April 2013 Dec Page
Question and Answer
The following question and answer is reprinted with permission from Malecki on Insurance, a monthly newsletter written by Don Malecki, a contributing editor for the FC&S Bulletins.
Question: A Texas subscriber writes: I just received the February issue of your newsletter on the new blanket additional insured endorsement, CG 20 38. I want to confirm that no coverage applies under this new endorsement for products-completed operations coverage. Assuming that coverage is limited to ongoing operations, is an updated companion form going to be offered so as to make completed operations coverage available?
Also, I know that anti-indemnity statutes apply to construction contracts. But, referring to the new endorsement's reference to “construction agreement” in the title of the endorsement, what precisely does “construction agreement” mean? Does the construction have to be with reference to a building or structure? Or, could installation of equipment in a building, or painting an existing building also be considered construction?
Answer: You are correct that the blanket additional insured endorsement, CG 20 38, does not include completed operations coverage. Actually, this new endorsement parallels the other standard ISO blanket additional insured endorsement, CG 20 33, which also limits coverage to ongoing operations. The primary difference between the two blanket additional insured endorsements is that CG 20 38 is intended to include as additional insureds persons or organizations that are not parties to the contract, but need the coverage. This would include a project owner when the contract is between the general contractor and a subcontractor.
We can understand your concern with the new endorsement because it only solves one half of the problem. It is fine that CG 20 38 will cover persons or organizations as additional insureds that are not parties to a contract; but without also including completed operations coverage (which appears to be a common request in contracts), the named insured will still be confronted with an allegation of breach of contract for failing to procure completed operations coverage as mandated in the contract. What you may have to do is seek out insurers that are willing to issue blanket additional insured endorsements with completed operations coverage.
As for the meaning of “construction agreement”, we really do not know, but we do not believe it is meant to be restrictive. Reference to the term “construction” has been questioned in the past and we suppose that if an insurer were looking for a way to not provide coverage to an additional insured, the insurer could find some way to maintain that “construction” is limited to newly built buildings or structures.
Note that, in fact, the meaning of “construction” has been challenged in court.
The case of TRB Investments, Inc. v. Fireman's Fund Insurance Company, 50 Cal. Rptr.3d 597 (2006) is one that involved a property policy that limited coverage to specified perils while the insured premises was vacant. The exclusion in question contained an exception stating that buildings “under construction” were not considered vacant.
When a water heater or waterline ruptured and caused substantial damage to the property, the insureds argued that the structure was under construction and therefore covered by the policy. The insurer, on the other hand, disagreed with this interpretation. The court of appeals affirmed in favor of the insurer, determining that the word “construction” envisioned the building of a new structure, which was not the case in this instance.
The Supreme Court of California, however, reversed that ruling. In doing so, the court stated that “construction”, as used in the policy, could not reasonably by understood as being limited only to the erection of a new structure. Rather, the court said, the term contemplated all building endeavors, whether classified as new construction, renovations, or additions.
The insurer in Brouillette v. Phoenix Assurance Company, 340 So.2d 667 (1976) also made an attempt at arguing that “construction” did not include repairs, maintenance, reconstruction, or renovation; the insurer cited a number of cases in support of its argument. The court, however, declined to follow the cases cited by the insurer.
Considering that the word “construction” is not defined in the endorsement and has been subject to more than one interpretation would lead some to conclude that it is ambiguous and should be construed against the insurer. If the insurer, as the drafter of the policy wording, wants to litigate the meaning of “construction”, there is nothing to prevent it; however, the odds appear to be against those that do so.
One final point is that reference to “construction” appears in the title of CA 20 38 and not within the actual wording of the endorsement. Endorsement titles alone should not be seen as controlling the content of an endorsement.
Real Estate Property Managed Endorsement
The following article is another one written by Don Malecki for FC&S subscribers.
Whenever property is managed by real estate agents or property managers, one of the endorsements prescribed for use with the standard ISO commercial general liability policy is the Real Estate Property Managed endorsement, CG 22 70. When this endorsement is issued in conjunction with the CGL policy (or coverage form) of the real estate agent or property manager, it is intended to serve two purposes.
