1. For indemnity relating to "long tail" claims¹, the "all sums" language in the Comprehensive General Liability (CGL) policies obligates a carrier to indemnify up to the policy limits, so long as some portion of the "property damage" that is the subject of the suit occurred during the policy period; and
2. The insured is entitled to "stack" the limits of successive policies up to the policy limits for indemnity relative to that loss.

The case arose out of the State of California's claim for indemnity under its excess Comprehensive General Liability policies in connection with a federal court-ordered cleanup of the State's Stringfellow Acid Pits waste site. The State designed the Stringfellow site, and operated it as an industrial waste disposal facility from 1956 to 1972, when groundwater contamination was discovered. In 1998, a federal court found the State liable for all past and future cleanup costs for the site. Each of the six insurers that were parties to the appeal issued excess Comprehensive General Liability policies to the State between 1964 and 1976.

The Stringfellow site, and the resulting insurance litigation, has given rise to several insurance rulings already, including Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 — adopting the continuous injury trigger for defense, and State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008 — holding that the relevant event to determine if there is an "occurrence" is the discharge into the environment from a contained area, and that where there is an indivisible injury, the insured is not obligated to prove the amount of any property damage resulting from any discrete cause.

There are several critical aspects of the Court's decision.

First, there was no dispute that the environmental damage began shortly after the operation of Stringfellow began, and that it continued throughout the defendant insurers' policy periods and beyond. According to the opinion, the site was uninsured prior to 1963, and after 1978. The issue, therefore, was whether the State of California could be allocated partial responsibility for the cleanup costs for the amount of property damage occurring in years where it was self insured. This fact pattern — where there is insurance for some but not all of the affected years — is common in "long tail" or "progressive loss" type cases. A carrier with only one year of coverage could potentially be responsible for all damages regardless of the length of time over which the property damage occurred.

However, the second critical aspect of the Court's decision, and one that may temper its precedent value, is the specific policy language. The Excess Policies at issue utilized older Comprehensive General Liability policy language. The Court observes:

Under the heading "Insuring Agreement," insurers agreed "[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law ... for damages ... because of injury to or destruction of property, including loss of use thereof." Limits on liability in the agreements were stated as a specified dollar amount of the "ultimate net loss [of] each occurrence." "Occurrence" was defined as meaning "an accident or a continuous or repeated exposure to conditions which result in ... damage to property during the policy period ..." (at pg.4) (emphasis added)

In newer Commercial General Liability policies, the Insuring Agreement reads: "We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies ... This insurance applies to "bodily injury" and "property damage" only if ... the "bodily injury" or "property damage" occurs during the policy period ..." (e.g., ISO form CG 00 01 10 01) (emphasis added)

The State of California Court noted that the "pro rata," or time on the risk allocation approach advanced by the carriers assigns liability for those years of the continuous progression of property damage to all affected years, including those where the insureds chose not to purchase insurance. The Court determined the "all sums" language of the policies was inconsistent with this result, emphasizing that its holding follows directly from the policy language, rather than any general principle, and is therefore arguably inapplicable to policies using the revised language:

Under the CGL policies here, the plain "all sums" language of the agreement compels the insurers to pay "all sums which the insured shall become obligated to pay ... for damages ... because of injury to or destruction of property ..." (Ante, at p. 4.) As the State observes, "[t]his grant of coverage does not limit the policies' promise to pay 'all sums' of the policyholder's liability solely to sums or damage 'during the policy period.'"

The insurers contend that it would be "objectively unreasonable" to hold them liable for losses that occurred before or after their respective policy periods. But as the State correctly points out, the "during the policy period" language that the insurers rely on to limit coverage, does not appear in the "Insuring Agreement" section of the policy and therefore is neither "logically [n]or grammatically related to the 'all sums' language in the insuring agreement." (emphasis added)

Under later ISO policy forms, the Insuring Agreement requires that property damage occur during the policy period. Accordingly, there are valid arguments — at least for carriers using later versions of the Commercial General Liability policy forms — to distinguish the "all sums" holding by this decision, and that explicit language requiring that property damage occur during the policy period is unambiguous and should be applied. It is therefore an open question whether the allocation approach advanced by the carriers would have been successful with the newer policy forms.

The third critical aspect of the decision is its rejection of FMC Corp. v, Plaisted & Cos. (1998) 61 Cal.App.4th 1132. The Court noted that in this case, like FMC, the policies had no specific prohibition on stacking of policy limits. The Court concludes:

We agree with the Court of Appeal, and find that the policies at issue here, which do not contain antistacking language, allow for its application. In so holding, we disapprove FMC Corp. v. Plaisted & Companies, 61 Cal.App.4th 1132

In conclusion, this decision from the California Supreme Court is significant, because it firmly extends the "all sums" language to indemnity. For policies with the applicable language, if any part of the property damage that is part of a "long tail" case, the carrier will be obligated to pay up to the policy limit, and then seek equitable contribution between other carriers on the risk.

¹The kind of property damage associated with the Stringfellow site, often termed a "long-tail" injury, is characterized as a series of indivisible injuries attributable to continuing events without a single unambiguous "cause." Long-tail injuries produce progressive damage that takes place slowly over years or even decades. (Pg 7-8)

The Right Of The Insurer To Intervene And New Issues Created By The Presence Of The Insurer

As noted, the Kaufman & Broad Communities, Inc. decision indicates that an insurer may intervene in a lawsuit against its insured where its insured is a suspended corporation. The right to intervene arises from California Insurance Code Section 11580,29 which permits a party securing a judgment against a suspended corporation to proceed directly against the suspended corporation's insurance carrier to enforce the default judgment.³⁰ In order to prevent an entry of default judgment, an insurer may intervene in a lawsuit to contest its insured's (the suspended corporation) liability and damages.³¹

The intervening insurer, however, may not expand the scope of issues in the lawsuit to include coverage issues,³² despite the fact that the insurer, as an intervenor, is a party to the lawsuit.³³ Instead, the intervening insurer must wait until a subsequent action is filed to litigate insurance coverage issues, but even then can only litigate coverage "to the extent that the issues relevant to coverage were not actually litigated in the first lawsuit."³⁴

The law is still developing with respect to which coverage issues are properly reserved for a subsequent direct action. For instance, is the subsequent suit limited to the ultimate issues of coverage, such as whether an exclusion applies, or can facts that support liability and may impact coverage also be litigated? Without a clear answer to these questions, a practitioner representing an intervening insurer must develop a strategy with respect to the adjudication of issues in the initial lawsuit.

How Is An Intervening Insurer To Be Referred To During The Course Of The Litigation?
When an insurance company intervenes in a lawsuit to which its insured, a suspended corporation, is a party, the insurer becomes an actual party to the suit,³⁵ as opposed to the suspended corporation in a representative capacity.³⁶ This makes sense, as the purpose of intervention is to afford the insurer an opportunity to protect its interests by contesting the liability and damages claims against its named insured, the suspended corporation.³⁷ This, however, also creates some uncertainty with respect to how the insurance carrier is to be referred to during the litigation.

Evidence of liability insurance is inadmissible to prove negligence or other wrongdoing.³⁸ Further, evidence of liability insurance is generally "regarded as both irrelevant and prejudicial to the defendant."³⁹ With respect to an intervening insurer, then, any reference to the insurer in front of a jury would likely prejudice its insured, the suspended corporation. So how should the intervening insurer be referred to during the course of the litigation?

During the pretrial process, referring to the intervening insurer as a party would likely pose little threat of prejudice to the suspended corporation. The same, however, is not true of the trial itself, where reference to the intervening insurer in front of the jury would likely result in substantial prejudice to the insured. With this in mind, a court will likely identify the intervening insurer as a party during the pretrial process only. Should the case proceed to jury trial, and the client of the attorney representing the intervening insurer need to be identified, either by the court, or the attorney stating an appearance, the court will likely identify the suspended corporation as the attorney's client, and direct the attorney to do the same. Another possibility would be to not identify a client, but instead indicate that the attorney is representing the interests of the suspended corporation. Regardless of how it is done, the court and parties to the suit must refrain from referring to the intervening insurer in front of the jury.

Does The Lawyer Retained By The Intervening Insurer Represent The Insurer Or Its Insured, The Suspended Corporation?
As discussed, the purpose of intervention is to afford the insurer an opportunity to protect its interests in the lawsuit.⁴⁰ While this will typically involve contesting the liability and damages issues as to the intervening carrier's named insured, the attorney retained by the intervening carrier does not represent the insured. Rather, the attorney represents the intervening insurer, so that, should the interests of the intervening insurer and suspended corporation diverge, the attorney would be obligated under most circumstances to represent the interests of the intervening insurer.

Is An Intervening Insurer That Defends Its Interest To The Detriment Of Its Insured, The Suspended Corporation, Exposed To Bad Faith Liability If The Suspended Corporation Revives?
Implied in every insurance policy is a covenant of good faith and fair dealing.⁴¹ Pursuant to this covenant, an insurer must consider the insured's interests to the same extent it considers its own, and not act so as to deprive the insured of its rights under the policy.⁴²

Typically, an insurer that provides a defense to its insured will retain defense counsel on behalf of the insured, thereby creating a tripartite relationship between the insurer, the insured and defense counsel.⁴³ This triumvirate will generally have a common interest in limiting liability to a third party plaintiff or cross-plaintiff.⁴⁴ This common interest, however, will be undermined should it become clear that some or all of the third party's allegations against the insured fall outside the scope of coverage afforded by the insurer's policy.⁴⁵

In a situation where the interests of the insurer and insured begin to diverge, the insurer is still subject to the covenant of good faith and fair dealing, and so must refrain from action that deprives the insured of its rights under the policy.⁴⁶ With respect to discovery and motions, for example, an insurer would be acting to deprive its insured of rights under the policy were it to direct defense counsel to fail to oppose a motion seeking to establish that the insured intentionally caused the alleged damage at issue, or to propound discovery with the intention of establishing that the insured's work did not cause damage, but, instead, was simply defective (and therefore not an "occurrence" causing "property damage"). In both instances, the insurer's action or inaction would help to establish liability on the part of the insured, while also helping to establish that the loss is not covered under a standard general liability policy.

When a suspended corporation is named as a defendant or cross-defendant to a lawsuit, the relationship between the insurer, the insured and counsel is of a completely different nature than the tripartite relationship that exists when the insured is not suspended. The suspended corporation's insurer becomes a party to the lawsuit through intervention for the purpose of representing its interests, not those of its insured. The question, then, is whether an intervening insurer faces bad faith exposure if in defending its interests it acts contrary to the interests of its insured, the suspended corporation. Though this question is of particular concern because of a suspended corporation's ability to revive itself, it appears that no court has squarely addressed this issue.

Imagine a scenario in which an intervening insurer has established undisputed facts that would entitle it to a declaration of non-coverage, only to have the suspended corporation revive itself. Upon revival, the suspended corporation would once again be a party to the action, but would not be entitled to a defense from its insurer, the intervening carrier, due to facts established by the insurer during the period of suspension.⁴⁷ In this scenario, would the insured then have a claim against the carrier for prejudicing its defense and rights to coverage under the carrier's policy?

It seems unlikely that an insured, upon revival, would have an actionable bad faith claim against its insurer, where its insurer intervened in a lawsuit during a period of suspension and represented its interests to the detriment of the insured's. Simply put, the law allows the carrier to intervene in the lawsuit to protect its interests; subjecting the carrier to bad faith liability for protecting its interests would undermine the purpose of intervention in the context of suspended corporations. Nonetheless, a carrier considering intervention would be wise to retain an attorney with experience in the substantive area of law with which the lawsuit is concerned, as well as insurance coverage and bad faith. On the other side of the coin, an attorney representing a suspended corporation intending to revive must be mindful of and plan for the possibility that the suspended corporation's insurer will intervene in a lawsuit and take action that is detrimental to the suspended corporation.

What Effect Does An Intervening Insurer Have On The Issues Litigated And Discovery Conducted?
An insurance carrier that intervenes in a lawsuit because its insured is a suspended corporation will have an interest in disproving coverage under its policies. The question is whether the intervening insurer, by virtue of trying to disprove coverage, will change the nature of discovery and the issues litigated.

The presence of an intervening insurer will not greatly change the nature of the issues litigated in a lawsuit, as an intervening party may not enlarge the scope of issues to be tried.⁴⁸ However, the intervening insurer may attempt to establish facts through discovery that, while relevant to the lawsuit, tend to disprove coverage. In this manner, an intervening insurer is likely to have a significant impact on a lawsuit, as the coverage-related discovery it pursues may affect the liability of the remaining parties to the suit, and the coverage afforded by their insurance carriers.

For instance, in a construction defect case, an intervening insurer could pursue discovery as to the dates the damages occurred in order to establish that the damages occurred outside the effective dates of its policy. The intervening insurer's primary motivation for seeking this information would be to disprove coverage under its policy. This information, however, would also likely affect the insurers of the other parties to the suit as well. In this way, an insurer's intervention and attendant litigation strategy could significantly impact the ability of the remaining parties to settle a lawsuit. For this reason, the parties to a lawsuit, regardless of size and complexity, need to anticipate an intervening insurer's litigation strategy when developing litigation strategies of their own.

