Hinshaw & Culbertson LLP is pleased to introduce the Construction Defect Alert. This newsletter, published by the firm’s Construction Defect Group, will address recent construction defect court decisions and provide analysis of the opinions. Additionally, it will address other related construction defect topics such as insurance coverage and additional insured endorsements, as well as provide practice pointers on how to deal with these issues.
We invite you to call our attorneys if you have a construction defect law question or suggestions for topics you would like us to cover. We hope you enjoy this publication and find it useful. If you would like it sent to others in your office, please contact me, and I will add them to our mailing list.
Thank you.
Darrell S. Dudzik
Partner and Co-Chair of the Construction Defect Group
Phoenix
602-631-4400
This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.
In This Issue:
Recent Opinion Could Complicate Construction Defect Claim Handling in Minnesota
On Jan. 13, 2006, the Minnesota Court of Appeals issued an unpublished decision that will resonate throughout the construction defect litigation arena in Minnesota. The case, Kootenia Homes, Inc. v. Federated Ins. Co. and Cincinnati Ins. Co., A05-278, involves insurance coverage for moisture intrusion and mold claims arising out of defective construction. The court disregarded long-standing Minnesota law by concluding that faulty construction is an “occurrence” and that defective construction is a “discrete and identifiable event” that is both the “cause” of property damage and the “effect” in the same moment. The result in this case was a finding that the policies in effect at the time the homeowners discovered the moisture intrusion were not implicated at all. Instead, only the policy in effect at the time of the construction would be implicated by the claims for property damage despite the fact that no property damage was demonstrated to have occurred at the time of construction. In so holding, the Court essentially rejected the long-standing “actual injury” trigger to implicate insurance coverage, instead adopting the “exposure” trigger in construction defect cases.
If allowed to stand, this unpublished decision will complicate the handling of construction defect claims in Minnesota and will almost certainly have a significant impact upon other long-term exposure cases as well. Defendant Federated Insurance Co., represented by Hinshaw & Culbertson LLP’s Minneapolis office, has filed a petition for review to the Minnesota Supreme Court.
Two California Courts Analyze Construction Defect Litigation Defense Issues in Different Contexts
Crawford v. Weather Shield Mfg., Inc. - A Subcontractor's Contractual Duty to Defend Begins Upon Tender and is Unrelated to Ultimate Liability
A new California appellate court decision finds that, depending on the wording of the subcontract, a subcontractor can be obligated to assume a proportionate share of a developer’s defense costs upon tender, from the outset of litigation, and that a subcontractor cannot rely on an ultimate finding of non-liability to avoid a contractual defense obligation. Although Crawford v. Weather Shield Mfg., Inc. (2006) 136 Cal.App.4th 304 did not involve an insurance claim, the court’s decision could have a significant impact on subcontractor insurers whose policies include coverage for attorneys’ fees and expenses required by the terms of an “insured contract,” even where a tendering general contractor or developer is not entitled to coverage as an additional insured. In addition, this decision could have a very expensive impact on subcontractors whose insurance policies do not provide coverage for defense costs required by the terms of an "insured contract." (We note, however, that this is a single district court appellate decision, not binding on all trial courts in California.)
Crawford involved a developer who made post-trial claims against a window manufacturer subcontractor for reimbursement of defense costs based on the subcontractor's alleged wrongful failure to assume the developer’s defense upon tender in a construction defect action. The subcontract provided that:
Contractor does agree to indemnify and save owner harmless against all claims for damages to persons or to property and claims for loss, damage and/or theft of homeowners’ personal property growing out of the execution of the work, and at his own expense, to defend any suit or action brought against owner founded upon the claim of such damage or loss or theft . . . .
The court found that this wording required the subcontractor to reimburse the developer’s defense costs because “even narrowly construed, [it] plainly and unambiguously called for the window manufacturer to provide a defense; i.e., for an attorney or attorneys to conduct that defense of the homeowners’ suit, at least to the degree the suit was ‘founded upon’ claims of window problems independent of whether the manufacturer was itself ever held to be responsible for those window problems.” 136 Cal.App.4th at 342.
The developer’s suit was brought after the underlying construction defect suit was concluded. The window manufacturer argued that the duty to defend was voided because the jury had found that it was without any liability. The Crawford court found that the subcontractor's obligation to defend had existed since the outset of the underlying action, and that the contractual duty was not dependent on whether the subcontractor had any actual liability for the damages alleged by the plaintiff in the construction defect action.
Crawford is not, however, without substantial limitations. The court noted that its opinion:
...most certainly [did] not say that a subcontractor is necessarily responsible for providing a ‘complete defense’ to an action founded upon a claim growing out of a subcontractor's work. We only say that this subcontract obligated this window manufacturer to pay for its half share of defense costs reasonably attributable to the homeowners' window claims, i.e., clearly “growing out” of the subcontractor's own work. No one should assert that this opinion stands for any proposition broader than that. Id.
The parties to the subcontract, and other subcontractors with similar obligations, must work out the allocation of defense costs between themselves. Because, under Crawford, the defense obligation is found to commence when suit is filed against the developer or general contractor, subcontractors that find themselves with this obligation will perhaps negotiate interim defense cost sharing agreements, subject to reallocation after settlement or judgment, so that, if there are numerous defending subcontractors, their ultimate shares of the defense cost obligation will be proportionate to their shares of ultimate liability. In many cases, the number of parties with an obligation to share defense costs could be increased significantly, including subcontractors' insurers with contractual defense obligations as well as subcontractors' insurers with additional insured obligations and, in some cases, subcontractors without adequate insurance coverage for this contractual obligation.
