What if the "Your Work" Exclusion is Inapplicable? ISO Classification and Construction Defect Claims.
February 14, 2023 —
David Humphreys - Carson Law Group, PLLCThis article was first published by the National Association of Home Builders (NAHB) on their NAHBNow blog
One of the risks faced by a residential builder is that, following completion of construction, the homeowner may assert a claim against the builder for damage to the home caused by an alleged construction defect. One of the ways a builder manages the risk of such construction defect claims is by purchasing commercial general liability (“CGL”) insurance.
A builder’s CGL policy covers those sums the builder is legally obligated to pay as damages because of bodily injury or property damage caused by an “occurrence,” that is, damage that is accidental rather than being expected or intended by the builder, so long as the claim does not fall within any of the policy’s several “exclusions” from coverage.
When faced with a construction defect lawsuit, our builder clients are often surprised—and dismayed—when their CGL insurer denies coverage and refuses to defend the builder. However, builders shouldn’t take their insurer’s denial of coverage at face value. This article discusses a new argument we recently discovered that has been a game-changer for our builder clients who were denied coverage in construction defect cases.
Whether coverage exists always depends on the specific language of the particular CGL policy, and courts generally construe exclusions against insurers. This allows experienced coverage attorneys to, at times, successfully challenge declinations of coverage and, at a minimum, convince insurers to pay for the builder’s defense.
A typical CGL policy provides products-completed operations coverage, which is sought by businesses that face potential liability arising out of the products that they have sold or operations that they have completed. Products-completed operations coverage allows builders to obtain many years of coverage for a completed project. Over the years, insurers have added to their policies modifications and exclusions that limit their exposure for claims that fall under that coverage.
Exclusion (l) or the “your work” exclusion, will often exclude coverage for a latent defect claim against the builder. A standard “your work” exclusion provides:
This insurance does not apply to: . . . “[p]roperty damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”
This “your work” and similar exclusions are designed to limit coverage for business risks that are within the contractor’s own control; e.g., a claim that the contractor caused damage to the contractor’s own work. These exclusions apply both to ongoing and completed projects, which can leave a builder unprotected from lawsuits for years after a project is completed.
However, builders who are classified on the declarations page with Code 91580 Contractors— Executive Supervisors or Executive Superintendents, may not be subject to the “your work” exclusion. 91580 is a common classification assigned to builders during insurance underwriting. This classification falls into what is referred to as “dagger class” or “plus sign class,” which indicates that Products and/or Completed Operations coverage is
included as part of and not separate from the Premises/Operations coverage (emphasis added).
It has been noted that dagger” and “plus sign” classifications create confusion because of the seeming contradiction between policy wording and coverage rules.* The CGL policy seems to expressly exclude products and/or completed operations losses for “dagger” or “plus sign” classes. In the definitions section we find the following:
“Products-completed operations hazard”: . . .b. Does not Include “bodily Injury” or “property damage” arising out of:. . . (3) Products or operations for which the classification, listed In the Declarations or in a policy schedule, states that products- completed operations are subject to the General Aggregate Limit.”
This apparent exclusionary language, however, must be read in conjunction with the Insurance Services Office’s (ISO) Rule 25.F.1.:
Rule 25. CLASSIFICATIONS
F. Symbols
1. Plus Sign
A plus sign when shown in the Premium Base column under General Liability insurance in the Classification Table - means that coverage for Products and/or Completed Operations is included in the Premises/Operations coverage at no additional premium charge. When this situation applies, the classification described in the policy schedule or Declarations must state that:
“Products-completed operations are subject to the General Aggregate Limit” to provide Products and/or Completed Operations coverage(s).
When read together then, the exclusionary wording in the policy definition removes any product or operation loss subject to the “dagger” or “plus sign” classification from the definition of Products Completed Operations Hazard. Under the dagger or plus sign classification of Rule 25, coverage for products and/or operations is included in the premises operations coverage. Consequently, a loss can no longer be defined as a product completed loss, and as a result it is no longer subject to the “your work” exclusion.
Recall that the standard “your work” exclusion quoted above excludes coverage for “property damage” to “your work” “arising out of it or any part of it
and included in the “products-completed operations hazard”.” Here, we emphasize “and” because the “your work” exclusion applies only to property damage that is also included in the “products-completed operations hazard.” Since property damage claims arising under “plus sign” classifications are expressly excluded from the “products-completed operations hazard” (they are included in the premises/operations coverage) the “your work” exclusion simply does not apply. This means that, if your CGL insurer denies your construction defect claim based on the “your work” exclusion, do what the title of this article suggests: Check your ISO classification! If 91580 “Executive Supervisors or Executive Superintendents” is listed on your Declarations page, you may be in luck.