May An Intervening Insurer File A Motion For Summary Judgment On An Issue That Is Determinative Of Coverage Under Its Policies?
Kaufman & Broad Communities, Inc. decision makes it clear that an intervening carrier may not expand the scope of a lawsuit by raising coverage issues.⁴⁹ Instead, the carrier is generally limited to contesting issues of damages and liability with respect to its insured, the suspended corporation, and must wait until a subsequent direct action is filed against it to litigate coverage issues.⁵⁰ It remains to be seen, however, whether a court would allow an intervening carrier to file a motion for summary judgment on an issue of damages that, if granted, would dispose of coverage under the carrier's policies.

While not addressing this issue directly, the Kaufman & Broad Communities, Inc. decision does provide some guidance insofar as it acknowledges that coverage issues can be litigated in a lawsuit to which an insurer intervenes.⁵¹ Specifically, Kaufman & Broad Communities, Inc. provides that "to the extent that issues relevant to coverage were not actually litigated in the first lawsuit" they can be litigated in a subsequent action brought to determine if the judgment is covered by insurance.⁵² Within the context of the Kaufman & Broad Communities, Inc. decision, this statement appears to be an acknowledgement that the adjudication of issues properly within the scope of the lawsuit to which the insurer has intervened may result in a determination of coverage issues as well. Such an acknowledgement would imply that an intervening carrier is permitted to litigate issues affecting coverage, so long as the issues fall within the scope of the lawsuit.

Though Kaufman & Broad Communities, Inc. arguably permits an intervening insurer to file a motion for summary judgment that, if granted, would dispose of coverage under the insurer's policies, it hardly provides a definitive answer to the question posed in this section. Until a definitive answer is provided, a court confronted with this question will likely be afforded a great deal of discretion when determining whether to hear the intervening insurer's motion.

May An Intervening Insurer Pursue Contribution From Additional Insured Carriers?
The question posed by this section is most likely to arise within the context of a construction defect lawsuit. In a typical construction defect case, the developer of the construction project at issue will have contractually obligated the subcontractors that worked at the project to provide the developer with additional insured coverage. As a result of this contractual requirement, the liability policies maintained by the subcontractors will typically contain either "blanket" additional insured endorsements⁵³ or additional insured endorsements that specifically identify the developer as an additional insured to the policies.

The question, then, is whether an intervening carrier to a construction defect lawsuit may pursue additional insured coverage for its insured, the suspended corporation, where the suspended corporation was the developer of the construction project at issue.

Any attempt by an intervening insurer to pursue additional insured coverage for the suspended corporation will likely be met with strong opposition from the additional insured carriers.⁵⁴ Specifically, the additional insured carriers will likely argue that because the suspended corporation is prohibited from defending itself under California Revenue and Taxation Code Section 23301, a duty to defend cannot exist. Further, the additional insured carriers will likely point to the fact that the intervening insurer is not representing the interests of the suspended corporation in the lawsuit, but instead is representing its own interests as the suspended corporation's insurer.

In response to the opposition of the additional insured carriers, an intervening insurer will likely argue that the issue is one of equity, not strictly policy terms,⁵⁵ and that as a matter of equity, the additional insured carriers should be paying a share of the intervening insurer's legal costs. While persuasive arguments exist on both sides of the issue addressed in this section, it appears that the courts have not yet taken a position on this matter. As such, the extent to which an intervening carrier may pursue additional insured coverage remains uncertain.

Conclusion

When a suspended corporation has been named as a party to a lawsuit filed in California, a number of issues arise which must be carefully considered by the parties to the lawsuit, the parties' attorneys, and the parties' insurance carriers. This is especially true with respect to the suspended corporation's attorney, who risks criminal punishment and disbarment by continuing to represent the suspended corporation in the lawsuit.

The presence of a suspended corporation in a lawsuit brings with it the possibility of intervention by the suspended corporation's insurance carrier. Should the suspended corporation's insurance carrier choose to intervene, the parties to the suit must be conscious of the fact that the intervening insurer is representing its own interests, as opposed to those of its insured, and that in doing so it can have a significant impact on the outcome of the lawsuit.

In the context of a civil lawsuit, there are currently more questions than answers when it comes to suspended corporations. For this reason, it is important for the parties to a lawsuit, their lawyers, and their insurers to be aware of the dangers and opportunities inherent in a lawsuit to which a suspended corporation is a party, and to develop a strategy for effectively managing the litigation.

²⁹ California Insurance Code Section 11580 (b)(2) states that an insurance policy shall contain, or be construed so as to contain a "provision that whenever judgment is secured against the insured ... in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment."

³⁰ This is type of suit is commonly referred to as an 11580 action. See Reliance Ins. Co. v. Superior Ct., 100 Cal. Rptr. 2d 807, 84 Cal. App. 4th 383, 386 (2000).

³¹ Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 224.

³² In Kaufman & Broad Communities, Inc., the California Appellate Court indicated that the parties to a lawsuit could stipulate to allow an intervening insurer to litigate coverage issues in that lawsuit. Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 225. Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 224.

³³ See Hospital Council of Northern Cal. v. Superior Ct., 106 Cal. Rptr. 247, 30 Cal. App. 3d 331, 336 (1973).

³⁴ Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 224 (emphasis added).

³⁵ See Hospital Council of Northern Cal., 30 Cal. App. 3d at 336.

³⁶ See Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 218, 220.

³⁷ Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 218, 223.

³⁸ Cal. Evid. Code § 1155.

³⁹ Neumann v. Bishop, 130 Cal. Rptr. 786, 59 Cal. App. 3d 451, 469 (1976).

⁴⁰ See Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 218, 223.

⁴¹ Rappaport-Scott v. Interinsurance Exchange of the Automobile Club, 53 Cal. Rptr. 3d 245, 146 Cal. App. 4th 831, 836 (2007); Hand v. Farmers Ins. Exchange, 29 Cal. Rptr. 2d 258, 23 Cal. App. 4th 1847, 1854 (1994).

⁴² Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 658–659 (1958); Century Surety Co. v. Polisso, 43 Cal. Rptr. 3d 468, 139 Cal. App. 4th 922, 948 (2006); See Crisci v. Security Ins. Co., 58 Cal. Rptr. 13, 66 Cal. 2d 425, 430–431 (1967).

⁴³ See San Diego Fed. Credit Union v. Cumis Ins. Society, 208 Cal. Rptr. 494, 162 Cal. App. 3d 358, 364 (1984).

⁴⁴ Cumis Ins. Society, 162 Cal. App. 3d at 364.

⁴⁵ Cumis Ins. Society, 162 Cal. App. 3d at 364.

⁴⁶ Comunale, 50 Cal. 2d at 658–659.

⁴⁷ In California, extrinsic evidence can be used to create, as well as defend against, the duty to defend. Montrose Chemical Corp. v. Superior Court, 24 Cal. Rptr. 2d 467, 6 Cal. 4th 287, 291 (1993).

⁴⁸ Kaufman & Broad Communities, Inc., 136 Cal. App 4th at 224.

⁴⁹ Kaufman & Broad Communities, Inc., 136 Cal. App 4th at 224.

⁵⁰ Kaufman & Broad Communities, Inc., 136 Cal. App 4th at 224.

⁵¹ Kaufman & Broad Communities, Inc., 136 Cal. App 4th at 224.

⁵² Kaufman & Broad Communities, Inc., 136 Cal. App 4th at 224.

⁵³ A "blanket" additional insured endorsement is one that provides coverage to any person or organization that the named insured is required by contract to provide with additional insured coverage.

⁵⁴ Under California law, an insurer's duty to defend generally applies to the entire action, Presly Homes v. American States Insurance Co., 108 Cal. Rptr. 2d 686. 90 Cal. App. 4th 571, 575 (2001); Buss, et al. v. Superior Court, 65 Cal. Rptr. 2d 366, 16 Cal. 4th 35, 49 (1997), but is subject to equitable allocation where multiple insurers owe a duty to defend. See Maryland Casualty v. Nationwide Mutual Insurance Co., 97 Cal. Rptr. 2d 374, 81 Cal. App. 4th 1082 (2000). As such, an insurer that provides additional insured coverage to a suspended corporation will likely be in the same position as the suspended corporation's primary carrier. However, where the suspended corporation's primary carrier has intervened to contest damages and liability as to the suspended corporation, an additional insured carrier will likely have no incentive to do so as well.

⁵⁵ See Crowley Maritime v. Boston Old Colony Ins. Co., 70 Cal. Rptr. 3d 605, 158 Cal. App. 4th 1061, 1068 (2008) (holding equitable contribution arises not from contract, but from equity).

Default Judgment

An entry of default judgment conclusively establishes the facts as to liability.¹⁹ Consequently, the entry of default judgment against a suspended corporation greatly limits the coverage defenses available to its insurer in the event the plaintiff seeks to enforce the default judgment against the insurer. In addition, the available coverage defenses may be further limited insofar as the failure to intervene is somewhat analogous to the failure to defend, and an insurer that has an opportunity to defend, but does not, is bound by the issues adjudicated as to its insured.²⁰

When faced with liability for a default judgment entered against its insured, one option available to the carrier is to argue that its policy's cooperation clause²¹ bars coverage. This argument would apply in instances where the insured, by virtue of its suspension, is unable to cooperate with the carrier in the underlying action, and, as a result, has a default judgment entered against it. This argument, however, is unlikely to succeed, as the burden will be on the carrier in the subsequent action to establish that had the cooperation clause not been breached, there is a substantial likelihood the trier of fact in the underlying action would have ruled in favor of the insured.²²

Instead of contesting coverage after a default judgment has been entered, a more effective strategy may be for the carrier to intervene in the lawsuit to which its insured, the suspended corporation, is a party, in order to prevent the entry of default judgment in the first place. A carrier is permitted to intervene where preventing an entry of default judgment against its insured is necessary to protect its own interests.²³ Moreover, in Kaufman & Broad Communities, Inc. v. Performance Plastering, the California Appellate Court observed the following:

Some cases, however, have sanctioned intervention as an appropriate approach. For example, in Reliance Ins. Co. v. Superior Court (2000) 84 Cal. App. 4th 383, 388, the appellate court concluded the trial court abused its discretion in refusing to allow the insurance company (Reliance Insurance Company) to intervene in a lawsuit against the insured suspended corporation ... The Sixth District Court of Appeal concluded the insurance company had a direct interest in the litigation. (Id. at pp. 386–387.) Under Insurance Code section 11580, a judgment creditor can sue the insurance carrier for the defendant against whom a judgment is obtained. (Reliance Ins. Co. v. Superior Court, supra,atp. 386.) As a result, where there is a danger that a judgment will be entered by default, the insurance carrier is entitled to intervene in the underlying case to contest its insured's fault or the available damages. (Id. at p. 387) O'Hearn v. Hillcrest Gym & Fitness Center, Inc. (2004) 115 Cal. App. 4th 491, 494, footnote 1, comes to this same conclusion.²⁴

Under California law, an insurance company is permitted to intervene in a lawsuit where its insured is a suspended corporation and a party to the lawsuit. Failure to intervene may ultimately result in the insurance company being found liable for a default judgment entered against its insured, unless, of course, there was no coverage for the claim to begin with. Intervention, and the issues associated therewith, will be discussed in more detail in the third article in this series.

The Penalty For Representing A Suspended Corporation And The Resulting Ethical Conflict

California Revenue And Taxation Code Section 19719 states that any person who attempts to exercise the powers, rights and privileges of a suspended corporation (which would include prosecuting or defending claims) may be punished "by a fine of not less than $250 and not exceeding $1,000, or by imprisonment not exceeding one year." In 1998, this statute was amended to exclude counsel retained by an insurer on behalf of a suspended corporation.²⁵ This exclusion, however, was not extended to counsel retained directly by the suspended corporation, or an entity, other than an insurer, acting on its behalf. Consequently, an attorney that represents a suspended corporation in a litigated matter, but was not retained by an insurance company on behalf of the suspended corporation, is in violation of Section 19719.

There are two instances in which Section 19719 is implicated vis a vis a suspended corporation's attorney. The first would be where an attorney is directly retained by a corporation that, subsequent to the attorney's retention, fails to pay its taxes and is suspended. The second would be where an attorney is retained directly by a suspended corporation that intends to seek a reviver. In both instances, especially the former, it is possible that the attorney representing the corporation may be unaware of its suspension, and, as a result, continue in good faith to defend and prosecute the corporation's legal interests. It seems unlikely that a judge would imprison a lawyer that represents the client in good faith and without knowledge of the corporation's suspension; nonetheless, an attorney retained directly by a corporation would be well served to remember the draconian penalty permitted by Section 19719.

