Exhaustion & Below Limits Settlements Presented By: Samantha M. Evans February 25, 2014
For Discussion and Educational Purposes Only Overview • Insurance program comprised of multiple layers of follow form insurance policies • Coverage dispute between an insured and lower level insurer settles for less than full limit of liability • Attempts to “fill the gap” left by the settlement before seeking higher level excess coverage
For Discussion and Educational Purposes Only Issues to Watch • Does the applicable excess policy contain ambiguous language, or language the court deems ambiguous? • Is “actual payment” required and, if so, who may make that payment? • Will public policy favoring settlements change the outcome for an excess insurer?
For Discussion and Educational Purposes Only Below Limits Settlements Zeigv. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) • Courts focus on specific policy language in the excess policies • Excess policy required that underlying insurance be “exhausted in the payment of claims to the full amount of the expressed limits.” (emphasis added) • No need to interpret “payment” as “payment in cash”
For Discussion and Educational Purposes Only Zeig: Below Limits Settlements • “Payment” interpreted broadly to mean “satisfaction of a claim by compromise, or in other ways.” • Permitted insured to fill the gap then collect from excess Insurer • Public policy against inhibiting settlement • Excess insurer was only called on to pay that portion of loss in excess of underlying limits
For Discussion and Educational Purposes Only Zeig: Below Limits Settlements • New York courts, as well as some courts in other jurisdictions, adhere to Zeig where policy language is ambiguous, permitting access to excess coverage if the insured’s obligations exceed the underlying limits • See e.g., Lexington Ins. Co. v. Tokio Marine and Nichido Fire Ins. Co., 2012 WL 1278005 (S.D.N.Y. Mar. 28, 2012) (applying Zeig to find that “in the absence of unambiguous language requiring exhaustion via full payment of the underlying policy, no such exhaustion is required”).
For Discussion and Educational Purposes Only Recent Trend: Second Circuit Distinguishes Zeig Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013) • Held: Underlying Limits must actually be paid in full before excess policies attach • Court focused on policy language, which left open who must pay • Exhaustion occurs “solely as a result of payment of losses thereunder.” • Obligations versus actual payment
For Discussion and Educational Purposes Only Recent Trend: Second Circuit Distinguishes Zeig Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013) • “Payment of losses” refers to the actual payment of losses, and not the mere accrual of losses in the form of liability • While containing similar “payment” language: • Zeig arose under a first-party policy • Liability excess carriers have “good reason to require payment up to the attachment point of the relevant policies, thus deterring the possibility of settlement manipulation.”
For Discussion and Educational Purposes Only Liability Alone Insufficient Estate of Bradley v. Royal Surplus Lines Ins. Co., 647 F.3d 524 (5th Cir. 2011) • Excess policy required that the underlying insurance be used in the payment of judgments or settlements • Fifth Circuit rejected insured’s claim that “the mere entry of a judgment that exceeded the limits of the underlying insurance” was sufficient • Instead, the Fifth Circuit enforced the policy language requiring actual payments to exhaust the SIR and the underlying policy’s limits
For Discussion and Educational Purposes Only Very Recent Trend: Quellos Group Quellos Group LLC v. Federal Ins. Co., 312 P.2d 734 (Wash App. 2013) • Two excess policies required: 1) underlying insurers to “have paid in legal currency the full amount”; 2)”actual payment of loss” • Unambiguous language requires “actual payment” • Not a condition to coverage • Great American Ins. Co. v. Bally Total Fitness Holding Corp., 2010 U.S. Dist. LEXIS 61553 (N.D. Ill. 2010)
For Discussion and Educational Purposes Only What Constitutes “Actual Payment”? • Courts will enforce excess policy language which specifically requires the underlying carrier to “have paid, in the applicable legal currency, the full amount of the underlying limit” • Great American Ins. Co. v. Bally Total Fitness Holding Corp., 2010 U.S. Dist. LEXIS 61553 (N.D. Ill. 2010) • Less specific policy language may yield a different result • If the excess policy does not specify the manner in which payment may be accomplished, the execution of a promissory note in the context of a partial settlement can constitute “actual payment” • Chartis Specialty Ins. Co. v. Queen Anne HS, LLC, 867 F. Supp. 2d 1111 (W.D. Wash. 2012)
For Discussion and Educational Purposes Only Who May Pay? Trinity Homes, LLC v. Ohio Cas. Ins. Co., 629 F.3d 653 (7th Cir. 2010) • Insured settled with multiple primary carriers for approximately 75% of the policies’ limits, and paid the remainder of the limits • Umbrella carrier denied coverage, arguing that the primary policies were not “completely exhausted” or “otherwise unavailable” as the umbrella policy required • Seventh Circuit found that the policy was ambiguous because it did not “clearly provide that the full limit must be paid out by the CGL carrier alone.”
