In construction liability insurance, there is a great deal of inconsistency in determining whether faulty workmanship is an occurrence. The answer is all over the map, according to Finley Harckham, a veteran insurance attorney at the New York law firm Anderson Kill & Olick.
Harckham offered his perspective on construction liability insurance during his firm’s policyholder advisor conference, held in New York on Oct. 13. The goal of the event was to help risk managers and corporate general counsels maximize their companies’ insurance recovery.
“There is a lot of uncertainty in the coverage and a lot of uncertainty in the law. There are all kinds of problems throughout the country,” Harckham told conference attendees. The topic drew a lot of interest. This breakout session drew dozens of corporate managers and lawyers.
Uncertainty in Coverage
Harckham talked about his client, a construction contracting company, to illustrate his point.
A contractor was hired to construct a building. And a sub-contractor was hired to put up the facade, brick work and some other work associated with the facade. The facade was completed and then collapsed. The developer demanded that the contractor repair the building and the contractor obliged and repaired the damage. Then the contractor sought coverage under his liability insurance. The owners did not submit this under their property program.
So the contractor was left to seek coverage under his own liability insurance. But the insurer denied the claim for a range of reasons: asserting that there was no occurrence; there was really nothing accidental about what happened because the work was defective workmanship; there is the “your work” exclusion, which doesn’t cover defective workmanship; and then the collapse exclusion, sometimes it’s in these policies, sometimes it’s not but it’s always raised in a context like this.
“So the big question is, is the contractor entitled to coverage under this fact pattern?” the attorney asked.
“Who knows, unfortunately, may be the answer. It’s unpredictable.”
Law Varies From State to State
Harckham said the law on these issues varies from state to state. It’s all over the map, he said. On whether faulty workmanship is itself an occurrence, some states say yes, some states say no, some states are undecided, and some states say faulty workmanship is not an occurrence but the resulting damage is. “You also see differences in states in other issues as well.”
Very often defective construction is something that’s created over time, according to the attorney. It’s not easy to point and say, “Oh there is the occurrence.” And that opens a door to a lot of dispute.
“Is bad construction the occurrence? Or is it when a brick falls off the wall and hits a passerby on his head? Or is it something else? Sometimes it’s an occurrence, sometimes it’s not. Even in a state like New York, the courts cannot speak in a single tongue,” the attorney said.
An important point, Harckham said, is that the law is literally all over map. “A bell has to go off in your head if you have a claim. You’ve got to think, where do I want to go on the map. Sometimes you have no choice. Sometimes you are here in New York, the policy is issued in New York, the project is in New York, everything is in New York, then you are just stuck in New York.”
But many times, that’s not the case, Harckham explained. Oftentimes there are parties from different states and insurance policies are issued in different states. There is potentially an opportunity to forum-shop.
He said forum-shopping has become a dirty term to most companies because most companies see it happen to them. “Plaintiffs’ lawyers decide, well, I’ve got a great claim against you and I am gonna’ bring it in Texas, some obscure little part of Texas, where they give plaintiffs everything under the sun.”
So there is a bad connotation to forum-shopping. But sometimes it is a perfectly legitimate exercise and sometimes it’s an important exercise to protect insureds’ rights, he said. “And guess what? The insurance companies are going to do it to you.”
Harckham said in his client’s case, “our client was up in Massachusetts with New York connections. We were sued in New York and then we turned around and countersued in Massachusetts. That issue has not yet been resolved but it could be important for the outcome.”
Proactive Risk Managers
“So if you find yourself in one of these situations, first of all, think about what’s being brought and why, and you have to make strategies and be aware that the insurer is strategizing about the same thing,” Harckham told risk managers and corporate general counsels.
“In what’s called first-filed rule, whoever sues first, they get to pick (in which jurisdiction to proceed). Our response to that is, we are the natural plaintiff, we are the aggrieved party. Sometimes that works, sometimes it doesn’t. So you have to be very proactive.”
The law keeps changing, he added. Now several state have legislation on whether there is an occurrence in claims involving construction defects.