In addition to potential criminal penalty, an attorney, other than one retained by an insurance company, who knowingly advances the legal interests of a suspended corporation, puts his or her license in jeopardy, as the California Supreme Court has long held: "It has always been considered a sufficient cause for disbarment for an attorney and counselor ... to encourage the commencement of proceedings which he knows, or has reason to know, are illegal or unjust."²⁶ This professional tenet has been codified under California Rule of Professional Conduct No. 3-210, which provides that an attorney shall not advise the violation of any rule or law with respect to the prospective conduct of the client, the interaction between the attorney and the client, or the specific legal services sought by the client.²⁷

The threat of criminal penalty and disbarment provides substantial disincentive for an attorney retained by a suspended corporation to vigorously represent the corporation's interests, especially in instances where the attorney learns of the corporation's suspended status subsequent to undertaking the representation. Though there appears to be no case law directly addressing this ethical issue, an attorney would be well served to treat a suspended corporate client as any other client with whom a conflict of interest may exist, by providing the suspended corporate client with written disclosure of the conflict and, if necessary, obtaining the suspended corporation's informed written consent.²⁸

¹⁹ Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir. 1977).

²⁰ See Clemmer v. Hartford Ins. Co., 151 Cal. Rptr. 285, 22 Cal. 3d 865, 884 (1978).

²¹ In the Conditions Section of the industry standard general liability policy form, there is a provision requiring the insured to cooperate with the insurer in the defense of any lawsuit.

²² Nasongkhla v. Gonzalez, 34 Cal. Rptr. 2d 379, 29 Cal. App. 4th Supp. 1, 4–5 (1994).

²³ See Truck Ins. Exchange v. Superior Ct., 70 Cal. Rptr. 2d 255, 60 Cal. App. 4th 342, 347–348 (1997).

²⁴ Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 221–222.

²⁵ While the statute clearly excludes counsel retained by an insurance carrier, it is unclear if it also excludes independent counsel, or Cumis counsel, retained by the insured suspended corporation as a result of a conflict of interests with its insurance carrier. In California, an insurer is statutorily required to allow the insured to retain independent counsel where the insurer's reservation of rights creates a conflict between its interests and the interests of its insured. Cal Civ Code § 2860. However, in the case of a suspended corporation it is difficult to envision a scenario in which this issue would arise, as any attorney retained by the suspended corporation's insurance carrier would be representing the insurance carrier as an intervenor, not the suspended corporation. See Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 219–221.

²⁶ In re Disbarment of C.C. Stephens, 77 Cal. 357, 359–360 (1888).

²⁷ California Rule of Professional Conduct No. 3-210 provides that an attorney shall not advise the violation of any law, rule, or ruling of a tribunal unless the attorney believes in good faith that such law, rule, or ruling is invalid. The Discussion accompanying this Rule provides that the Rule applies to the prospective conduct of a client, the interaction between the attorney and client, and the specific legal service sought by the client from the attorney.

²⁸ California Rule of Professional Conduct No. 3-310(B)(4) provides that an attorney must provide the client with written disclosure where the attorney has legal, business, financial, or professional interests in the subject matter of the representation. Though the interests of the attorney representing a suspended corporation would lie in the representation itself, rather than the subject matter of the representation, this is the Rule that most closely addresses the conflict of interests inherent in the representation of a suspended corporation.

Introduction

Corporations that do not pay their state taxes may be suspended in California.¹ Once suspended, a corporation effectively finds itself in a legal coma from which it can neither defend nor prosecute civil actions during the pendency of its suspension. In the context of a complex civil lawsuit, the limitations placed on a suspended corporation that is a party to the suit present unique circumstances for all concerned. For example:

• As to the suspended corporation, it is still a party to the lawsuit, but can neither prosecute its claims, nor defend itself from others;
• As to the attorney representing the now suspended corporation in the litigation, he or she risks criminal penalty and possible disbarment by continuing to defend or prosecute claims on behalf of the suspended corporation;
• As to the other parties to the lawsuit,the suspended corporation is still a party, but legally incapacitated; the situation creates strategic risks and opportunities for those other parties;
• As to insurance carriers for suspended corporations, they face the dificult choice of intervening and becoming parties to the action, or not intervening and possibly being held liable for any judgment entered against the insured; and
• As to the court, it must be aware that an insurer intervening on behalf of a suspended corporation can alter the character of the lawsuit with respect to how the case is tried under the circumstances.

The purpose of this series is to discuss some of the issues that arise when a suspended corporation is a party to a lawsuit. First, this series will explain what a suspended corporation is, and how suspended status differs from bankruptcy and dissolution. Second, it will discuss the implications of and options for dealing with an entry of default judgment against a suspended corporation. Third, it will address the risks and issues involved in representing a suspended corporation. Fourth, it will address the issues and problems that can arise when a suspended corporation's insurance carrier intervenes in a lawsuit to which the suspended corporation is a party.

What Is A Suspended Corporation?

Suspended Corporation Defined
Pursuant to California Revenue and Taxation Code Section 23301, the exercise of corporate powers, rights and privileges may be suspended for the failure to pay taxes. A suspended corporation, then, is a corporation that has failed to pay its state taxes and, as a result, can no longer exercise corporate powers, rights and privileges, including the right to defend against and prosecute legal claims.² California, while somewhat unique, is not alone in its treatment of corporations that fail to pay their state taxes.³

Motions To Dismiss And Revival Of A Suspended Corporation
The purpose of California Revenue and Taxation Code Section 23301 is to encourage the payment of taxes by corporations.⁴ For this reason, a suspended corporation can revive itself, i.e. return to its prior corporate status, by simply paying its back taxes and filing the appropriate paperwork. Further, once a corporation has been revived, its tax delinquencies, upon correction, are viewed as mere irregularities.⁵ The same, however, is not true with respect to legal action taken by and against the corporation during the period of suspension.

Since the purpose of California Revenue and Taxation Code Section 23301 is to encourage the payment of taxes by corporations, the California Supreme Court has held that the revival of corporate powers has the effect of validating prior legal action taken during the period of suspension.⁶ This rule, however, is limited to procedural acts, and does not apply to negate substantive defenses that have accrued during the period of suspension.⁷ To illustrate, consider a scenario in which a complaint is filed by a corporation during a period of suspension, and then, prior to the corporation's revival, the applicable statute of limitations runs. In this scenario, the suspended corporation's revival would not toll the statute of limitations, even though the complaint was filed prior to the statute running, as the statute of limitations provides a substantive defense.⁸

While a suspended corporation's revival will not "unring the bell" of a substantive defense, it can defeat a motion to dismiss based on the suspended status of the corporation. For instance, when faced with claims made by a suspended corporation, a party may assert the suspension of corporate powers as a defense during the period of suspension.⁹ This defense, which is a plea in abatement, will be defeated by the subsequent revival of the corporation.¹⁰

When a party pleads the suspension of corporate powers as a defense, the court may grant a continuance in order to allow the suspended corporation to revive itself.¹¹ Although the granting of a continuance would further the purpose of California Revenue and Taxation Code Section 23301, and pleas in abatement are generally disfavored in law,¹² a court maintains discretion to deny a request for a continuance where it deems it appropriate to do so. For example, in Old Fashion Farms v. Hamrick, the California Appellate Court found the plaintiff suspended corporation's request for a continuance was properly denied because the lawsuit was lacking in merit and the suspended corporation had made no efforts to revive itself.¹³ In light of this, a suspended corporation that intends to request a continuance must be prepared to show diligence in seeking a revival, as well as facts evidencing that its claim or defense is not meritless.

Distinguishing Suspension from Bankruptcy and Dissolution
What makes the suspension of a corporation drastically different from bankruptcy and dissolution is this: a bankrupt or dissolved corporation can legally continue to defend itself and prosecute claims, while a suspended corporation cannot. With respect to bankruptcy, there is an immediate statutory stay on litigation against the corporation following the filing of the bankruptcy petition.¹⁴ This stay, however, does not necessarily put an end to all litigation, as relief from the stay will be granted to a party in interest for cause, such as protecting an interest in property.¹⁵ With respect to dissolution, the corporation continues to exist for the purpose of prosecuting and defending claims.¹⁶ Therefore, bankrupt and dissolved corporations, or their insurance carriers, may defend and litigate the merits of legal claims.¹⁷ This is not the case with a suspended corporation.

A suspended corporation is incapacitated, but not protected. Other parties to a lawsuit may still prosecute claims against the suspended corporation, while also asking the court to prevent the suspended corporation from defending against or prosecuting its claims. In a complex multi-party lawsuit, for instance, a plaintiff could seek damages for personal injuries from a suspended general contractor, but the general contractor would be unable to seek indemnity from the responsible subcontractors via cross-complaint. The plaintiff could even move for default judgment against the suspended corporation, and then seek to establish coverage under the suspended corporation's general liability policies in a subsequent direct action against the suspended corporation's insurance carrier.¹⁸

¹ Cal. Rev. & Tax Code § 23301.

² Kaufman & Broad Communities, Inc. v. Performance Plastering, 39 Cal. Rptr. 3d 33, 136 Cal. App. 4th 212, 217–218 (2006).

³ A survey of several states indicates California is not alone in suspending the corporate rights and privileges of corporations that fail to pay state taxes. Much like California, Arizona also suspends "the corporate powers, rights and privileges of a domestic corporation" for failure to pay taxes. Ariz. Rev. Stat. 43-1152. Further, "[a]ny person who attempts or purports to exercise any of the rights, privileges or powers of any corporation suspended pursuant to section 43-1152 ... shall be guilty of a class 1 misdemeanor." Ariz. Rev. Stat. 43-1154.

Similarly, Oklahoma provides for the forfeiture of corporate rights where a corporation fails to pay taxes owed to the state. 68 Okl. St. § 1212. The forfeiture of corporate rights includes the right "to sue or defend in Oklahoma courts." Century Inv. Group, Inc. v. Bake Rite Foods, Inc., 2000 OK CIV APP 48, 1 (2000); Okl. St. § 1212(c). Like Arizona, Oklahoma law provides that any person who attempts to exercise the rights or privileges of a suspended corporation "shall be guilty of a misdemeanor." 68 Okl. St. § 1212 (b).

In Texas, a corporation that fails to pay state taxes will forfeit its corporate privileges. Tex. Tax Code § 171.251. Falling in line with California and Oklahoma, Texas law provides that a corporation which has forfeited its corporate privileges "shall be denied the right to sue or defend in a court of this state." Tex. Tax Code § 171.252 (1). Despite the clear language of Section 171.252, it appears some Texas courts have "limited the statute to prohibit defendants from bringing cross actions, not from merely defending lawsuits." Anoco Marine Indus. v. Patton Prod. Corp., 2008 Tex. App. LEXIS 6662, 6 n. 4 (Tex. App. Fort Worth Aug. 29, 2008).

While California is not unique in its handling of corporations delinquent in their payment of taxes, other states employ different legal mechanisms for dealing with said corporations. In Washington, for example, a corporation that fails to pay license fees may be administratively dissolved. Rev. Code Wash. § 23B.14.200. Once a corporation has been administratively dissolved, "it continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs." Rev. Code Wash. § 23B.14.050. Administrative dissolution does not "[p]revent commencement of a proceeding by or against the corporation in its corporate name." Rev. Code Wash. § 23B.14.050(2)(e).

⁴ Peacock Hill Association v. Peacock Lagoon Construction Co., 105 Cal. Rptr. 29, 8 Cal. 3d 369, 371 (1972).

⁵ Peacock Hill Association, 8 Cal. 3d at 371.

⁶ Peacock Hill Association, 8 Cal. 3d at 373.

⁷ Welco Constr., Inc. v. Modulux, Inc., 120 Cal. Rptr. 572, 47 Cal. App. 3d 69, 73 (1975).

⁸ Welco Constr., Inc., 47 Cal. App. 3d at 73; Cleveland v. Gore Bros., Inc., 14 Cal. App. 2d 681, 683 (1936).

⁹ A party wishing to take advantage of a corporation's suspended status must affirmatively assert the suspended status as a defense. Peacock Hill Association, 8 Cal. 3d at 373 (referring to Diverco Constructors, Inc. v. Wilstein, 4 Cal. App. 3d 6 (1970)).

¹⁰ Peacock Hill Association, 8 Cal. 3d at 373; Traub Co. v. Coffee Break Service, Inc., 57 Cal. Rptr. 846, 66 Cal. 2d 368, 370 (1967).

¹¹ A. E. Cook Co. v. K S Racing Enterprises, Inc., 79 Cal. Rptr. 123, 274 Cal. App. 2d 499, 500 (1969); United States v. 2.61 Acres of Land, 791 F.2d 666, 671–672 (9th Cir. 1985).

¹² Traub Co., 66 Cal. 2d at 370.

¹³ Old Fashion Farms v. Hamrick, 61 Cal. Rptr. 254, 253 Cal. App. 2d 233, 236 (1967).

¹⁴ 11 USCS § 362.

¹⁵ 11 USCS § 362(d).

¹⁶ Cal. Corp. Code § 6720 (a).

