July 17th, 2017
By, Amanda K. Anderson, Esq.
An insurance professional or coverage attorney may have experience in first-party coverage or third-party coverage, but often not both. When a mid-construction casualty like a fire or collapse occurs, the loss is likely to implicate both a builder’s risk policy – a first party coverage usually purchased by the owner – and commercial general liability (CGL) policies purchased by the general contractor and subcontractors.
- Different Types of Applicable Coverage
- Builder’s Risk Coverage
Courts have described builder’s risk coverage as “‘a unique form of property insurance that typically covers only projects under construction, renovation, or repair and insures against accidental losses, damages or destruction of property for which the insured has an insurable interest.” Vision One, LLC v. Philadelphia Indem. Ins. Co., 276 P.3d 300, 303 n.1 (Wash. 2012) (quoting Fireman’s Fund v. Structural Sys. Tech., Inc., 426 F. Supp. 2d 1009, 1025 (D. Neb. 2006)). The policy pays only for damage to the construction project itself. Id. “A typical builder’s risk policy provides work site insurance on a building, renovation, or construction project for property as it is brought to the site and made part of the improvements on the property.” John V. Garaffa & Heidi Hudson Raschke, The Valuation of Losses Under Builder’s Risk Policies, Brief, Fall 2010, at 50–51.
Although builder’s risk policies are not standardized, they are typically “all risk” policies – meaning that they cover all direct physical loss to covered property, except where exclusions apply. Builder’s risk policies, with varying language, typically exclude loss caused by defective workmanship, but not ensuing loss from covered causes like fire. 4 Bruner & O’Connor Construction Law § 11:234; see, e.g., Vision One, 276 P.3d at 308.
The authority on builder’s risk policies is sparse, but there are at least two state Supreme Court decisions on the scope of the faulty workmanship exclusion. In Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 845 So. 2d 161 (Fla. 2003), the Florida Supreme Court addressed an exclusion for “[l]oss or damage caused by fault, defect, error or omission in design, plan or specification,” with an exception for “physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.” Id. at 165. When a pre-occupancy inspection of a condominium revealed serious structural deficiencies, the project owner sought coverage for $4.5 million in corrective costs, claiming that the exclusion did “not exclude any costs for work that necessarily damages or destroys portions of the insured property as a result of required remediation or repair of defective property.” Id. at 164. Rejecting this argument, the court held that “[n]o loss separate from, or as a result of, the design defect occurred,” and that the owner was “not entitled to recover the expenses associated with repairing the design defect. To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion.” Id. at 168.
In Vision One, 276 P.3d at 302, the Washington Supreme Court addressed the scope of coverage for a building collapse caused by defective shoring for concrete slabs. Shortly after the concrete subcontractor finished pouring the first section of the floor, “the shoring underneath the concrete gave way. The framing, rebar, and newly poured concrete came crashing down onto the lower level parking area, where the wet concrete eventually hardened. It took several weeks to clean up the debris, repair the damage, and reconstruct the collapsed floor.” Id. To illustrate the scope of the faulty workmanship exclusion, the court analogized the case to one where faulty wiring work causes a fire: “the ensuing loss clause would preserve coverage for damages caused by the fire. But it would not cover losses caused by the miswiring that the policy otherwise excludes. Nor would the ensuing loss clause provide coverage for the cost of correcting the faulty wiring.” Id. at 307. Because collapse was a covered peril, and because the framing, rebar, and poured concrete were not themselves defective, the court affirmed that there was coverage for the non-defective items damaged in the collapse – but not for the defective shoring. Id. at 510–11, 519–22.
- General Liability Coverage
In the event of a mid-construction event like a collapse or fire, the scope of coverage under a CGL policy differs from the coverage under a builder’s risk policy. The standard CGL insuring agreement provides that the insurer will pay “ those sums that the insured becomes legally obligated to pay as damages  because of  ‘bodily injury’ or  ‘property damage’  to which [the] insurance applies.” Commercial General Liability Coverage Form (2013), Miller’s Standard Insurance Policies Ann. (7th ed.) (numbering added). Each of those five parts of the insuring agreement distinguishes a CGL policy from a builder’s risk policy.
