Insurance Claims And Issues

If Commercial Construction Loans Default, Insurance and Bond Claims May Follow.

    Fears continue of possible mass defaults on many Commercial Construction Loans.  Fear of Default has been embedded in the Commercial Construction Loan Market for months.  See generally Floyd Norris, "Off the Charts/Construction Loans Falter, a Bad Omen for Banks" p. B3, col. 1 (New York Times Nat'l ed., "Business" Section, Saturday, September 5, 2009).  As compared with the woes of loans for the construction of single-family homes, reportedly "[i]t is in commercial real estate construction -- be it stores or office buildings -- that the pain seems likely to rise."  Id.

    In particular, a research firm cited in the linked article predicts that "the biggest problems are in loans for condominium construction, with 38 percent of all construction loans troubled."  Id.  [Emphasis added.]

    If Commercial Construction Loans go into Default in large numbers, Insurance and Bond Claims will not be far behind.

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Construction Defect Claims and "Occurrrences" in Florida: Chinese Drywall Next.

This is PART TWO of a post begun on August 5, 2009.

Things changed in Florida Insurance Law in December, 2007, mirroring a change in Insurance Law across the nation.

 

That is at least partly because the relevant CGL Exclusion for Damage to Property changed.  The post-1986 standard CGL Coverage Form presently in use provides in relevant part that although there is still an Exclusion for Property Damage to the insured's work arising out of it or any part of it, this Exclusion does not apply if the work in question was performed on the insured's behalf by a subcontractor.

 

With this change in language, Insurance Coverage was extended in Florida to general contractors under their CGL Policies in cases presenting facts which earlier resulted in judgments of no coverage.  E.g., Auto-Owners Insurance Co. v. Pozzi Window Co. (Fla. Dec. 20, 2007, withdrawn and revised opinion substituted on June 12, 2008); United States Fire Insurance Co. v. J.S.U.B., Inc. (Fla. Dec. 20, 2007).  Other Courts in other jurisdictions have disagreed with parts of the Florida experience.

 

NEXT:  Applying these and other rules of Insurance Law to CHINESE DRYWALL CLAIMS.

 

THIS IS PART TWO.  Please Read The Disclaimer.

Construction Defect Claims and an Occurrence in Florida ....

    THIS IS THE FIRST OF TWO PARTS.

   Florida Insurance Law is an example of Comprehensive General Liability Insurance Issues arising from Construction Defect Claims.  Specifically, it is an example of how things have changed in that arena.

    This example begins at the beginning:  with cases involving pre-1986 standard-form Commercial General Liability Insurance Policies.  Looking at the language in those forms and endorsements, and also looking beyond the contract language to the avowed purpose of CGL Coverage, the Florida courts rejected CGL Coverage for many construction defect claims arising from a contractor's faulty workmanship.  Most if not all of these holdings involved damages claims against an insured general contractor for the replacement of its own defective materials and work.  See, e.g., Download LaMarche v. Shelby Mut. Ins. Co. (Fla. 1980).

    Once a construction project was completed, of course, even if the particular CGL Policy contained Coverage for a "Products - Completed Operations Hazard" still such Coverage was specifically excluded under these early forms for property damage to work performed by the named insured arising out of such work or any portion thereof.  Thus, where the named insured was also the defendant general contractor, all work on the construction project was deemed to be the work of the general contractor.  Under these forms, then, there was no Coverage under the general contractor's CGL.  Download Tucker Construction Co. v. Michigan Mut. Ins. Co. (Fla. 5th DCA 1982).

  THIS IS THE FIRST OF TWO PARTS.  Please Read The Disclaimer.

Property Insurers' Agenda Increases Premiums of Florida House.

    Property Insurance Companies' proposed legislation passed the Florida House.  The bill awaits the Florida Senate and the Governor.  Among other long-sought features, the Property bill would:

• Increase Citizens Property Insurance Company Premiums by 10% per year.
• Enable a Commission to recommend elimination of all or most of the Premium discounts for Hurricane Mitigation measures recently enacted into Florida Law -- measures to strengthen the construction of Florida Homes that were recently demanded by Property Insurance Companies.
• Increase Property Insurance Premiums including Homeowner's Insurance Premiums apparently, by 10% per year.
• Restrict Policyholders and other Insureds on adjusters they hire for assistance on their Homeowner's and other Property Insurance Claims, and enable another Commission to recommend more restrictions.

