Checklist for insurance claims professionals in handling construction related insurance claims.

1. Today’s Presentation: Construction Litigation: Current Trends Insurers Defense and Indemnity Obligations Presented by: Sponsored by: August 31, 2011

2. Housekeeping You are currently on mute on our end of the system. Chat Window – Use this to ask questions of the Panelists and they will answer during and after the presentation. Please direct technical questions to ‘Insurance Community Center’.

3. ABOUT THARPE & HOWELL: 35 year old, 60 + attorney law firm. Represents insureds, self-insureds, and insurers. California, Nevada, Arizona, Utah & Washington. Website: www.Tharpe-howell.com Disclaimers: This presentation focuses primarily on California law and is for informational purposes only. Please do not rely on the content for any particular case without consulting with an attorney. Please feel free to contact us to discuss any specific matter.

4. PANEL MEMBERS: Timothy Lake: Insurance Coverage Partner Michael Lee: Insurance Coverage Associate Johnna Hansen: Insurance Coverage Litigation Partner Robert Freedman: Insurance Coverage Litigation Partner

5. DISCUSSION TOPICS OVERVIEW: 1. Types of Liability Policies - Why Gaps Occur. 2. Insureds and Additional Insureds. 3. Defense Obligations. 4. Self Insured Retentions / Deductibles. 5. Indemnity Obligations. 6. Coverage Triggers. 7. Endorsements & Exclusions. 8. Claims Handling. 9. Insurer v. Insurer.

6. TYPES OF LIABILITY POLICIES AND WHY GAPS OCCUR 1. CGL, Professional E&O, D&O, EPLI, Auto Liability, Inland Marine, and Work Comp. 2. Wraps / OCIP’s. 3. Specialized Policies: Contractors Pollution, Environmental, Demolition liability, Lead Abatement, Mold Abatement, Asbestos Abatement, & Roofing Liability. 4. Site Specific and Project Specific Policies. 5. Excess and Umbrella policies. 6. Occurrence Based, Claims Made, and Modified Occurrence Policy Triggers.

7. INSURED’S / ADDITIONAL INSURED’S 1. Endorsements v. Certificates. Certificates are proof of coverage, but do not confer coverage. Always secure the actual endorsement when securing coverage and when analyzing a claim. 2. Endorsement Language: Completed Operations (20 10 11 85) or Ongoing Operations (20 10 11 93). Does the endorsement cover all matters “Arising out of YOUR Work,” or just those claims that arise during the project “Arising from your ongoing operations.” Beware of manuscript endorsements using alternative language. 3. Contractual Requirements and Blanket AI Endorsements: Most contracts require completed operations coverage pursuant to CG 20 10 11 85 or an equivalent. CG 20 10 11 93 is not an equivalent and can lead to a failure to procure claim. Potential that failure to obtain the right coverage from subcontractors may affect a developer’s policy and coverage. 4. Rights and Obligations: Assuming an actual endorsement is secured providing coverage, the insured’s rights and obligations are in full force and effect under the insurance agreement. This includes notification by the insurer of any changes to the underlying policy.

9. Includes groundless, false or fraudulent claims

10. Must defend entire lawsuit- Supplemental / Defense within limits

11. DEFENSE OBLIGATIONS2. Determining Defense Obligation: - “4-corners” or “extrinsic” evidence considerations - Doubts must be resolved in favor of insured - Extrinsic: (majority) Arizona, California, Illinois, Nevada, Utah, Washington - “4-corners”: Colorado, Florida, Oregon, Texas - No obligation to independently investigate claims - Facts known or reasonably could be obtained when defense demanded

13. SELF INSURED RETENTIONS VS. DEDUCTIBLE 1. CGL policies generally afford coverage for “suits,” which are generally defined as a “court proceeding initiated by the filing of a complaint”; “suits” include quasi-judicial administrative agency board proceedings. Ameron International Corp. v. Ins. Co. of the State of Pennsylvania, 50 Cal. 4th 1370 (2011) 2. Liability policies often contain a deductible or self insured retention (SIR) requiring the insured to bear a portion of a loss covered by a policy. A deductible generally only relates to the damages for which an insured is indemnified, not defense costs. A SIR, on the other hand, generally applies to defense costs and settlement of any claim.