First, the “legally obligated to pay as damages” requirement is central to the distinction between first-party and third-party coverage. The CGL coverage is fundamentally narrower, incorporating concepts of fault and legal responsibility that do not apply under first-party coverage.
Second, however, the “because of” language broadens the scope of potentially covered damages. Economic loss, standing alone, is not “property damage” under a CGL policy. Allan D. Windt, 3 Insurance Claims & Disputes § 11:1 (6th ed.). Nevertheless, the “because of” language means that a liable party’s CGL policy may pay consequential economic damages (id.), which a builder’s risk policy does not.
Third, in a catastrophic event like a fire or collapse, individuals may sustain “bodily injury” within the CGL insuring agreement. A builder’s risk policy does not pay for such bodily injury.
Fourth, the scope of “property damage” is similar, but not identical, to the risk of direct physical loss under a builder’s risk policy. “Property damage” is defined, in principal part, as “[p]hysical injury to tangible property, including all resulting loss of use of that property.” Commercial General Liability Coverage Form (2013), Miller’s Standard Insurance Policies Ann. (7th ed.). “Physical injury to tangible property” is similar in scope to “risk of direct physical loss” under a builder’s risk policy. Compare Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So. 2d 1241, 1249 (Fla. 2008), with Swire, 845 So. 2d at 168. Nevertheless, there is a division of authority whether “rip and tear” damage – injury to undamaged property in the course of remedying an uncovered condition – can, standing alone, constitute “property damage.” Compare Desert Mountain Props. L.P. v. Liberty Mut. Fire Ins. Co., 236 P.3d 421 (Ariz. Ct. App. 2010), aff’d, 250 P.3d 196 (Ariz. 2011), with U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 2015 WL 7792557, at *7 (Tex. Dec. 4, 2015). There is no comparable authority finding coverage for “rip and tear” under a builder’s risk policy. Moreover, “property damage” under a CGL policy – unlike loss under a builder’s risk policy – can include third-party damages, such as when a fire spreads to another property or forces nearby businesses to shut down.
Fifth, a CGL policy’s ongoing operations exclusions may apply more broadly than the defective work exclusion under a builder’s risk policy. Exclusion J5 applies to property damage to “[t]hat 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.” Commercial General Liability Coverage Form (2013), Miller’s Standard Insurance Policies Ann. (7th ed.). Exclusion J6 applies to property damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it,” but J6 “does not apply to ‘property damage’ included in the ‘products-completed operations hazard.’” Id.
The most widely cited case on the meaning of the phrase “particular part” is Columbia Mut. Ins. Co. v. Schauf, 967 S.W.2d 74 (Mo. 1998). Schauf held that exclusion J5 “denies coverage for more than just damage to the insured’s work … by excluding from coverage damage to the particular part of property on which the insured is performing operations.” Id. at 77. During the construction of a new home, a subcontractor hired to “paint, stain, or lacquer all interior and exterior surfaces” accidentally started a fire while cleaning his equipment immediately after spraying lacquer on the kitchen cabinets. Id. at 76. Exclusion J5 barred coverage under the subcontractor’s policy for any damage to the kitchen cabinets, but not to the fire damage to the rest of the home. Id. at 81. However, Florida courts appear to have moved toward a more liberal interpretation of these exclusions. See American Equity Ins. Co. v. Van Ginhoven, 788 So. 2d 388 (Fla. 5th DCA 2001) and Essex Ins. Co. v. Kart Const., Inc.,
2015 WL 4730540 (M.D. Fla. Aug. 10, 2015). For other examples, see Allan D. Windt, 3 Insurance Claims and Disputes § 11:18A (6th ed.), and 4 Bruner & O’Connor Construction Law § 11:100. Thus, the CGL ongoing operations exclusions – unlike the builder’s risk defective workmanship exclusion – can bar coverage for physically injured property other than the defective work itself.
