SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

Posted on November 22, 2014November 22, 2014 by Edward Garber

Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured. Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government? In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor? The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

In this case, the government hired a prime contractor to abate asbestos at a post office. The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project. The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused. The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim. After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee. The thrust of the claim was that the government breached the indemnification provision. The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government. The Court of Federal Claims agreed and dismissed the lawsuit. Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government. While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor. I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any claim.

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.

THE “PRIMARY AND NONCONTRIBUTORY” INSURANCE REQUIREMENT

Posted on September 19, 2014September 19, 2014 by Edward Garber

If you were ever involved in a construction defect claim or lawsuit, you may have heard the phrase “primary and noncontributory” when referring to YOUR insurance coverage. Or, you may have come across this phrase when discussing with your insurance broker the additional insured insurance coverage requirements you need to provide pursuant to your contract.

But, what does this mean when referring to YOUR insurance coverage? This phrase refers to the priority of YOUR insurance coverage.

For instance, a general contractor will require that that its subcontractors obtain CGL insurance coverage that not only names the general contractor as an additional insured (for both ongoing and completed operations), but also includes an endorsement reflecting that the subcontractor’s policy is “primary and noncontributory.” (See above picture for example of endorsement) The subcontract may provide, by way of example, that, “Insurance coverage provided by you [subcontractor] to the additional insured [general contractor] shall be primary and noncontributory with respect to any insurance coverage otherwise available to the additional insured.” This means that if the general contractor is sued associated with the negligence of its subcontractor, it will tender the claim to the subcontractor’s insurer to defend and indemnify it since it will (hopefully) be an additional insured under the policy. The subcontractor’s policy is the “primary” policy without contribution from the general contractor’s policy (as the general contractor’s policy will really come into play as excess insurance).

The general contractor, to be safe and circumspect, may want the subcontractor to obtain a “primary and noncontributory” endorsement that says that the subcontractor’s insurance will be primary and noncontributory when required by written contract. The reason this is safe is because most CGL policies already contain a section called “Other Insurance.” In this section (as depicted in part in the adjacent picture), the policy will state that it is primary except when other insurance (specified in the policy) is available in which case it will serve as excess insurance. One of the other insurance conditions that will deem your policy as excess is when you are identified as an additional insured under another’s policy (e.g., the subcontractor’s policy that identifies the general contractor as an additional insured is the primary policy and the general contractor’s policy will serve as excess insurance). The primary and noncontributory endorsement modifies this “Other Insurance” language.

Understanding the application of insurance and the interrelationship of potential policies is never easy. But, this understanding is of the utmost importance for construction risk assessment purposes where risk is inherent in the very nature of construction.

DO NOT LET LACK OF NOTICE VOID YOUR INSURANCE COVERAGE

Posted on September 7, 2014September 7, 2014 by Edward Garber

Unknown The Southern District of Florida’s opinion in Pharm. D v. Founders Insurance Co., 2014 WL 32557844 (S.D.Fla. 2014) illustrates that absolute importance of notifying a liability insurer of a claim and a lawsuit; otherwise, coverage that would be afforded to an insured could be voided. This should never occur!

In this matter, a water pipe ruptured and a fire occurred at the insured’s premises. This resulted in damage to a pharmacy located below the insured’s premises. Due to this damage, the pharmacy filed a lawsuit against the insured. The insured failed to take any action in the lawsuit and a default judgment was entered against the insured for in excess of $500,000.

Years later, the (third party) pharmacy sued the insured’s CGL (commercial general liability) insurer to recover the amount of its default judgment against the insurer. The insurer argued that coverage should be voided because its insured violated the terms of the policy. Specifically, the insured had the obligation to notify the insurer of any claim or suit as soon as practicable and to send copies of any lawsuit to its insurer. Apparently, the insured never did this and the insurer had no notice of the lawsuit. The Southern District agreed with the insurer that the lack of notice voided coverage:

“The insurance policy in question had a continuing notice obligation for a reason: the insured had the best information on legal action brought against it and, therefore, the insured was required to keep its insurer informed of developments. Accordingly, the insured had two distinct duties: (1) to notify Defendant [insurer] of any claims and (2) to notify Defendant of any lawsuits filed which may implicate the insurance policy.