This new ISO classification-based coverage argument will likely also apply to other exclusions and endorsements that CGL insurers routinely rely on in denying coverage in construction defect cases. We recently successfully challenged a coverage denial based on the following “prior work” exclusionary endorsement:
”This insurance does not apply to ‘your products’ or ‘your work’ completed prior to” a certain date listed in the endorsement. . .
“Specifically, this insurance does not apply to. . . “property damage”. . . included in the ‘products-completed operations hazard’ and arising out of. . . ‘your work’ performed by or on behalf of you prior to the date shown above.”
Again, this endorsement incorporates the “products-completed operations hazard,” which allowed us to successfully argue that the exclusion was inapplicable to a builder classified as a 91580 “Executive Supervisor or Executive Superintendent.”
To our knowledge, this new ISO classification-based coverage argument has not yet been addressed by a court. Our recent successes with it have concluded with favorable settlements for our clients. Accordingly, for now, the ISO classification-based argument is a powerful new tool to challenge denials of coverage in construction defect cases where the builder is classified under 91580 “Executive Supervisors or Executive Superintendents.”
David Humphreys is a Partner at Carson Law Group, PLLC, and has been representing construction contractors, subcontractors, and owners for more than two decades in Mississippi and throughout the Southeast.
*See “Dagger” or Plus Symbol Classes: What They Mean, Chris Boggs - Virtual University | “Dagger” or Plus Symbol Classes: What They Mean) (independentagent.com)
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District Court Awards Summary Judgment to Insurance Firm in Framing Case
August 04, 2011 —
CDJ STAFFIn the case of Continental Western Insurance Company v. Shay Construction Inc., Judge Walker Miller has granted a summary judgment against Shay Construction and their co-defendant, Milender White Construction Company.
Shay was the framing subcontractor for Milender White on what the court described as “a major construction project in Grand County, Colorado.” Two of Shay’s subcontractors, Wood Source Inc. and Chase Lumber Company furnished materials, labor, and equipment to Shay. They subsequently sued for nonpayment and sought to enforce mechanic’s liens, naming both Shay and Milender as defendants. Milender White alleged that Shay had “breached its obligation under its subcontracts with Milender White.”
Shay’s insurance provider, Continental Western, stated that its coverage did not include “the dispute between Shay, its subcontractors, particularly the cross claims asserted by Milender White.” Shay then sued Continental Western, alleging breach of contract and statutory bad faith.
The court, however, has found with Continental Western and has granted them a summary judgment. They found “no genuine issue as to any material fact.” The judge did not side with Continental Western on their interpretation of the phrase “those sums that the insured becomes legally obligated to pay as damages.” The court found that the Colorado courts have not limited this to tort actions only. However, as Milender’s cross claim included claims of faulty workmanship on the part of Shay, Judge Miller found for Continental.
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Negligence of Property Appraiser
September 28, 2017 —
David Adelstein - Florida Construction Legal UpdatesA new appellate decision came out discussing the statute of limitations associated with a negligence claim against a property appraiser. In this case, Llano Financing Group, LLC v. Petit, 42 Fla. L. Weekly D2071a (Fla. 1st DCA 2017), the court held that the four year statute of limitations for negligence claims commences when the lender relied on the appraisal to fund the loan. The statute of limitations does not commence years later when the property is ultimately sold at a loss. Oh no. Once the lender receives the appraisal and funds the loan, the statute of limitations for the negligence claim begins. Applying this rationale in other contexts, the statute of limitations to sue a property appraiser in negligence would commence once an appraisal is received and relied on.
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David Adelstein, Florida Construction Legal UpdatesMr. Adelstein may be contacted at
dadelstein@gmail.com
Mediation Fails In Federal Lawsuit Seeking Damages From Sureties for Alleged Contract Fraud
August 17, 2020 —
Richard Korman - Engineering News-RecordAfter mediation failed, a federal whistle blower lawsuit over alleged fraud against two contractors, which also targets sureties and a surety bond producer, is moving forward. The parties have asked a U.S. district court judge in Washington, D.C. to rule on outstanding motions in preparation for a possible trial.
Richard Korman, Engineering News-Record
Mr. Korman may be contacted at kormanr@enr.com
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Delaware Settlements with Minors and the Uniform Transfer to Minor Act
October 15, 2014 —
Stephen J. Milewski – White and Williams LLPAs a Delaware lawyer, one of the most frequently asked questions I get from insurance clients is: “Do all personal injury settlements with minors need to be approved by the Court?” The answer is and always has been yes. This is true regardless of the amount of the settlement. There have, however, been some recent changes under Delaware law which may help facilitate the process and even reduce the costs associated with settling small tort cases with minors. Traditionally, when settling cases with a minor, a Petition would be filed with the trial court (Superior Court) and then a hearing would be scheduled for the parties to present to the Court the terms of the settlement, explain the plaintiff’s injuries and itemize the fee breakdown. This would be the settlement approval process. After that, the plaintiff would be required to have a guardian appointed over the proceeds, which had to be approved by Chancery Court (Delaware’s Court of Equity). The purpose of this process was to ensure the settlement money going to the minor was managed properly; the net proceeds were generally placed into a bank account not to be used by the guardian or the minor until the minor reached the age of majority. To both the plaintiff, and the insurance carrier paying out the settlement, this process was burdensome and added disproportionate costs to small settlements.