The potentially biggest feature of this bill even when it is put alongside these other very big features?  "Gradually reduce the $29 billion Florida Hurricane Catastrophe Fund by $12 billion."  Julie Patel, "Rates Would Rise Under Legislation/Florida House Passes Sweeping Property Insurance Bill" (South Florida Sun-Sentinel.com, Friday, May 1, 2009).

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Property Insurers Dovetail With Environmentally Concerned Coalitions.

     The Travelers and Fireman's Fund Insurance Companies are reportedly pressing for innovations to meet climate changes that would alter forever the face of Property Insurance Coverage in the United States.  See, e.g., Cornelia Dean, "Groups See Added Risks From Change in Climate" (New York Times Online, Friday, April 24, 2009);   NU Online News Service, "Group Unveils Blueprint to Save Billions From Hurricanes" published by P & C/National Underwriter, Thursday, April 23, 2009.

    Among the innovations backed by an increasingly broader array of supporters:

• Adopting local land-use policies that deter people from construction in high-risk flood-prone areas.  An example is reportedly provided by City and County officials working together in or about Charleston, South Carolina to restrict development on Johns Island to its interior.
• Enacting more realistic Construction Codes and, at the same time, encouraging existing homeowners and commercial property owners to make their buildings more resistant to storms in storm-prone areas. 

While the members of the coalition were apparently reluctant to endorse the use of Property Insurance Premiums as a planning tool, clearly where Property Insurance in such areas is available at all the Premiums will be very high -- and the Property values are likely to increasingly become lower than they are even now.  See generally John K. DiMugno, Steven Plitt & Dennis J. Wall, "CAT Claims:  Insurance Coverage for Natural and Man-Made Disasters" (Thomson-West Publishing 2008).

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Texas Court Answers "Injury in Fact" Property Damage, Occurrence Questions.

    In a ground-breaking answer in a Construction Insurance Coverage case, the Texas Supreme Court recently adopted an "Injury in Fact" test under a standard "occurrence-based commercial general liability [CGL] insurance policy":  Download 07-0639 Don's Building Supply, Inc_ v_ Onebeacon Ins_ Co.

    The Court unanimously answered certified questions from the Federal Fifth Circuit Court of Appeals in this case.  The first of the certified questions is addressed in this post.  In it, the Fifth Circuit basically asked how Texas Insurance Coverage Law would determine whether and when there was "Property Damage" and an "Occurrence" within the policy period, or not, for alleged damages resulting from installation of a synthetic stucco product called an "Exterior Insulation and Finish System (EIFS)."

    The Texas Court's answer is instructive in how the Texas Justices unanimously read seemingly different provisions of the CGL Policy together, before reaching a conclusion about any one or more of those Policy provisions.  As a result, their answers to the certified questions in that case affect Texas Insurance Law issues that go way beyond "Property Damage" and "Occurrence" definitions.  Their answers also reach out toward how, in determining when and whether there was an "Occurrence" of "Property Damage" within the Policy period, Texas Courts would simultaneoulsy be forced to thereby address other provisions in the Insurance Policy including "per occurrence" and "aggregate" limits of the Insurance Company's liability under the Policy.

    The Texas Supreme Court's answer in this regard is worth reading, repeated below without footnotes:

    The policy defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."  We recently noted, in construing the same CGL language, that "[a]n accident is generally understood to be a fortuitious, unexpected, and unintended event."  The policy's requirement that property damage be caused by an "occurrence" limits coverage in at least two respects.  First, because the occurrence must be an "accident," coverage for intentional torts is excluded.  Second, because a single occurrence can be "an accident" and consist of "continuous or repeated exposure to substantially the same general harmful conditions," the definition of occurrence serves to limit the number of occurrences an insured can claim for what the policy deems to be a single accident.  This limitation is sometimes important because the dollar limits of the policy include an aggregate limit and also a lower dollar llimit per occurrence.

Following the language which has just been quoted, the Texas Supreme Court examined the Policy's brief "Property Damage" definition, stated that it had construed all these Policy provisions together, and answered the question by stating that, under Texas Insurance Law at least, "property damage under the policy occurred when actual physical damage to the property occurred."

