Insurance Coverage 101: Essential Coverage Tips Every Defense Counsel Should Know When Representing a Client in Construction Defect Litigation
When you are representing the interests of a defendant or cross-defendant in a lawsuit complaining of construction defects and your client is, or may be, an "insured" under one or more insurance policies affording liability coverage regarding the suit, you will need to:
- Explore what insurance benefits may be potentially available to your client by virtue of both liability insurance maintained by your client and liability insurance available to your client under a policy maintained by a third party.
- Do everything possible to obtain the maximum defense and indemnity benefits for your client from all such liability insurance.
Regardless of whether you have been appointed by an insurer to defend, or are personal counsel for, the insured person or organization, as defense counsel you need to minimize the exposure to your client by maximizing the risk transfer available for the loss. By developing a basic understanding of insurance coverage, you will be able to focus your resources accordingly and avoid any unnecessary expenditure of your time and resources. All too often, defense counsel believe the issues discussed herein are tasks to be handled by the insured, insurance carrier, insured TPA or insured risk manager, and as a result, they miss crucial elements in their client's defense. This discussion is intended to provide you with a few very basic tips to assist you in these efforts and to provide some quick reference tools.
It is important for you to have a general understanding of the type of insurance your client has available in order to understand what exposure your client may have personally for the construction loss even though they have commercial general liability insurance.
There are various types of liability insurance, e.g. general liability, professional liability, and personal liability, to name but a few. Your client may have a few different policies which they purchased in order to protect themselves from economic and business risks associated with construction. This discussion does not address all types of liability coverage. Instead, it focuses standard "occurrence"-based commercial general liability insurance coverage, which requires for potential coverage that the triggering event, e.g., the happening of specified injury or damage, occur during the particular policy period. This is the most typical type of liability insurance maintained by persons and entities engaged in the construction business, and it is the type of insurance that most often affords coverage for construction defects.
How To Identify And Obtain Policy Information:
- Information regarding liability policies in which your client is the "named insured" (named as an insured in the policy Declarations) should be available through the client and the client's insurance agent(s).
- If, at the time of the events giving rise to the suit, your client was acting as an officer, director, partner or employee of some other party and/or company, you should explore whether the client qualifies as an "insured" under the Persons Insured/Who Is An Insured provisions of the liability policy maintained by this other party.
- Check out the possibility that your client may be an "additional insured" under a liability policy issued to another party involved in the construction defect project pursuant to an Additional Insured Endorsement which is part of that policy. General Contractors will often require a subcontractor to have the general contractor named as an "additional insured" under the subcontractor's insurance policies.
Include the following in your investigation on this issue:
1. Ask the client and check the client's records for Certificates of Insurance and Additional Insured Endorsements referencing the client as an "additional insured", and review pertinent contracts to see if another party agreed to name the client as an "additional insured" under its liability insurance.
Note: A Certificate of Insurance issued for "informational purposes only" confers no rights upon the certificate holder. Further, such certificate does not make the certificate holder an "additional insured." Pursuant to the law in many, if not all, states, it is the general rule that a "for information only" certificate of insurance does not amend, extend or alter the coverage afforded by the policy to which
2. If you find an Additional Insured Endorsement that either names or generally describes your client, whether or not your client would qualify as an "additional insured" with respect to the construction defect suit in issue depends on the terms of the particular endorsement as applied to the underlying factual situation. Check the endorsement to determine what restrictions may apply, such as:
- Is coverage limited to ongoing operations only?
- Is coverage limited to a specific location?
- Is a written contract required for coverage to apply?
3. If you learn that your client has the benefit of a contractual indemnity/hold harmless clause in an applicable contract with another party (i.e. is a potential indemnitee), does this mean that your client is automatically an "insured" under the other party's liability insurance? The answer in many, if not all, states is "No." You will need to review the Supplementary Payments Provisions of the policy to see if all required conditions are satisfied.
- Once you obtain your client's insurance information, it is essential that you tender the defense and indemnity of your client to each such insurer, including any carriers providing excess coverage. A delay in tendering can limit, and sometimes it can totally preclude the insurer's potential coverage obligation. For example:
1. It is the general rule in many, if not all states, that, even if, pursuant to the terms of the policy, the insurer owes a duty to defend its insured, the insurer does not owe a duty to pay defense costs incurred by the insured prior to the date of tender.
