THE FUN NEVER ENDSKey Insurance Developments 2009 - 2010

The Insured Coverage A Exclusions Conditions Performance

OVERVIEW

Additional Insured Endorsements- Coverage only for AI’s vicarious liability?- Coverage for AI’s negligence?- What does “arising out of” mean?

THE INSURED

AIE Example;- Construction manager is additional insured

“only with respect to liability arising out of [the named insured’s] ongoing operations...”

- Held: “Arising out of” means “‘originating from, incident to, or having connection with’…[,] requiring ‘only … some causal relationship between the injury and the risk for which coverage is provided.’” 930 N.E.2d 259 (N.Y. 2010) (New York law)

THE INSUREDcausal nexus

Interpretations of “arising out of”– Natural consequence– Cause in fact but not necessarily a proximate

cause– More liberal concept than proximate cause

while rejecting strict “but for” causation– Minimal causal connection or incidental

relationship

THE INSURED

Property Damage Occurrence Trigger of Coverage Known Losses

COVERAGE A

Property Damage; – Physical injury to tangible property, including

all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it.

– Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

COVERAGE A policy definitions

Property Damage;– Issue: Does an unwanted odor that permeates a

building or residence constitute a physical injury to tangible property?

– Held: Allegations that an ”unwanted odor permeated the building and resulted in a loss of use of the building are reasonably susceptible to an interpretation that physical injury to property has been claimed.” 562 F.3d 399 (1st Cir. 2009) (Massachusetts law)

case examples

COVERAGE A

Occurrence; – An accident, including continuous or repeated

exposure to substantially the same general harmful conditions

• Faulty workmanship• Resulting damage• Breach of contract• Intentional acts, unexpected damage

COVERAGE A policy definition

Occurrence; – Issue: Is water intrusion that occurs as a result

of faulty workmanship an “occurrence”? – Example 1: “Faulty workmanship, even when

cast as a negligence claim, does not constitute [an occurrence]; nor do natural and foreseeable events like rainfall.” 609 F.3d 223 (3d Cir. 2010) (Pennsylvania law)

case examples

COVERAGE A

Occurrence; case examples– Issue: Is water intrusion that occurs as a result

of faulty workmanship an “occurrence”? – Example 2: Water intrusion was an

“occurrence” because it was unclear whether the policyholder knew or should have known with substantial probability that the defective windows would cause resulting water damage. 631 F.Supp.2d 1125 (S.D. Iowa 2009) (Iowa law)

COVERAGE A

Trigger of Coverage; – What must happen during the policy period in

order to trigger coverage?• Majority: “The key date is when injury

happens, not when someone happens upon it.” 267 S.W.3d 20 (Tex. 2008) (Texas law)

• Minority: “[T]he date on which the damage first becomes visible.” 2010 WL 2821981 (M.D. Fla. July 16, 2010) (Florida law)

COVERAGE A the issue

Known Losses;– Whether any qualifying insured knew that

property damage had commenced before policy period?

• What degree of knowledge must be shown?• Will courts look at each item of loss?• Who bears the burden of proof?

COVERAGE A the issue

Known Losses; – Issue: Must the qualifying insured know of its

potential legal liability?– Held: “For the known loss doctrine to apply …,

the insured must know … an occurrence … has caused damage to the property of a third party;” and that “it is substantially probable that the insured will be liable for the damage.” 2010 WL 1050252 (Wis. Ct. App. Mar. 24, 2010) (Wisconsin law)

COVERAGE A case example

During Operations

Exclusion j(5)

Exclusion j(6)

After Completion

Your Work

WHEN DID PROPERTY SUSTAIN DAMAGE ?

