The Long Tail

As has often been the case, principles of law established in long-tail exposure cases migrate from one area of law to another. The migration of case law from long-tail exposure cases to construction defect cases is well known, beginning with continuous trigger jurisprudence with its accompanying duty to defend and indemnify allocation issues. The next step in this continuous migration of cases is the importation of “never-ending” operations claims litigation.

The Once Bright Line

Before the advent of long-tail exposure, continuous loss cases, it was easy to use “bright line” reasoning to determine whether or not a loss should be characterized as an ongoing operation or completed operation claim. All one needed to determine was whether the loss took place while the insured was still on the job or after the work was completed. During this time, it was the common practice to have no aggregate limits on operations claims (technically, more accurately described as premises claims).

The underwriting purpose for placing no aggregate limits on operations claims was simple — the premium was based on past loss history and company revenues. If the premium for any one year proved insufficient, the underwriter could then either raise the premium or discontinue the account. In so structuring the policy, underwriters understood they could pay multiple per occurrence limits in any given year, as the only limit on operations claims were per occurrence limits, i.e., there was no aggregate. Underwriters were willing to accept this risk as they had the ability to make reasonable actuarial assumptions as to what would occur during the 365 days they were on the risk and they could adjust premium in the following year(s) relatively rapidly to account for unanticipated loss levels. This time-limited exposure was further controlled by the underwriters’ ability to insist on certain safety standards and operating procedures.

Thus, during this pre-continuous loss era, reserves could be accurately set and renewal decisions could be made with relatively complete information. What losses were to be adjusted under any particular policy was known within the term of the policy, or relatively shortly thereafter. Any other understanding would have resulted in unlimited, uncapped operations coverage, a completely unacceptable underwriting scenario.

In contrast, aggregate limits were historically placed on completed operations claims. Underwriters recognized that a completed operation claim can arise at any time (during the tail period) after the insured has completed its work or operations. Roger Henderson, in his landmark 1941 Nebraska Law Review article, wonderfully lays out this reasoning, including examples of work and products causing damage long after they are manufactured, processed or put in the stream of commerce. All of Professor Henderson’s completed operations scenarios shared one common feature: the occurrences, whether it be a piece of roof tile from a completed home becoming displaced and injuring a passerby or a defective toaster burning down a house, were discrete happenings in time. During this time, construction underwriters saw workplace injuries and discrete property damage events, such as a crane collapse destroying property of third parties, as their principal exposures.

Carriers’ Response

Beginning in the 1970s and accelerating into the early 1980s, more and more jurisdictions interpreted the standard occurrence definition contained in CGL policies to allow for more than one policy to be triggered by a loss. These rulings sent shockwaves through the industry as multiple carriers were being asked to respond to long-tail environmental, product and asbestos claims. These claims were made under the historical policies described above, i.e., policies with no operations aggregate.

The enormous costs associated with unaggregated operations claims was a disaster for the industry measured in the tens of billions of dollars. Consequently, by 1986, the standard ISO CGL form incorporated operations aggregate limits. The industry collectively issued a sigh of relief, confident that its new aggregate limits on operations claims insulated it from unlimited operations exposure.

Policyholders were now in a position of having aggregated operations coverage and, at the same time, possibly facing exhaustion of completed operations coverage by long-tail claims classified as products/completed operations claims. As a consequence, coverage for long-tail exposure claims, particularly asbestos claims, bankrupted or threatened the continued existence of companies throughout America.

Policyholders Strike Back

In the face of exhausted completed operation limits, asbestos policyholders turned to the operations coverage under their policies, including those policies incepting long after the operations that had exposed the claimant had concluded. In laying claim to long forgotten operations coverage, the rallying cry became “once an operations claim, always an operations claim.” Asbestos policyholders argued that since the injury allegedly began while operations were ongoing, that is how the claim should be classified for all policies, for all time, regardless of whether the subsequent policies incepted after the operations were complete.