When it comes to evaluating a case’s settlement value, a CGL insurer faces the prospect of paying the cost of defending its policyholder in the liability action. An insurer for a subcontractor often faces a second set of defense costs – if the general contractor is named as an “additional insured” on the subcontractor’s policy, the insurer may also pay a share of the general contractor’s defense costs. Indeed, because many CGL policies limit “additional insured” coverage to injury arising out of the named insured’s ongoing operations, e.g., Weitz Co., LLC v. Mid-Century Ins. Co., 181 P.3d 309, 312 (Colo. Ct. App. 2007), mid-construction damage is more likely than post-completion damage to trigger an obligation to defend a general contractor under its subcontractors’ insurance policies.
- Particular Questions that Arise
- “Other Insurance” Clauses
A CGL policy’s “other insurance” clause typically states that the “insurance is excess over … (a) Any of the other insurance, whether primary, excess, contingent or on any other basis … (i) That is Fire, Extended Coverage, Builder’s Risk, Installation Risk or similar coverage for ‘your work.’” Commercial General Liability Coverage Form (2013), Miller’s Standard Insurance Policies Ann. (7th ed.). This clause has been held to refer “solely to first-party property coverage.” Colony Ins. Co. v. Ga.-Pac., LLC, 27 So. 3d 1210, 1214 (Ala. 2009).
It does not appear that courts have addressed the mechanics of how a third-party liability coverage and a first-party property coverage can be primary or excess to one another. But, as discussed in the next section, the more pressing question is the scope of a builder’s risk insurer’s subrogation rights after it pays for a loss.
- Risk Transfer
Effective risk management is an important goal in any contract negotiation, particularly when the parties’ performance under the contract exposes them to potential third party claims for bodily injury, property damage, and other alleged injuries. One tool in the bag of effective risk management is contractual risk transfer: the process by which one party transfers the potential liability from particular risks to another party by specific contract provisions. By effectively implementing contractual risk transfer and risk management measures, you can minimize your client’s liability to third parties, and you may be able to positively impact your client’s own insurance coverage profile.
Even if a builder’s risk policy pays first, the builder’s risk insurer will then have a subrogated right to sue responsible parties. But, as a general matter, the “anti-subrogation rule” precludes an insurer from asserting a subrogated claim against a person who qualifies as an insured under the policy. 16 Couch on Ins. § 224:1.
A builder’s risk policy often will provide that various persons, such as contractors and subcontractors, are additional insureds “as their interests may appear.” Dyson & Co. v. Flood Eng’rs, Architects, Planners, Inc., 523 So. 2d 756, 758 (Fla. 1st DCA 1988). Some courts have held that this language triggers the anti-subrogation rule and bars subrogated claims against all such persons. Id. at 758–59 (collecting authority on both sides of issue); see 4 Bruner & O’Connor Construction Law § 11:200. The builder’s risk insurer can always try to seek recovery from responsible parties who do not qualify as its insureds – perhaps including architects, construction managers, engineers, suppliers, or manufacturers.
- Alternative Dispute Resolution
Disputes may arise regarding which insured holds the power to settle a builder’s risk loss. The answer most likely will come from the general contract, the terms of which typically are incorporated by reference into subcontracts. Standard language promulgated by the American Institute of Architects provides:
The Owner as fiduciary shall have power to adjust and settle a loss with insurers unless one of the parties in interest shall object in writing within five days after occurrence of loss to the Owner’s exercise of this power; if such objection is made, the dispute shall be resolved in the manner selected by the Owner and Contractor as the method of binding dispute resolution in the Agreement. If the Owner and Contractor have selected arbitration as the method of binding dispute resolution, the Owner as fiduciary shall make settlement with insurers or, in the case of a dispute over distribution of insurance proceeds, in accordance with the directions of the arbitrators.