    The possibility that damage to property might not be discovered did not give the Texas Court much pause:  "So in this case, property damage occurred when a home that is the subject of an underlying suit suffered wood rot or other physical damage.  The date that the physical damage is or could have been discovered is irrelevant under the policy."  However, the Court carefully limited its answers to, among other things, the duty to defend in this particular case:

    Today's decision rests upon the specific language of these parties' CGL policies regarding property damage in the construction-defect context, and it is directed only to the specific questions posed by the Fifth Circuit.

The Texas Court in answering the certified questions in this case was careful to note that there is a split in authority on the question of whether and when "Property Damage" takes place, i.e., is an "Occurrence" within the Policy period, with many Courts lining up behind an alternative point of view that there is an "Occurrence" when "Property Damage" manifests itself.  Judges, lawyers, Insurance Companies, and Policyholders in any given jurisdiction should consult the Insurance Law of their own jurisdiction to determine where their chosen jurisdiction lines up on this question.

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Bond Insurance on Auction-Rate Bonds, Too?

   Among the revelations emerging from the financial fiasco is that Insurance Companies reportedly have "issued policies guaranteeing so-called auction-rate bonds."  Mike Boehm, "Mortgage Crisis Hits Cultural Institutions" (Los Angeles Times Online, Friday, March 21, 2008).   Issuers of auction-rate bonds for construction projects in particular, are listed in the linked newspaper report as including the Los Angeles County Museum of Art, the Orange County [California] Performing Artscenter, and the Natural History Museum of Los Angeles County.

   One of the Insurance Companies that used to issue Bond Insurance Policies for "auction-rate bonds" is reportedly the now imperiled Financial Guaranty Insurance Company.  "With the bond insurance no longer ironclad, investors are demanding higher interest -- if they are willing to bid at all," it is reported in the newspaper article.

   These troubles are leading Bond Issuers "to restructure the bonds or find bankers to vouch for them in lieu of the now-suspect bond insurers."  One restructuring method currently being explored is negotiating with banks to back these construction Bonds with letters of credit.

   Another financial alternative reportedly is to seek out County, State and other Government bodies which may have an interest in investing in these outstanding construction Bonds.  For example, Los Angeles County is reportedly in such negotiations right now with the  Los Angeles County Museum of Art and the Natural History Museum of Los Angeles County, both of which are governed separately from the Government of Los Angeles County.

   In the meantime, other "cultural institutions" are moving forward with construction projects for which funding was obtained by issuing "unaffected fixed-rate bonds."

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"Review Insurance Policies Now" Says Orlando Newspaper.

   Good advice with related links in this newspaper article published in the Orlando Sentinel, February 22, 2008, by Greg Groeller, "Review Insurance Policies Now".  Every Policyholder and their Agents and Brokers holding every kind of Insurance Policy can benefit from following the good advice published by this linked newspaper article.

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Late Loan Payments, Fewer Jobs And ... Insurance Claims More Likely.

    Late loan payments and as a result, an increasing number of defaults on all sorts of loans in the future, are major problems spreading from home payments and the prospect of ever-increasing mortgage foreclosures, to automobile loans and home equity loans.  See Jeannine Aversa, "Late Loan Payments Jump" p. C3, col. 1 (Associated Press Report published in The Orlando Sentinel, Central Florida Business, Fri., January 4, 2008).  Claims on Mortgage Insurance Policies are very likely to become increasingly greater as real estate foreclosures increase.   Credit Insurance Policies of all types increasingly seem subject to the same likely fate.

    The United States economy is also producing fewer jobs of any kind than in recent months, while the unemployment rate is increasing.  These twin factors have a potentially huge impact on future Insurance Claims.  The latest jobs numbers at the time of this post are for the month just past which at this time is December, 2007 and those numbers are, respectively, 18,000 newly made jobs of any kind, with a simultaneous unemployment rate reported at 5%.  See Peter S. Goodman & Michael M. Grynbaum, "Unemployment Sounds Warning About Economy" p. A1, col. 6 (New York Times Nat'l Ed., Sat., January 5, 2008):

As fewer jobs are created, spending power could dry up.  Faced with declining business, employers could further trim payrolls.  As unemployment grows, more homeowners could fall behind on mortgages, leading to more losses at banks, and more layoffs.