¹⁷ Assuming that insurance is the only asset reachable by the claimant against the bankrupt or dissolved corporation, the attorney representing the corporation recognizes that the insurer is functionally, if not legally, the client.

¹⁸ Kaufman & Broad Communities, Inc., 136 Cal. App. 4th at 222.

This article in the series addresses issues which arise during a pending claim or suit.

Overview/Introduction
Once the parties' positions have been staked out, the case against the insured develops. Three exposures develop simultaneously as evidence is gathered and the liability brought into focus: (1) the insured's exposure to the plaintiff in the underlying or liability case; (2) the insurer's exposure on the policy; and (3) the insured's exposure for uncovered damages.

In theory, the insured and the insurer each seek to minimize the collective exposure to the plaintiff, then sort out the coverage arguments later. In practice, how and what discovery is conducted, what litigation positions are taken, and how exposure and case status is reported to the carrier and the policyholder drive settlement decisions and evaluation. If a global settlement of the liability and coverage issues is feasible, the discovery and evidence from the liability case become the foundation for later insurance litigation.

Traps To Avoid Respecting Evidence In Insurance Litigation When The Liability Case Settles
It is no surprise that in insurance litigation, the rules of evidence apply. However, many clients and lawyers fall into one of two common traps. The first one is to not develop facts necessary to litigate the coverage case later, such as where a case settles because of off-the-record and/or protected communications. The second, related, trap is to assume that a coverage determination against a nonparticipating carrier will be favorable simply because the settlement seemed favorable. An insurance case is, quite simply, a new lawsuit; the liability case is the earth where the evidentiary seeds are planted.

The Case Within A Case And Problems Created By Settlement
Follow-on insurance litigation after settlement is, in many respects, similar to professional liability matters where the issues are tried as a "case within a case." In a professional liability case, the foundational fact is whether there is an injury to the plaintiff, measured by a settlement or judgment that would not have been necessary but for the negligence of the defendant; similarly, in insurance coverage litigation, the fundamental question is whether the settlement by the insured or unsatisfied judgment against it would not have occurred had the carrier recognized coverage under the policy. If the insured receives a defense verdict or pays nothing, there are no damages aside from defense costs; if there is a settlement or judgment on an uncovered claim against the insured, there are no damages for an action against the carrier.

The concept of litigating a "case within a case" is less difficult where the underlying case proceeds to trial, because the basis for the insured's liability is documented. While insurance coverage must be kept in mind when considering settlement with certain parties or the form of the verdict (discussed below), a settlement raises several difficult questions regarding evidence in a subsequent case, including:

• Where defense counsel in the liability case opines that liability is likely and that a settlement can be obtained on more favorable terms, what is the admissibility and weight of counsel's opinion in the insurance case?
• Are the discovery responses by the insured, or letters sent to other parties by the insured or its lawyer, admissible in subsequent insurance litigation, and for what purpose?
• Are discovery responses and letters sent by other parties in the liability case (not insureds or parties to the insurance litigation) admissible under any circumstances?
• If the liability case settles at mediation, what effect does that have on admissible evidence in the subsequent insurance litigation?

Jurisdictions differ as to whether the issues may be handled in a single lawsuit. For example, under California law, common issues between the liability and coverage case are tried and determined in the liability case. Thus, for example, if an insured is sued for bodily injuries arising out of an assault, and the matter proceeds to trial and judgment, the insurer may not later force the insured to prove its liability to the plaintiff and the amount of damages. Rather, in subsequent insurance litigation, the issue is limited to whether that liability is covered by the insurance policy under an estoppel theory.¹⁰³

However, what if the liability case settles, and the insurer has denied coverage, or refused to contribute to the settlement? In that case, there is no adjudication of the insured's liability or the amount thereof. Since most cases settle, early recognition of coverage issues — and handling them — are critical.

In many jurisdictions, once an insurance carrier denies coverage, any later settlement reasonably entered by the insured in good faith becomes presumptive evidence that (1) the insured would have been held liable at trial, and (2) the settlement amount was less than any judgment against the insured had the case proceeded to trial. The insurance carrier bears the burden of proof on both issues to overcome the presumption. As stated by a California Appellate Court:

Where there is no trial and no judgment establishing the liability of the insured, but a settlement of the litigation has been made, the question whether liability of the insured was one which the contract of insurance covered is still open, as is also the question as to the fact of liability and the extent thereof, and these questions may be litigated and determined in the action brought by the insured to recover the amount so paid in settlement. The settlement, or a judgment rendered upon a stipulation of such a settlement, becomes presumptive evidence only of the liability of the insured and the amount thereof, which presumption is subject to being overcome by proof on the part of the insurer."¹⁰⁴

The carrier can introduce evidence to rebut the presumption as to any of the following: (1) whether the insured is liable at all, (2) the reasonable settlement value, or (3) on what theory the insured was liable. These complexities can occur in long tail exposures with multiple theories of liability asserted against an insured. Examples are everywhere, but, would include in a construction defect matter whether the principal damages relate to both earth movement and defective construction of improvements, or whether damages are the result of defective construction or the failure to disclose them at the time of sale to the purchasers.

A developer and/or contractor can be liable for negligently performing construction improvements, or for failing to disclose the condition of those improvements at the time of sale. Most would agree that, in a vacuum, an insured's liability for failing to disclose the condition of property during a sale would not be covered as an economic loss under a general liability policy¹⁰⁵, whereas, if the insured was a real estate developer, damage caused by defects in construction during the improvement phase may very well be.¹⁰⁶ Under California law, however, if insurance litigation resulted after settlement, an issue would be whether the claim settled was "failure to disclose" or "negligent construction". The carrier and the insured will introduce evidence as to what claim was settled.

Whether carrier or policyholder, it is critical to spot liability issues that will likely become insurance issues while the theories and damages are being discovered and documented. Remembering that why a case settled may have to be proven, the practitioner needs to keep in mind:

• What are the different theories of liability, and where are they documented?
• What is the liability exposure on the different theories of liability?
• What is the likelihood of liability on each?
• What is the easiest for the plaintiff to prove, and what are the "home runs" for plaintiff?
• What is the amount paid by others on the same claims, and are the liability theories different against them?
• Did defense counsel recommend a settlement, and why?
• Was there agreement between the insured and carrier at the time of settlement as to why the case settled, how much was to be paid, and that settlement was the proper course?

Particular Problems Where Liability Case Settles In Mediation
An entirely separate set of traps is involved in mediation. Many complex construction disputes (and for that matter, asbestos or environmental disputes) are managed and mediated outside of the court confines. In California, the mediation privilege in Evidence Code §1119, et seq., renders documents, charts and statements made in the context of the mediation inadmissible in any subsequent proceeding without a signed agreement from all parties to the mediation.¹⁰⁷ Query whether any of the following may be used as evidence by the insured or the insurer in any subsequent insurance litigation:

• Cost of repair (construction defect or property damage claim);
• Mediation brief and settlement demand by the plaintiff to the insured(to show the claims that would be made if the case did not settle, and arguments against the insured);
• Documentation of the amounts paid in settlement by parties to the litigation other than the insured (to show the insured's settlement was reasonable and/or that settlement for the amount contemplated was in the insured's best interest);
• Statements by the mediator or other parties regarding settlement negotiations—to show other parties' positions.¹⁰⁸
• Settlement demands, counsel's recommendation re: settlement and a carrier's offers that might influence the insured to settle the lawsuit (to show that a carrier's offers were unreasonable in light of the evidence that would be presented).

Litigation Decisions And Communications With The Carrier
An insurance company likely has "the right and duty" to defend an insured against allegations which are potentially covered by the policy. For purposes of this section, it is assumed that the carrier has a duty to defend, and the focus turns instead to the role of defense counsel in creating evidence for use in insurance litigation later.

The Right To Independent Counsel
A defense lawyer has an ethical duty to both the insurer and the insured. However, should there be any conflict between them, in most cases the insured is placed above the insurer for purposes of the duty of loyalty. In states that recognize the tripartite relationship, the insured and insurer are within the attorney-client relationship. Most defense counsel hired by the insurer are well aware of their ethical obligations to the insured, and scrupulously abide by them. They understand that their client is best served, normally, by a settlement of the matter minimizing the amount paid by their client, the insured. Most will try to steer their efforts impartially to limit liability and damage, and will avoid blatant coverage issues.

In California, the insured's right to independent counsel is governed by statute. The Civil Code prescribes when a conflict of interest exists: when the outcome of a coverage issue can be affected by counsel first retained by the insurer.¹⁰⁹ Succinctly, the insurer may reserve its right to deny coverage (i.e. there may or may not be coverage depending on how the facts are ultimately determined) based upon an issue (a specific reservation of rights) that can be affected by the manner in which the defense is handled. In those circumstances, the insured can choose counsel at the insurer's expense. Other states have similar rules by statute or case law. As a rule of thumb, however, if the carrier simply denies coverage outright for some of the damages, but not others, it is less likely that a conflict of interest exists.

However, even being careful, defense counsel can affect coverage issues by the discovery they undertake, the litigation positions they advance, and the evaluations they give the carrier and the insured. If independent counsel is allowed, then the policyholder has far greater control over opinions and facts supporting likely liability on different theories.

The decision to provide independent counsel can influence the ultimate coverage situation for the client/insured. However, what happens when the carrier refuses to provide independent counsel? On the one hand, arguments can be made by policyholders that the carrier has not provided a conflict-free defense and thus has waived its coverage defenses. On the other hand, the carrier will argue that the statute itself is silent as to any remedy and that, at most, the insured would be entitled to the cost of independent counsel.¹¹⁰ Clearly, depending on the jurisdiction, identifying whether the insured is entitled to independent counsel and insisting on those rights, may influence a carrier's willingness to settle.

Communications With Defense Counsel Affecting Coverage Issues
The next question is how defense counsel can influence the outcome of insurance litigation. First, the opinions of defense counsel concerning liability and damages are certainly relevant and admissible when the case involves settlement rather than trial. Assuming the carrier is unwilling to fund a settlement, but willing to allow the insured to settle and seek coverage, one of the threshold questions is "what claim was settled," or "was the settlement reasonable"? In many cases, the answer will be obvious. In others, however, it will not be.

For example, in an environmental case, the pleadings alleged that a pollution condition was not promptly rectified when it was discovered in 1984, although the insured was under close supervision by the State's agencies and was cooperating and taking direction regarding monitoring and testing. As a matter of insurance coverage, since California follows the continuous injury trigger, any groundwater damage had been done by the time it was discovered. The insured's operation that was allegedly causing damage was unchanged for decades, and early policies (pre-1972) had no pollution exclusion. Defense counsel was extremely experienced, with extensive background in coverage and environmental liability matters. However, given that the "failure to rectify claim" seemed defensible even under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, and the "damage during normal operations for decades" was less so, defense counsel's litigation strategy was to argue publicly in pleadings and discovery that the only liability theory that had any validity was the failure to rectify.¹¹¹

In most states, if the insured could be liable for the same damages based on concurrent causes, it is entitled to coverage if any of them would be covered under the policy. Stated differently, if there is a single item of damage caused by a covered and an uncovered cause concurrently, or in sequence, in most circumstances the insured is entitled to coverage.¹¹² Therefore, whether defense counsel is "independent" or "carrier-appointed," communications with the insured and the carrier must document clearly the different theories and the evidence supporting each, and even the reasons for the settlement.

Trial
Assuming an insurer has agreed to defend, and the liability case is proceeding to trial, the trial itself will affect the insurance coverage issues. Most importantly, the insured (or the plaintiff in a direct action) will have to prove that the judgment is within the scope of coverage provided.¹¹³ A corollary to this rule is that the insured and the insurer are "in privity" for purposes of matters that are adjudicated in the liability trial. Therefore, those matters may not be re-litigated, and operate as collateral estoppel in the second coverage trial.¹¹⁴ In theory, only those matters that were not litigated in the liability trial may be litigated in the second trial. The client must consider what issues are "actually litigated" in the first trial. Thus, the strategic use of special verdict forms (to ask the jury specific questions about the evidence), the decision certain causes of action, and the decision whether to settle at all with certain of the parties (to include or exclude evidence relating to a particular party) are part of the strategic decisions that can have a huge impact on insurance coverage.

