CGL POLICIES AND THE “YOUR PRODUCT” EXCLUSION

Posted on September 10, 2013September 10, 2013 by Edward Garber

Understanding exclusions in insurance policies is important to understand what is and what is not covered under the policy. The recent case of Liberty Mutual Fire Insurance Co. v. MI Windows & Doors, 38 Fla. L. Weekly, D1890a (Fla. 2nd DCA 2013), discusses the “your product” exclusion that is found in CGL policies.

In this case, MI is a manufacturer of sliding glass doors. It sold its doors to All Seasons which installed the sliding glass doors in condominium projects. In some of the condominiums, All Seasons manufactured and installed transoms along the top of the sliding glass doors. Condominium associations sued MI and All Seasons when the condominiums experienced damage from tropical storms and hurricanes. MI settled the lawsuits. It then sued its CGL carrier to recover consequential damages and for the costs of replacing defective sliding glass doors in the condominiums.
The CGL carrier argued at the trial level that the “your product” exclusion barred coverage for MI’s damages to its products, i.e., sliding glass doors. The trial court found that the “your product” exclusion did not apply to the doors with transoms because adding the transoms to the top of the sliding glass doors significantly changed the doors. Thus, the doors were no longer MI’s product.

The “your product” exclusion in MI’s CGL policy provided that the insurance did not apply to:

“Damage to Your Product. ‘Property Damage’ to ‘your product’ arising out of it or any part of it.”

On appeal, the Second District reversed finding that “[t]he addition of transoms to the sliding glass doors did not fundamentally change the nature and function of those doors.” MI Windows & Doors, supra. In other words, because the sliding glass doors continued to operate as sliding glass doors even with the addition of the transoms, the doors remained MI’s product. For this reason, the Second District held that the “your product” exclusion applied to bar damages to replace the doors.

In MI Windows & Doors, the Court found that if alchemy alters the original product, then the “your product” exclusion may not apply based on cases outside of Florida that discuss this exclusion. Importantly, however, the Court footnoted Auto-Owners Ins. Co. v. American Building Materials, Inc., 820 F.Supp.2d 1265, 1272 (M.D.Fla. 2011), where the Middle District of Florida also discussed this exclusion. The Middle District in this case maintained that drywall that was incorporated into a house was not barred by the “your product” exclusion based on the language of the exclusion because the drywall, once incorporated, became real property and the exclusion did not apply to real property. Because this case or issue was not framed on appeal in MI Windows & Doors, the Court did not apply this case to the facts.

The “your product” exclusion can be found in CGL policies to bar coverage. Understanding the exclusion as written in the policy (as well as other exclusions) is important so that coverage is understood before or when a dispute arises.

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.

UNDERSTANDING YOUR RIGHTS AS AN ADDITIONAL INSURED

Posted on March 9, 2013March 9, 2013 by Edward Garber

Being an additional insured is a topic discussed, and it absolutely should be, in the negotiation of construction contracts. It is an important part of risk management in construction. An owner wants its contractor and consultants to name it as an additional insured under their liability policies. A contractor, likewise, wants its subcontractors, etc. to name it as an additional insured under their liability policies.

Let’s say a general contractor wants its window/glazing subcontractor to name it as an additional insured under the subcontractor’s commercial general liability (CGL) policy. The window subcontractor would be the primary or named insured under its CGL policy. The general contractor, smartly, wants the window subcontractor’s CGL policy to have an endorsement that identifies the general contractor as an additional insured under that policy (ideally, for both ongoing and completed operations). By adding the general contractor as an additional insured, the window subcontractor is protecting / providing coverage to the general contractor for the window subcontractor’s negligence. It is not designed to protect the general contractor for its negligence — so the general contractor will still need its own liability insurance; rather, it is again designed to provide coverage to the general contractor for the window subcontractor’s negligence.

Let’s also say that during the subcontractor’s operations or after, an incorrectly installed window simply fell and caused an injury to a person or damage to property other than the window. (Yes, an extreme example!) As a result of the injury / damage, both the general contractor and the window subcontractor get sued. The general contractor will seek indemnification from the window subcontractor and the subcontractor’s CGL policy as an additional insured under the subcontractor’s policy. The reason being is that the general contractor wants to be indemnified by the subcontractor and have the subcontractor’s insurer provide it a defense and coverage because the window fell out due to the subcontractor’s negligence.

In this situation, either the window subcontractor’s CGL insurer should provide (pay for) a defense for both the window subcontractor (named insured) and the general contractor (additional insured) subject to the insurer’s reservation of rights. This can be done by the insurer retaining counsel for both the named insured or additional insured or, which may be the case in a multi-party litigation such as a multi-party construction defect case, contributing to the general contractor’s defense.

Importantly, in the recent decision of University of Miami v. Great American Insurance Co., 38 Fla. Law Weekly D392a (Fla. 3d DCA 2013), the Third District maintained that where both the named insured and additional insured have been sued in negligence with allegations that both caused the injury / damage to the plaintiff, the insurer (for the named insurer) is required to provide separate defense counsel for each in order to avoid conflicts of interest with one defense counsel. This is done to ensure that the additional insured has independent counsel to represent its interests.

Understanding rights of an additional insured is a must for any construction project in order to maximize insurance coverage and indemnification rights.

CGL POLICIES AND THE IMPORTANCE OF COUCHING THE CLAIM TO THE INSURER

Posted on August 24, 2011August 24, 2011 by Edward Garber

Contractors and subcontractors that work on construction projects should, and generally do, maintain commercial general liability policies (“CGL Policies”). Owners absolutely want their contractor and the subcontractors to be sufficiently insured in the event a claim is made either against them or damages or defects occur to their project. Likewise, the contractor wants its subcontractors to be sufficiently insured for the same reasons. Contractors and subcontractors, jointly, want CGL Policies so that if a claim is made or they are sued the insurer defends their interests and, hopefully, pays insurance proceeds to resolve the claim.

