Construction Defect Disputes and the Abandoned Policyholder: Getting the Carrier to the Table

Barbara A. Reeves Neal, Esq.

Barbara A. Reeves Neal, Esq.

Kenneth Gibbs

Kenneth C. Gibbs, Esq.

By Barbara A. Reeves Neal, Esq. and Kenneth C. Gibbs, Esq.

There is much that can go wrong in any large construction project:  improper installations, defective products, errors and omissions made by designers, unexpected site conditions—the list is long.  Insurance coverage or a performance bond often means the difference between compensating injured parties and a nightmare of litigation and financial distress.  Unfortunately, insurance carriers often choose to wait while parties take their disputes through lengthy, expensive litigation, often adding yet more delays to the project.  Getting insurers to the table before litigation would save all parties significant time and money.  This article is a case study in one method of bringing insurers into settlement discussions early on through cooperative non-binding arbitration among the parties, followed by mediation with the insurance carriers.

The main problem for parties seeking insurance coverage in complicated construction defect cases is that there are too many variables.  There is often a tangle of liability issues, as well as confusion over which party the insurer is obligated to pay.  Further complicating matters, defective construction claims may involve (1) builder’s risk insurance (first-party coverage), (2) liability insurance (third-party coverage) and (3) a performance bond and the responsibility of the surety behind the performance bond.  Sorting this out can cause significant delays, particularly if a carrier takes the position that it does not owe coverage or that it is reserving its rights and refuses to come to the table for settlement discussions until after the other parties have fully litigated liability.

A recent case illustrates one solution to these problems.  It started when a mixed-use commercial/residential high-rise project took too long, cost too much and sprung a leak.  Normally in such a case, the owner would consider options to seek insurance coverage directly on a first-party basis under its property, or all-risk-type, policy, or to sue the contractor and product supplier pursuant to a third-party commercial general liability (CGL) policy.  However the owner decided to proceed, the next step would be for the parties to ask their respective insurance carriers for coverage and/or protection in and from a lawsuit.  The carriers would then answer yes and grant full coverage, answer no and deny coverage or answer maybe and agree to defend under a reservation of rights to later deny or accept coverage. The latter two answers, of course, will likely to lead to protracted, and expensive, litigation as the parties sort out liability.

The parties in this dispute, however, tried a completely different option.  The owner, contractor and subcontractors agreed to submit their claims to non-binding arbitration, with an agreement that the arbitration award would become binding 30 days after issuance if no party rejected it.  To expedite the proceedings, they agreed to submit their evidence through written presentations, largely from experts, with cross-examination available at the hearing.  All parties agreed that there was some degree of liability on the parts of one or more defendants, although they disagreed about the amount of damages.  However, all their efforts to date to involve their insurance carriers in meaningful settlement discussions or mediation had failed.  Thus, the parties entered into the arbitration with the expectation of an award in favor of the plaintiff/claimant, albeit in an unknown amount.

For the rest of this discussion on Construction Defect Disputes and the Abandoned Policyholder, please read the full article from Law.com by clicking here.

Insurance Coverage for Defective Construction: Litigation, Legislation and Reaction

Barbara A. Reeves Neal, Esq.

Barbara A. Reeves Neal, Esq.

By Barbara A. Reeves Neal, Esq.

If you have ever remodeled or built a house, you can begin to understand a significant issue that has generated both litigation and legislation arising out of defective construction:  Do comprehensive general liability (“CGL”) policies provide coverage for construction defects?

Contractors typically purchase performance bonds to cover their work, but these bonds generally have higher premiums than liability policies.  While it is not surprising that consumers would prefer the availability of the lower-priced coverage if provided by CGL policies, the cost of those policies may increase if courts and legislatures mandate constructive defect coverage under CGL policies.

A CGL policy covers potential liability for property damage caused by an “occurrence,” typically defined as an “accident,” including gradual accidental harm. In construction defect coverage, courts across the country have handed down opinions with varying interpretations of the “occurrence” issue, with most being divided on the issue as to whether coverage is available for construction defects.

One approach takes the position that defective construction work—and resulting damage—is not covered under liability insurance policies because neither was the result of an “accident” (i.e., an “occurrence”).  Pennsylvania, New Jersey, New York, Arizona, Ohio and Kentucky courts, among others, have adopted this position, while courts in Colorado and Hawaii were split within the state.  The analysis is that construction defects are the natural consequence of performing (substandard) work and liability policies do not protect against foreseeable business risks.  They conclude that CGL policies are not performance bonds and liability insurers did not sign up to be guarantors of a contractor’s work.

Other jurisdictions, including Florida, Wisconsin, and Alabama, among others, have held that faulty or defective workmanship is considered an “accident” and therefore an “occurrence,” or that even if the defective construction work itself is not an “occurrence,” the resulting damage is covered because it was fortuitous and unintended.  (“Your substandard work may not have been an accident, but the resulting mess was.”)

For the rest of this discussion on Insurance Coverage for Defective Construction, please read the full article from Law.com by clicking here.

ABA Construction Forum Coming Next Week

The American Bar Association’s Construction Fall Forum is taking place next week in Atlanta, GA from October 13-14, 2011. This forum brings together people with diverse construction backgrounds from around the U.S. and focuses on strategies that can lead to both better results for clients and results more efficiently achieved.

JAMS neutrals Hon. James Rosenbaum (Ret.) from Minneapolis and Douglas Oles, Esq. from Seattle will all participate in the interactive sessions along with other construction industry professionals. We’re proud our neutrals will participate and add to the discussion.

Topics include:

  • The Shifting Sands of Contract Drafting, Interpretation and Application
  • Strategies for Technical Defenses
  • The Moonscape of DRBS/DABS
  • Comparative Challenges Obtaining Third-Party Discovery
  • Ethics: Mediation and Settlement Negotiations