An example will illustrate how a simple liability issue — deciding whether to settle with a subcontractor — can directly influence coverage. In a construction defect case, there were water intrusion issues relating to communal bathrooms in a hotel, and separate issues relating to the elevator construction and maintenance, which led to leaking oil into the soil. Maintaining the cross-complaint against the elevator subcontractor assures that there will be a verdict separating the elevator/pollution-related issues from the shower/water damage-related issues. Figuratively speaking, without raising a finger to assert a coverage defense, not settling with one of the subcontractors resulted in a verdict that separated out the pollution related damages from the verdict as a whole.¹¹⁵

Similarly, in a California construction defect action, a plaintiff was required to show "damage to other property" caused by a construction defect in order to collect under a tort theory of liability against the developer.¹¹⁶ In that case, insurance coverage was problematic, and the plaintiff knew there would be a subsequent direct action to collect insurance for any verdict. Recognizing that in California, construction defects are an "occurrence" but covered "property damage" must be shown by demonstrating that a defect in construction caused damage to other property¹¹⁷, the plaintiff dismissed the breach of contract claims prior to trial, and took the case to verdict on the negligence claims only. This tactical decision allowed the plaintiff to argue in the subsequent insurance action that the jury's award must have been based upon covered "property damage" because the jury's finding that the defendant was liable in negligence meant that it had determined that the defects in construction had in fact caused damage to other property. That argument proved very persuasive in the subsequent case, even though it was not clear from the evidence that the jury understood the subtlety.¹¹⁸

¹⁰³ See, e.g., Clemmer v. Hartford Ins. Co. 22 Cal.3d 865 (Cal. 1978)

¹⁰⁴ Lamb v. Belt Casualty Co. (1935) 3 Cal. App. 2d 624, at 631-362; see also Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal. 3d 775, 791-794

¹⁰⁵ See, e.g., Allstate Ins. Co. v. Miller 743 F.Supp. 723 (N.D. Cal. 1990)

¹⁰⁶ See, e.g., Maryland Cas. Co. v. Reeder 221 Cal.App.3d 961 (Cal.App. 1990)

¹⁰⁷ See, e.g., Simmons v Ghaderi 44 Cal. 4th 570 (Cal. 2008).

¹⁰⁸ New scenarios, and more, were analyzed pursuant to California law in New Evidentiary Rules Applied to Insurance Litigation, John H. Podesta, New Developments in Evidentiary Law in California, © 2010 Thompson Reuters-Aspatore.

¹⁰⁹ Cal. Civil Code §2860

¹¹⁰ Much has been written on the subject of independent counsel throughout the United States and the remedies provided for failure to provide it. See, e.g., materials provided in last year's seminar: Independent Defense Counsel: When Can The Policyholder Select Its Own Defense Lawyer and How Much Does the Insurer Have to Pay? A 50-State Survey.

¹¹¹ Employers Ins. of Wausau v. California Water Service Company (N.D.Cal.) 2008 U.S. Dist. LEXIS 65433

¹¹² State of California v Allstate Ins. Co. 45 Cal. 4th 1008, 1028-1029 (Cal. 2009)

¹¹³ Rafeiro v. American Employers Ins. Co. 5 Cal.App.3d 799 (Cal.App. 1970)

¹¹⁴ Clemmer v Hartford Ins.(1978) 22 Cal.3d 865

¹¹⁵ As this insurance case was ultimately settled there is no case citation for this anecdote

¹¹⁶ Aas v. Superior Court (2000) 24 Cal.4th 627.

¹¹⁷ F&H Constuction v. ITT Hartford Ins. Co of the Midwest (2004) 118 Cal. App. 4th 364.

¹¹⁸ Similarly, this insurance case was ultimately resolved by settlement in the San Diego Superior Court, so there is no case citation.

This article in the series begins to address the question of what to do when an insurance dispute is likely.

Choice Of Law
Choice of law can be outcome-determinative on many substantive issues in insurance coverage litigation, including litigation over coverage for construction defect claims. Sections below will highlight a number of key substantive issues on which the determination often depends on what state's law applies.

Because choice of law can be outcome-determinative on key issues, both the policyholder and insurance carrier must analyze this issue early on. The first question is: what choice-of-law rule will the court apply? Different approaches to choice of law can lead to vastly different results. Generally speaking, courts follow one of three approaches to choice of law in insurance coverage disputes: (1) the traditional lex loci contractus approach (First Restatement); (2) the most significant contacts approach (Second Restatement); and (3) statutory approaches.

Lex Loci Contractus (First Restatement)
The traditional lex loci contractus rule applies the law of the place (state) where the insurance policy (contract) was formed. In insurance cases, the place where the contract was formed is usually considered to be the place where the policy was issued or the place where the policy was delivered to the insured.⁷⁰

Most Significant Contact (Second Restatement)
Most jurisdictions have rejected the lex loci contractus rule as antiquated and inflexible.⁷¹ A majority of states have adopted the Restatement (Second) choice-of-law rule. This approach focuses on which state has the greatest interest in the dispute.

Issue-by-Issue Analysis: An introductory note to the Restatement (Second) explains that "the applicable law is now said to be the local law of the state which, with respect to the particular issue, has the most significant relationship to the transaction and the parties."⁷²

Principles and Factors that Guide the Restatement (Second) Analysis: Section 6 of the Restatement (Second) outlines seven principles designed to help a court determine which state has the most significant relationship to the dispute in a given case:

1. the needs of interstate commerce;
2. the relevant policies of the forum;
3. the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue;
4. the protection of justified expectations;
5. the basic policies underlying the particular field of law;
6. certainty, predictability, and uniformity of result; and
7. ease in determining and applying the law.⁷³

In applying the Section 6 principles, courts are guided by factors set forth in Section 188:

1. the place of contracting;
2. the place of negotiating the contract;
3. the place of performance;
4. the location of the subject of the contract; and
5. the domicile, residence, nationality, place of incorporation, and place of business of the parties.⁷⁴

These five factors must be "evaluated according to their relative importance with respect to the particular issue."⁷⁵ In other words, courts do not simply add up the number of factors that point to a given state and apply the law of the jurisdiction with the most contacts.⁷⁶

Location of the Insured Risk is the Key Factor in Insurance Coverage Disputes: In insurance coverage disputes, the most significant contact is the location of the insured risk as long as the insured risk is located, at least principally, in a single state.⁷⁷ On the other hand, if the risk moves from state to state or the policy covers risks that are located in two or more states, this factor is less significant.⁷⁸

Choice Of Law Statutes
Several states have statutes governing choice of law in insurance coverage disputes. North Carolina and South Carolina, for example, have almost identical statutes that provide:

All contracts of insurance on property, lives, or interests in this State shall be deemed made therein, and all contracts of insurance the application for which are taken within the State shall be deemed to have been made within this State and are subject to the laws thereof.⁷⁹

In North Carolina, courts will apply the choice-of-law statute if a "close connection" exists between the state and the interests insured by the insurance policy.⁸⁰ Similarly, in Virginia and Texas, the choice of law statutes⁸¹ will generally not be applied in any fashion that would give "extraterritorial" effect to either state's law.

For example, Texas Courts apply a three-part test to determine whether the Texas statute requires the application of Texas law:

1. the insurance proceeds must be payable to a citizen or inhabitant of Texas;
2. the policy must be issued by a company doing business in Texas; and
3. the policy must be issued in the course of the insurance company's Texas business.⁸²

Key Substantive Law Issues That Often Turn On Choice Of Law

Late Notice
As described above, late notice may completely bar coverage under one state's law, such as New York law, regardless of whether the late notice prejudiced the insurer.⁸³ In other states the insurer has the burden of proving it was prejudiced by the late notice, failing which the late notice will not bar coverage.⁸⁴ Consequently, both the policyholder and insurance carrier should analyze the late notice issue (as well as the choice of law governing that issue) carefully before filing suit. This issue can often be outcome-determinative.

Trigger Of Coverage For Continuous Damages
Construction disputes can raise critical "trigger of coverage" questions concerning which insurance policy or policies apply to the claim. Consider the following fact pattern:

A general contractor completes construction of a building in 2002. In 2004, water damage is discovered during an inspection. Repairs are performed in 2004, but a subsequent inspection in 2005 reveals that the water intrusion has continued. An expert concludes in 2005 that the water intrusion was caused by improper installation of roofing and flashing materials during the original construction in 2002. The building owner sues the general contractor in 2005.

Suppose the general contractor had insurance coverage with three different insurance companies in 2002, 2004, and 2005. Which policy applies? Is it the policy in place in 2002 when the defective work was done? Is it the policy in place in 2004 when the water intrusion was discovered? Is it the policy that was in place in 2005 when the damage remains unrepaired? Is it all three policies, under a "continuous trigger" theory?

This "trigger of coverage" issue is critical to both policyholders and insurance carriers. Significant differences in policy language may mean that the resolution of this issue will determine whether any coverage exists at all and/or how much coverage exists. For example, if the only policy triggered in the above hypothetical is the 2002 policy, which has minimal limits of coverage, the policyholder may not recover enough money under the policy to cover the claim. If only the 2005 policy is triggered, a new exclusion may bar coverage. If the claim is covered under all of the policies, the policyholder may have plenty of coverage, but allocation of liability among the insurance carriers may raise significant issues.

Courts apply different approaches to this trigger of coverage issue, and knowing the trigger rule of a particular jurisdiction may guide where litigation is pursued and which law is advanced by a particular party as the controlling law.

Injury-in-Fact: Under the "injury-in-fact" approach, the insurance policy in effect when the injury was actually inflicted is triggered.⁸⁵ In the fact pattern outlined above, the property damage occurred, for insurance purposes, during the installation of the roof and flashing materials in 2002.

Manifestation:
Under the "manifestation" approach, the policy in place at the time the damage is first manifest or discovered is triggered.⁸⁶ In the hypothetical fact pattern outlined above, the policy in place in 2004 would be triggered under this theory, because the water damage was first discovered in 2004.

Continuous Trigger Under the "continuous trigger" approach, all insurance policies in effect during the continuing or progressive damage are triggered.⁸⁷ In the hypothetical fact pattern above, all of the policies in place between 2002 and 2005 would be triggered under a "continuous trigger" theory, because the damage continued throughout that timeframe.

Exposure: Under the "exposure" approach, the policy in place at the time that the property was exposed to the harm is triggered.⁸⁸ Depending on the facts, this theory could point to the same policies as the "injury-in-fact" trigger of coverage theory. The "exposure" theory could also trigger multiple policies if continuing exposure to progressive or additional damage occurs during multiple policy periods.⁸⁹ In the hypothetical fact pattern outlined above, an "exposure" trigger of coverage theory could trigger all of the policies in place between 2002 and 2005, because the building was exposed to water intrusion throughout that timeframe.

Do Construction Defects Constitute An "Occurrence"?
One of the most critical issues in litigation over insurance coverage for construction defects is whether a construction defect constitutes an "occurrence" for insurance policy purposes. Some courts find that construction defects constitute an "occurrence," because the defects were unexpected and/or unintended by the policyholder and therefore constitute an "accident, including continuous or repeated exposure to substantially the same harmful conditions."⁹⁰

Other courts have reached the opposite conclusion. These courts have concluded that no "accident" has occurred. Rather, the construction defects are the natural and foreseeable consequence of a failure to perform under a contract.⁹¹

Again, knowing the rule in a particular jurisdiction respecting the existence of an "occurrence" in the construction defect context may have a significant impact on the selection of a forum for coverage litigation and the law which is advanced in that litigation as controlling.

Allocation: May The Policyholder Seek Full Coverage From Any Covering Policy?
If multiple policy years are triggered, a critical issue arises over whether the policyholder is entitled to full coverage under any single policy among all of the covering policies, or whether the coverage be allocated, by some method, among all of the policies that are triggered. Policyholders, of course, prefer a theory that allows them to select one policy and hold the carrier issuing that policy liable for the entire loss (up to the limits of that policy and any excess policies in place for that policy period). The insurer then has the burden of pursuing contribution from all other policies triggered by the claim. Approaches that allow the policyholder to select one policy (or vertical exhaustion through one policy period) are typically referred to as the "pick and choose," "all sums," or "joint and several" approach.⁹² Courts adopting this approach reason that because a policy is triggered, it is triggered in full. The policy obligates the carrier to pay "all sums for which the insured is liable."

Other courts have ruled that coverage obligations must be allocated among all policies triggered by the claim. This approach requires horizontal exhaustion across all primary polices that are triggered before reaching any excess policies. Insurers prefer this approach because it spreads the liability across multiple policies without requiring the insurers to litigate against each other to recover contribution.

Allocation methods may vary. Courts sometimes allocate the coverage based on "time on the risk," apportioning liability among insurers in proportion to the length of time for which their policies covered the claim.⁹³ Other courts allocate liability among insurance carriers according to their policy limits.⁹⁴ Other courts have considered factors other than time on the risk or policy limits. For example, if the facts demonstrate that more injuries or damage occurred during a particular policy year or years, the allocation method could proportion the liability among insurance carriers accordingly.⁹⁵

Potential Obligation To Pay Multiple Deductibles Or Self-Insured Retentions
If multiple insurance policies are triggered, the policyholder's obligation to pay a deductible or self-insured retention becomes an issue. Must the policyholder pay multiple deductibles/self-insured retentions, or is the policyholder entitled to coverage after paying a single deductible/self-insured retention? Generally speaking, if a court allocates liability for coverage among multiple insurance policies, then the policyholder must typically pay multiple deductibles, satisfying the deductible for each policy that is triggered.⁹⁶ If the policyholder is allowed to "pick and choose" among all triggered policies, the policyholder typically must pay only one deductible or self-insured retention, satisfying the deductible/self-insured retention for the policy year chosen.⁹⁷

Forcing the policyholder to pay multiple deductibles could result in the policyholder paying more than its appropriate share of the loss. For example, suppose five consecutive polices are triggered by a continuous damage claim. Each policy has a $100,000 deductible and a $1 million policy limit. If the policyholder is forced to pay $500,000 in deductibles before any insurance coverage is reached, the policyholder is arguably paying considerably more than its fair share of the loss. By the same token, each insurance carrier is getting the benefit of a much higher deductible than the policy premium likely reflects.⁹⁸ To avoid this unfair result, some courts apply prorated allocation of the deductible to be paid by the policyholder.⁹⁹

Needless to say, if the policyholder has a large deductible or large self-insured-retention, the policyholder will not want to pay more than one deductible. A policyholder considering litigation must carefully consider what state's law will apply to the allocation/multiple deductible issue to evaluate the potential outcome in the forum chosen for litigation.