***

The record shows there is no genuine dispute of material fact that the insured failed to notify Defendant of the state lawsuit and, thus, materially breached the insurance policy. As a matter of law, this breach absolved Defendant of its contractual requirement to defend in the state lawsuit and renders Defendant not liable on the default judgment entered in state court.”

Pharm. D, supra, at *3, *5.

The lesson learned from this matter is that if suing a party in which liability insurance is applicable (such as any case involving property damage or personal injury), take affirmative steps to ensure that the party’s liability insurer (CGL insurer) is notified of a claim and of the lawsuit. Even if the party does not respond to the lawsuit, send a copy of the lawsuit to the party’s insurer. Take steps to locate the insurer or the party’s insurance broker to ensure that proper notice is served and so that you are not relying on a potentially silent party to notify its insurer of a lawsuit (especially, when you are relying on insurance to cover your damages). Clearly, in this matter, the insured-party did nothing despite having CGL coverage that perhaps would have covered some of the pharmacy’s damages.

HMM–WAIVER OF SUBROGATION–SHOULD IT STAY OR SHOULD IT GO?!?

Posted on September 5, 2014September 5, 2014 by Edward Garber

Parties involved in construction are familiar with the phrase “waiver of subrogation” because there is commonly, and virtually always, a waiver of subrogation provision in the construction contract. For instance, the AIA Document A201 (General Conditions) contains a waiver of subrogation provision for damages or loss covered by builder’s risk property insurance. A waiver of subrogation provision prevents an insurance company from paying a claim and then stepping in the shoes of the insured (through subrogation) to sue a waived third party responsible for the claim. To ensure the waiver of subrogation provision does not conflict with any other rights in the contract, the A201’s waiver of subrogation provision provides: “A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.”

For example, let’s assume a fire during construction caused substantial damage to an owner’s property. The owner submitted a builder’s risk claim and it was determined that the damage caused by the fire (peril) was covered. Let’s assume the fire was attributed to the negligence of the contractor and its electrical subcontractor. With waiver of subrogation language, the carrier cannot pay the claim to the owner and then subrogate to the interests of the owner to pursue claims directly against the contractor and/or electrical subcontractor to recoup the proceeds it paid to the owner. This waiver would apply even though the owner’s contract with its contractor required the contractor to indemnify the owner for damage caused by the contractor or the contractor’s subcontractor’s negligence. Without the waiver of subrogation language, the carrier would not be deprived of this subrogation right.

In addition to the waiver of subrogation relating to builder’s risk property insurance, parties are requesting waivers of subrogation endorsements for CGL policies and other liability policies. With CGL policies, the waiver of subrogation endorsement is referred to as the “Waiver of Transfer of Rights of Recovery Against Others to Us” endorsement. Sometimes parties want a blanket waiver or at least they want to know they are specifically identified in the endorsement to ensure the CGL carrier waives a subrogation claim against it if the carrier pays out insurance proceeds. This endorsement is important because without it a party could be breaching its insurance policy and voiding applicable coverage by contractually agreeing to waive subrogation that is in conflict with the policy’s subrogation language. If a carrier is willing to issue this endorsement (and there are times it may not), it will usually come at a cost through a higher premium, etc., since the waiver of subrogation impacts an insurer’s risk assessment.

I like contractual waiver of subrogation language relating to builder’s risk property insurance claims. As long as the insurance broker and carrier are aware of the contractual waiver so that there is not any issue that the waiver impacts policy language / coverage (and, the broker and carrier should inquire since it’s become boilerplate language in construction contracts), the waiver of subrogation allows a covered claim to be paid without an otherwise waived party worried about whether the carrier is going to try to later recoup losses against it.