2. Most Commercial General Liability Conditions provisions require that a named insured provide written notice to its insurer of a claim or suit "as soon as practicable" and "immediately" provide the insurer with copies of legal papers the insured receives concerning the claim or suit. In many states, a delay in complying with these requirements that results in prejudice to the insurer will void the insurer's coverage obligations. In others, the insurer will owe no coverage obligation even if it has not been prejudiced by the delay.
3. Most Commercial General Liability Conditions also state: "No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent." The insurer will owe no coverage obligation regarding such a payment or expense. In many instances, the first plan of resolution is to have your client perform repairs, and depending on the scope and nature of the repairs, this may not be the most prudent course of action if your client cannot afford the repair costs and would be looking for the carrier for reimbursement. Even if the repair costs submitted for reimbursement are minimal, without proper notice the carrier could decline coverage.
Understanding Whether Coverage Is Subject To An Applicable Deductible Or Self-Insured Retention Is Crucial To The Defense Of The Client.
You must determine whether the liability coverage afforded by a particular policy is subject to a self-insured retention ("SIR") that must be satisfied before the coverage could apply, or whether the policy is subject to a deductible.
- Is the liability coverage afforded by a particular policy subject to a deductible?
Insurance policies written with deductibles generally provide that the insurer will pay the defense and indemnity costs in connection with a covered suit. The responsibility for the defense and settlement of each claim rests solely with the insurer, which therefore maintains full control of the entire claim process.
- Is the liability coverage afforded by a particular policy subject to an SIR? If so, consideration should be provided to the following items:
- Policies written with self-insured retentions place a large degree of (if not the entire) responsibility for investigation, suit payment and settlement on the shoulders of the insured. While language may vary, the insured is typically required to pay the defense and other allocated expense costs, as well as indemnity payments, until the amount of the retention is paid, after which the insurer assumes full responsibility for the claim or suit.
- The SIR differs from a deductible because the insured performs all the initial functions normally undertaken by the insurer for a claim or suit within the SIR, including claims adjusting and audits, funding and paying claims, and complying with applicable state and federal laws and regulations.
- Some SIR endorsements require an immediate notice of claim to the insurer and regular status reports or reports at certain intervals. Others require notice when the insured has satisfied 50% or 75% of the SIR so that the insurer can take over once the SIR is satisfied at 100%. Immediate notice to the insurer may be required in the event the loss involves a severe injury, such as paralysis, or death. (The endorsement will generally set forth what constitutes a severe injury.) You must review the endorsement and comply with all notice requirements therein, as notice and communication with the excess carrier is key.
- You have to look at the particular SIR provisions and applicable state insurance law to determine: Who can satisfy the SIR? Must the named insured pay the amount of the SIR? Can the SIR be paid by another insured or by another insurer? What does the endorsement say about the kinds of payments by that count towards satisfaction of the SIR amount? Can payment of defense costs count toward satisfaction of the SIR?
- Remember, the policy language trumps any contract between the contractors and subcontractors when it comes to the party which may satisfy the SIR, such that if the contract language is contrary to the policy language, the terms of the policy prevail.
- Will more than one SIR have to be satisfied in order for the liability coverage afforded by the policy to apply? Look at whether the SIR applies "per claim," "per occurrence" or otherwise. The number of SIR's will significantly impact your client and the defense of the suit.
- If there are different deductibles and/or SIRs applicable to multiple policies, will the insured have to separately satisfy each? Answer: It depends on the terms of each policy and applicable state insurance law. Further, your client may wish to tender to only one policy, and you will need to evaluate whether it makes economic sense to trigger a policy with a large SIR where the client's exposure is relatively low and there is another policy which may apply and which has a deductible which is more affordable to your client even though that policy may not provide coverage for the entire loss.
- You should assist your client in documenting that the amount of the SIR has been properly satisfied by keeping up to date records regarding payments of damages and, if applicable, defense costs, and submitting these records to the insurer. You will need to be able to demonstrate, through cancelled checks or other tangible evidence, that the client satisfied the SIR - it is not enough simply to incur the fees and costs, they have to be paid by that person/entity required to satisfy the SIR under the policy.
