AIA Warns Established Commercial Contract Language is at Risk

August 15, 2001

According to the American Insurance Association (AIA), a policyholder’s attempt to transform a commercial property insurance policy’s condition of coverage language into a grant of coverage for defective workmanship could have far-reaching ramifications for construction defect litigation and pending Y2K remediation lawsuits. If accepted by the courts, such an interpretation would allow large commercial policyholders to avoid the consequences of sloppy workmanship and shoddy design by passing on such risks to their insurer — even if such risks are specifically excluded from coverage.

In an amicus brief filed today, the American Insurance Association (AIA) urged the U.S. 11th Circuit Court of Appeals to uphold the decision of the U.S. District Court for the Southern District of Florida in Swire Pacific Holdings Inc. vs. Zurich Insurance Company.

Eric M. Goldberg, AIA assistant general counsel, stated that AIA’s brief challenges Swire’s argument that the longstanding contract language known as the “sue and labor clause” should be reinterpreted to cover repairs for defective workmanship, which is a non-covered loss.

The sue and labor clause, originating in maritime insurance contracts dating back to the 1600s, is a condition of coverage intended to reduce the insurer’s exposure. The clause requires policyholders to take all reasonable steps to prevent or mitigate losses that the insurer would be liable for if they occurred. The obscure clause has generated attention recently because of allegations in a number of Y2K lawsuits that it can be used to recover expenses for businesses that upgraded their computer systems to avoid potential foreseeable, non-covered losses.

Goldberg stated that the policyholder in the Florida case is attempting to rely on the sue and labor clause to make the insurer liable for repairs of defective workmanship, non-accidental losses that are otherwise clearly excluded from the policy’s coverage. He added that a decision in favor of the policyholder would be bad public policy in that it would encourage sloppy workmanship on the part of contractors who know they will be paid to correct their initial mistakes.

Was this article valuable?

Here are more articles you may enjoy.