From an owner or contractor’s perspective, I also usually like the idea of the party being hired to provide the waiver of subrogation endorsement / waiver of transfer of rights endorsement in its CGL policy irrespective of the requirement to identify the hiring (or paying) party as an additional insured. The primary reason is that in the event there is any issue whatsoever with the additional insured status under the hired party’s policy such that it does not apply to the hiring party (e.g., additional insured status of a general contractor under its hired subcontractor’s policy), with the waiver of subrogation, if the hired party’s policy pays it has at least waived its right to recoup that money against the hiring party through subrogation.

I know there are some parties that do not like waiver of subrogation language, especially with CGL policies, due to underwriting issues that it poses and/or potential increased premium costs associated with the endorsement. Sure, this is true. But, a waiver of subrogation does enable a dispute to be streamlined by allocating risk to a party that is in a position to control the risk and has insurance to cover that risk and by reducing continued litigation associated with a claim.

A BUILDER’S RISK INSURANCE TIDBIT

Posted on August 29, 2014August 29, 2014 by Edward Garber

Builder’s risk insurance is a form of all-risk property insurance that protects an owner’s property / project from perils during the course of construction subject to the exclusions identified in the policy. Sometimes there is the question when negotiating a contract between an owner and general contractor whether to name the contractor as an additional named insured (along with the owner) and/or a loss payee under the builder’s risk insurance policy procured by the owner. A contractor prefers, and should prefer, to be included as a named insured and/or loss payee to ensure it is protected and paid for a covered loss during construction. In reality, it is much better for the contractor to be identified as a named insured; being identified as a loss payee simply means the contractor can be paid insurance proceeds (it can be named on the check), but it is not an insured under the policy.

Each of the standard form construction agreements contain slightly different language regarding a contractor’s interest under a builder’s risk policy procured by the owner. For example, the AIA would require the builder’s risk insurance to include the interests of the owner, the general contractor, subcontractors, and sub-subcontractors. Ok; this makes sense but it does not specifically require the owner to name these entities as named insureds under the policy and/or loss payees. Rather, the AIA contains language that allows the owner to adjust the claim as a fiduciary with the payment made to the owner as a fiduciary. The ConsensusDOCS provide better language for the contractor that would require the owner to name the contractor as a named insured. Again, being identified as a named insured is preferable as it allows the contractor to assert a builder’s risk claim directly against the policy as an insured. And, from an owner’s perspective, sometimes it is preferable to allow the contractor to assert a claim for a loss associated with a peril that may be covered even if the peril is due to the negligence of the contractor. While the standard form contracts require the owner to bear the cost of the deductible, an owner may want to shift that deductible to the contractor if the contractor is seeking to recoup losses under the policy for a peril due to its negligence.

Finally, the standard form contracts do contain a waiver of subrogation for losses against the owner, contractor, subcontractors, etc. to the extent covered by property insurance. This means that the property insurer is waiving rights to recoup insurance proceeds it paid associated with a claim against a third party included in the waiver of subrogation provision. This provision should not be deleted as the contractual waiver of subrogation benefits both the owner and contractor.

ARE YOU FAMILIAR WITH SUBCONTRACTOR DEFAULT INSURANCE (SUBGUARD)?

Posted on August 24, 2014August 24, 2014 by Edward Garber

Are you familiar with subguard? If not, subguard is an insurance product also known as subcontractor default insurance. It is an insurance product obtained by the general contractor and subcontractors are enrolled by the contractor into the subguard program; the general contractor does the prequalification based on the subcontractors and suppliers it wants to utilize. The general contractor can recover its losses (direct and indirect) from defaulting subcontractors (including consequential losses, losses from defective work, losses from a defaulting subcontractor’s non-payment to others, etc.). Subguard is typically more cost effective than requiring subcontractors to obtain performance bonds and allows the general contractor to recover losses (above a deductible) much quicker than if there was a subcontractor performance bond. (Subguard is not the only subcontractor default insurance product on the market, but it is perhaps the most recognized product. For purposes of this article, subguard will refer to all subcontractor default insurance products.)

