Article
The Insurance Coverage Gordian Knot: Complex Construction Claims
August 19, 2024
By: Christopher Yetka
Construction defect claims often involve multiple parties and layers of liability insurance spanning several years. When businesses purchase insurance (primarily commercial general liability insurance) and review their insurance program, they must understand not only the difference between different types of insurance, but how various primary insurance and excess insurance policies interact with one another. Changes in insurers over time and differences in policy language – whether between different years or between primary and excess coverage in a single year- can create gaps in coverage. Furthermore, how different policies will be triggered, and how amounts will be allocated between the various policies can have a significant impact on whether a claim is fully or only partially covered. These issues must be considered and understood before a policyholder attempts to resolve a construction claim because some settlements may not be fully covered. Additionally, all of these factors are significantly affected by the jurisdiction in which the claim is made because different courts take different approaches when allocating insurance policy limits among multiple insurance policies. This article will briefly discuss gaps in coverage, which policies are triggered when a claim is made, and how coverage is allocated between various insurance policies.
Avoiding Gaps in Coverage
One place that a gap in insurance coverage can arise is when a policyholder wants to settle a large claim with its primary insurer. This is particularly troublesome if the claim could exceed a policyholder’s primary policy limits but the primary insurance company has raised coverage issues. The policyholder may want to settle the insurance claim with the primary carrier for something less than the full policy limits and to free themselves to pursue coverage against the excess carriers. The question becomes whether the policyholder can “swallows the gap” between the settlement amount and the primary policy limits and seek coverage under the excess policy. Some courts will allow the policyholder to seek coverage from the excess carrier so long as the primary policy limits have been paid by either the primary insurer or the policyholder. (See Zeig v. Mass. Bonding & Ins. Co., (2nd Cir. 1928)). The reasoning for this is that the result is equitable, final and promotes settlement. However, other courts have held that the primary policy limits have to be paid only by the applicable primary insurers. (See Comerica Inc. v. Zurich, (E.D. Mich. 2007). The Comerica court looked at the policy language to come to this conclusion. Therefore, it is important to know your state’s approach and look closely at the language of your policies before you settle with a primary insurer for less than the policy limits. Other gaps can arise where the insuring language and exclusions of the primary policy are different than the excess policy. This problem can be mitigated if the policyholder purchases “follow form” excess policies, where the language of the excess policies matches that of the primary policies.
Trigger of Coverage
The concept of trigger of coverage refers to whether a policy is implicated by damage or injury occurring during the policy period and caused by a covered event. This would seem like a simple concept, courts have taken different approaches when determining if an insurance policy is implicated. The more complicated cases involve continuous trigger of coverage. That is, where there is not a sudden event like a collapse, but something that takes place over time like the degradation of plumbing, or the slow settling of a foundation. In those instances, a court may find that only those policies that were in place at the time the damage manifested itself are implicated. (See Don’s Building Supply, Inc. v. One Beacon, (Texas 2008) for a description of this approach). Other courts apply an exposure trigger, implicating policies that were in place when the exposure to the harmful condition occurred that led to the injury. (See Insurance Co. of North Am. v. Forty-Eight Insulations, Inc., (6th Cir. 1980)). Some courts focus on when the injury occurred that triggers the policy. (See Emhard Industries v. Century Indemn,(1st. Cir. 2009)). Finally, many courts hold that the trigger is continuous and occurs not only at initial exposure but continues progressively in each year where damage may have occurred. (See Keane Corp. v. Ins. Co. of N. America, (D.C. Cir. 1981)). The trigger approach used by a court can have a drastic impact on whether a policyholder has one, several or a large number of policies to draw from to satisfy a claim.
Allocation
Once a policy is triggered, the concept of allocation dictates how the loss is apportioned among multiple policies. There are two basic ways that courts have approached this. The first is to apply the losses “vertically” by exhausting all of the policies applicable to one year at a time. The second approach is the pro rata approach, with the court allocating the loss to multiple policy years simultaneously using various methods.
Vertical Allocation
There are two basic vertical allocation models. One model is to pick the most applicable year and apply all of the insurance in that year to the specific claim. (See Keene Corp. v. Ins. Co. of N.America, (D.C. Cir. 1981)). A second model is the all sums approach, which takes after the prior insuring language of the commercial general liability policy that provided coverage for “all sums.” These courts allow the policy holder to pick a triggered year, exhaust the limits of that year and then move on to subsequent years until the claim is fully paid or all policies are exhausted. Society Ins. v. Town of Franklin, (Wisc. Ct. App. 2000). This approach is the most favorable to the policyholder.
Pro Rata Allocation
There are a number of different approaches courts may use if multiple policy years are triggered, and the court wants to apply a pro rata allocation. Courts may look at the number of years each insurer provided coverage to the policyholder and apportion a percentage based on that time on the risk. (See Insurance Co. of N. America v. Forty-Eight Insulations, Inc,. (6th Cir. 1980)). Another approach is to determine the amount of policy limits each insurer provided and use that to determine their share. (See Employers Reinsurance Corp. v. Phoenix Ins. Co,. (Cal. Ct. App. 1986)). Some courts combine these approaches and use both the time on the risk and the policy limits to come up with a formula to apportion liability. (Armstrong World Industries v. Aetna, (Cal. Ct. App. 1986). Another approach is to allocate liability in equal shares regardless of policy limits. (Reliance Ins. Co. v. St. Paul Suplus Lines Ins. Co., (4th Cir. 1985).
Summary on Allocation
The allocation approach a court uses can drastically alter the total amount of insurance that is available to pay a claim, and different courts will apply very different approaches. For example, Minnesota is a pro rata state, applying indemnity on a pro rata based upon time on the risk, but allocates defense costs on equal shares. Wisconsin, on the other hand, is a vertical “all sums” state which allows the policyholder to pick a triggered year and exhaust all coverage before moving on to another year. This can be very important because a policyholder may have high deductibles that would be implicated in Minnesota for multiple years, whereas only one policy year would be implicated at a time in Wisconsin.
Additionally, different courts approach uninsured years differently. If a court applies a vertical all-sums approach, it is not an issue. The policyholder can simply pick a year where they have insurance. However, if the policyholder is in in a pro-rata jurisdiction, they will have to address years for which they didn’t have insurance. For example, the policyholder may not be able to find old policies, or they may have insolvent insurers, or years where they were not able to obtain coverage.
Conclusion
Complex construction claims implicate insurance coverage in a myriad of ways, and the language of your policy and the law that is applied can have a significant impact on the extent of your coverage. You should work closely with your insurance advisers in advance to maximize your coverage before a claim is made and feel free to contact me with any questions regarding this complex area of risk management at cyetka@larkinhoffman.com.