14. SELF INSURED RETENTIONS VS. DEDUCTIBLE 3. A “per claim” SIR applies once to a single lawsuit regardless of the number of homes or homeowners involved where the term “claim” is undefined in the policy and ambiguous. Clarendon America Ins. Co. v. North American Capacity Ins. Co., 186 Cal. App. 4th 556 (2010). 4. A CGL policy may specifically require that the SIR be satisfied by the named insured; in such cases, an additional insured cannot satisfy the SIR. Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4th 1466 (2010). 5. An insurer that refuses to participate in the defense of an insured on the ground that the insured failed to satisfy the SIR may be unable to contest liability or subsequent judgment against the insured. See, e.g., Executive Risk Indemnity, Inc. v. Jones, 171 Cal. App. 4th 319 (2009).

15. INDEMNITY OBLIGATIONS & ACTUAL COVERAGE 1. Unlike the defense obligation, payment of policy benefits to indemnify an insured depends on a claim or lawsuit that is actually covered, not just potentially or possibly covered. 2. The most common indemnity exclusions are for damage to the insured’s own work or products for which there is no coverage.

16. INDEMNITY OBLIGATIONS & ACTUAL COVERAGE 3. The coverage under a CGL policy is for damage to the work of other contractors or to the property of the homeowner or property owner. 4. A CGL policy also provides coverage for an insured’s liability for breach of a written contract by which the insured agrees to indemnify another for his tort liability to a third party.

17. INDEMNITY OBLIGATIONS & ACTUAL COVERAGE 5. The “trigger” event for coverage is an “occurrence” of property damage that takes place during the policy term, not the negligent or defective work by the insured. General Ins. v. American Safety. 6. Where an insurer pays indemnity on behalf of an insured on a claim the insurer contends was not covered, the insurer can seek reimbursement from the insured, assuming this right was reserved in a Reservation of Rights letter to the insured when the insured’s defense was taken up. American Modern v. Fahmian; Blue Ridge v. Jacobson.

18. INDEMNITY OBLIGATIONS & ACTUAL COVERAGE 7. Under the recent case of Ameron v. Ins. of Pennsylvania, an administrative action by a governmental body against an insured that requires an insured to retain counsel and potentially pay money damages qualifies as a “suit” to trigger an indemnity obligation.

19. COVERAGE TRIGGERS 1. Under a CGL policy, coverage is usually triggered by an “occurrence” of property damage or bodily injury that occurs during the policy. 2. Due to the difficulty of determining when property damage occurs due to alleged defective construction, the case of Montrose v. Sup. Ct. held that a “continuous injury” trigger applies.

20. COVERAGE TRIGGERS 3. Under such a theory, coverage is triggered based on when the insured performed defective work that led to the property damage that is the subject of the claim or suit. 4. The law presumes that the property damage began when the defective work was performed and continues until it is repaired.

21. COVERAGE TRIGGERS 5. Under a “continuous injury” trigger of coverage, all policies that are in effect when the defective work was performed and the damage continues owe a duty to indemnify the insured. 6. The main limitation is that the insured’s work must have been performed and completed during the policy period. Otherwise the “completed operations” coverage does not apply to these completed operations type of claims where the damage is alleged to have occurred after the insured completed its work.

22. ENDORSEMENTS & EXCLUSIONS 1. In response to the Montrose v. Sup. Ct. “continuous injury” trigger of coverage rule, many insurers have developed policy language and/or endorsements to eliminate coverage for such damage claims. 2. The cases of USF Ins. v. Clarendon America Ins.; Pennsylvania General Ins. v. American Safety Indem., have set out examples of such endorsements that the Courts will uphold to eliminate coverage for a “continuous injury” trigger of coverage.

23. ENDORSEMENTS & EXCLUSIONS 3. An approved such provision is one that states that “all property damage arising from an occurrence shall be deemed to take place at the time of the first such damage even though the damage may be continuous, progressive or evolving.” 4. Under such a policy provision, there is no coverage for property damage that first manifests or becomes known before the inception of the policy.

