Embed Size (px)
Citation preview
Construction Defect Claims: Horizontal vs. Vertical
Exhaustion of Insurance Coverage Navigating Exhaustion of Primary Policies, Triggers for Excess
Carriers and Additional Insured Coverage
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
TUESDAY, SEPTEMBER 24, 2013
Presenting a live 90-minute webinar with interactive Q&A
Richard B. Friedman, Partner, McKenna Long & Aldridge, New York
David G. Jordan, Associate, Saxe Doernberger & Vita, Hamden, Conn.
Rebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, Texas
Sound Quality
If you are listening via your computer speakers, please note that the quality of
your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory and you are listening via your computer
speakers, you may listen via the phone: dial 1-866-927-5568 and enter your PIN
when prompted. Otherwise, please send us a chat or e-mail
[email protected] immediately so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
• Click the SEND button beside the box
If you have purchased Strafford CLE processing services, you must confirm your
participation by completing and submitting an Official Record of Attendance (CLE
Form).
You may obtain your CLE form by going to the program page and selecting the
appropriate form in the PROGRAM MATERIALS box at the top right corner.
If you'd like to purchase CLE credit processing, it is available for a fee. For
additional information about CLE credit processing, go to our website or call us at
1-800-926-7926 ext. 35.
FOR LIVE EVENT ONLY
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ sign next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
Richard B. Friedman
McKenna Long & Aldridge LLP, New York, New York
David G. Jordan
Saxe Doernberger & Vita, P.C., Hamden, Connecticut
Rebecca DiMasi
Van Osselaer & Buchanan, LLP, Austin, Texas
Strafford Webinar
September 24. 2013
Coverage Overlap
General Contractor
(“GC”)
GC’s Corporate Primary
Insurance
GC’s Corporate Excess
Insurance
Sub-Contractor
(“Sub”)
Sub’s Primary Insurance
(GC’s AI Carrier)
Sub’s Excess Insurance
(GC’s AI Excess Insurance)
Promise to Indemnify
Promise to
Procure Insurance
www.sdvlaw.com 6
Relevant Issues
Multiple parties
Multiple layers of coverage in AI context
Loss exceeds limits of a single primary
policy
7
Which Insurer Responds First?
Typically primary insurer of downstream party (Additional Insured Carrier) has initial
obligation to defend and indemnify the claim.
Priority is established by “Other Insurance” language commonly found in most CGL Policies
e.g. This insurance is excess over: Any other primary insurance available to you covering you for damages … for which you have been added as an additional insured by attachment of an endorsement.
When such language is not present, primary carriers of Upstream and Downstream Parties
may dispute priority. See e.g. Briarwoods Farm, Inc. v. Cent. Mut. Ins. Co., 22 Misc. 3d
427, 428, 866 N.Y.S.2d 847, 848 (Sup. Ct. 2008).
Which Insurer Responds Second?
The AI Excess carrier OR the corporate primary policy?
Disputes arise when, as is often the case, the subcontractor’s
primary CGL policy is insufficient to cover the loss to the injured party.
8
Priority of Coverage
2 schools of thought:
1.Priority determined by provisions of Insurance Policies:
Review language of competing policies’ “other insurance” clauses;
2.Priority determined by the provisions of the Trade Contract:
Determine intent of parties regarding risk transfer by reviewing the indemnity and insuring provisions of the underlying contract.
9
Priority of Coverage
Horizontal Exhaustion
All available primary policies must
exhaust first
Focus on policy language, not underlying
contract
Excess policy is a payer of last resort 10
Priority of Coverage Vertical Exhaustion
AI policies (primary & excess) exhaust before upstream party’s primary policy
Focus on underlying contract’s indemnity obligation, not policy language
Reflects intent of parties
Avoids circuity of litigation 11
Priority of Coverage
12
Horizontal Cases
Illinois
California
New York
Vertical Cases
4th Circuit (Virginia)
5th Circuit (Texas)
8th Circuit (Arkansas)
Missouri
Kentucky
12
1. Traditional Approach Allocation was determined without regard to any indemnification provisions in trade
contracts. Courts compared the language of each policy to ascertain the priority of coverage.
2. Traditional Conclusion Courts almost always applied Horizontal Exhaustion resulting in the exhaustion of the
subcontractors’, general contractors’, and owners’ primary CGL policies prior to the triggering of any excess or umbrella coverage.