Werner Sabo, Legal Guide AIA Documents § 4.65.
In some cases, it may make sense for the owner or the insurer to demand appraisal under the policy. A common policy provision states:
If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding.
Builders Risk Coverage Form, Miller’s Standard Insurance Policies Annotated (7th ed.).
This language contemplates a two-party process between the insurer and “you” (i.e., the named insured). Thus, the insurer and the owner will select the two appraisers. Nevertheless, insureds other than the owner likely can submit materials to the appraisers and umpire for their consideration. Cf. 15 Couch on Ins. § 211:58 (appraisal binds other interested parties, such as mortgagees, if they receive adequate notice and an opportunity to be heard).
Although the appraisers cannot resolve questions of policy construction or conditions of coverage, they often can decide which items of claimed loss resulted from covered or excluded causes. State Farm Fire & Cas. Co. v. Licea, 685 So. 2d 1285, 1288 (Fla. 1996) (“[Appraisal] necessarily includes determinations as to the cost of repair or replacement and whether or not the requirement for a repair or replacement was caused by a covered peril or a cause not covered, such as normal wear and tear, dry rot, or various other designated, excluded causes.”).
Each case will present its own facts and contract provisions. In most cases, however, the builder’s risk insurer must pay to repair the portions of the property that have sustained direct physical loss, minus the cost of repairing the initially defective work that caused the loss. If the negligent parties are named insureds or additional insureds under the builder’s risk policy, the builder’s risk insurer is likely to face difficulty pursuing subrogated claims against their CGL insurers. But the CGL insurers face a broader set of risks and, if a case cannot settle quickly, the steep cost of defending their policyholders and additional insureds. A builder’s risk insurer, by contrast, often can avoid significant legal fees by demanding appraisal to resolve questions regarding the scope and valuation of the covered loss.
July 3rd, 2017
AN INTENDED ACT DOES NOT EQUATE TO INTENDED HARM: THE HIGH BAR EMPLOYEES MUST MEET TO UTILIZE THE INTENTIONAL ACT EXCLUSION TO BRING A CLAIM DIRECTLY AGAINST THEIR EMPLOYER
By, Ellen G. Smith, Esq.
Just because an employer intends that an act be done does not mean that an employer intended harm to come from that which would allow employees to avoid workers’ compensation laws. Florida Statute §440.11(1)(b) delineates when an employee can seek coverage under the intentional tort exception in workers’ compensation claims. Florida Statute §440.11(1)(b) states:
(1) The liability of an employer prescribed in s. 440.10 shall be exclusive and in place of all other liability, including vicarious liability, of such employer to any third-party tortfeasor and to the employee, the legal representative thereof, husband or wife, parents, dependents, next of kin, and anyone otherwise entitled to recover damages from such employer at law or in admiralty on account of such injury or death, except as follows:
(b) When an employer commits an intentional tort that causes the injury or death of an employee. For purposes of this paragraph, an employer’s action shall be deemed to constitute an intentional tort and not an accident only when the employee proves, by clear and convincing evidence that:
- The employer deliberately intended to injury the employee; or
- The employer engaged in conduct that the employer knew, based on prior similar accidents or on explicit warnings specifically identifying a known danger, was virtually certain to result in injury or death to the employee, and the employee was not aware of the risk because the danger was not apparent and the employer deliberately concealed or misrepresented the danger so as to prevent the employee from exercising informed judgment about whether to perform the work.
