Throughout my career in practicing insurance-defense litigation, primarily representing developers, general contractors, and homebuilders in construction-defect and construction-accident matters, the most critical key to success has been the ability to identify and transfer risk to the culpable parties. This is true for obtaining a complete defense and indemnification for clients and their respective insurance carriers.
Traditionally, in construction matters, the developer/contractor is hired by an owner to construct the project through the retention and use of qualified, skilled subcontractors for each trade and does not self-perform any of the work. These subcontractors enter into contractual agreements with the developer that include express provisions that require the subcontractor to defend, indemnify, and hold the developer harmless in the event that claims, alleged defects, issues, or eventual litigation arises based upon their work at the construction project. When the owner of the property initiates litigation or a claim for construction damages against the developer, the developer uses these tools built into the subcontract agreement, supported by caselaw and statute, to transfer the risk to the implicated subcontractor responsible for the alleged damages.
The goal is to:
- Tender early, follow up often, and leave no stone unturned in your efforts to obtain coverage to your client.
- “Put a bow at the end of every tender” and make sure that you receive a final coverage opinion (acceptance or valid declination) from every single carrier and subcontractor that you are pursuing.
- Keep an ongoing accurate tender matrix and update constantly when new information (discovery responses) or new coverage requests or opinions are presented.
- Create an insurance chart from prior actions for your clients to use for future cases.
- Challenge all improper coverage denials and, if necessary, get coverage counsel involved. And, most importantly, be diligent but polite to ensure full compliance from the insurance carriers—phone calls are a great resource.
It is important to maximize every layer of coverage for the developer. Start with the primary insurance coverage for your client and make sure that all known primary carriers have been placed on notice and provide a final coverage opinion. Then, critically review the subcontract agreement, insurance documents, and job-file documents and create a matrix of all subcontractors and their insurance carriers—and tender to all of them.
Once you obtain a single additional-insured acceptance, keep pressing the others until you have exhausted all potential defense and additional-insured participants by receiving final coverage opinions. Finally, it is imperative to place all excess carriers on notice should the claim potentially exceed primary policy limits. If you are successful in these tender efforts, the developer may be in a position to have the entirety of the defense and indemnity covered by the implicated subcontractors and their carriers.
There are three basic methods of risk transfer that assist the developer in obtaining maximum recoveries from the subcontractors and their carriers: indemnification; contractual defense; and additional-insured coverage. As discussed above, identifying the potentially implicated trades and reviewing their subcontract language is paramount. Then, commence a comprehensive tender-letter campaign against all subcontractors and their carriers to place them on notice.
Additionally, prepare a proper cross-complaint or third-party complaint/petition against the subcontractors formally bringing them into the action.
Around the States
For indemnification, each state operates differently, but the general position is to raise the appropriate settlement monies from the trade partners responsible for creating the alleged damage to the owner. The subcontract agreement typically has strong indemnity language that requires the subcontractor to indemnify the developer for everything except its own negligence and self-performed work. It may even be necessary to file a declaratory relief action on contractual indemnity against a recalcitrant subcontractor to provide a judicial ruling that the subcontractor owes indemnification to the developer. In the end, a successful resolution of the owner’s claims includes raising as close to 100 percent of the settlement funds from the implicated subcontractors.
The duty to defend in almost all states arises from the date of tender. Therefore, it is critical to tender at the earliest possible opportunity to lock in the date. (See Figure A for a quick reference by state of the duty-to-defend obligations).
Texas and Florida are four-corner states and require that all of the defect allegations must be expressly spelled out in the plaintiff’s complaint/petition without looking to extrinsic evidence such as a defect list or expert report. To assert potential coverage in your tender, Texas requires that the four corners of the petition and the insuring agreement (eight corners) are the only two documents that an insurance carrier may examine. Sometimes it is important to educate your plaintiff to properly plead with specificity all construction deficiencies against all potentially implicated subcontractors’ work to ensure full coverage to the developer.
California allows extrinsic evidence to supplement the pleadings to afford coverage. Motions for summary judgment (California) and declaratory relief actions (Texas and Florida) are also great strategies to obtain defense coverage.
Finally, a defense can be provided to the developer through additional-insured coverage from the subcontractor’s own general liability policy. The developer becomes an “additional insured” with the benefits and coverage similarly afforded to the “named insured” subcontractor. Most developers require subcontractors to provide additional-insured coverage (CG 2010 11/85 or equivalent) to the developer as part of their contractual obligations prior to performing work on the project. Make sure to review the type of additional-insured endorsement, whether the coverage is for ongoing or completed operations, and any exclusions of coverage. In California, additional-insured coverage is typically provided if the actual work was performed during the policy period and damages result from that work.
Once these risk-transfer tools are employed, the developer will be able to defend all claims brought by the owners through contributions from the implicated subcontractors and their insurance carriers. The developer will also be able to pass along all defect allegations onto those trades responsible through indemnification. A final takeaway is to be thorough, transparent, diligent, and efficient. A good file is a closed file according to most claims professionals, but a great file is one where others bear the risk.
Figure A: Duty-to-Defend Obligations by State
The Duty to Defend Arises at Tender
CALIFORNIA
The duty to defend arises immediately upon the proper tender of defense (before the litigation has determined whether indemnity is actually owed). Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541
TEXAS
The insured only has the burden of proof to show that a claim is potentially covered. Nat’l Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997); Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)
FLORIDA
The duty to defend is triggered upon tender. EmbroidMe.com, Inc. v. Travelers Property Casualty Co. of America, 845 F.3d 1099 (11th Cir. 2017)
The Duty to Defend is Broad
CALIFORNIA
The duty to defend is broader than the duty to indemnify and applies to claims that are not only actually covered, but even those claims that are merely potentially covered. Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 59
TEXAS
An insurer can refuse to provide a defense only when the facts as alleged fall outside of the coverage grant or when an exclusion applies that negates any potential for coverage. Nat’l Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997); Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)
FLORIDA
Carriers must provide a defense to their insured even if the facts alleged are untrue or the legal theories alleged are unsound because, in determining if there is a duty to defend, only the allegations of the complaint factor into the analysis. Grissom v. Commercial Union Ins. Co., 610 So. 2d 1299 (Fla. 1st DCA 1992)