For Discussion and Educational Purposes Only Are Payments for Defense Costs “Judgments or Settlements”? Siltronic Corp. v. Employers Ins. Co. of Wausau, 921 F. Supp. 2d 1099 (D. Ore. 2013) • Question: when excess policies require exhaustion by “payment of judgments or settlements”, can the underlying policy be exhausted by defense costs? • Court considered “judgments or settlements” language, finding that it includes payments made pursuant to consent decrees, even if those decrees or orders are not “final,” but that defense payments do not constitute exhaustion via “judgments or settlements”
For Discussion and Educational Purposes Only Are Payments for Defense Costs “Judgments or Settlements”? • Delaware Supreme Court recently held that the phrase “payments of judgments or settlements” cannot be construed to encompass an insured’s own payment of defense costs. • “Judgments” refer to a decision by an adjudicative body as to the parties’ rights, and “settlements” involve agreements between parties as to the dispute between them. • Defense costs do not fall within the meaning of either term. • Intel Corp. v. American Guar. & Liab. Ins. Co., 51 A.3d 442 (Del. 2012) (applying California law).
For Discussion and Educational Purposes Only Public Policy May Not Carry the Day • Excess policy required payment of the full amount of its $15 million limits, but primary paid only $10 million • Sixth Circuit enforced excess policy’s plain language, finding that Goodyear’s settlement public policy argument was “meritless” • Goodyear v. National Union Fire Ins. Co., 694 F.3d 781 (6th Cir. 2012); Qualcomm, Inc. v. Certain Underwriters at Lloyds, 161 Cal. App. 4th 184 (2008)
For Discussion and Educational Purposes Only Lesson: Policy Language Matters • In the absence of the clear policy language interpreted in the foregoing cases, courts may reach a different result • If the excess policy does not specify the entity which must make the underlying payments, courts may permit insureds to “fill the gap”
For Discussion and Educational Purposes Only Policy Language Matters Maximus, Inc. v. Twin City Fire Ins. Co., 856 F. Supp. 2d 797 (E.D. Va. 2012). • Insured settled for less than limits with underlying carriers, and “filled the gap” for the remaining limits, and excess carrier denied coverage • Held: policy was ambiguous • Excess policy language did not specifically require the underlying insurers to pay, nor preclude the insured from filling the gap • Excess coverage could be triggered by the insured settling for less than limits and then filling the gap.
Contact Information Samantha M. EvansAssociate, Global Insurance Department 215-665-4106 | email@example.com
Confidential/For Discussion and Educational Purposes Recent Statutes Addressing Coverage for Construction Defects: Update on Legislation and Effective Claim Management Practices Presented By: Richard C. Mason, Esq. Cozen O’Connor New York/Philadelphia firstname.lastname@example.org (215) 665-2717
For Discussion and Educational Purposes Only Overview 1. Division in courts regarding defective construction as an “occurrence” 2. New statutes declaring construction defects to be an “occurrence” 3. Court challenges to new statutes 4. Legal issues once an “occurrence” has been found (or deemed) to occur
For Discussion and Educational Purposes Only Traditional General Contracting Owner Architect/Engineer Surety General Contractor Surety Subcontractor Material Supplier Sub-Contractor
For Discussion and Educational Purposes Only Risk Transfer Illustration Owner (Prime Contract) Tender Architect / Engineer E&O Insurer Indemnity Insurance /AI General (Subcontract) Tenders GL Insurer Indemnity Insurance /AI Subcontractor GL Insurer Third Party Claimant
For Discussion and Educational Purposes Only “Occurrence” Typical Definition: “An accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Note: Standard CGL policies do not define the term “accident.”
For Discussion and Educational Purposes Only Decisions Finding No “Occurrence” Pennsylvania • Damage that is the natural or probable consequence of the work or supervision of the insured does not qualify as an accident. Millers Capital Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706, 711 (Pa. Super. 2007) NEBRASKA • Faulty workmanship, standing alone, is neither an “accident” or “occurrence.” Auto-Owners Ins. Co. v. Home Pride Companies, Inc., 684 N.W. 2d 571 (Neb. 2004)
For Discussion and Educational Purposes Only Courts Deeming Defective Construction to Constitute an “Occurrence” • Liberal construction of policy terms • Focus on business risk exclusions to eliminate moral hazard and other public policy concerns Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65 (Wis. 2004); U.S. Fire Ins. Co. v. J.S.U.B., Inc., 2007 WL 4440232 (Fla. 2007)
For Discussion and Educational Purposes Only Courts Deeming Defective Construction to Constitute an “Occurrence” West Virginia • Defective construction can be an “occurrence.” • Previous court decisions defined an “accident” in a policy as “not deliberate, intentional, expected, desired or foreseen.” • Court reasoned that the contractor did not deliberately intend or desire resulting damages. • Recognizing a “definite trend in the law” the court reversed long-standing precedent in the state. Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508 (W.Va. 2013).