Insurers, however, are not always keen on paying claims and rely on various exclusions in policies that are applicable to the circumstances of the claim. In other words, if there is no coverage for the claim based on an exclusion, the insurer will appropriately rely on an exclusion in the CGL policy. As it pertains to CGL Policies, there are two important exclusions insurers rely on when a claim is asserted against a contractor or subcontractor for construction defects. These exclusions are known as the j(5) and J(6) exclusions and exclude damage to:

j(5) That particular part of real property on which you…are performing operations, if the property damage arises out of those operations; or

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

A contractor or subcontractor that reviews their CGL Policies will find the j(5) and j(6) exclusions to be substantially similar to the above. While contractors typically do not self-perform work, subcontractors typically do self-perform all or a substantial part of the work.

A recent case, Wilshire Insurance Co. v. Birch Crest Apartments, Inc., 2011 WL 3586228 (4th DCA 2011), bolsters insurers’ arguments to exclude coverage under a self-performing subcontractor’s CGL Policy under the (j)5 and j(6) exclusions. In this case, a painter performing work on an apartment project spattered paint on glass doors and windows. The painter tried to remove the paint spatter, and in the process of doing so, damaged the glass doors and windows. The owner sued the painter and the painter consented to a judgment and assigned its rights under its CGL Policy to the owner. This allowed the owner to sue the insurer directly and assert certain claims against it.

The issue in this case was whether the painter’s damage to the glass windows and doors were covered under the policy, or, conversely, whether coverage was excluded pursuant to the j(5) and j(6) exclusions under the policy. The Fourth District Court of Appeal held that these exclusions barred coverage for all of the owner’s damages:

“[T]he record here shows that cleaning paint spatter from windows and doors was within the natural and intended scope of work undertaken by the contractor as part of the painting operations on Birch’s [owner] property if in fact such paint spatter occurred.

***

[T]he scope of the contractor’s operations were intended to include the apartments which were being painted and would, if required, involve cleaning up surfaces which were spattered with paint. There is no genuine issue of material fact that the property damage in this case was to the apartment upon which H&H [painter] was performing its operations, and that it arose out of the insured’s operations within the meaning of (j)5. Additionally, there is no genuine issue of material fact that the underlying claim resulted from the insured’s incorrect work on the glass doors and windows of the apartments within the meaning of exclusion j(6).

Wilshire Insurance Company, 2011 WL at *2.

In this case, it appears that the owner hired the painter directly and that the painter self-performed the work. This is noteworthy because had the owner hired the general contractor and the general contractor hired the painter, or had the painter hired sub-subcontractors to perform all of its work, there could have been certain arguments raised to maximize insurance coverage. These arguments, however, will not be discussed in this specific post. What is also noteworthy is that the Fourth District focused on what fell within the “natural and intended scope of work” of the self-performing painter. Since the damage or activity of cleaning up paint on glass fell within the natural and intended scope of the painter’s work, the Fourth District found that the painter essentially damaged property it was performing work on (the j(5) exclusion) and, thus, required repairs to the painter’s own work (the j(6) exclusion).

It is imperative that when an owner, etc. submits a claim to a contractor or subcontractor’s CGL Policy, the owner consults with a lawyer in furtherance of couching the claim to optimize insurance recovery. Furthermore, and equally important, when a contractor or subcontractor receives a claim, especially a claim for defects or damage, that they too should consult with a lawyer to best present the claim to optimize the insurer protecting their interests and paying proceeds to resolve the claim.

COMPLYING WITH POST-LOSS POLICY CONDITIONS UNDER AN INSURANCE POLICY

Posted on June 16, 2011June 16, 2011 by Edward Garber

Insurance policies, particularly property insurance policies, contain post-loss obligations (that serve as conditions precedent to payment). This essentially means that when an insured submits a claim to an insurer, an insurer can demand obligations from the insured, and the insured is required to comply with these obligations. These obligations could be requiring the insured to submit a sworn proof of loss, allowing the insurer to inspect the damaged property, submitting all applicable documentation to the insurer, and allowing the insurer to take an examination under oath of the insured. An examination under oath is simply a pre-suit deposition where the insured answers the insurer’s questions under oath about the insurance claim with a court reporter memorializing the questions and answers. While these post-loss obligations can pose an inconvenience to the insured, they are obligations under the policy (the insurance contract) and refusing to comply with these obligations will allow the insurer to easily argue that the insured forfeited insurance coverage. Thus, an insured could be in a position where they are denied coverage for failure to comply with post-loss obligations in an insurance policy when, had they complied, there would have been coverage and payment.

To briefly illustrate, recently, in Edwards v. State Farm Florida Insurance Company, 37 Fla. L. Weekly D1269a (Fla. 3d DCA 2011), a homeowner, through a public adjuster, submitted a claim to its property insurer for reimbursement for the costs to fix roof damage from a hurricane. The insurer made numerous efforts to obtain documentation of expenses that the homeowner incurred to fix the roof, but was never provided this documentation. The insurer also scheduled an examination under oath of the insured, which was cancelled prior to the scheduled date. The insured providing documentation to reflect the amount of the claim and submitting to an examination under oath were post-loss conditions in the insurance policy. Because the insured did not comply with these policy conditions, the Third District Court of Appeal held that the insured forfeited coverage: “Failure to comply with a condition precedent to payment relieves the insurer of its duty to make payment.” See Edwards.

Accordingly, an insured that submits a property insurance claim (or any insurance claim, for that matter) should ensure they are complying with post-loss policy conditions that are being requested by the insurer.