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Stephen J. Milewski, White and Williams LLPMr. Milewski may be contacted at
milewskis@whiteandwiliams.com
Nevada Supreme Court Rejects Class Action Status, Reducing Homes from 1000 to 71
July 02, 2014 —
Beverley BevenFlorez-CDJ STAFFThe Las Vegas Review-Journal reported that the “Nevada Supreme Court has rejected a request for class action status for claims of damaged stucco from faulty construction by Del Webb Communities involving nearly 1,000 Sun City Summerlin residents,” however, “the court upheld the award of damages to 71 homeowners following a jury trial in Clark County District Court in 2008.”
The case began in 2003, and the Las Vegas Review-Journal referred to it as “one of the largest construction-defect cases in Nevada history.” But District Judge Allan Earl denied class action lawsuit in 2006. “Attorneys were seeking $70 million for the homeowners.” In 2008, another court “determined that only 71 homeowners merited compensation totaling $4 million for the stucco issues.”
According to the Las Vegas Review-Journal, “[h]omeowners alleged that Del Webb failed to install metal screeds that would protect homes from water damage, and as a result, the homes suffered from cracked stucco, mold and weakened walls.”
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Colorado Court of Appeals Decides the Triple Crown Case
January 17, 2014 —
Berkeley W. Mann, Jr. – Higgins, Hopkins, McLain & Roswell, LLCIn an earlier blog post, I discussed the case of Triple Crown Observatory Village Assn., Inc. v. Village Homes of Colorado, Inc., et al (2013 WL 5761028) because it presented the rare case where the Colorado Court of Appeals accepted an interlocutory appeal. Notably, the interlocutory appeal resulted from dismissal of the HOA case in which the trial judge directed the parties to arbitrate in lieu of a jury trial, under the declaration of covenants, conditions, and restrictions that governed the community. The Court of Appeals decided the case on its merits on November 7, 2013, and its decision can be found at 2013 WL 6502659. (Note: this presently unpublished opinion may be subject to further appeal to the Colorado Supreme Court.)
The case resulted from an attempt by the HOA’s counsel to amend the mandatory arbitration provisions of the declarations before it filed suit. This amendment process took the form of soliciting signature votes of homeowners on a revocation resolution to repeal the specific provisions of the declarations that provided mandatory, binding arbitration as the sole remedy for disputes between the HOA and the developer and/or general contractor. The declarations required that 67% of homeowners vote in favor of amendment in order to modify the declarations.
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Berkeley W. Mann, Jr., Higgins, Hopkins, McLain & Roswell, LLCMr. Mann may be reached at
mann@hhmrlaw.com
Texas Shortens Its Statute of Repose To 6 Years, With Limitations
October 02, 2023 —
Jason Daniel Feld & Roni Most - Kahana FeldEffective June 9, 2023, Texas has shortened its statute of repose from the existing 10-year statute for builders of new homes to 6-years under specific conditions. The significantly shorter statute of repose bars suits against construction contractors of detached one-and two-family homes and townhomes, filed six years after the substantial completion of such homes, where the contractor also furnished a written warranty in compliance with the statute. Notably, projects including apartments, mixed-use, and hotels are not covered by the new law. It is also noted that a grey area in the law exists as to whether condominiums will be covered by the statute. The statute of repose strictly bars the filing of any action, claim or arbitration demand regardless of when the injury was actually discovered (latent defects) and is separate and distinct from any applicable statute of limitations.
The New Texas Statute of Repose Law
Under the
Texas Civil Practice & Remedies Code § 16.009, persons who construct or repair improvements to real property cannot be sued for defective or unsafe conditions of the property or deficiencies in the construction or repair of the improvement later than 10 years after substantial completion of the improvement, except in certain narrow circumstances. This statute is known as the “statute of repose.” The statute applies not only to suits for construction defects, but also personal injury, wrongful death, contribution, and indemnity.
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Jason Daniel Feld, Kahana Feld and
Roni Most, Kahana Feld
Mr. Feld may be contacted at jfeld@kahanafeld.com
Mr. Most may be contacted at rmost@kahanafeld.com
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