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.
November 13th, 2013
The Duty to Settle and Bad Faith
By Molly A. Chafe, Esquire
Boyle, Gentile, Leonard & Crockett, P.A.
Many policyholders are not fully aware that an insurance company (“insurer”) owes certain fiduciary duties to them. This not only encompasses first-party claims, but third-party claims as well. Generally, an insurer is required to defend its insured against any actions or proceedings brought against the insured that fall within the coverage of the policy. When an insurer becomes aware of a claim against one of its insureds, the insurer assumes certain fiduciary duties with regard to how the insurance company handles those claims. In assuming control, the insurer acquires a fiduciary duty toward the insured, with obligations to make decisions and otherwise act in the insured’s best interest and to exercise the utmost good faith in all aspects of handling the claim. Baxter v. Royal Indemnity Co., 285 So. 2d 652 (Fla. 1st DCA 1973).
In general, this duty of good faith toward an insured involves diligence and care in investigating the facts, evaluating the claim, and considering and negotiating a settlement. Williams v. Infinity Insurance Co., 745 So. 2d 573 (Fla. 5th DCA 1999). An insurer, in handling the defense of claims against its insured, has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980). For when the insured has surrendered to the insurer all control over the handling of the claim, including all decisions with regard to litigation and settlement, then the insurer must assume a duty to exercise such control and make such decisions in good faith and with due regard for the interests of the insured. Boston Old Colony, 386 So. 2d at 785.
This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might to avoid the same. Boston Old Colony, 386 So. 2d at 785. The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable, and settle the claim, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. Government Employees Ins. Co. v. Grounds, 311 So. 2d 164 (Fla. 1st DCA 1975), cert. discharged, 332 So. 2d 13 (Fla. 1976); Government Employees Ins. Co. v. Campbell, 288 So. 2d 513 (Fla. 1st DCA 1973), quashed, 306 So. 2d 525 (Fla. 1974); Baxter, 285 So. 2d 652, cert. discharged, 317 So. 2d 725 (Fla. 1975). Because the duty of good faith involves diligence and care in the investigation and evaluation of the claim against the insured, negligence is relevant to the question of good faith. Boston Old Colony, 386 So. 2d at 785.Moreover, where substantial injuries by the claimant and potential liability of the insured are obvious, the failure to tender modest policy limits constitutes bad faith. See Powell v. Prudential Property & Casualty Ins. Co., 584 So. 2d 12, 14 (Fla. 3d DCA 1991).
However, the case of Gutierrez v. Yochim has further strengthened an insurer’s duty to settle. 23 So. 3d 1221 (Fla. 2d DCA 2009). In Gutierrez, Ms. Gutierrez, who was insured by Dairyland, was driving her van when she made a left turn directly into the path of a motorcycle operated by Mr. Yochim, who sustained serious injuries. Id. at 1222. Ms. Gutierrez immediately reported the accident to Dairyland. Id. Within the month, the insurance company determined that Ms. Gutierrez was at fault and sent her a certified letter advising her that she would be personally exposed to an excess judgment for property damage and bodily injuries. Id. The insurance adjuster attempted to call Mr. Yochim but was unable to reach him but ordered an appraisal of the damage. Id. Within eight days of the accident, the adjuster learned that Mr. Yochim suffered an “incapaciting” injury. Id. The appraisal report indicated a total loss upon which Dairyland cautioned Ms. Gutierrez that it “will make every effort to resolve these claims within your insurance coverage. Due to the serious nature of the accident, this may not be possible….” Id. at 1223.
Roughly a month after the accident and after a telephone conversation with the plaintiff’s attorney informing the insurer of his client’s possible paralysis diagnosis, the adjuster set the reserves for the injuries and asked for the medical records. Id. Although plaintiff’s attorney had the medical records, he sent the medical authorization forms to insurer two months after the accident.Id. However, it was almost five months after the accident that Dairyland actually ordered the medical records. Id. After receipt of the medical records, Dairyland formally tendered the policy limits. Id. This was eight months after the accident. A stipulated judgment in excess of the policy limits was entered by agreement among the parties. Id. at 1224. As a result, Mr. Yochim filed suit against Ms. Gutierrez, and she filed a bad faith claim against Dairyland. Id. Trial court granted summary judgment on the bad faith action in favor of Dairyland based on its assertion that it orally offered to settle for policy limits within a day of receiving the medical records. Id.
The appellate court reiterated that an insurer has an obligation to properly defend its insured from claims that are covered within the policy of insurance and that it must exercise good faith in satisfying that obligation. Id. at 1225. The court dismissed Dairyland’s argument that the delay in tendering the policy limits was a result of the claimant failing to provide medical authorization in stating that Dairyland’s “fiduciary duty to timely and properly investigate the claim against the insured was not relieved simply because it was waiting to receive information from the claimant’s attorney.” Id. It further stated that because Dairyland knew within days of the accident that its insured was entirely at fault in causing the accident and was aware that damages exceeded the insured’s policy limit, it could not say, as a matter of law, that Dairyland satisfied its duty of good faith under the circumstances. Id. at 1226.
Some practitioners have suggested that the Gutierrez case has effectively resulted in an unreciprocal and uncooperative relationship between third parties and insurers. Specifically, the argument is that an insurer has an affirmative duty to initiate settlement negotiations while, at the same time, leaving the claimant with no duty to cooperate with such negations. However, throughout litigation, counsel for both sides should engage in cooperative communication so as to facilitate an action in good faith. But an insurer must also be aware of the duties owed, keep the insured involved and advised of the potential liability when an excess judgment is probable, and timely investigate cases involving serious injuries in order to prevent potential bad-faith claims. The duty to “settle” is not the duty to “tender policy limits.” Rather, the duty to settle encompasses the duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his or her own affairs. This includes timely investigation which may lead to a tender of policy limits, but the terms are not synonymous.