24. ENDORSEMENTS & EXCLUSIONS 5. Other current policy provisions or endorsements exclude coverage for work that is completed prior to the policy period, or work that is performed prior to the policy period. 6. The goal of these provisions is to limit coverage for property damage to damage that actually occurs during the policy period.

25. CLAIMS HANDLINGInvestigation & Response: 1. Every policy of insurance imposes on an insurer a duty of good faith and fair dealing. 2. First Party Claims: Insurer has a duty to make a thorough and prompt investigation of the insured’s claim for benefits. Insurer must not unreasonably delay or withhold benefits. 3. Third Party Claims: Insurer has a duty to make a prompt investigation, provide a defense when there is a potential for coverage, attempt to effect a reasonable and timely settlement within policy limits.

26. CLAIMS HANDLINGStatutes: 1. California Code of Regulations section 2695.5(e)(1): Fifteen (15) days after notice of claim, insurer is required to acknowledge receipt to claimant and provide necessary forms, instructions, assistance and specify information claimant must provide for proof of claim. 2. California Code of Regulations section 2695.5(b)(1): Fifteen (15) days after receipt of any communication from claimant that reasonably suggests a response is expected, a complete response -based on facts known must be provided. 3. California Code of Regulations section 2695.7(b): No later than forty (40) days after receiving proof of claim, insurer is required to accept or deny the claim, in whole or in part.

27. CLAIMS HANDLINGStatutes: 4. California Code of Regulations section 2695.7(c)(1): If more time is required to accept or deny a claim, insurer must provide written notice of the need for additional time, specify additional information required, and state reasons for the inability to make a decision; written notice must be provided every thirty (30) days until a determination is made or notice of legal action. 5. Each claim under single policy should be handled separately (i.e. additional insured should assigned to own adjuster).

28. CONTRIBUTION BETWEEN INSURERS 1. A participating insurer may seek equitable contribution from a non-participating coinsurer, i.e., an insurer sharing the same level of liability on the same risk as to the same insurer, for both costs of defense and settlement if it has paid more than its fair share. Safeco Ins. Co. of America v. Superior Court, 140 Cal. App. 4th 874 (2006); Scottsdale Ins. Co. v. Century Surety Co., 182 Cal. App. 4th 1023, 1036 (2010). 2. Burden is on the participating insurer claiming coverage to show that a coverage obligation arose or existed under the non-participating coinsurer’s policy; a showing of potential for coverage under the non-participating insurer’s policy in order to obtain coverage for the costs of defense, reflecting California law that only a potential for coverage is required to establish an insurer’s duty to defend.

29. CONTRIBUTION BETWEEN INSURERS 3. Where a duty to defend by the non-participating coinsurer is shown, the non-participating coinsurer is presumptively liable for the costs of defense and settlement; the nonparticipating coinsurer waives the right to challenge the reasonableness of the defense costs and settlement. 4. The non-participating coinsurer has the burden to show the absence of actual coverage under its policy as a defense. 5. Generally, when multiple policies share the same level of risk or cover the same type of loss, but have different or inconsistent “other insurance” clauses, California law requires insurers to contribute on a pro rata basis. Travelers Casualty and Surety Company v. Century Surety Company, 118 Cal. App. 4th 1156 (2004).

30. CONTRIBUTION BETWEEN INSURERS 6. However, no universally accepted standard for allocation has been adopted by California courts. See Scottsdale Ins. Co. v . Century Surety Co., 182 Cal. App. 4th 1023, 1032 (2010), citing Centennial Ins. Co. v. United States Fire Ins. Co., 88 Cal. App. 4th 105, 112-113 (2001) (various methods of allocating costs include the following: (1) apportionment based on time on risk; (2) apportionment based on the relative policy limits of each policy; (3) apportionment based on both time on risk and relative policy limits; (4) apportionment based on the amount of premiums paid to each carrier; (5) apportionment among each carrier in equal shares).

31. CONTRIBUTION BETWEEN INSURERS 7. Additionally, a participating insurer may pursue, in subrogation, a contractual indemnity claim of its insured against the tortfeasor for its breach of contract with the insured. Interstate Fire and Cas. Ins. Co. v. Cleveland Wrecking Co., 182 Cal. App. 4th 23 (2010)

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