3. Leading Case: State Farm Fire & Casualty Company v. LiMauro, 65 N.Y.2d 369 (1985) New York Court of Appeals held that insurers have the right to rely upon the terms
of their contracts with their insureds and that the terms of such contracts dictate the priority of coverage.
In most subsequent New York Appellate Division cases, when determinations of coverage have involved primary and excess insurance, the result has been Horizontal Exhaustion of all primary policies prior to the triggering of the subcontractor’s excess policies. See the following First Department cases:
Bovis Lend Lease LMB, Inc. v. Great American Ins. Co., 53 A.D.3d 140 (N.Y. App. Div. 1st Dept. 2008)
Tishman Construction Corp. v. Great American Ins. Co., 53 A.D.3d 416 (N.Y. App. 1st Dept. 2008)
Horizontal Exhaustion
Long Established New York View
13
Horizontal Exhaustion - Bovis
Elevator Sub.
(AJ MCNULTY)
Great American
Decedent
Const. Mgr.
(BOVIS)
Illinois $1M Primary Policy
Gen. Ctr.
(STONEWALL)
Liberty $1M Primary
Policy
Westchester $10M
Umbrella
Concrete Sub.
(J&A)
QBE $1M Primary
United $5M Umbrella
Steel Ctr.
(SMI-OWEN)
Owner
(DASNY)
Horizontal Exhaustion: The Bovis Case
14
Horizontal Exhaustion: The Bovis Case Trial Court Apportionment of AI Coverage for Bovis
QBE
$1,000,000
J&A Primary
ILLINOIS
$1,000,000
BOVIS Primary
WESTCHESTER
$10,000,000
Stonewall Umbrella
UNITED
$5,000,000
J&A Umbrella
LIBERTY
$1,000,000
Stonewall Primary
15
Appellate Court Apportionment of AI Coverage for Bovis
QBE
$1,000,000
J&A Primary
LIBERTY
$1,000,000
Stonewall Primary
ILLINOIS
$1,000,000
BOVIS Primary
UNITED
$5,000,000
J&A Umbrella
WESTCHESTER
$10,000,000
Stonewall Umbrella Sharing pro rata
Horizontal Exhaustion: The Bovis Case
16
Vertical Exhaustion
Indemnity/Circuity of Litigation
Wal-Mart Stores, Inc. v RLI Ins. Co., 292
F.3d 583 (8th Cir 2002)
American Indemnity Lloyds v Travelers
Property Casualty Ins. Co., 335 F.3d 429 (5th Cir 2003)
17
Vertical Exhaustion: The Wal-Mart Case
National Union
$10M Primary
Wal-Mart Retailer
RLI
$10M Excess
Cheyenne - Manuf.
Contract – required $2M Primary
Obtained - $1M Primary/$10M Excess
Settlement - $11M: St. Paul $1M/RLI $10M
DJ – Wal-Mart and National Union sought to avoid contributing to $10M paid by RLI
Result – St. Paul $1M/RLI $10M
2
1
AI Status
Indemnity
St. Paul
$1M Primary
3
18
Horizontal Approach
GC
Sued
GC
tenders to AI
primary and AI
Excess
carrier
AI primary pays but AI
Excess asserts GC’s
corporate primary must
pay next
GC’s primary
pays
AI excess
carrier pays (GC
corporate limits
replenished)
Subcontractor tenders indemnity lawsuit to its
excess carrier (b/c primary carrier
exhausted)
GC’s
primary subrogates
to GC’s interests
and sues
Subcontractor for
indemnity
Circuity of Litigation Vertical exhaustion avoids “Circuity of Litigation”:
unnecessary legal steps which result in AI excess carrier
paying for loss
19
Upstream insurers argue against “circuity of litigation”, i.e., that it is
a waste of judicial resources to require them to pay for their portion
of the allocated loss and then have to recoup, via subrogation, that
payment from the subcontractor’s excess carrier.