Procedural Concerns

Parties' Respective Burdens Of Proof In The Coverage Litigation
Generally speaking, the policyholder has the burden of proving that a claim falls within the coverage provisions of the policy. Under a general liability policy, this typically means proving an "occurrence" took place during the policy period, resulting in sums the insured is legally obligated to pay as damages because of "bodily injury" or "property damage." The terms "occurrence," "property damage," and "bodily injury" are defined terms in the policy and are often the subject of litigation. As noted, in construction defect claims, the policyholder has the burden of proving that the construction defect is a covered "occurrence."

Once the insured proves that a claim falls within the coverage grant of the insurance policy, the insurance company has the burden of proving that an exclusion precludes coverage for the claim. In construction defect claims, insurance carriers will look to the "business risk" exclusions, such as the "your work" and "impaired property" exclusions.

These respective burdens of proof for the policyholder and the insurance carrier are standard in most jurisdictions. The approach to specific coverage provisions or exclusions, however, varies widely in different jurisdictions.

Will Insurance Litigation Be Stayed Pending The Underlying Litigation?
Insurance coverage disputes frequently relate to underlying claims that are being litigated against the policyholder. The insurance coverage dispute may raise issues that could prejudice the insured in the underlying litigation. For example, the insurance carrier may want to prove that the policyholder expected or intended the injury or damages at issue, in order to deny coverage on the basis of the "expected or intended" policy exclusion. The insurance carrier's efforts to prove such an expectation or intention of the policyholder in the coverage litigation could significantly increase the policyholder's risk in the underlying litigation. Both the insurance carrier and the policyholder have an interest in limiting the policyholder's exposure in the underlying litigation. Consequently, it may benefit both the insurance carrier and the policyholder to stay the insurance coverage litigation pending the outcome of the underlying litigation.

The insurance carrier, however, may want to resolve the insurance coverage issues as quickly as possible, in order to avoid the costs of defending the policyholder in the underlying litigation. The duty to defend is broader than the duty to indemnify, and the insurance carrier may face a bad faith claim if it refuses to defend the policyholder in the underlying litigation. Consequently, the insurance carrier is often eager to litigate the insurance coverage dispute, in hopes of obtaining a quick ruling that it owes no duty to defend or indemnify the policyholder.

Many courts will stay litigation of an insurance coverage dispute if the insurance coverage litigation could prejudice the policyholder in the underlying litigation. Courts are particularly inclined to stay insurance litigation if issues in the insurance coverage disputes overlap with issues in the underlying litigation.¹⁰⁰

Courts will also consider (a) whether discovery in the insurance coverage action could prejudice the policyholder in the underlying litigation, (b) the burden of requiring the policyholder to fight a "two-front war," and (c) the burden on judicial resources.¹⁰¹ Another approach is to request a stay of the underlying liability litigation until the coverage dispute is resolved.¹⁰²

⁷⁰ See, e.g., Roomy v. Allstate Ins. Co., 123 S.E.2d 817, 820 (N.C. 1962).

⁷¹ O'Connor v. O'Connor, 519 A.2d 13, 18 (Conn. 1986).

⁷² RESTATEMENT (SECOND) OF CONFLICT OF LAWS, ch. 8, intro. note (emphasis added).

⁷³ Id. § 6(2)(a)-(g).

⁷⁴ Id. § 188(2)(a)-(e).

⁷⁵ Id. § 188(2).

⁷⁶ See, e.g., Emerson Elec. Co. v. Aetna Cas. & Sur. Co., 743 N.E.2d 629, 640 (Ill. App. Ct. 2001) (noting that not all of the factors are of equal significance).

⁷⁷ See RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 193 & cmts. b-e.

⁷⁸ Id.

⁷⁹ N.C. GEN STAT. § 58-3-1 (2010); S.C. CODE ANN. § 38-61-10 (2010).

⁸⁰ See, e.g., Fortune Ins. Co v. Owens, 526 S.E.2d 463, 466 (N.C. 2000); Collins & Aikman Corp. v. Hartford Acc. & Indem. Co., 436 S.E.2d 243, 246 (N.C. 1993).

⁸¹ VA. CODE ANN. § 38.2-313 (2010); TEX. INS. CODE ART. 21.42 (2010).

⁸² Hefner v. Republic Indem. Co. of Am., 773 F.Supp. 11, 13 (S.D. Tex. 1991).

⁸³ See, e.g., Argo Corp. v. Greater N.Y. Mut. Ins. Co., 827 N.E.2d 762, 764 (N.Y. 2005).

⁸⁴ See, e.g., Great Am. Ins. Co. v. C. G. Tate Constr. Co., 279 S.E.2d 769, 775 (N.C. 1981).

⁸⁵ See, e.g., Harleysville Mut. Ins. Co. v. Berkley Ins. Co. of the Carolinas, 610 S.E.2d 215 (N.C. Ct. App. 2005).

⁸⁶ See, e.g., Wrecking Corp. of Am., Virginia, Inc. v. Ins. Co. of N. Am., 574 A.2d 1348 (D.C. Cir. 1990); Mraz v. Canadian Universal Ins. Co., Ltd., 804 F.2d 1325 (4th Cir. 1986).

⁸⁷ See, e.g., Joe Harden Builders, Inc. v. Aetna Cas. and Sur. Co., 486 S.E.2d 89 (S.C. 1997), and Montrose Chem. Corp. v. Admiral Ins. 10 Cal.4th 645 (Cal. 1995).

⁸⁸ See, e.g., TBG, Inc. v. Commercial Union Ins. Co., 806 F.Supp. 1444 (N.D. Cal. 1990).

⁸⁹ Id.

⁹⁰ See, e.g., Anthem Elec., Inc. v. Pacific Employers Ins. Co., 302 F.3d 1049 (9th Cir. 2002); Auto Owners Ins. Co. v. Newman, 684 S.E.2d 541 (S.C. 2009).

⁹¹ See, e.g., Lexicon Inc. v. Ace Am. Ins. Co., 2010 WL 79479 (E.D. Ark. Jan. 7, 2010); Penn. Nat'l Mut. Cas. Ins. Co. v. Parkshore Dev. Corp., 2009 WL 1737032 (D. N.J. June 17, 2009); CMK Dev. Corp. v. West Bend Mut. Ins. Co., 917 N.E.2d 1155 (Ill. App. Ct. 2009).

⁹² One of the seminal cases applying the joint and several approach is J.H. France Refractories Co. v. Allstate Insurance Co., 626 A.2d 502 (Pa. 1993). See also, Goodyear Tire and Rubber Co. v. Aetna Cas. and Sur. Co., 769 N.E.2d 835 (Ohio 2002); Armstrong World Ind., Inc. v. Aetna Cas. and Sur. Co., 52 Cal. Rptr. 2d 690 (1st Dist. 1996).

⁹³ See, e.g., City of Sterling Heights v. United Nat'l. Ins. Co., 2007 WL 172529 (E.D. Mich. Jan. 19, 2007); Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal. App. 4th 1279 (Cal. Ct. App. 1998).

⁹⁴ See, e.g., AMHS Ins. Co. v. Mut. Ins. Co. of Ariz., 258 F.3d 1090 (9th Cir. 2001) (Arizona law).

⁹⁵ See, e.g., Olin Corp. v. Certain Underwriters at Lloyds London, 468 F.3d 120 (2d Cir. 2006) (New York law).

⁹⁶ See, e.g., Atchison, Topeka & Santa Fe Railway Co. v. Stonewall Ins. Co., 71 P.3d 1097 (Kan. 2003) (Kansas and Illinois law); Public Service Co. of Colo. v. Wallis and Companies, 986 P.2d 924 (Colo. 1999); E.I. duPont de Nemours & Co. v. Allstate Ins. Co., 879 A.2d 929 (Del. Super. Ct. 2004).

⁹⁷ See, e.g., Cal. Pacific Homes, Inc. v. Scottsdale Ins. Co., 83 Cal. Rptr. 2d 328 (1999). See also, J. Stephen Berry & Jerry B. McNally, Allocation of Insurance Coverage: Prevailing Theories and Practical Applications, 42 TORT TRIAL & INS. PRAC. L.J. 999, 1012 ("By pushing all liability into one policy period, the insured can avoid the effect of deductibles of multiple policies by paying only one.").

⁹⁸ Marc S. Mayerson, Settlement of Complex Liability Coverage Disputes, 33 TORT & INS. L.J. 783, 798 (Spring 1998).

⁹⁹ See, e.g., PECO Energy Co. v. Boden, 64 F.3d 852, 857 (3d Cir. 1995); LaFarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389 (5th Cir. 1995).

¹⁰⁰ See, e.g., Great Am. Ins. Co. v. Superior Court of L.A. County, 100 Cal. Rptr. 3d 258, 270 (Cal. Ct. App. 2009); Allianz Ins. Co. v. Guidant Corp., 839 N.E.2d 113, 133 (Ill. App. Ct. 2005) ("[A]s a general matter, a declaratory judgment action to determine an insurer's duty to indemnify its insured should not be decided prior to the adjudication of the underlying action where the issues to be decided in both actions are substantially similar.")

¹⁰¹ See, e.g., McCullough v. Minnesota Lawyers Mut. Ins. Co., 2010 WL 441533 (D. Mont. Feb. 3, 2010); Great Am. Ins. Co. v. Superior Court of L.A. County, 100 Cal.Rptr.3d 258 (Cal. Ct. App. 2009).

¹⁰² See, e.g., Newhouse by Skow v. Citizens Sec. Mut. Ins. Co., 501 N.W.2d 1 (Wis. 1993).

This article in the series begins to address the question, "The Claim Occurs - Now What?"

What Carriers Should The Claim Be Tendered To?
Insurance policies and programs serve one fundamental purpose: to transfer the risk associated with a loss. When confronted with unexpected delays and ever-changing management concerns on the jobsite, one can easily forget that insurance is available for many losses. Policyholders must be hypersensitive to potential claims and involve available insurance as soon as possible.

Think carefully about the nature of the claim — more than one policy may be implicated.

Identifying an insurance claim can often be difficult in the construction setting. Consider, for example, a construction manager on a building construction job that is half complete. A portion of the progressing structure collapses and destroys most of the completed work. As a result of the damage and ensuing delay, a subcontractor that is already on-site cannot proceed with its work and must store materials and equipment, as well as reassign labor, until the damage is cleared and the project resumes.

The reason for the collapse is unclear, but may involve a combination of design error and contractor negligence. Once work resumes, the subcontractor submits a change order to the construction manager, indicating that the original contract price of $1 million is inadequate in light of costs caused by the collapse and must be increased to $1.2 million. The construction manager approves the change order, assuming responsibility for the loss. In this situation, the subcontractor's cost increase resulting from the property damage is potentially covered by insurance; however, it can be overlooked as a business expense. Instead of absorbing this cost, the construction manager could potentially have transferred it to available insurance. Moreover, because of the nature of the damage, it may implicate both commercial general liability coverage and professional liability coverage.

It is important, at the onset of a loss or a potential claim, to consider all available insurance (Commercial General Liability, Professional Liability, Builders Risk, Environmental and Excess/Umbrella; see Section II., B., supra) and think critically about how the loss may require insurance to respond.

Other Considerations in Tendering a Claim

Does the Policy Respond to "Claims" or Just "Suits"? In the Commercial General Liability and Professional Liability context, the existence or non-existence of an actual lawsuit may dramatically impact the carrier's response to a claim. Commercial General Liability policies pay all sums an insured becomes "legally obligated to pay" because of bodily injury or property damage, and promise to defend "suits" seeking such damages. Some insurers contend that this language requires that the policyholder's obligation to pay damages be preceded by a formal lawsuit.⁵³ Similarly, some carriers have taken the position that a "claim" covered by a professional liability policy requires actual litigation. Absent the initiation of such a suit, the carrier may conclude that it is not required to respond.

The insured, however, should not assume that litigation is always required and take extra precaution to put the carrier on notice. Depending on the circumstances, a claim may fall short of litigation, but still implicate available coverage.