The first purpose is to preclude coverage for any liability having to do with property damage to the property being managed or operated, or for which the real estate agent or property manager acts as an agent for the collection of rents. Note that, since the real estate agent or property manager (named insured) has no coverage under its CGL policy for damage or destruction of the real estate it manages or operates, there are only three options for it to secure protection: (1) purchase insurance on the property; (2) be named as an insured on the owner's property insurance; or (3) obtain a waiver of subrogation from the owner.
The second purpose for this endorsement is to clarify that, to the extent liability arises out of the real estate agent's or property manager's management of the property for which it is acting as a real estate manager, the policy issued to the real estate agent or property manager (to which this endorsement is attached) is considered to be excess insurance over any other valid and collectible insurance available to it. The reason this endorsement is considered to be excess is because the standard CGL policy (or coverage form), and most independently filed ones, automatically include as an insured (on a primary basis), any person or organization while acting as the property owner's real estate manager. So, for example, the real estate manager should have primary coverage, as an additional insured on the owner's CGL policy, for liability because of bodily injury, property damage, and for offenses dealing with personal and advertising injury sustained by third parties. If excess coverage is necessary, it would come from the real estate agent's or property manager's own CGL policy (or coverage form) to which endorsement CG 22 70 is attached.
An important point to consider here is this: Suppose the real estate agent or property manager (1) does not purchase insurance on the property managed, (2) is not listed as an insured on the owner's property insurance, and (3) does not obtain a waiver of subrogation from the property owner. Assume further that the real estate agent or property manager negligently causes extensive damage to the managed property. Based on the Real Estate Property Managed endorsement, CG 22 70, there would be no coverage for that liability, according to the first part of the endorsement. But what about the second part of that endorsement that says that coverage applies on an excess basis for liability arising out of the property being managed? While that may not be the intent of this endorsement, it may seem reasonable to some people (and to the courts) to conclude that coverage does apply for that liability.
The following is an example of judicial thinking on the matter.
A dispute between two insurers that bore out the ambiguity of CG 22 70 is Allstate Insurance Company v. West American Insurance Company, 2010 WL 3001902. The underlying case (i.e., the case preceding this one between two insurers) involved a homeowners association and the developer-builder arguing over a variety of construction and maintenance problems. Allstate provided liability insurance to both the developer and property manager during the periods of 1997 to 2003. West American then provided coverage for the periods 2003 through 2005.
When the underlying case was settled, Allstate paid most of the settlement amount and then sought contribution from West American, which maintained it had no contractual liability to its named insureds (developer and property manager) because of the Real Estate Property Managed endorsement. The endorsement, with the exception of two words, is virtually identical to the standard ISO one. It read: “This insurance does not apply to property damage to property you operate or manage as to which you act as agent for the collection of rents or in any other supervisory capacity. With respect to your liability arising out of your management of property for which you are acting as real estate manager this insurance is excess over any other valid and collectible insurance available to you.”
West American, citing the first paragraph of the endorsement, argued that because the alleged property damage was caused by the property manager, there was no coverage. According to the court, the first paragraph of that endorsement could rationally be interpreted in that manner. However, the second paragraph indicated that liability arising from the property manager's management of the property applied excess to other applicable coverage. From the court's perspective, this created an ambiguity, because the two paragraphs of this endorsement could be read as inconsistent; that is, damage to property managed by the manager is not covered, but damage caused by the manager is covered. Either way, said the court, as a matter of law, the endorsement did not exclude coverage in this case.
The fact that the second part of the endorsement can be read in two reasonable ways, it is likely that insurers will have to amend this endorsement if they want to eliminate having to pay for what they think should not be covered. The question is whether the second part of this endorsement is even necessary, given that property managers are viewed as additional insureds on a primary basis on the liability policies issued to property owners. In light of the possibility of other insurance disputes, perhaps the second part of the endorsement could be moved to the other insurance provision of the policy (or coverage form).
The most recent revision affecting this endorsement is with the April 2013 revisions of the commercial general liability program. CG 22 70 is said to require a revision to reinforce the point that the insurance provided is excess over any other insurance available, whether the insurance is primary or excess; however, the potential ambiguity remains.
Considering that Damage to Property exclusion (j) in the standard CGL coverage form may not encompass all of the property management activities of real estate agents, it is necessary that CG 22 70 be attached to the coverage form. In fact, it is prescribed by the ISO Commercial Lines Manual with reference to the classification: Real Estate Property Managed, class code 47052.