Large general contractors on large-scale projects prefer subguard versus requiring subcontractors to obtain performance bonds considering general contractors are in a position to prequalify subcontractors and remedy a potential subcontractor default (without having to jump through the required performance bond hoops that could result in further financial loss to the contractor while the claim is being investigated by the surety). Unlike a performance bond where there is the principal, the surety, and the obligee, with subguard, there is only the general contractor–the insured that obtains the subguard–and the insurance company. Subcontractors, while enrolled in the program, are not parties to the policy; the general contractor is the only party that can submit a claim on the subguard policy.

Subguard is a first party insurance policy but it works different than a typical first party insurance policy. The general contractor obtains a subguard policy with a policy limit and (large) per claim deductibles / self-insured retentions. The policy is written for a set period of time (in numerous instances the 10 year statute of repose period). When there is a claim, after the general contractor pays its deductible, there is a co-pay requirement where the general contractor and subguard insurer share in the losses until the general contractor pays a retention aggregate amount which is the capped amount the general contractor will have to pay relating to a claim. Once the cap has been paid, the subguard insurer pays the balance of the claim up to the policy limit. The sentiment is with a large deductible and co-pay requirement until an aggregate amount is paid, the general contractor has more incentive to prequalify subcontractors, manage the work, and eliminate subcontractor default since the contractor has a vested financial interest to prevent the default from occurring. For example, a subguard policy can have a large deductible of $500,000, a retention aggregate of $1,000,000, and require the contractor to pay 20% of the loss after the $500,000 deductible. So, if a subcontractor default costs the contractor $2,500,000, the contractor will pay the first $500,000 and then 20% of the remaining $2,000,000 up to its retention aggregate. In this example, the contractor would have to pay another $400,000 (20% of the $2,000,000), which would be a total of $900,000 and below its retention aggregate of $1,000,000. The subguard insurer would be responsible for the remaining portion of the claim.

Additionally, a contractor that is well equipped at managing subcontractor defaults may procure a subguard policy with a retrospective premium agreement. This is advantageous to the experienced contractor because deposit premium (sometimes referred as the experience portion of the premium) can be returned to the contractor based on no subcontractor defaults or minimal claims on the policy that the deposit portion of the premium would be applied to.

From an owner’s perspective, subguard is not a substitute for requiring the general contractor to obtain a performance and payment bond. A major reason being that the owner is not an insured under the policy. With that said, subguard is a valuable alternate to requiring subcontractors to obtain performance and payment bonds and is a product on large projects by large contractors that an owner should consider since most of the work will be performed by subcontractors (and, as mentioned above, it is typically more cost effective than requiring subcontractors to be bonded). With subguard, the general contractor is bearing the risk (with no excuses) for subcontractor default since it obtained an insurance product to specifically cover this risk (and the direct and indirect losses associated with this risk) and, thus, is incentivized to best manage the trades and eliminate default.

Check out this presentation for more information on subcontractor default insurance as an alternative to subcontractor performance bonds.

A “LOSS RUNS” IS…

Posted on August 18, 2014August 18, 2014 by Edward Garber

Ever hear the terms “loss runs” or “loss runs report?” These are actually common terms in the insurance industry. Insurance companies generate loss runs reports that reflect a history of the claim activity on your policies. In other words, loss runs reports document claim history on a particular policy which is taken into consideration when an insurance company is underwriting a policy (including renewing a policy) and determining rates / the premium for the policy. The loss runs report will itemize the respective claims and will include the amount paid on a claim or held in reserve (set aside) to cover the claim provided the claim remains open. The amount an insurer pays out on claims in addition to the amount held in reserve to cover claims are important determinations that affect the rate / premium of the policy.