In reaction to the Supreme Court’s ruling in Turner v. PCR, Inc., 754 So. 2d 683 (Fla. 2000), the Florida legislature raised the bar in the enactment of Florida Statute §440.11(1)(b), from the previous standard of substantially certainty, to create an even narrower window where employees can avoid the immunity employer’s possess under the worker’s compensation laws. Not only did the legislature require that employees prove their case by the heightened standard of clear and convincing evidence, but also created a standard where an employer must have deliberately intended the harm or where a harm is so obvious to occur because the harm has occurred before and will occur every time a that act is performed. Since its enactment several District Courts have evaluated claims under the new heightened test, all of which have failed to meet the significantly higher standard created in Florida Statute §440.11(1)(b). See Gorham v. Zachry Industrial Inc., 105 So. 3d 629, 634 (Fla. 4th DCA 2013)(“[T]he mere knowledge and appreciation of a risk-something short of substantial certainty – is not intent. The defendant who acts in the belief or consciousness that the act is causing an appreciable risk of harm to another may be negligent, and if the risk is great the conduct may be characterized as reckless or wanton, but it is not an intentional wrong.”); See Boston v. Publix Super Market, Inc., 112 So. 3d 654, 657 (Fla 4th DCA 2013)(“the statute provides an exceptionally narrow exclusion from immunity, requiring intentional, deceitful conduct on the part of the employer.”); See List Industries, Inc. v. Dalien, 107 So. 3d 470, 471 (Fla. 4th DCA 2013)(“The change from ‘substantial certainty’ to ‘virtually certain’ is an extremely different and manifestly more difficult standard to meet. It would mean that a plaintiff must show that a given danger will result in an accident every – or almost every – time.”); See Vallejos v. Lanm Cargo, S.A., 116 So. 3d 545 (Fla. 3d DCA 2013)(“the failure to train or warn of obvious dangers does not amount to concealing or misrepresenting the danger so as to prevent [the employee] from exercising informed judgment”).
The Florida Supreme Court in Travelers Indem. Co. v. PCR. Inc., 889 So. 2d 779 (2004) relied upon the standing rule that “tort law principles do not control judicial construction of insurance contracts….Thus, intentional act exclusions are limited to the express terms of the policies and do not exclude coverage for injuries more broadly deemed under tort law principles to be consequences flowing from the insured’s intentional acts.” at. 793; quoting Prudential Prop. & Cas. Ins. Co. v. Swindal, 622 So. 2d 467, 470 (1993). Intentional act exclusions are not a bar to insurance coverage for liability arising from claims brought under the objectively, substantially certain to result in injury exception. Travelers, 889 So. 2d at 781. The key distinction is whether the employer intended to cause the harm, not whether the employer intended the action. See id.; Swindal, 622 So. 2d at 472 (intentional acts exclusion did not bar coverage where insured approached another with a loaded handgun, got into an altercation with that individual during which the gun discharged and severely injury the individual; insured testified he did not intend to shoot and cause harm to the person) (emphasis added); See Cabezas v. Florida Farm Bureau Cas. Ins. Co., 830 So. 2d 156, 160 (Fla. 3d DCA 2002)(intentional acts exclusion did bar coverage where the insured admits he intentionally struck the person behind him who he believed was an assailant); Cloud v. Shelby Mut. Ins. Co. of Shelby OH, 248 So. 2d 217 (Fla. 3d DCA 1971)(ruling that tort law’s “reasonably foreseeable consequences” rule has no application to insurance policies, and intentional act exclusion did not bar coverage where the insured intentionally pushed another car out of its way causing injury to a passenger in the car being pushed); Phoenix Ins. Co. v. Helton; 298 So. 2d 177 (Fla. 1st DCA 1974)(exclusionary clause did not bar coverage because the insured did not intend to injure others even though insured intentionally drove his car into a crowd of people).
The Florida legislature’s enactment of Florida Statute 440.11(1)(b) combined with the Florida Supreme Court ruling in Travelers makes clear that the legislature intends for employees to use the channels created in the workers’ compensation law scheme which itself was put in place to provide quick recovery for employees who are injured on the job and emphasizes that tort principles have no place in workers’ compensation claims.
 The Supreme Court recognized that an exception to employer’s worker’s compensation immunity existed in Turner utilizing a “substantially certain” to cause injury or death standard.