The Crawford court’s second cautionary note was that the opinion:
...must not be read as importing the [Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263] ‘potentiality rule’ from insurance jurisprudence into the relationship between a general contractor and subcontractor. There simply is no substitute for reading the contract. All we are saying is that if the contract says that there is an obligation to defend a suit founded on a claim of ‘such damage’ as grows out of a subcontractor's work, and the suit clearly is founded on the subcontractor's work as this suit was, the defense obligation is triggered even if the claim itself ultimately proves to be unfounded. Surely even alleged window fogging and leaking is a ‘claim’ that ‘grows out’ of a window manufacturer’s work. Any other conclusion would render the obligation to ‘defend’ meaningless, or distort the word ‘defend’ to mean what it doesn’t, i.e., ‘reimburse upon a retroactive finding of negligence.’ Id.
Garamendi v. Golden Eagle (Unpublished) - "Defense Follows Indemnity" Allocation Among Additional Insurers
In a recent unpublished (and non-binding, non-citable) decision, California’s First District Court of Appeal finds that “Defense Follows Indemnity” is most equitable in an allocation dispute arising out of complex construction defect litigation, limiting the wording of ISO Form 2010-11/85. This decision is significant in revealing the allocation analysis of one California appellate court regarding this area of frequent intra-insurer dispute.
Allocation disputes among the direct and additional insurers of developers and general contractors have become all too frequent in California. The costs of defending general contractors and developers in complex construction defect litigation can be enormous; in fact, it is not unusual for defense costs to reach several million dollars. As a general rule, subcontractors are required to obtain general liability insurance that names the general contractor and the developer on a project as additional insureds, often under endorsement employing wording found in ISO’s Form 2010 – 11/85, which promises to indemnify the additional insured for all liability “arising out of” the subcontractor’s work for the additional insured.
While California law provides that any insurer with a defense obligation to an insured is legally responsible for providing a full defense (Presley Homes, Inc. v. American States Ins. Co. (2001) 90 Cal.App.4th 571, 577), the allocation of the additional insured’s defense costs among those insurers, which share the same 100 percent obligation, can be accomplished in any manner found to be equitable by the court.
There is no “bright line” rule regarding allocation among insurers with the same risk at the same level of coverage. Centennial Ins. Co. v. United States Fire Ins. Co. (2001) 88 Cal.App.4th 105. Allocation decisions must be made on the basis of equity, and the courts have approved many different allocation methods in contribution actions.
One allocation method, recently approved by the trial and appellate courts in Garamendi v. Golden Eagle, 2005 WL 1899409 (Cal.App. 1st District) (unpublished), is often called the “defense follows indemnity” method. It is a post-settlement or post-judgment allocation, which involves first determining the ratio of indemnity paid on behalf of a particular subcontractor in relation to the amount of indemnity paid by all defendants. Under this allocation method, an additional insurer’s share of a general contractor’s or developer’s defense costs will be the same percentage as that insurer’s settlement contribution on behalf of its insured bears to the total settlement. For example, under the usual interpretation of this allocation method, if a subcontractor’s insurer paid 10 percent of the total settlement, that insurer would pay no more than 10 percent of the cost of defending its additional insured[s], the general contractor and/or the developer.
In this recent decision, Golden Eagle’s policy named the general contractor as an additional insured under an ISO 2010-11/85 endorsement. Golden Eagle was sued by the general contractor’s direct primary insurer, which argued that the wording of this additional insured endorsement is so broad that it exposed Golden Eagle to liability for all damages that could be assessed against the general contractor, even those resulting from damage caused by other subcontractors or from the general contractor’s sole negligence. The general contractor’s insurer also argued that, on the basis of the broad interpretation of the “arising out of” wording in this endorsement, Golden Eagle should have to pay all of the general contractor’s defense costs.
Golden Eagle had paid $80,000 to settle claims against its insured subcontractor. This amount was 3.6 percent of the total settlement amount. Golden Eagle asserted that it should pay no more than 3.6 percent of the additional insured general contractor’s defense costs — despite the 2010-11/85 wording — and that its equitable contribution to indemnity was capped by the 3.6 percent it paid to settle claims against its named insured subcontractor. Both the trial and appellate courts agreed with Golden Eagle.
The appellate court found that Golden Eagle only had to pay for the additional insured’s liability arising directly out of damage resulting from Golden Eagle’s subcontractor insured’s work — not for liability arising out of the general contractor’s sole negligence and not for liability arising out of the other subcontractors’ work. It also found that it was only fair and equitable that Golden Eagle’s share of defense costs should be proportionate to its share of liability, so that Golden Eagle was liable for only 3.6 percent of the general contractor’s defense costs.
This court engaged in an analysis of all of the cases that have held that “arising out of [the named insured’s] work” in the 2010 11/85 additional insured endorsement should be interpreted so broadly that it exposes the additional insurer to liability for damages resulting from the additional insured’s sole negligence and to the additional insured’s vicarious liability for the work of other subcontractors. The court distinguished these decisions and reasoned that the "arising out of" wording must be interpreted differently with respect to complex construction defect claims. It found that the other California cases that interpreted this wording had all involved claims for damages for wrongful death and bodily injury, and a “single, indivisible claim of injury, rather than the circumstance presented here that involves an entire construction project with multiple deficiencies alleged against other subcontractors whose own scope of work bears no relationship to the work performed by the target contractor.”
This unpublished case cannot, of course, be cited as authority for the application of a “defense follows indemnity” allocation, but the court’s analysis will surely be adopted by insurers advocating a “defense follows indemnity” allocation in future litigation among direct and additional insurers involved in construction defect litigation.
Contact for more information: Anne D. O'Niell
This newsletter has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. |