An insured interested in their loss runs history or interested in procuring insurance can obtain their loss runs history from their insurer (or requesting directly from their broker). Understanding claims history is important which is why requesting this important piece of underwriting information can be beneficial to you.

THE OH NO! MOMENT – REALIZING THE SUBCONTRACTOR EXCEPTION WAS ELIMINATED FROM THE “YOUR WORK” EXCLUSION

Posted on July 24, 2014July 24, 2014 by Edward Garber

The recent Eleventh Circuit decision in J.B.D. Construction, Inc. v. Mid-Contintent Casualty Co., 2014 WL 3377690 (11^th Cir. 2014), demonstrates the unfortunate applicability of the “your work” exclusion in CGL policies when the subcontractor exception (see image) to this exclusion was eliminated from the policy through an endorsement. This subcontractor exception to the “your work” exclusion is important…I repeat, important…to the general contractor and anyone performing construction work that subcontracts out their work. Realizing the subcontractor exception to the “your work” exclusion has been removed or eliminated through an endorsement will create the dreadful “Oh No!” (or one its many wonderful euphemisms) moment! Just ask the contractor in J.B.D. Construction.

In this case, a general contractor was hired to construct a fitness center as an addition to an existing building. The fitness center was going to be constructed with prefabricated components making up the shell, slab, and flooring. The general contractor engaged subcontractors to install the prefabricated components and subcontractors to install the required mechanical, electrical, and plumbing.

After construction, water damage was discovered in the fitness center caused by leaks from the roof, windows, and doors. The water damage consisted of blistering stucco, rusting steel, and the peeling paint. The general contractor implemented repair measures to stop the water intrusion. The owner, however, refused to pay the general contractor its final payment. The general contractor filed a lawsuit for this payment and the owner filed a counterclaim due to the leaks for breach of contract, negligence, and a violation of building code. The owner’s counterclaim alleged that the general contractor’s deficient work caused “damages to the interior of the property, other building components and materials, and other, consequential and resulting damages” as well as “damage to other property.” J.B.D. Construction, supra, at *2.

At issue was whether the general contractor’s commercial general liability (CGL) carrier owed the insured-general contractor a duty to defend and duty to indemnify. In particular, the general contractor tendered the owner’s counterclaim to its insurer for defense and indemnification. While the CGL insurer was conducting its investigation to determine if it would provide a defense, the general contractor settled the counterclaim with the owner, paying the owner from its own funds. The general contractor then notified its insurer of the settlement and required reimbursement (indemnification) for the settlement amount in addition to legal/defense costs it incurred. Thereafter, the insurer tendered an amount it determined it owed for legal fees minus the policy’s deductible, but did not reimburse the general contractor for the settlement amount.

The trial court granted the insurer’s motion for summary judgment in part finding that if any of the owner’s claims were for costs to repair the defectively installed roof, windows, and doors, these costs were NOT covered by the policy—they were excluded under the “your work” exclusion. The trial court further stated that the insurer did NOT have a duty to defend or indemnify the general contractor in the counterclaim because there was nothing in the counterclaim that alleged damage to property other than to the fitness center (the “your work”).

The “your work” exclusion in the policy excluded:

l. Damage to Your Work

“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”

This exclusion did not include what is commonly known as the subcontractor exception to the “your work” exclusion that says this exclusion does not apply if the damaged work or work out of which the damage arose was performed by a subcontractor. This is the Oh No! moment! It turned out that the subcontractor exception was eliminated through an endorsement that completely changed the application of the “your work” exclusion.

