Much has been written about and litigated regarding the topic ofan “occurrence” as it is applied within the four walls of acommercial insurance policy.

There was the famous World Trade Center case (SR International Business Insurance Co. Ltd v.World Trade Center Properties LLC, et al) in which theevents of 9/11 were mostly defined as a single occurrence.

In the casualty arena, specifically construction, we have seen“occurrence” be adjudicated in various ways depending on the degreeof negligence of the policyholder, resulting damage versus damageto work itself, and the venue for the claim (for example,American Home Assurance Co. v. TrumbullCorp., Westfield Insurance Co. v. Custom Agri SystemsInc., Travelers Indemnity Co. of America v. Moore &Associates. Inc., etc).

Partially as a result, we have seen various states develop theirown distinct opinions and statutes regarding what qualifies as an“occurrence” within the CG0001 policy form (see South Carolina,Hawaii, among others). However, there is a dearth of literature onthe topic of an occurrence when it comes to the narrow focus ofconstruction defects within the scope of a Controlled InsuranceProgram.

For decades, insurance and claims professionals have seeninsurers treat individual construction-defect lawsuits each assingle occurrences within controlled insurance programs; even suitsalleging multiple and various defects in construction involvingmultiple trades. Claims adjusters have typically askedpolicyholders for one deductible payment or self-insured retentionsatisfaction during the loss adjustment process, and proceeded todefend and indemnify the named insureds and other enrolledcontractors under the program.

Emerging trend

However, an emerging trend among a small consortium of insurersis the treatment of each alleged defect within a singleconstruction-defect suit as a separate occurrence. This treatmenthas the narrow potential to benefit policyholders in cases wherethe aggregate limits of a controlled insurance program are higherthan its occurrence limits, but it also has the more debilitatingpotential effect of the application of the policy deductible orself-insured retention (typically written on a “peroccurrence” basis) multiple times for the same construction-defectsuit. Obviously the more substantial the deductible or self-insuredretention amount on the policy, the more damaging theeffect.

As every construction-insurance professional is aware, withinthe unmodified CG0001 “occurrence” is defined as an accident,including continuous or repeated exposure to substantially the samegeneral harmful conditions. This definition has been usedsuccessfully by several attorneys and insurance brokers — includingme — to argue the single application of a policy deductible to asingle and consistent defect that exists in multiplelocations/units within a single building, or within severaldifferent buildings in the case of detached residentialconstruction (or other similar cases).

A simple example would be several hundred windows that wereflashed improperly in the same manner across multiple units, allresulting in similar water intrusion. Yet this same application ofthe definition of “occurrence” could result in the undesired effectof several discrete construction defects within a single suit torequire the satisfaction of several multiples of the policydeductible or self-insured retention. Clearly, a new solution (orsolutions) must be crafted to address this recent development,requiring insurers to clarify their coverage intent in deductibleor self-insured retention application, or policyholders mustbe educated on the topic and their expectations managed.

Myriad solutions possible

Since this development is still within its infancy, so are anyproposed solutions to the development that are favorable topolicyholders. It's the author's experience that most insurerswithin the controlled insurance program arena have not been askedto address this issue in the past, and several balk initially at amenu of proposed solutions to the issue. However, given the currentstate of the market and the broad appetite of constructionliability risk underwriters, a viable solution is typically foundand agreed upon.

As mentioned, myriad solutions could be enacted to rectify thiscoverage incongruity. It is up to each professional insurancebroker to craft a solution befitting his or her client. However,two suggested workable solutions to this issue are as follows:

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   1. Deductible/self-insured retention aggregatestops. This is probably the most simple solution. Thiscaps the policyholder's out-of-pocket expense for all claimsattributable to the policy. The aggregate stop amount can bestructured to work within the client's balance sheet.
   2. “Per claim” or “Per occurrence” deductiblewording: This is a slightly more exotic solution thatallows the policyholder to elect which basis on which thedeductible applies, on a claim-by-claim basis.

Different carriers have different levels of tolerance inallowing for aggregate stops, but this option is certainlyavailable in the marketplace. The latter solution may be a bit toopeculiar for some carriers' appetites, but the example serves tohighlight how creative a broker can be in crafting a workablesolution for their client to address this emerging coverageconcern.

Jett Abramson, CPCU, is executive vice president atCharlotte, North Carolina-based AmWINSGroup Inc. Email him at [email protected].