Duty to Defend and Damage to Work Exclusion
Before the court were cross-motions for partial summary judgment on the issue of whether the insurer breached its duty to defend the insured. This case is Lukes v. Mid-Continent Casualty Company, 2013 WL 496203.
Rubio was hired by the Lukes to design and serve as general contractor for the construction of a home; in turn, Rubio hired subcontractors to install the siding and roofing. Some time after the house was completed and the Lukes had moved in, the siding began shrinking, warping, sagging, and pulling away from the house. Moisture entered the house and water leaked into the interior of the house, damaging the walls, ceilings, and wooden floor. The Lukes sued Rubio and he presented the claim to his insurer, Mid-Continent. The insurer declined defense and coverage, explaining that various provisions of the policy precluded coverage.
Subsequently, the Lukes entered a judgment against Rubio and Rubio assigned his first-party insurance rights to the Lukes, resulting in this action.
The Lukes claimed that Mid-Continent's refusal to defend Rubio was wrongful because conflicting policy terms rendered the policy ambiguous and factual issues precluded the denial. Three provisions of Rubio's policies are at issue: exclusions j(5) and j(6) and endorsement CG 22 94, exclusion—damage to work performed by subcontractors on your behalf.
The United States District Court took note of exclusions j(5) and j(6). The insurer argued that the exclusions were not applicable because the home was completed. The court said that exclusion j(5) excludes property damage to that particular part of real property on which the insured is performing operations and since Rubio was no longer performing operations on any part of the Lukes' house, exclusion j(5) does not apply. As for exclusion j(6), the court said that is was less clear whether the exclusion applies.
Exclusion j(6) does not apply to property damage included in the products-completed operations hazard. Mid-Continent emphasized that Rubio completed work and the Lukes moved in before the damage occurred. The insurer insisted that the property damage to the house is thus included within the products-completed operations hazard and is specifically excepted from the scope of exclusion j(6). The Lukes countered that this conclusion requires one to assume that the damage only occurred after Rubio's work was completed. The Lukes noted that the complaint leaves open the possibility that damage may have occurred while the work was still underway. For example, water may have started to enter the house before work was complete due to the fact that there was no flashing installed in a certain area where the wall meets the roof. The court ruled that the complaint does not unequivocally state that the damage to the Lukes' home only occurred after work was completed. Some of the damage may have occurred before the house was completed, so some part of the claim may not be included in the products-completed operations hazard.
The court said that exclusion j(6) must be read to exclude coverage only for damage to that particular part of the building on which faulty work was done. Some damage may have occurred to other parts of the building and some of this damage may have occurred before the house was completed. Such damage would not be excluded from coverage under exclusion j(6) and construing the complaint and exclusion in favor of finding a duty to defend, the court held that the complaint did not unequivocally demonstrate that none of the Lukes' claims fell within the insurance policies' coverage, thereby triggering Mid-Continent's duty to defend Rubio.
As for endorsement CG 22 94, the court said that the endorsement broadly excludes coverage for property damage to Rubio's work arising out of that work or any part of it, and the entire residence constitutes Rubio's work. CG 22 94 precludes coverage for any damage to the house that arose from Rubio's or his subcontractors' work and that occurred after the work was completed. In sum, any claim that faulty work by Rubio or his subcontractors caused property damage after the house was completed is barred from coverage and does not give rise to a duty to defend.
The court decided that many of the Lukes' claims are barred by the language of the policies, but, construed in the light most favorable to finding a duty to defend, the complaint does allege sufficient facts to trigger an obligation to defend. Some property damage to parts of the house may have occurred before the house was complete and such damage would not be excluded under exclusion j(6) or CG 22 94. Therefore, having the duty to defend even one claim, Mid-Continent had the duty to defend against all claims.
Mid-Continent's motion for partial summary judgment was denied and the Lukes' cross motion was granted. The Lukes were entitled as a matter of law to summary judgment as to Mid-Continent's duty to defend Rubio.
Editor's Note: The bottom line here after all the twists and turns over the exclusions and the endorsement is that the U.S. District Court ruled that “unless there exists an unequivocal demonstration that the claim against the insured does not fall within the policy coverage, the insurer has a duty to defend.”