EXAMPLE OF IMPORTANCE SUPPORTING THEME FOR INSURANCE COVERAGE

Posted on July 29, 2016July 29, 2016 by Edward Garber

The case of Divine Motel Group, LLC v. Rockhill Ins. Co., 2016 WL 3902041 (11^th Cir. 2016) illustrates the importance of presenting and supporting your theme for insurance coverage. This theme needs to be well thought out and considered in the context of maximizing insurance coverage. Otherwise, you are navigating in the world of insurance exclusions without a strategic agenda as to why an exclusion does not apply, such as there is an exception to the exclusion that your theme fits under.

In Divine Motel Group, an insured pursued its property insurer for rainwater damage stemming from a tropical storm. The property insurance policy contained the following exclusion for rain damage in addition to an exception to the exclusion:

[Rockhill] will not pay for loss of or damage to … [t]he interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain, … whether driven by wind or not.” The policy contained an exception to this exclusion, providing that Rockhill would pay for damage to the interiors caused by rain if “[t]he building or structure first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain … enters.” The policy listed “windstorm” as a covered cause of loss.

Divine Motel Group, supra, at *1.

Huh?!? An exclusion and an exception to an exclusion?!? That’s right. In a nutshell, the rainwater exclusion says that the policy does cover damage caused by rain. But, as an exception, the policy will cover rainwater damage if the property FIRST sustained damage to its roof or walls by a loss covered under the policy through which the rainwater enters.

The insured argued that the exception to the exclusion applied because the rainwater entered through roofs and walls damaged by the tropical storm (e.g., a covered cause of loss to the roof or walls through which the rain entered).

The problem for the insured was that it was unable to point to any competent evidence, including opinions from its expert, that there was damage to the roof and walls through which the rainwater entered. There the problem lies, as you can imagine, since there was no competent evidence to support the insured’s theme which was that the exception to the rainwater damage exclusion applied.

The morale is that if relying on an exception to an exclusion, the theme of the case, including expert opinions, needs to be specifically centered around the exception. There needs to be competent evidence in the record to prove that an exception to an exclusion applied. For instance, in this case, there was nothing in the record to prove that the tropical storm damaged the roofs and walls through which rainwater entered triggering the exception to the exclusion.

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

Posted on November 14, 2015November 14, 2015 by Edward Garber

Here 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 (11^th 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.

THE (j)(5) and (j)(6) DAMAGE TO PROPERTY EXCLUSIONS IN CGL POLICY

Posted on August 25, 2015August 25, 2015 by Edward Garber

The case of Essex Ins. Co. v. Kart Const., Inc., 2015 WL 4730540 (M.D.Fla. 2015) is an insurance coverage dispute. In this case, a fire started after a contractor’s welding operations to the metal exterior of a tower that damaged components of the tower. (In addition to the welding, the contractor was responsible for fire prevention measures to, among other things, monitor the welding during the welding and for a couple of hours after the welding.)

The contractor had a CGL policy. The CGL carrier denied coverage.

The policy contained the (j)(5) and (j)(6) exclusions:

j. Damage To Property

“Property damage” to:

…

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

The Middle District of Florida gave a great explanation regarding the application of the (j)(5) and (j)(6) exclusions in a CGL policy:

(j)(5)

In sum, Section (j)(5) excludes from coverage damage to “that particular part” of the real property on which the insured [contractor] is operating at the time of the accident [the moment of the accident]…..

Kart Const., supra, at *6.

(j)(6)

Unlike the “operations” under Section (j)(5), the “work” under Section (j)(6) need not occur at a specific time (e.g., the moment of the accident) for the exclusion to apply. Section (j)6) excludes damage to a “particular part of … property” if the insured [contractor] “incorrectly performed” work (at any time) on that part and the “incorrectly performed” work caused, or contributed to, damage to that part.

In sum, under Section (j)(6), the policy might exclude the damage to the tower if Kart [the contractor] incorrectly performed fire-prevention work on the tower (that is, incorrectly removed debris from the tower or incorrectly wet the tower) and that incorrect work caused, or contributed to, the tower’s damage.

Kart Const., supra, at *6, 7.