Your Product

Impaired Property

Contractual Liability

EXCLUSIONS

Business Risks;– Issue: Did property sustain damage during

operations or after completion?– Example 1: “[Exclusion j(6)] turns on when the

insured actually inflicted the damage on the property and, here, [the contractor] caused the damage to the woodwork while conducting its storage and installation operations.” 679 F.Supp.2d 229 (D.Mass. 2010) (New Hampshire law)

EXCLUSIONS case examples

Business Risks; case examples– Issue: Did property sustain damage during

operations or after completion?– Example 2: “Although [contractor] intended to

eventually complete construction work once the units were sold, an actor is not actively performing a task simply because he has not yet completed it but plans to do so at some point in the future.” 557 F.3d 207 (5th Cir. 2009) (Texas law)

EXCLUSIONS

Notice Cooperation No Voluntary Payments Contractor Warranties Self-Insured Retentions

CONDITIONS

Notice– Imposes duty upon named insured to promptly

notify insurance carrier of a potential loss, claim, or “suit”

– Example: Late notice, which deprives an insurance carrier of the opportunity to make pre-trial decisions, constitutes a material breach of the notice condition. 2010 WL 1050252 (Wis. Ct. App. Mar. 24, 2010) (Wisconsin law)

CONDITIONS

No Voluntary Payments– Prohibits an insured from making voluntary

payments to a third-party claimant without the insurance carrier’s consent

– Example: An insured’s voluntary repair of damage sustained by homeowner (in attempt to “do the right thing” and “mitigate damages”) constitutes material breach of condition. 671 F.Supp.2d 1314 (S.D. Fla. 2009) (Florida law)

CONDITIONS

Contractor Warranties– Requires an insured contractor to obtain risk-

shifting documents from each downstream subcontractor

– Example: Court found the endorsement to be an enforceable condition-precedent to coverage in a dispute between carriers. 99 Cal.Rptr.3d 225 (Cal. Ct. App. 2009) (California law)

CONDITIONS

Duty to Defend Duty to Indemnify Supplementary Payments

PERFORMANCE

Duty to Defend; – Potential for indemnification for any claim– Mixed actions require complete defense– Extrinsic evidence may create potential for

coverage or negate defense obligation– “Four corners” or “eight corners” rules limit

scope of relevant inquiry

PERFORMANCE legal standards

Duty to Defend;– Issue: Will courts consider extrinsic evidence

showing an exclusion does not apply?– Held: Although “[f]aulty workmanship by a

subcontractor might fall under the ... exception[,]” the petition against the insured did not mention any subcontractors or any negligent supervision by the builder. 279 S.W.3d 650 (Tex. 2009) (Texas law)

PERFORMANCE case example

Duty to Defend;– Issue: Do pre-lawsuit proceedings constitute a

“suit” that an insurer must defend?– Held: Mandatory, pre-litigation proceedings

satisfied the definition of “suit,” because they are “part and parcel of construction … defect litigation … and, as such, cannot be divorced from a subsequent complaint.” 113 Cal.Rptr.3d 585 (Cal. Ct. App. July 27, 2010) (California law)

PERFORMANCE case example

Duty to Indemnify;– Issue: Must an insurance carrier indemnify its

policyholder where no duty to defend?– Held: “[A]n insurer may have a duty to

indemnify its insured even if the duty to defend never arises.” 300 S.W.3d 740 (Tex. 2009) (Texas law)

PERFORMANCE case example

Supplementary Payments– Affords insurance benefits that are outside of

policy limits– Example: “We will pay, with respect to any …

‘suit’ … we defend … The cost of bonds to release attachments, but only for bond amounts within the applicable limit of insurance … [and] … All costs taxed against the insured in the ‘suit’.”

PERFORMANCE

Supplementary Payments– SPP applicable “regardless of whether the

claims are or are not ultimately covered.” 2010 WL 2821981 (M.D. Fla. July 16, 2010) (Florida Law)

– SPP does not enlarge the carrier’s duty to defend or obligate it to pay “costs taxed against the insured” on claims not potentially covered. 95 Cal.Rptr.3d 845 (Cal. Ct. App. 2009) (California law)

PERFORMANCE ; case law

Looking Forward- Additional Insured Coverage- Meaning of “Occurrence”- Known Loss Provisions- SIR’s and Contractor Warranties- Duty to Defend Issues- Chinese Drywall Issues

CONCLUSION

INSURANCE COVERAGE COUNSEL