In the professional liability setting, for instance, a "claim" generally means "a demand for specific relief owed because of alleged wrongdoing," and courts have held that it "can be some demand well short of a formal enforcement proceeding."⁵⁴ Likewise, "relief" is not a one-dimensional term and can include the requirement that a company produce documents and/or appear for a deposition: "A demand for ‘relief' is a broad enough term to include a demand for something due, including a demand to produce documents or appear to testify."⁵⁵ Further, the insurer also has the right and duty to defend any "suit" alleging a claim against the insured. "Suit" is often undefined, but some courts will find a "suit" so long as the claimant has "assume[d] a coercive adversarial posture and threatens the insured with probable and imminent financial consequences."⁵⁶ For example, in a Second Circuit case applying New York law, the insured received a demand letter from the Department of Environmental Quality commencing an administrative process to clean up environmental waste. The Second Circuit had "little trouble" viewing the administrative proceeding as a "suit" and held that the insurer was obligated to defend its insured. The court recognized that the demand letter commenced a formal proceeding against the insured, advised the insured that the agency had assumed an adversarial posture towards it, and that disregarding the demand could result in substantial loss to the insured. The court deemed these elements the "hallmarks of litigation."⁵⁷

Additional Insured Carriers. If a corporation is potentially liable for damages, one of the first goals of risk managers and in-house lawyers is to look for sources of recovery beyond the corporation's own assets. This is also true for insurance claims. Even if a corporation has insurance coverage, it should always consider whether someone else's insurer should pay first. Having one's own insurer pay a claim is not without consequences to the policyholder. First, the limits of liability under the insurance policy are reduced.

Second, the "claims history" (a seven year look back of claims payments) is affected, causing the insured to pay higher rates for insurance in the future. Finally, and most important, tapping the insurance of another party potentially avoids the obligation to satisfy a self-insured retention ("SIR") or deductible (discussed below) carried by a corporate policyholder.

The primary mechanism by which a corporation may transfer risk to another is the contractual risk transfer scheme used in most commercial contracts, such as an indemnity agreement. Additionally, one party is usually required to add the other party as an additional insured ("AI") on its insurance policy. In construction, the owner usually requires the general contractor to name the owner as an additional insured and, in turn, the general contractor requires its subcontractors to name the general contractor as an additional insured on their policies.⁵⁸

The Impact of Deductibles and Self-Insured Retentions. The existence of a deductible or self-insured retention can also have a considerable impact on the submission of a claim. A deductible is commonly understood as that amount of a claim for which the insured is responsible. A claim will be tendered to an insurer for handling and seek reimbursement of the deductible from the insured. In contrast, a self-insured retention requires the insured to pay a certain amount towards a loss before the insurer incurs any defense and/or indemnity obligation. Thus, the policyholder has to pay for the loss or its defense out of pocket until this threshold is met.

Deductibles and self-insured retentions should be analyzed carefully by insurers and policyholders because they do not always identify a specific dollar amount, but instead use a percentage of the loss or project, and can be written more broadly or narrowly than originally intended. For example, in a Second Circuit case applying Texas law, where the court addressed the application of a "wind" deductible to a loss involving rain damage, rain was an excluded cause of loss under the subject insurance policy, except in cases where rain enters an enclosed structure through means created by a covered cause of loss. In this particular case, the rain gained access to the interior of the structure through openings caused by wind, which was a covered cause of loss under the policy. However, the policy contained a "wind" deductible equal to 1 percent of the project's total value. The insurer argued that the wind deductible applied to Turner's loss because the force of wind enabled the rain damage to occur. Turner conversely argued that the deductible did not apply because the damage itself was caused by rain, not wind. Whether or not the wind deductible applied to the loss was vital because 1 percent of the project's value exceeded the amount of the loss, which would preclude any recovery under the policy.⁵⁹

Ultimately, the court concluded that the language of the wind deductible was unclear as to whether the deductible pertained to any loss involving wind or, instead, if it only concerned losses for which wind was the direct cause. Applying the well-recognized rule of insurance law that requires policy ambiguities to be interpreted in favor of the insured, the wind deductible was deemed not to apply. The court stated:

The term "wind deductible" is not defined by the policy. Doubtless it applies to damage directly caused by wind; if a tornado leveled Turner's project, the wind deductible would apply. The damage in this case, however, was directly caused by rain, and only indirectly caused by wind. In other words, although wind created the opening through which the rain entered, it was the rain alone that caused the damage at issue.

Nothing in the policy suggests that the wind deductible applies to damages only indirectly caused by wind .... Because the policy's "wind deductible" provision is ambiguous, in that it does not unambiguously apply to damages caused only indirectly by wind, we construe it to reach only those damages caused directly by wind.⁶⁰

Turner, however, was not free from dissent. One judge considered it illogical to avoid the application of the wind deductible when rain would have been an excluded cause of loss, but for the fact that it gained access to the building because of wind. Thus, for the reason that coverage for rain was linked to wind, the dissent believed that it also should be linked to the wind deductible.⁶¹ As Turner demonstrates, diverging interpretations of awkwardly worded deductibles are not only met with disagreement between policyholder and insurer, but may also be disagreed upon by the trier of fact.

Most importantly, the precise amount or proper interpretation of a deductible/self-insured retention should not be assumed by either party and, for the policyholder, all insurers should be put on notice even if it initially appears the relevant damages may be within the applicable deductible or self-insured retention.

Tender the Loss as Early as Possible. As discussed above, policyholders must be sensitive to potential claims and, likewise, should always take great care to tender notice of a claim or potential claim as soon as possible. Prompt notice of a claim will allow the insurer the opportunity to investigate the claim as close to its occurrence as possible⁶² and avoid any possibility of a disclaimer based on late notice or a forfeiture of coverage rights by making voluntary payments.

However, what is "practicable" can vary greatly depending on applicable law and the circumstances of the particular claim. The prudent contractor should make it a practice to give notice rather than try to predict whether an incident will result in a claim under the policy.⁶³

Even if notice appears to be untimely, the insured should not assume there will be no coverage. While some states hold that the failure to give timely notice results in a forfeiture of coverage,⁶⁴ other states require that the insurer prove that notice was actually late and that it suffered prejudice as a result of the late notice before it can disclaim on that basis.⁶⁵ If it can be shown that the insurer did not suffer any prejudice, the claim may still be covered in spite of late notice.

Direct communication with the insurer is critical. Policyholders seeking coverage as an additional insured, in particular, should always give separate notice to the additional insurer and not depend on the named insured to provide notice on its behalf. Likewise, policyholders should not assume that the notice obligation has been satisfied if they have given notice to a broker.

Voluntary Payment. Similarly, insurance policies typically contain a "no voluntary payments" provision, "which prohibits the insured from voluntarily assuming any liability [or] settling any claims ... without the insurer's consent."⁶⁶ This policy requirement, typically found in the "Duties in the Event of Occurrence, Claim or Suit" section of a Commercial General Liability policy, is geared towards preventing collusion between the claimant and the insured and to ensure insurer control over the claim.⁶⁷ In the scenario described at the onset of this section, an insurer could potentially argue that the resolution of claims between the general contractor and subcontractor violates this clause. Thus, contractors must be aware of potential issues if claims are resolved without first notifying the relevant insurers.

The application of a voluntary payments clause and the impact of a late notice will depend heavily on the facts of a particular case the applicable law, which may require a showing of prejudice.⁶⁸ Other states do not require prejudice to be shown, but make it clear that a voluntarily assumed cost (such as pretender defense costs or repair costs undertaken by a general contractor) are not the responsibility of the insurer; however, payment by the insured does not void coverage for the claim for other, non-voluntarily assumed costs.⁶⁹ The better practice is to involve the insurer before any final resolutions are reached.

⁵³ See e.g., Ameron International Corp. v. Ins. Co. of the State of Pennsylvania 50 Cal.4th 1370 (Cal. 2010) — a federal administrative adjudicative proceeding was a "suit" under the Commercial General Liability, retreating somewhat from the previous rule that a "suit" was limited to a lawsuit in a court of law.

⁵⁴ Windham Solid Waste Mgmt. v. Nat'l Cas. Co., 146 F.3d 131, 134-135 (2d Cir. 1998).

⁵⁵ Minuteman Int'l, Inc. v. Great American Ins. Co., No. 03 CV 6067, 2004 WL 603482, at *1 (E.D. Ill. March 22, 2004) (SEC investigation constituted a "claim" under an errors and omissions policy); Richardson Elecs, Ltd. v. Fed. Ins. Co., 120 F.Supp. 2d 698, 701 (E.D. Ill. 2000) ("[C]haracterizing a [Justice Department] investigation as involving a ‘request' for information understates the seriousness of what such investigation involves.").

⁵⁶ Hartog Rahal P'ship v. Am. Motorists Ins. Co., 359 F.Supp.2d 331, 332 (S.D.N.Y. 2005); Ryan v. Royal Ins. Co. of Am., 916 F.2d 731, 735 (1st Cir. 1990) ("To argue that the word ‘suit' is to be accorded talismanic significance brings to the language of the policy a precision that the drafter omitted and that the parties were not bound to anticipate.").

⁵⁷ Avondale Industries, Inc. v. Travelers Indemnity Co., 887 F.2d 1200 (2d. Cir. 1989). at 1206.

⁵⁸ Again, many projects are now employing OCIPs or CCIP, which replaces this standard model and provides one insurance program for all tiers of contractors.

⁵⁹ Turner Constr. Co. v. ACE Prop. & Cas. Ins. Co., 429 F.3d 52 (2d Cir. 2005)

⁶⁰ Id. at 54.

⁶¹ Id. at 56 (Staub, C.J. dissenting).

⁶² See Aetna Cas. & Sur. Co. v. Murphy, 206 Conn. 409, 417 (1988) ("The purpose of a policy provision requiring the insured to give the company prompt notice of an accident or claim is to give the insurer an opportunity to make a timely and adequate investigation of all the circumstances....").

⁶³ Under the traditional claims-made policy, for example, notice must be provided "as soon as practicable." Other notice provisions require the insured to inform the insurer "immediately" or "promptly" or "within a reasonable time". These inexact terms allow for a certain degree of subjectivity as to when notice must be given to the insurer. One court has described these terms as "roomy words," meaning "a reasonable time under all the circumstances." See Young v. Travelers Ins. Co., 119 F.2d 877, 880 (5th Cir. 1941).

⁶⁴ See, e.g., Flick v. Liberty Mut. Fire Ins. Co., 205 F.3d 386 (9th Cir.), cert. denied, 531 U.S. 927 (2000) in a first party context. State Farm Mut Auto Ins. Co. v. Cassinelli 216 P.2d 606 (Nev. 1950)

⁶⁵ See, e.g., PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 360, 634 (Tex. 2008), and Belz v Clarendon America Ins Co. 159 Cal.App.4th 615 (Cal.App. 2007).

⁶⁶ BARRY R. OSTRAGER & THOMAS R. NEWMAN, HANDBOOK ON INSURANCE COVERAGE DISPUTES 357 (14th ed. 2008).

⁶⁷ See Id.; Onder v. Allstate Ins. Co., No. 02-213-IEG, 2002 WL 1354826, at *15 (S.D. Cal. June 12, 2002).

⁶⁸ See MD. CODE ANN., Ins. § 19-110 (2010) (Maryland's statute requiring an insurer to establish actual prejudice to succeed on a disclaimer based on lack of cooperation).

⁶⁹ See e.g., Low v. Golden Eagle Insurance Co. 110 Cal. App. 4th 1532, 1546 (Cal App. 2003)

This article will address issues and conflicts which arise under Owner Controlled Insurance and Contractor Controlled Insurance programs.

Related To The Workers' Compensation Bar
Questions have arisen respecting the extent to which an owner or general contractor is the "statutory employer" of an injured employee solely by virtue of the fact that all contractors and their employees are enrollees on an Owner Controlled Insurance Program. The outcome is significant: potential targets of tort liability may obtain the benefit of tort immunity to the same extent as the injured person's direct employer. Courts have reached inconsistent results on the issue, based upon differing state laws and statutory provisions respecting workers' compensation.