Surprisingly, there is very little appellate guidance on this topic, despite the insurance industry literally spending billions and billions of dollars on “reopened operation limits.” The principal appellate authorities are the Wallace & Gale cases decided in the state and federal courts of Maryland. These cases hold that if the claimant’s initial exposure occurred while Wallace & Gale was still conducting operations, no aggregate limit will apply in favor of the carrier on the risk during those operations. However, these cases rejected the policyholders’ argument for limitless operations coverage and held that, if the injury continues after exposure and after the associated work is ended, then post-operation carriers on the risk after the work is complete have “only” their aggregated completed operation limits at risk.

The Wallace & Gale battle continues to be fought in trial courts across the country. Policyholders had an early victory in the MMPI case in Minnesota while suffering a recent defeat in the Plant Insulation case venued in San Francisco. Along with stressing the timing of when the policy triggering damage occurred, integral to defending a “Wallace & Gale case” is focusing the court on underwriting intent and the accompanying premium charged. A successful Wallace & Gale defense results in the court understanding that premium for operation coverage is based on current business revenue and exposures, with no pricing consideration for risks long in the past.

Construction Defect Carriers’ Response

It had long been the custom and practice in the industry for subcontractors to provide general contractors and developers with additional insured endorsements that included completed operations coverage. Beginning in the 1990s, continuous trigger jurisprudence, mixed with duty to defend jurisprudence, resulted in insurers of peripheral subcontractors having a complete and undivided duty to defend general contractors and developers. At its extreme, the carrier for a doorknob supplier with a $5,000 scope of work might end up paying for the defense of the $10 million construction defect claim in a 1,000-unit development.

In response to this unanticipated, large additional insured completed operation obligation in the construction defect arena, underwriters nationwide began declining to issue additional insured endorsements with completed operations coverage. Construction underwriters instead issued additional insured endorsements providing coverage only for ongoing operations. Underwriters intended this change to preclude coverage for construction defects for additional insureds, while still affording traditional operations coverage for discrete injuries and third party property damage.

The coverage strategy pursued by policyholders on the battlefields of asbestos litigation to reopen operation limits long thought to be closed is being increasingly adopted by lawyers in the construction defect field. This relatively recent push to begin to re-characterize claims traditionally thought of as completed operations arose in direct response to the industry-wide practice of removing completed operations coverage from the typical additional insured endorsement. Construction-based claims historically considered to be only covered as completed operations are now being boldly prosecuted as operations claims.

This attack on the completed operations hazard in the construction defect arena is spreading with results varying from state to state. Nevada, in its Jaynes decision, rejected the traditional time limitation once thought to be inherent in completed operations coverage. Conversely, the Fifth Circuit, in the Carl E Woodward matter, rejected the argument that construction defects are covered under “ongoing operations” coverage. Scores of such cases probing the limits of “ongoing operations” endorsements are being actively litigated in trial courts in throughout America. The arguments being made echo, without exactly mirroring, the arguments made in the asbestos arena.

Construction defect policyholders argue that if, during construction, any one trade’s work damaged that of another or if, during construction, a continuous loss begins to occur (typically, but not always, due to water intrusion), then the CGL carrier on the risk prior to the completion of construction would have a coverage obligation.

Completed Operations Definition

In opposition, insurers argue that the completed operations definition in their policies makes clear that it applies to any claim presented to it after the work or operation of the insured has been completed. Bolstering this argument, construction defect carriers make the same premium calculation and underwriting risk arguments made in the asbestos arena. The Pardee case in California is one example of a court accepting that the carriers’ underwriting intent is fundamentally different between operations and completed operations coverages.

The litigation concerning the proper classification of claims under a CGL policy is ongoing and far from complete. Once again, concepts originally propagated in long-tail exposure cases are being imported into the construction defect arena with the latest example being the reopening under the operations limits of claims once thought to be long-closed under the exhausted completed operations limits on CGL policies.