National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In Stuart v. Pittman, A134858 (Or. Ct. App. May 5, 2010), the insured convinced a jury that it deserved coverage for extensive snow, ice and water damage to a home under construction.  The insured’s policy clearly excluded the loss, but the insured successfully argued that coverage should be provided under an oral binder that preceded the policy.  The insured’s reasoning was that when he had asked for “course of construction” coverage “although he did not know specifically what that was,” the insurer’s agent had told him that the policy would cover “anything that goes through the cracks … anything for which I might be deemed liable … and anything that the contractor’s coverage did not specify or provide benefit for.”  Because the insurer failed to provide a copy of the policy (with its relevant exclusions) until after the damage had occurred, the insured argue that coverage should be provided consistent with the agent’s representations.

The Court of Appeals reversed, holding that the evidence was “simply to vague and obscure to satisfy the requirement of ORS 742.043(1)” that, in the context of oral binders, any exception to standard coverage must be “clear and express.”  Because the insured’s own expert testified that standard “course of construction” policies would not have covered the loss, the burden was on the insured to prove that the standard terms had clearly and expressly been broadened for purposes of the oral binder.  Viewing the evidence (which consisted almost exclusively of the insured’s own testimony about what had been represented to him) in the light most favorable to the insured, the Court of Appeals nevertheless found “that there is no evidence that the parties agreed to or that [the agent] bound terms that clearly and expressly waived or superseded the usual terms or exclusions of course of construction coverage.”

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The duty to defend, in the context of a contribution lawsuit between insurers, and the right to pursue appeal after an unfavorable summary adjudication ruling, were the subjects of a decision from California’s Court of Appeal, Second Appellate District (Los Angeles).

In Monticello Insurance Company v. Essex Insurance Company (2008) __ Cal.App.4^th __ (2008 WL 1851316), the court of appeal affirmed the trial court’s ruling that Monticello failed to prove on motion for summary adjudication/judgment that Essex had a duty to contribute to the defense of a general contractor (“GC”) in a construction defect case.  Monticello was the direct insurer of the GC and Essex insured the GC as an additional insured under a policy issued to a drywall subcontractor. While the legal principles of equitable contribution may not be new, the case is an example of what evidence was found to be inadequate to substantiate the right to contribution. Both the trial and appellate courts (even though reviewing by different standards) found Monticello failed to show there was a potential that the drywaller’s work caused damage to other property.

(What the court does not address, and perhaps Monticello did not feature, was that Essex must have concluded there was a potential for coverage as it was defending its direct insured, the drywaller.)

 

The case suggests the insurer seeking contribution should consider: (1) continuing to provide additional information to the other insurer, which information may impact a decision on the duty to defend, and (2) filing an earlier declaratory relief action (while the defense is ongoing).

The court also addressed whether the parties had standing to appeal. The appeal followed a ruling on summary judgment/adjudication. There were still issues that could have been litigated further, but it did not make much sense to litigate in light of the court’s ruling. Therefore, the parties stipulated judgment would be entered against Monticello for purposes of concluding the case so Monticello could immediately appeal. The court found this appropriate under the circumstances.

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Clarifying several rulings on coverage for construction defects, South Carolina’s Supreme Court ruled this week that a trial court did not err in determining that a CGL policy covered damages awarded to a homeowner in an arbitration against an insured contactor for water intrusion related to negligent application of stucco by a subcontractor. The court first clarified prior decisions and found that an “occurrence” is present where defective construction results in property damage. The court acknowledged that there was some confusion in the trial courts as to the difference between an “occurrence” of alleged negligent construction from negligent construction resulting in an “occurrence.” The court concluded that although “the stucco subcontractor’s negligent application is not on its own sufficient to constitute an “occurrence,” we find that . . . the continuous water intrusion into the home resulting from the subcontractor’s negligence qualifies as an “accident” involving “continuous or repeated exposure to substantially the same harmful conditions.” The court additionally rejected the insurer’s argument that the water intrusion damages were excluded under the policy as “expected or intended” damages as the insured contractor certainly did not intend for its subcontractor to perform negligently. Finally, the court allowed for recovery under the policy for that portion of the arbitration award concerning removal and replacement of the stucco stating this was necessary in order to remedy the extensive water intrusion damage behind the stucco and was therefore associated with remedying covered property damage.

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The Illinois Supreme Court has ruled that targeted tenders do not trump the rule of horizontal exhaustion in construction defect cases.  As a result, additional named insureds must now  exhaust their own primary insurance before they can reach the excess layer of additional insured coverage. The court declared that “extending the targeted tender rule to require an excess insurer to pay before a primary policy would eviscerate the distinction between primary and excess insurance.” The court ruled, therefore, that despite Kajima’s targeted tender to St. Paul after the sub’s primary exhausted, Kajima was required to exhaust its own primary insurance before St. Paul paid.

In Kajima Construction Services, Inc. v. St. Paul Fire & Marine Ins. Co., No. 103588 (Ill. November 29, 2007), a general contractor and its own insurer (Tokio Marine) sued St. Paul to recover $1 million that Tokio had contributed to a $3 million personal injury settlement.  St. Paul, which had issued primary and umbrella coverage to a subcontractor that named Kajima as an additional insured, paid its $2 million primary limit but stated that its umbrella policy was excess of Kajima's own primary insurance and need therefore not contribute.

For the last several years, Illinois has followed the unique path of allowing insureds to designate the particular line of coverage under which they wish to be covered where multiple policies cover a construction claim.  In most such cases, therefore, a general contractor's first line of coverage is the CGL policy issued to a subcontractor on which it is listed as an additional insured.   The logical extension of this "targeted tender" theory would make the sub's umbrella policy the second line of defense.   However, that analysis conflicts with the principle of "horizontal exhaustion," wherein all available primary insurance must be exhausted before an umbrella pollicy must pay.  As a result, most courts have ruled that the general contractor's own CGL policy must pay after the sub's primary insurance.

In adopting the majority rule, the Illinois Supreme Court seems to have implicitly acknowledged some of the practical and doctrinal problems that result from a court making up a legal doctrine that is rooted more in a court's vision of public policy than the language of the policies themselves.

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