The overall figure of 18,000 newly made jobs masks a major increase of 93,000 jobs in the service industries, including the Insurance industry.  See "U.S. Economy:  Job Growth at Weakest Pace Since 2003 (Update 3)" by Bob Willis & Joe Richter (Bloomberg.com, Fri., January 4, 2008).  (Payroll counts are apparently decreased by job losses, such as a reported December decrease of 31,000 in factory payrolls reported in the same article, thus leading to an overall payroll increase of 18,000 in December.)      

    Take out the take by the American Bankers Association on these developments.  That ABA (not referring to the American Bar Association, the other ABA if you will) sponsors insurance products for its members, including automatic mutual ownership of a Reinsurance Corporation for various Lines of Insurance including Directors and Officers Liability Insurance, Financial Bond Insurance, and Employment Practices Liability Insurance.  Its views on these developments are thus instructive on Insurance implications.

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Hurricane Insurance Coverage Fears Set Florida Roof Costs Soaring.

     By October 1, 2007, the Florida Building Commission was required by the Florida Legislature to adopt and develop a couple of sets of requirements by rule, "which take immediate effect" and which shall be incorporated into the next edition of the Florida Building Code.  At least one purpose, and likely the dominant if not the only purpose, was to encourage mitigation or prevention of future Hurricane Damages and resulting Catastrophe Claims.  More solid structures, particularly homes, should reduce Hurricane Claims and in turn, Homeowners Insurance premiums and Property Insurance premiums -- where such Coverage is available.  See previous posts on this Web Log for information about developments which affect both premiums and availability of Coverage for Hurricane and other Catastrophe Claims.

     Here are some of the important new requirements imposed by the Legislature in Florida Statute Section 553.844, entitled, "Windstorm Loss Mitigation; Requirements for Roofs and Opening Protection."                  

     Single-family residential structures, unlimited by value of the structure, are in one group.  Not all single-family residential structures are addressed by the legislation, however.  The requirements apply to (1) single-family residential structures that are (2) built on site, (3) "constructed prior to the implementation of the Florida Building Code [Fla. Stat. § 553.73, 'Florida Building Code', was first enacted in 1974]", and (4) undergoing a "roof replacement".  When those things come together, then the new roof has to incorporate and comply with:

"Secondary water barriers for roofs and standards relating to secondary water barriers." 
                                       * * *
"Strengthening or correcting roof-decking attachments and fasteners during reroofing".

         

     Another set of requirements applies to certain -- but not all -- buildings with "an insured value of $300,000 or more" or that have "a just valuation for the structure for purposes of ad valorem taxation of $300,000 or more," and which receive a "roof replacement".  Such buildings must add "[p]rescriptive techniques for improvement of roof-to-wall connections" when the roof is replaced.

     The executive director of the Florida Roofing, Sheet Metal & Air Conditioning Contractors Association, Inc. is quoted as the source in a newspaper report for an estimate that water-barrier requirements applicable to the first group of site-built single-family homes above, would add between $1,600.00 and $4,000.00 to reroof a home with a 4,000-square-foot roof.

     Additional costs to reroof a single-family residential building on the coast, i.e., in the second group above, would according to the same source add at least about $5,000.00 to a three-bedroom home, for example, in Volusia or Brevard County, Florida.  (The second group above does not appear to be limited to single-family residential buildings under the statute.)  Here is a link to the newspaper report published in the Orlando Sentinel on Friday, October 5, 2007:  Robin Benedick, "New Hurricane-Safety Law is Raising the Roof on Costs"  Page A1, Col. 3 (Orlando Sentinel, Friday, October 5, 2007).  The newspaper report was originally published in the South Florida (Ft. Lauderdale) Sun-Sentinel:  Robin Benedick, "Cost of Replacing Roof Goes Sky High Under New Law" (Sun-Sentinel.com, Thursday, October 4, 2007).

     The next Hurricane Damage Claims in Florida will tell the tale of whether Insurance Coverage will be more widely available, or at a higher or lower premium, as a result of these "mitigation" or damage-prevention efforts.  Until then, roofing contractors are apparently not happy as a result of these efforts.

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