The Eleventh Circuit made it clear that removing or replacing defectively installed work is not property damage covered by the CGL policy. Ok. That should be clear. But, what about resulting damage or damage that arose from the defective work? With the subcontractor exception to the “your work” exclusion, resulting damage should be covered if the defective work was performed by a subcontractor; in other words, damage to another subcontractor’s work (e.g., drywall, flooring) should be covered if the damage arose out of a separate subcontractor’s defective work (e.g., roofer, glazer). The question, though, is whether this resulting damage is covered if the subcontractor exception was eliminated from the “your work” exclusion. Hence, if a roof leaks and causes damage to other property or work not performed by the roofing subcontractor, would this resulting damage be covered? The Eleventh Circuit held NO as any claims against the general contractor for damage to the fitness center (“your work”) arising from the general contractor or its subcontractors’ defective work are NOT covered under the policy:

Originally, the MCC Policy [CGL policy] also included a subcontractor exception to the “your work” exclusion, which stated that the “your work” exclusion did “not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” As originally written, therefore, the MCC Policy covered claims for damage to J.B.D.’s [general contractor] “work” arising from the faulty construction of J.B.D.’s subcontractors. However, this exception was eliminated by Endorsement CG 22 94 101 01. By eliminating the subcontractor’s exception, the MCC Policy no longer covered any claims for damage to J.B.D.’s “work” arising from work performed by J.B.D.’s subcontractors.

***

Therefore, the “your work” exclusion, absent the subcontractor’s exception, bars coverage for damages to the completed fitness center or its components (J.B.D.’s “work”) arising from J.B.D. or its subcontractor’s defective construction.

J.B.D. Construction, supra, at *6-7.

Now, even though the Eleventh Circuit held that there was no CGL coverage (thus, no duty for the insurer to indemnify the general contractor), the insurer still had a duty to defend. How could this be? Because the duty to defend is broader than the duty to indemnify and is dictated by the allegations in the complaint. If a complaint potentially triggers coverage, the insurer has a duty to defend unless there is an exclusion that applies to bar coverage based strictly on the allegations in the complaint. Since the complaint alleged buzz language “damage to other property” caused by the general contractor’s actions, this arguably included damage to non-fitness center property that would be covered and not considered the general contractor’s work. Based on this, and even though the Eleventh Circuit held that the insurer did not have to reimburse the general contractor for the settlement amount paid the owner, it found that the insurer breached the duty to defend by not defending the general contractor with respect to the counterclaim. The insurer argued that it tendered defense costs to the general contractor based on the attorney’s fees the general contractor incurred from the date of the tender to the insurer through the settlement with a deduct for the deductible. The Eleventh Circuit did not buy this argument stating that the general contractor accepted the money making it clear that it was not in satisfaction of the general contractor’s claim for additional payments/costs. For this reason, the Eleventh Circuit remanded the case back to the trial court to determine whether the general contractor is entitled to damages, including consequential damages, as a result of the insurer’s breach of its duty to defend the general contractor.

Practical Considerations

For the general contractor (or subcontractors that engage sub-subcontractors) – Look at your CGL policy. Does it have the subcontractor exception to the “your work” exclusion? If so, is there an endorsement that eliminates this subcontractor exception. In this case, it was endorsement CG 22 94 101 01 (see image without subcontractor exception) that simply did not include the subcontractor exception language. You do NOT want this endorsement as it strengthens the “your work” exclusion for many construction defect claims. Again, as a contractor that subcontracts work, you do NOT want an endorsement eliminating the subcontractor exception.

For the party asserting the complaint and party receiving the complaint– Remember the duty of the insurer to defend its insured is broader than the duty to indemnify so include buzz language in the complaint that there is “damage to other property” other than the work itself. It is always good to review the insurance policy of a party that you are suing to see whether there is an endorsement that eliminates the subcontractor exception to the “your work” exclusion. But, irrespective of whether you have the policy, including general buzz language could at least bring an insurer to the table and give an argument to the insured-defendant to get its insurer to defend the allegations in the complaint. If the insurer refuses to defend, there may be a potential avenue to explore that the insurer breached its duty to defend that may entitle the insured to certain, provable damages.

