss.

***

Accordingly, the anti-concurrent cause provision, coupled with the undisputed evidence that the loss was caused by a combination of both excluded and covered perils, foreclosed the analysis of whether the jury could legally or factually separate the damage caused by water coming through the door from water coming through the walls and windows. Therefore, we hold that the trial court erred in directing the verdict in favor of the insured and reverse and remand for the trial court to direct the verdict in favor of Security First.

Czelusniak, supra.

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.

 

KNOW THY INSURANCE COVERAGE

If you are involved in construction, insurance is vital.  There are too many risks and you want to make sure you have insurance to cover many of those risks.   Commercial general liability insurance (CGL) is an insurance product most contractors maintain and need to maintain.  However, not all policies are the same by virtue of the endorsements issued with the policies that restrict coverage.   It is important that you know what coverage you have and that you are not working on projects where you have no coverage.  That would be a mistake for both you and the party that hired you.

You may think you have coverage only to find out that you do not, which seems to be the case in South Winds Construction Corp. v., Preferred Contractors Ins. Co. Risk Retention Group, 2020 WL 2463778 (Fla. 3d DCA 2020).  In this case, a contractor was sued for water damage on the 6th through 11th floors caused to a condominium project.  The contractor’s insurer denied coverage and, thus, its duty to defend the insured in the lawsuit, because the policy had an exclusion that precluded coverage for buildings and structures exceeding three stories.  Essentially, this is a type of condominium exclusion where the policy does not apply to high-rise projects.

While an insurer’s duty to defend its insured in an underlying lawsuit is broader than its duty to indemnify its insured, here, the claim fell clearly and squarely within a policy exclusion.  It was an easy coverage denial from the get-go. Southwinds Construction Corp., supra, at *1. (“This placed the claim squarely and unambiguously within the exclusion from coverage applicable to work in buildings above three stories in height.”)

It is possible the contractor was performing and had performed many condominium projects or projects exceeding three stories in height.  All the while the contractor had no coverage as long as it was performing work with a policy that had this exclusion.  Not only does this harm the contractor, but it also harms the owner that was relying on insurance coverage in the event of property damage caused by the contractor.  This does not mean the contractor is not liable.  It just means it has no insurance coverage!

 

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.

 

 

PRIORITY OF LIABILITY INSURANCE COVERAGE AND HORIZTONTAL AND VERTICAL EXHAUSTION

Recently, I participated in a webinar involving the horizontal and vertical exhaustion of insurance coverage.  Say what?

This pertains to the PRIORITY of liability insurance coverage and the interface between a general contractor’s (or upstream party’s) primary insurance and the subcontractor’s (or downstream party’s) excess insurance, particularly when the general contractor is required to be indemnified by the subcontractor and named as an additional insured under the subcontractor’s liability policies.

For instance, let’s assume the general contractor has a $2M primary policy and a $5M excess policy.  Its subcontractor has a $1M primary and a $5M excess policy. The general contractor is an additional insured under the subcontractor’s policies and the subcontractor is required to contractually indemnify the general contractor.  An issue occurs caused by the subcontractor’s negligence resulting in a $5M judgment against the general contractor and the subcontractor.

A. Horizontal Exhaustion

Under the horizontal exhaustion approach, the court will look primarily to the “other insurance” provision in the policies–specifically, the subcontractor’s excess policy–which will take precedence over the contractual indemnification language. Since the “other insurance” provision in excess policies typically state it is excess over the exhaustion of primary policies, under the horizontal exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from subcontractor’s primary policy;
2) $2M from general contractor’s primary policy; and
3) $1M from the general contractor’s excess policy and $1M from the subcontractor’s excess policy, as the excess policies share in coverage after the primary coverage is exhausted.

The general contractor and its insurers do not perceive this to be equitable as it dilutes the indemnification and additional insured requirement. Further, it results in the general contractor’s carriers subrogating to the rights of the general contractor to pursue a separate action against the subcontractor, which gets sent right back to the subcontractor’s excess insurer (as its primary insurance was exhausted) for reimbursement.  Under the above example, the subcontractor’s excess insurer still had a remaining $4M in coverage to reimburse the general contractor’s primary and excess insurer.  This is known as a circular chain of events because the priority of coverage under horizontal exhaustion invariably results in a separate subrogation claim for reimbursement.

B. Vertical Exhaustion

Under the vertical exhaustion approach, the court will look primarily to the contractual indemnification and additional insured language, irrespective of the “other insurance” provision in the excess policy, to avoid the circular chain of events with the general contractor’s carriers pursuing a separate subrogation claim. Under the vertical exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from the subcontractor’s primary policy; and
2) $4M form the subcontractor’s excess policy.

The subcontractor’s primary and excess policies would be exhausted BEFORE the general contractor’s primary policy comes into play.  This is designed to avoid the the separate subrogation claim since the subcontractor’s insurance coverage is being exhausted first.

C. Priority of Insurance Coverage

The priority of insurance coverage can become a very significant consideration in sizable claims.  There is a reason parties contractually negotiate insurance coverage in the contract.  For this reason, during the contract negotiation, it is important to appreciate this consideration on the frontend. Consult with counsel and an insurance broker as to the following:

 The contractual indemnification language – make sure it is enforceable in your jurisdiction;
 The additional insured language and applicable insurance endorsements – make sure you get the right endorsement for ongoing and completed operations that covers issues wholly or partially caused by the subcontractor’s (or downstream party’s) negligence;
 The primary and noncontributory language and applicable endorsements in the primary and excess policy-this modifies the “other insurance” provision from a priority of coverage standpoint and you want this in both the primary policy and excess policy; and
 The “other insurance” language in the general contractor’s (or upstream party’s) policy — the objective is to maximize vertical exhaustion of coverage to avoid the circular chain of events discussed above so this may result in manuscript language to the general contractor’s “other insurance” language to reflects its priority.

Claims that involve or rely on construction insurance claim can become complex.  But, insurance is crucial in order to properly assess risk, flow down risk, and manage risk.   In order to evaluate associated risk, it requires consultation with lawyers and insurance brokers and understanding the type of claim exposure relative to the project, and maximizing value of insurance–primary and excess insurance–for which you are an additional insured.

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.