For Discussion and Educational Purposes Only Courts Diverge Over Whether Defective Construction is an “Occurrence” • Other Recent Decisions Seem to Expand the Potential Scope of Coverage • Pennsylvania: Indalex v. National Union Fire Ins. Co., 201 WL G237312 (Pa. Super., Dec. 3, 2013) • Georgia:Taylor Morrison Servs. V. HDI-Gerling American Ins. Co., 746 S.E.2d 587 (Ga. 2013). • Connecticut: Capstone Building Corp. v. Am. Motorists Ins. Co., 2013 Conn. LEXIS 187 (Conn. Jun. 11, 2013).
For Discussion and Educational Purposes Only Nationwide Status of “Occurrence” Positions for Construction Defect Claims Highest court or state statute deems defective construction to be an occurrence. Leaning towards coverage; only lower state court or federal court authority exists. Highest court has deemed defective construction notto be an occurrence. Tending against coverage; only lower state court or federal court authority exists. Defective construction only an occurrence when there is damage to third-party property. Unclear No decision
For Discussion and Educational Purposes Only Insurance Coverage for ConstructionDefects: Statutory Developments • Between 2010 and 2011, four states enacted legislation addressing insurance coverage for construction defect claims. • Each statute favors coverage, albeit in different ways and to varying degrees. • These statutes signal that the battle over whether construction defects constitute an "occurrence" may have shifted from the courts to state legislatures.
For Discussion and Educational Purposes Only Insurance Coverage for Construction Defects: Statutory Developments • New state statutes are intended to overrule, at least to some extent, judicial decisions that denied insurance coverage for construction defect claims. • The thrust of these statutes is to require construction defects to be treated as an accidental "occurrence" within the meaning of the CGL insurance policy.
For Discussion and Educational Purposes Only State Statutes StateEffective Date Colorado May 21, 2010 Arkansas March 23, 2011 South Carolina May 17, 2011 Hawaii June 21, 2011
For Discussion and Educational Purposes Only Colorado: 2010 Statute • The Builders’ Insurance Act, C.R.S. 13-20-808 codifies interpretive rules for occurrence based liability policies insuring construction professionals. The Act allows courts to consider: • (1) an insured's objective, reasonable expectations concerning coverage; and • (2) insurance industry and internal insurance company explanatory materials to help interpret and apply certain policies.
For Discussion and Educational Purposes Only Colorado: 2010 Statute • Property damage, including damage to construction work performed by an insured, is presumed to be an "accident" unless the damage was intended and expected by the insured. • The Act applies to all insurance policies in existence or issued on or after the Act's effective date of May 21, 2010.
For Discussion and Educational Purposes Only Hawaii: 2011 Statute Chapter 432, Article 1 of the Hawaii Revised Statutes provides that the term “occurrence” shall be construed in accordance with the law as it existed at the time that the insurance policy was issued.
For Discussion and Educational Purposes Only Hawaii: 2011 Statute • This statute still leaves it to the courts to interpret the applicable law with respect to any particular claim. • Preamble states: "Prior to the Group Builders decision ... construction professionals entered into … insurance contracts under the reasonable, good-faith understanding that bodily injury and property damage resulting from construction defects would be covered under the insurance policy. It was on that premise that general liability insurance was purchased.”
For Discussion and Educational Purposes Only South Carolina: 2011 Statute • South Carolina Code Section 38-61-70 enacted on May 17, 2011 • Provides that CGL policies shall contain or be deemed to contain a definition of “occurrence” that includes property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.
For Discussion and Educational Purposes Only Arkansas: 2011 Statute Arkansas Code Section 23-79-155 (enacted on March 23, 2011) • Requires CGL policies offered for sale in Arkansas to contain a definition of occurrence that includes "property damage or bodily injury resulting from faulty workmanship“ • Act also states that it does not limit the nature or types of exclusions that an insurer may include in a CGL policy.
For Discussion and Educational Purposes Only New State Statutes: Overview • Recent legislation generally will make it easier for policyholders in the affected states to establish potential coverage for a construction defect claim. • The statutes generally do not alter the exclusions that already apply to construction defect claims, and they leave the interpretation of the meaning of these exclusions to the courts.