Vertical Approach
GC Sued GC tenders
to AI
primary and
AI Excess
AI primary
pays first,
then AI
Excess
carrier
pays
Circuity of Litigation
20
Indemnity Insurance Company of North America v. St. Paul Mercury
Insurance Company, 74 A.D. 3d 21 (N.Y. App Div. 1st Dept. 2010)
In 2010, the Appellate Division First Department in Manhattan held that a
priority determination in a construction case is irrelevant if:
1. a court has found that the upstream additional insured’s, i.e., the
owner’s or general contractor’s, liability is strictly vicarious to that of
the named insured subcontractor, and
2. the subcontractor's insurers agreed to defend and indemnify the
upstream party without reservation or qualification.
Vertical Exhaustion:
St. Paul Mercury
21
St. Paul Mercury
ROMANO (Sub)
YONKERS (GC)
Excess $10 M
Indemnity Ins.
Primary $1 M Royal
Excess $5 M
St. Paul
Primary $1 M
St. Paul
Contractual Indemnity
Additional Insured
Horizontal Exhaustion
CIRCUITY – Indemnity Ins. can force St. Paul Primary to pay first under principle of
horizontal exhaustion but Yonkers could then pass that liability back to Romano via
contractual indemnity, which would flow back to Indemnity Ins. Court shortcuts that result by simply holding that horizontal exhaustion does not apply. 22
1. General contractors and owners with contractual indemnity rights against
subcontractors should seek to establish as soon as possible their right to
contractual indemnity against subcontractors.
This can be done via a third party claim in the underlying action brought by the
injured party.
If a right to contractual indemnity is established prior to a determination regarding
the priority of coverage, the upstream insurers should argue that, under St. Paul
Mercury, the upstream parties’ liability passes to the subcontractors and its insurer,
and thus the priority of coverage is irrelevant.
2. Upstream insurers should also be aware that St. Paul Mercury is not binding in
New York other than in the First Appellate Department. And, even in the First
Department, Bovis and Tishman are still good law.
3. Although Horizontal Exhaustion remains generally the law In New York, St. Paul
Mercury provides insurers with the ammunition to argue for greater use of
Vertical Exhaustion in certain circumstances.
Action Points For General Contractors And Owners
and Their Insurers in light of St. Paul Mercury
23
Changing Landscape
Anti-Indemnity Statutes Impact upon Priority of
Coverage
Statutory limitations upon scope of
indemnity obligation, diminish circuity of
litigation argument
Statutory Limitations upon Additional
Insured Coverage restricts vertical
exhaustion
24
Anti-Indemnity Statutes
Legislative limitation on contractual indemnity
agreements
+/- 44 states recognize some form of anti- indemnity
limitation in construction contracts
Exceptions: AL, DC, ME, NV, ND, PA, WI
Insofar as the claim against the upstream party implicates
such party’s own negligence, the argument that the sub’s
excess carrier will ultimately pay whether vertical or
horizontal exhaustion is applied may not be accurate!
25
Anti-Indemnity Statutes:
Insurance Implications A number of states preclude GC from Requiring Sub to
obtain AI coverage which protects GC from its own negligence
e.g., California, Colorado, Kansas, Louisiana, Michigan, Montana, New Mexico, Oklahoma, Oregon and Texas
A few states have given some (but not a clear) indication that the anti-indemnity prohibition extends to insurance
e.g., Delaware, Georgia and Ohio
To the extent claims against the additional insured implicate its own negligence, the AI Coverage and GC’s own coverage may both be required to provide indemnity
26
Changing Landscape
Evolution of ISO AI Coverage
Limitations upon the Scope of AI coverage directly impact the
Horizontal / Vertical Exhaustion Debate. 27
Additional Insured Changes
Limits: No more than contract provides
$10 Million
$2 Million
$5 Million
$1 Million $1 Million
Contract
Requirements
Policy Limits
28
Additional Insured Changes
Limits: No more than contract provides
$10 Million
$2 Million
$5 Million
$1 Million $1 Million
Contract
Requirements
Policy Limits
29
$1 Million
$10 Million
Additional Insured Changes
Limits: No more than contract provides
$2 Million
$5 Million
$1 Million $1 Million
$1 Million GAP
Contract
Requirements
Policy Limits
30
$1 Million
Additional Insured Changes
Limits: No more than contract provides
$10 Million
$2 Million
$5 Million
$1 Million $1 Million
$1 Million GAP
Contract
Requirements
Policy Limits
31
$1 Million
32
What happens when the insured settles with the
primary carrier for less than policy limits?