“FORFEITURE” PROVISIONS IN INSURANCE POLICIES

Posted on July 3, 2014July 3, 2014 by Edward Garber

Insurance policies contain what are referred to as “forfeiture” provisions. These are provisions where an insured through its actions / conduct can arguably forfeit coverage under the policy for a peril or claim that would otherwise be covered under the policy. Typical examples of forfeiture provisions are post-loss obligations contained within the policy such as submitting timely notice, submitting a proof of loss, or complying with an examination under oath provision in a policy. As it pertains to these post-loss obligations (submitting timely notice, submitting a proof of loss, or agreeing to submit to an examination under oath), an insured should comply with them in order to remove any argument from the insurer that the insured forfeited coverage through non-compliance.

The recent case of Axis Surplus Ins. Co. v. Caribbean Beach Club Association, Inc., 39 Fla. L. Weekly D1350c (2d DCA 2014), demonstrates how an insurer can waive a forfeiture provision in a policy. In this case, the insured condominium had a property insurance policy. Fire was a covered peril under the policy. The policy also contained additional coverage (at an additional insurance premium) through an Ordinance or Law Coverage endorsement. This endorsement stated:

“b. With respect to the Increased Cost of Construction:

(1) We will not pay for the increased cost of construction:

(a) Until the property is actually repaired or replaced, at the same or another premises; and

(b) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years.”

A fire damaged the property in April 2003. After the governing authority inspected the damage, in late 2004, it implemented the 50% rule that provided “if a building is more than 50% damaged, any reconstruction or repair must comply with current building codes.” This is the reason the insured condominium paid the additional premium for the Ordinance or Law Coverage endorsement. The implementation of this rule resulted in a huge increase to required construction costs because this meant that the condominium would need to replace the damaged building to comply with current flood elevation codes.

Initially, the insurer was cooperating with the insured condominium and was prepared to pay for the replacement work for the fire damage since fire damage was a covered peril. It engaged a contractor that prepared a replacement estimate and intended to pay the full replacement cost. However, in late June 2005, more than two years after the fire damage, the insurer told its insured condominium that it will not pay the increased costs of construction pursuant to the endorsement as it would rely on the two-year clause contained in the endorsement that provided: “Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years.” In other words, since the repairs were not made within two years from the loss or damage and never extended by the insurer, the insurer was denying the increased construction costs as a consequence of the governing authority requiring the repairs to comply with current code requirements.

The insured filed a lawsuit against the property insurer arguing that the insurer waived the right to rely on the two-year repair period in the endorsement. The insured argued that the two-year provision was essentially a forfeiture provision that an insurer can waive. The Second District agreed that the two-year provision was a forfeiture provision and, relying on Florida law, explained:

“Florida law abhors forfeitures. As a result, [i]f an insurer intends to stand on any forfeiture reservation, it should inform the insured as soon as practicable after it has ascertained facts upon which it bases its forfeiture. It is equally well established that when an insurer has knowledge of the existence of facts justifying a forfeiture of the policy, any unequivocal act which recognizes the continued existence of the policy or which is wholly inconsistent with a forfeiture, will constitute a waiver.”

Caribbean Beach Club Association, supra (internal citations and quotations omitted).

Based on this law, the Second District held that the insurer waived its right to rely on this two-year forfeiture provision. The insurer knew about the two-year provision to complete repairs from the date of loss and never brought it to its insured’s attention knowing full well that its insured expected that the insurer was going to pay the claim including the increased costs of construction as the result of the local governing authority implementing the 50% rule. And, the insurer continued to adjust the claim even after the two-year window actually expired. Since the insurer was not substantially prejudiced by the insured’s noncompliance with the two-year provision, and the insurer could not support that it was prejudiced, the Second District found that the two-year window did not apply and the insured was entitled to the increased costs of construction per the endorsement. To that end, the Court further held:

“The trial court correctly found as a matter of law that the two-year clause was a forfeiture provision waived by Axis [insurer]. When an insurer acquiesces to an insured’s failure to strictly adhere to a timetable of payment or performance, courts are inhospitable to the insurer’s sudden invocation of strict enforcement of forfeiture provisions.”

Caribbean Beach Club Association, supra.