For Discussion and Educational Purposes Only Insurer Challenges to Statutes: South Carolina • Harleysville Mutual filed a complaint in the South Carolina Supreme Court seeking injunctive relief and a declaration that the new statute violates the U.S. and South Carolina constitutions. • Court held: • It is within the legislature’s power to define “occurrence.” • Provision in statute which applies new law retroactively is unconstitutional. • The remaining provisions of the statute are upheld and its effective date is May 17, 2011.
For Discussion and Educational Purposes Only Post-Legislation Case law: South Carolina Bennett & Bennett Construction, Inc. v. Auto Owners Ins. Co., 747 S.E.2d 426 (S.C. 2013). • Decided by South Carolina Supreme Court after it upheld the constitutionality of South Carolina Code Section 38-41-70. • “The plain language of exclusions j(5) and n each independently exclude coverage when, as here, a subcontractor acting on behalf of the insured directly damages the insured's work product, necessitating its removal and replacement.” • “[A] CGL policy does not insure the insured’s work itself but consequential risks that stem from the insured’s work. CGL coverage is for tort liability for injury to persons and damage to other property and not for contractual liability of the insured for economic loss….”
For Discussion and Educational Purposes Only Post-Legislation Case law: Hawaii Nautilus Ins. Co. Co. 3 Builders, Inc., 2013 WL 3223743 (D. Haw. Jun. 24, 2013). • Not a direct challenge to statute, but decided after Haw. Rev. Stat. § 431:1-217(a) was enacted. • Policy was in effect in 2008. The court did not follow Group Builders, Inc. and instead relied on 9th Circuit’s analysis in Burlington v. Oceanic, which was decided in 2007. • Following Burlington, as a matter of Hawaiian state law, construction defect claims do not constitute an occurrence under a CGL policy.
For Discussion and Educational Purposes Only Post-Legislation Case law: Hawaii Illinois National Ins. Co. v. Nordic PCL Construction, Inc., 2013 WL 3975668 (D. Haw. Jul. 31, 2013). • The court reasoned that even if § 431:1-217(a) nullified Group Builders by “restoring” pre-Group Builders law, the statute did not nullify pre-Group Builders decisions. • Following those decisions, construction claims do not involve accidents or “occurrences.”
For Discussion and Educational Purposes Only Insurer Challenges to Statutes: Colorado Colorado Pool Systems, Inc. v. Scottsdale Ins. Co., 2012 WL 5265981 (Colo. App. Oct. 25, 2012). • Court recognized that if it were to apply C.R.S. 13-20-808, the CGL policy at issue would cover the insured’s defective workmanship, including the damage to insured’s own work. • However, the negotiation and execution of the policy, the faulty workmanship and resulting damage, and the denial of coverage all occurred before the statute’s effective date. • The court held that retroactive application of the statute was unconstitutional. • Court held that injuries flowing from the faulty workmanship were only an occurrence if the resulting damage was to non-defective property and were unexpected.
For Discussion and Educational Purposes Only Insurer Challenges to Statutes: Colorado Colorado Pool Systems, Inc. v. Scottsdale Ins. Co., 2012 WL 5265981 (Colo. App. Oct. 25, 2012). • On September 3, 2013, the Supreme Court of Colorado granted a petition for writ of certiorari. • The court will address: • Whether the court of appeals erred in holding that CRS 13-20-808 would be unconstitutionally retrospective as applied to the CGL policy at issue • Whether the court of appeals erred in its interpretation of the CGL policy under common law
For Discussion and Educational Purposes Only Common Coverage Issues in Construction Defect Cases • The “legally liable” requirement • The “Your Product” exclusion • The “Your Work” exclusion
For Discussion and Educational Purposes Only The “Legally Liable” Requirement • CGL policies typically cover only “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’…” • Precludes coverage for property damage for which the insured is obligated to pay damages by reason of the liability in a contract. • If the damage does cause a breach of contract, courts may find coverage only if Insured would have been liable anyway; i.e., damages were caused by the insured’s negligence.
For Discussion and Educational Purposes Only Nucor Silo Collapse, Port Lisas, Trinidad
For Discussion and Educational Purposes Only “Your Product” Exclusion • Precludes coverage for “property damage” to “your product” arising out of it or any part of it • “Your Product” means: • Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by: • You; • Others trading under your name; or • A person or organization whose business or assets you have acquired; and
For Discussion and Educational Purposes Only “Your Product” Exclusion • “Your Product” may also mean • Warranties or representations made at any time with respect to the firmness, quality, durability, performance or use of “your product;” and • The providing of, or failure to provide, warnings or instructions.