Keep The Terms Of The Policy And Applicable State Insurance Law In Mind When Reporting To The Insurer And Evaluating What The Insurer Will And Will Not Pay For Under The Policy.
Is "bodily injury" and/or "property damage" involved in the suit as directed against your client?
1. "Bodily injury" is generally defined as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time."
● Since injury, sickness or disease experienced by a "person" is required, a business entity plaintiff should not have a "bodily injury" claim.
● In many states, where "bodily injury" is limited to "bodily injury, sickness or disease sustained by a person . . .", mere emotional distress or a mental problem unaccompanied by physical symptoms is not "bodily injury." (You must understand what position your state has taken on this issue.) However, check to see if the policy includes (typically, by way of endorsement) a broader, nonstandard "bodily injury" definition which would include more than physical problems, such as emotional or mental distress.
● In some states, a person's physical problems resulting from mere economic loss do not qualify as "bodily injury."
2. "Property damage" is generally defined as "physical injury to tangible property" or "loss of use of tangible property that is not physically injured."
● In many states, where this definition applies, injury to or loss of use of intangible property rights (for example, easement rights) or mere economic loss is not "property damage."
● In some states, "loss" of property (e.g. by conversion, theft or misappropriation) is not physical injury to or loss of use of tangible property as required for "property damage" under standard liability coverage.
3. Punitive damages awarded against an insured as a punishment for its willful, malicious and/or fraudulent conduct, generally do not qualify as insurable "damages." Absent an express policy definition of "damages" to the contrary, "damages" means compensation for harm suffered by a third party. Statutory penalties and multiplied damages also may not qualify as "damages." You need to make sure your client is aware of the personal exposure for these allegations.
Evaluate the trigger of coverage issue, to determine which policy or policies could apply.
1. Claims-Made Coverage:
- Claims-made policies afford potential coverage for claims made against the insured during the policy period. Although claims-made policies are rarely issued to contractors, it is still important to tender to the liability insurer on the risk at the time the claim was first made against your client. Note: Be sure to review the policy for any specific reporting requirements, as well as to determine whether there is "tail" coverage (an extended reporting endorsement), which extends the claims reporting period after the policy has ended.
2. Occurrence-Based Coverage:
- When the liability coverage is "occurrence"-based the Insuring Agreement may provide, in pertinent part as follows: "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies. We will have the right and duty to defend any 'suit' seeking those damages. . . .This insurance applies to 'bodily injury' and 'property damage' only if: (1) The 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; and (2) The 'bodily injury' or 'property damage' occurs during the policy period." The standard "occurrence" definition is: "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
- For trigger of coverage purposes under standard "occurrence"-based liability coverage, it is the "bodily injury" or "property damage," not the conduct that caused that injury or damage, that must occur during the policy period. The triggering event is the happening of the injury or damage about which the particular claimant complains.
- In many, if not most, construction defect cases, the "bodily injury" or "property damage" may occur during more than one policy period such that the coverage afforded by more than one "occurrence"-based policy may apply. You will need to know what the applicable state's trigger of coverage approach is concerning injury or damage that continues during more than one policy period. The most often applied trigger of coverage approaches applied by the various states include: continuous, manifestation, exposure and injury in fact. In order to fully defend your client without negatively impacting coverage, it is essential that you understand each of these approaches and how they are applied.
- If there is any doubt as to when the "bodily injury" or "property damage" occurred, you should tender the claim under all liability policies in effect during the period of time when the injury or damage could have occurred.
Is there a "known" "bodily injury" and "property damage" coverage limitation included in the policy?
Some liability policies include language that expressly precludes potential coverage where prior to the policy period the insured knew that the injury or damage had, in whole or in part, occurred. This language may instead be included in the policy by way of endorsement.
Was the "bodily injury" or "property damage" caused by an "occurrence" "accident") as required for potential coverage?
1. The standard current policy definition of "occurrence" is "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
2. There are a number of approaches which the various states apply in determining whether an "accident" for liability coverage purposes is involved, and you should be aware of which approach applies to your situation. Notably, in a minority of states, mere faulty construction work does not meet the threshold "occurrence"/"accident" requirement for potential coverage.
Does the "bodily injury" or "property damage" qualify as injury or damage "to which this insurance applies," i.e. does an exclusion or other coverage limitation apply?