For more information on forfeiture provisions, such as complying with post-loss obligations in a policy, please see: https://floridaconstru.wpengine.com/complying-with-post-loss-policy-conditions-under-an-insurance-policy/.

CGL POLICIES AND THE EXCLUSION FOR POLLUTANTS

Posted on June 16, 2014June 16, 2014 by Edward Garber

Owners, contractors, and subcontractors, etc. need to understand the liability insurance coverage they maintain so that in event of a claim relating to bodily injury or property damage they know whether there is potential coverage for the claim. Not only does this include understanding the exclusions in the policies, but also understanding endorsements that may further restrict or modify coverage.

CGL policies contain a pollution exclusion that excludes environmental pullutants / contaminants (as it has been referred to as an absolute pollution exclusion). If an entity requires the type of insurance to cover potential environmental liabilities, there is pollution liability insurance that can be procured, but this is separate from the CGL policy.

Although not a construction dispute, the recent case of Endurance American Specialty Ins. Co. v. Savits-Daniel Travel Centes, Inc., 2014 WL 2600071 (S.D.Fla. 2014), illustrates the general application of the pollution exclusion in a personal injury situation. In this case, a woman was at a bar and was exposed to pepper spray causing her to fall and fatally hit her head. Her estate sued the owner of the premises and the owner tendered the claim to its CGL carrier. The carrier denied coverage and an action for declaratory relief ensued to determine whether the CGL carrier was responsible for a duty to defend and indemnify. The issue in the case was whether the pepper spray constituted a pollutant; if it was a pollutant, then bodily injury arising out of the pepper spray pollutant was excluded from coverage.

The policy contained the following language (common to CGL policies):

2. Exclusions This insurance does not apply to:

* * * *

f. Pollution

(1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants”:

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.

* * * *

SECTION V—DEFINITIONS

* * * *

15. “Pollutants” mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

In addition, there was an endorsement that further restricted coverage known as the “Mold, Fungus, Bacteria, Virus, and Organic Pathogen Exclusion:”

ENDORSEMENT

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE FORM

MOLD, FUNGUS, BACTERIA, VIRUS AND ORGANIC

PATHOGEN EXCLUSION

It is hereby agreed that this policy shall not apply:

1. to “bodily injury”, “property damage”, or “personal and advertising injury”;

2. to damages for devaluation of property or for the taking, use or acquisition or interference with the rights of others in property or air space;

3. to any loss, cost or expense, including but not limited to fines and penalties, arising out of any governmental direction or request, or any private party or citizen action, that an insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize “organic pathogens”; or

4. to any “suit” or administrative or regulatory procedure or process in which an insured may be involved as a party;

arising, directly or indirectly, or in concurrence or in any sequence out of or in any way relating to actual, alleged or threatened existence, discharge, dispersal, release or escape of “organic pathogens,” whether or not such actual, alleged or threatened existence, discharge, dispersal, release or escape is sudden, accidental or gradual in nature.

This insurance shall not apply to any “bodily injury”, “property damage”, “personal and advertising injury”, loss, cost or expense arising out of or in any way related to any form of “organic pathogens,” whether or not such actual, alleged or threatened existence, discharge, dispersal, release or escape is intentionally caused, or whether or not such injury, damage, devaluation, cost or expense is expected or intended from the standpoint of the insured.

“Organic pathogen” means any organic irritant or contaminant, including but not limited to mold, fungus, bacteria or virus, including but not limited to their byproducts, such as mycotoxins, mildew, or biogenic aerosols.

The Southern District agreed with the CGL insurer based on the exclusionary pollution language in the policy that pepper spray was a pollutant excluded from coverage.

Check your CGL policy and corresponding endorsements. You will see the pollution exclusion. During construction, there are certainly pollution / environmental risks that would require a contractor to obtain such insurance to cover and address these risks. The objective is know the risks you need covered and the policies you have in place to ensure you are being covered for those risks.