It depends on your jurisdiction and policy language . . .
33
Zeig v. Massachusetts Bonding & Ins. Co.,
23 F.2d 665 (2d Cir. 1928)
Settlement by insured with primary carrier did
not eliminate excess coverage
Excess carrier – no rational interest in whether
insured collected full primary limits
Public policy: delay, promotion of litigation,
chilling effect on settlements
But parties could impose conditions precedent if
they chose to do so…
34
Cases following the Zeig rationale:
Koppers Company, Inc. v. Aetna Casualty and Surety Company,
98 F.3d 1440 (3d Cir. 1996) (Pennsylvania law) (court did not focus
on policy language; settlement with primary carrier “functionally
exhausted” primary policy)
Trinity Homes, LLC v. Ohio Casualty Insurance Company, 629
F.3d 653 (7th Cir. 2010) (Indiana law) (policy was ambiguous; did
not clearly require payment of full CGL limit)
Rummel v. Lexington Insurance Company, 123 N.M. 752, 945 P.2d
970 (N.M. 1997) (policy language – “liability of the Company
under this policy shall not attach unless and until the Insured’s
Underlying insurance has been paid or has been held liable to pay
the total applicable underlying limits” – did not preclude
underlying insurer from settling for less than its limits and being
credited for the balance)
35
Comercia Inc. v. Zurich American Insurance Co.,
498 F.Supp.2d 1019 (E.D. Mich. 2007)
Distinguished Zeig - lack of specificity in excess
policy language
Different result with specific policy language
Public policy favors settlements, but can not
supersede unambiguous policy language
Policy required “actual payment of losses” by the
underlying insurer
36
Cases following the Comercia rationale:
Citigroup, Inc. v. Federal Insurance Company, 649 F.3d
367 (5th Cir. 2011) (excess policies not ambiguous; plain
language dictated primary carrier pay full limits before
excess coverage was triggered)
Qualcomm, Incorporated v. Certain Underwriters at
Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770 (Cal.
Ct. App. 2008) (policy language was not ambiguous;
did not apply Zeig because it placed policy
considerations above plain language, employed a
strained interpretation of “payment,” and stated that
parties could use express language)
37
Policy language supporting no excess coverage:
Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367, 372-73 (5th Cir.
2011) (emphasis added)
“(a) all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities, (b) the full amount of the
Underlying Insurance policies have been collected by the plaintiffs,
the Insureds or the Insureds’ counsel, and (c) all Underlying
Insurance has been exhausted.”
“The insurer shall only be liable to make payment under this policy
after the total amount of the Underlying Limit of Liability has been
paid in legal currency by the insurers of the Underlying Insurance.”
“only after any Insurer subscribing to any Underlying Policy shall
have agreed to pay or have been held liable to pay the full amount of its respective limits . . .”
“in the event of the exhaustion of all of the limit(s) of liability of
such ‘Underlying Insurance’ solely as a result of payment of loss thereunder.”
Policy language supporting no excess coverage:
Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008)
“Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability.”
Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007)
Policy required “actual payment of losses” by underlying insurer, and stated that the “policy does not provide coverage for any loss not covered by the ‘Underlying Insurance’ solely by reason of the reduction or exhaustion of the available ‘Underlying Insurance’ through payments of loss thereunder.”
38
CGL Ins. Emerging Issue - Allocation
When Losses Span Multiple Policy Periods
“Joint and Several” Approach –
Insurer responsible for complete
defense / indemnity up to policy
limits
“Pro-Rata” Approach –
Insurer only responsible
for time on the risk
39
Consolidated Ins. Programs:
A.K.A “Wrap Ups”
Helps avoid much of the finger pointing and allocation arguments involved when projects are insured by traditional programs
40
Review all relevant policies to assess scope, limits, and “other
insurance” provisions
Determine applicable state/jurisdiction that may govern the
policies and the trade contract(s)
Upstream Parties (e.g., General Contractors and Owners) should
insist upon “primary and non-contributory” language in
downstream parties’ (e.g., Subcontractors’) insurance policies
Upstream Parties should seek to include a vertical exhaustion
provision in their own insurance policies
Consider whether a consolidated insurance (a/k/a “wrap-up”)
program is cost-effective and otherwise appropriate for your
project
TAKE AWAYS
41