1. Even if the suit meets the standard insuring agreement requirements for coverage of damages because of "bodily injury" or "property damage" that was not "known" by the insured prior to inception of the policy period and caused by an "occurrence," it must involve injury or damage "to which this insurance applies" in terms of not being excluded from coverage pursuant to a policy exclusion or other coverage limitation.
2. There are a variety of exclusions listed in the basic standard coverage form concerning various types of "bodily injury" and/or "property damage" situations. The exclusions most typically involved in the usual construction defect situation concern: injury or damage expected or intended from the standpoint of the particular insured; liability assumed by the insured in a contract or agreement; pollution; and damage to property in various situations.
The most typically pertinent standard "damage to property" exclusions concern "property damage" to property the named insured owns, rents or occupies or premises the named insured sells, gives away or abandons; personal property in the insured's care, custody of control, real property on which operations are being performed when the damage occurs; property that must be restored, repaired or replaced because the named insured's "work" was incorrectly performed on it; damage to the named insured's "product" or "work;" damage to "impaired property" or property not physically injured; and recall of products, work or impaired property.
3. There may also be applicable exclusions or other pertinent coverage limitations stated in policy endorsements which modify the basic coverage form. For example, endorsement exclusions for injury or damage arising out of professional services, asbestos, mold or fungi, subsidence, or residential construction work. The liability coverage could also include an endorsement limiting potential coverage to "bodily injury" and "property damage" arising out a designated premises or project or an endorsement precluding coverage for claims falling within the scope of the products/completed operations hazard (a hazard which is defined in the basic policy). There may also be an endorsement broadening the scope of the pollution exclusion that is stated in the basic coverage form. There can also be exclusions which limit coverage with respect to damage arising out of work performed or commenced prior to the policy's inception.
4. In addition, some states preclude coverage for injury or damage caused by the insured's willful or other aggravated misconduct, whether by statute or public policy recognized in case law.
What You Should Do If You Want Your Client To Have The Maximum Liability Coverage To Which The Client May Be Entitled.
- Make sure to tender in a timely manner to each insurer that might afford coverage. A delay in tendering may either reduce or totally preclude the insurer's potential coverage obligations.
- Explain what each item of alleged damage is so that the insurer can fairly evaluate whether there is any covered "property damage" and, if so, to what extent.
- Separately discuss each type of property damage and exactly what property that has been damaged and to what extent, based on what has been alleged in the pleadings and what has been identified in discovery and/or defect reports. Do not simply report to the insurer only what the expert(s) may conclude regarding the nature and extent of the damage. Be as detailed as possible, as the claims adjuster needs as much information as possible to be able to properly reserve the file and request settlement authority, especially for large exposure losses.
- Remember to report to the insurer what may appear to you to be only miniscule or de minimis items of damage. Sometimes small items of damage with minimal repair costs might constitute the only "property damage" that could trigger the insurer's defense obligation or cause the insurer to decide that it cannot withdraw from the defense.
- Remember to report to the insurer any "bodily injury" either alleged in the pleadings or revealed by discovery, even where you believe that the gravamen of the suit is "property damage."
- It is important to detail to the claims adjuster all pertinent dates and time periods such as dates of both the construction work, scope of work performed and the alleged injury and damage for which your client is facing liability. Make sure to obtain a complete job file from your client and from any other party which may have information in relation to your client's work which is at issue in the suit. All these details are important to coverage determination and claims handling of the loss.
- Avoid "under reporting" to the insurer, as this may result in the insurer deciding that there is no coverage obligation at all, or that its indemnity obligation is very limited. Report all facts as they are.
- As your status reports to the insurer are crucial, make sure to follow any and all litigation management guidelines. Discuss the underlying facts separate from your conclusions regarding what you ultimately hope to prove. Make sure the reports are concise but discuss all pertinent issues.
- It is very important to review any motions, pleadings etc., in conjunction with the available coverage prior to filing, as many legal strategies which are beneficial to the defense of the suit can actually plead your client out of insurance coverage for the loss and expose the client personally for the loss. If the matter is going to trial, you need to also review trial strategy, motions in limine and jury verdict forms for potential coverage consequences and make the decision which is in the best interests of your client.