In Kentucky, for example, if a party secures compensation of benefits for an injured worker through insurance, that alone can trigger the workers' compensation bar in favor of that party.²³ A general contractor who purchases a wrap policy for employees subject to the Longshoremen's and Harbor Workers' Compensation Act is entitled to tort immunity for injuries to subcontractors.²⁴

Similarly, in Texas, "(i)f the general contractor ‘provides' workers' compensation insurance, it becomes a statutory employer of the subcontractor's employees", and is immune from suit filed by a subcontractor's employee.²⁵ In cases addressing the Texas workers' compensation statute, courts have found that the general contractor must do more than merely require enrollment in the Owner Controlled Insurance Program to be deemed to be "providing" insurance.²⁶ But where Owner Controlled Insurance Program enrollment is required, and where workers compensation insurance is in fact issued, covering a subcontractor pursuant to the Owner Controlled Insurance Program, Texas courts have deemed the general contractor a statutory employer, even if the general contractor did not directly purchase the workers' compensation coverage.²⁷ In contrast, under Georgia law, simply purchasing and paying the premiums for an Owner Controlled Insurance Program which provides workers compensation benefits is not the same as "providing" benefits so as to grant workers compensation immunity to the purchaser.²⁸

In some jurisdictions, the fact that there is an Owner Controlled Insurance Program or Contractor Controlled Insurance Program program in place eliminates the opportunity for the owner or general contractor to claim statutory employer status. For example, in Nebraska, courts have held that where a subcontractor is required to enroll in a workers compensation Owner Controlled Insurance Program program, the subcontractor is in essence providing its own insurance, and the contractor or owner therefore cannot be deemed the statutory employer of the subcontractor's employees.²⁹ Michigan applies a similar rule, finding that a general contractor can only be deemed a statutory employer when the subcontractor fails to secure workers' compensation (or is not required to secure such insurance) for the injured employee. Under an Owner Controlled Insurance Program, since all contractors and subcontractors are typically covered, the subcontractor is deemed to supply workers' compensation, eliminating the general contractor's opportunity to be considered a statutory employer.³⁰

Other courts reach another conclusion. In those jurisdictions, the existence of an Owner Controlled Insurance Program/Contractor Controlled Insurance Program is irrelevant to the question of whether a general contractor or owner is a statutory employer protected by immunity. In these states, relevant statutes determine the proper scope of the workers' compensation laws and employee status, and such considerations as the "right to control" and the "right to fire" are determinative¸ without regard to the presence or application of an Owner Controlled Insurance Program.³¹

In Wisconsin, for example, to be considered a "statutory employer", the general contractor is required to have the typical master-servant relationship with the subcontractor's employee. In one case, the owner created an Owner Controlled Insurance Program and purchased a policy from Liberty Mutual.³² In a dispute over workers' compensation benefits, it was argued that each contractor should be deemed the employer of the injured worker and therefore be entitled to tort immunity. The court rejected the argument, noting that each contractor was considered a separate insured under the Owner Controlled Insurance Program and that nothing about the Owner Controlled Insurance Program demonstrated that any other contractor should be deemed the statutory employer of the injured employee for workers' compensation purposes. The court furthermore rejected the notion that the terms of the Owner Controlled Insurance Program could be determinative of an employer-employee relationship. Finally, the court stated that it would not make sense that a "less expensive insurance program would afford participants more coverage by insulating them from tort suits not just from their own employees but from employees of all other firms involved."³³

Pennsylvania courts have reached a similar conclusion. Where an owner had a right to inspect work pursuant to the contract documents (and where, incidentally, the project was covered by an Owner Controlled Insurance Program) to ensure that safety requirements were being met, this ability did not constitute "retained control" so as to make the owner the employer of a subcontractor's employee under Pennsylvania law.³⁴

A Maryland court held that regardless of the master/servant relationship or the fact that there is an Owner Controlled Insurance Program, an entity will qualify as a statutory employer where there are "two contracts, one between the principal contractor and a third party whereby it is agreed that the principal contractor will execute certain work for the third party, and another between the principal contractor and a person as subcontractor whereby the subcontractor agrees to do the whole or part of such work for the principal contractor."³⁵

The Resolution Of Priority Disputes In The Case Of Competing Insurance Policies
As noted above, a contractor/subcontractor afforded coverage under an Owner Controlled Insurance Program or Contractor Controlled Insurance Program for a particular project may have its own insurance, either because it pre-existed the Owner Controlled Insurance Program/Contractor Controlled Insurance Program enrollment or as a means of obtaining additional coverage for future liabilities. In the workers' compensation arena, an employer may procure its own workers' compensation coverage to supplement the Owner Controlled Insurance Program for injuries occurring away from the Owner Controlled Insurance Program project site.³⁶ An Owner Controlled Insurance Program and a Commercial General Liability policy procured by a contractor individually may have competing "other insurance" or "excess only" endorsements which will impact the priority of coverage.³⁷

In these circumstances, the intra-carrier disputes about priority of coverage which are often obviated by the issuance of an Owner Controlled Insurance Program or Contractor Controlled Insurance Program, may arise.

In an Illinois case, Reliance issued an Owner Controlled Insurance Program policy for a particular project which included workers' compensation coverage. Virginia Surety had also issued a general workers' compensation policy for contractor. Reliance became insolvent, and the Illinois Insurance Guaranty Fund stepped in on behalf of Reliance, and then sought reimbursement from Virginia Surety. The contractor's bid included a credit for the cost of insurance, and was therefore covered under the Owner Controlled Insurance Program. The Virginia Surety policy contained a provision indicating that coverage was provided unless there was other insurance, and Virginia Surety returned a portion of the contractor's premium as it related to the subject work site. On these facts, the court determined that the Fund was responsible for the workers' compensation benefits at issue, and that Virginia Surety had no duty to afford coverage.³⁸

In a California case, Aetna provided a primary commercial general liability policy, and National Union provided a commercial umbrella policy under an Owner Controlled Insurance Program policy. A subcontractor enrolled in the Owner Controlled Insurance Program had previously purchased Commercial General Liability coverage from American & Foreign, and National Union asserted that it wasexcess to the primary policy issued by American & Foreign. American & Foreign argued on the other hand that the National Union policy was purchased as part of an Owner Controlled Insurance Program for the purpose of providing primary coverage for any incident at the project site, whereas American & Foreign simply afforded general coverage. Applying the competing other insurance provisions within the respective policies, the court agreed with National Union that its coverage was excess over American & Foreign.³⁹

In a New York case, the workers' compensation insurer for a construction subcontractor sought a declaration that the issuer of a "wrap up" policy, covering all authorized participants in the project, was required to defend and indemnify the subcontractor, which had been brought in as third-party defendant in an employee's bodily injury action. The court held that the workers' compensation carrier failed to show that the subcontractor was an insured under the wrap-up policy; coverage under the wrap-up policy did not extend to all contractors and subcontractors but only those who enrolled in the program; the subcontractor was not a valid enrollee because written approval for hiring the subcontractor was not obtained; and therefore the subcontractor was an unknown entity who did not pay any premiums or notify the Workers' Compensation Board of the policy's issuance pursuant to New York law.⁴⁰

In a New Jersey case, the court resolved a coverage dispute concerning which policy was primary for a bodily injury claim arising out of a construction accident. There, the owner was required by contract to maintain liability coverage during construction of a project and to designate the general contractor as a "named insured" on the policy. The general contractor also had its own general liability policy which included an exclusion for "wrap up" policies.

The insurer for the owner argued that its policy did not provide "wrap up coverage" as that term is generally understood in the insurance industry because it did not provide workers' compensation coverage, did not cover any of the subcontractors, and did not provide builder's risk coverage for the premises. The Court found the term "wrap up" to be ambiguous, turning to extrinsic evidence to ascertain the intent of the insurers, which it found to require application of the exclusion to relieve the general contractor's personal insurer from any obligation to afford coverage.⁴¹

The Allocation And Collection Of Premium Costs For Owner Controlled Insurance Program/Contractor Controlled Insurance Program Coverage
As noted above, the cost of Owner Controlled Insurance Program/Contractor Controlled Insurance Program coverage is typically accounted for (and effectively paid by each enrollee) by way of a credit against its bid for work on the project in the amount of the liability insurance the contractor would otherwise be obligated to obtain. As also noted, in policies where the premium is not fixed but is instead loss sensitive — ultimately determined only on the basis of claims paid — adjustments to a contractor's contribution of its share of the premium cost may occur throughout and even after completion of the project. This potentiality has run afoul of at least one state's statutory provisions. Specifically, a New York court held that the terms of an Owner Controlled Insurance Program permitting post-project recalculation of an enrollee's share of the policy premium violated statutory insurance provisions, holding that the enrollee could only be required to provide a credit for insurance coverage in its initial bid.⁴²

In a Massachusetts case, an Owner Controlled Insurance Program requiring the cost of insurance to be included in a bid, with deductions for the subcontractor's allocable share of Owner Controlled Insurance Program insurance costs taken from the contract balances due the subcontractor was acceptable.⁴³ A Connecticut case pointed out the interplay of the intent of the contracting parties and the actual terms of the Owner Controlled Insurance Program as it related to payment of premiums and self-insured retentions, and found a question of fact as to whether the parties' intent on the payment for these items should control to resolve arguably ambiguous policy language.⁴⁴

Liability for the Control Or Management Of Owner Controlled Insurance Program/Contractor Controlled Insurance Program Responsibilities And Obligations
As noted, the cost in managing and administering an Owner Controlled Insurance/Contractor Controlled Insurance Program in terms of expenses and time can be substantial. Depending upon the plan documents, third parties may have purported obligations under the Contractor Controlled Insurance Program/Owner Controlled Insurance Program which can create a legal duty creating liability to third parties where those duties are breached.

For example, in a South Carolina case, the Owner Controlled Insurance Program plan provided that the insurance broker for the policy was an "administrator" under the plan and responsible for safety inspections. The evidence established that the broker in fact took no actual responsibility for safety inspections and was in no manner involved in ensuring safety on the project site. Based upon the provisions of the Owner Controlled Insurance Program, however, the broker was held to have a legal duty to serve this function, and possessed potential liability for a workplace injury to the employee of a contractor allegedly resulting from unsafe work conditions.⁴⁵ Two California cases have addressed similar issues. In one, the insurance broker, as part of implementing an Owner Controlled Insurance Program, developed a safety program for the project which identified risks attendant with the project, and then undertook to monitor compliance with that safety program. The court held that the broker could be held liable for negligently monitoring the program.⁴⁶ Another court, however, found that an owner implementing safety programs through an Owner Controlled Insurance Program was not the equivalent of control over a contractor's employees, and therefore the owner would not be responsible for the independent contractor's negligence.⁴⁷

The respective duties and obligations under a wrap program can have significant consequences. In one case, where a general contractor failed to include a subcontractor as an Owner Controlled Insurance Program enrollee, requiring the owner to pay a large deductible under an Owner Controlled Insurance Program to settle a tort claim by an employee of a subcontractor, the owner was deemed to have no claim for indemnity since under the construction agreement, the owner was obligated to obtain an Owner Controlled Insurance Program policy and the general contractor had no insurance procurement obligation.⁴⁸

Impact Of Underlying Waivers Of Subrogation
Contracting parties often enter into mutual "waivers of subrogation," under which the parties agree, expressly or impliedly, that they will look to insurance to cover any losses incurred on the project as opposed to seeking recovery from each other. Waivers of subrogation may expressly state that the parties will look to an Owner Controlled Insurance Program or Contractor Controlled Insurance Program for any losses arising from the project.⁴⁹ Also, waivers of subrogation often go hand-in-hand with agreements to purchase insurance, and these interlocking provisions are read as evidencing the parties' mutual intent to waive direct claims against each other for losses arising with the project and instead turning to insurance for those losses. For example, an owner's agreement to purchase an Owner Controlled Insurance Program can be construed as evidence of an intent to waive subrogation against a contractor on the project for losses arising during the project, and to look solely to the Owner Controlled Insurance Program for recovery.⁵⁰

Impact Of Anti-Subrogation Rules
Another potential issue raised by the implementation of Owner Controlled Insurance and Contractor Controlled Insurance Programs is the application of the anti-subrogation rule, which precludes an insurer from maintaining an action for subrogation against its own insured for a claim arising from the very risk for which the insured was covered. In a New York case, AIU Insurance Company issued a wrap-up insurance policy. Nationwide Mutual Insurance Company also insured a subcontractor-employer under a workers' compensation policy that provided coverage for damages claimed by third parties as a result of injury to the subcontractor's employees. The employee/decedent's wife obtained summary judgment against the site owner on the issue of liability. Thereafter, AIU caused the site owner to commence a third-party action against the subcontractor-employer, but AIU settled the main action after a trial on damages, and the subcontractor-employer was not involved in either the trial or the subsequent settlement. AIU argued that the subcontractor-employer was the only possible active tortfeasor, and therefore Nationwide was obligated to reimburse AIU for half of the settlement. The court noted that although the third-party action did not go forward after settlement of the main action, the anti-subrogation rule would have required its dismissal. As a result, the court held that any attempt by AIU, after having paid the settlement, to obtain reimbursement from a co-insurer must fail.⁵¹

Where an insurer issues policies covering separate risks under one Owner Controlled Insurance Program/Contractor Controlled Insurance Program plan, each risk may be considered a separate and distinct policy from which the right of subrogation survives. In another New York case, Travelers Insurance issued workers' compensation and liability insurance under an Owner Controlled Insurance Program. It paid under its workers' compensation policy, and the liability claims settled. Travelers asserted a statutory lien on the settlement for amounts paid out by workers' compensation, and argument was raised that the anti-subrogation rule precluded such action. The court held that the contractual relationship between defendants and subcontractor was irrelevant to right to assert statutory lien, and insurer had insured two separate risks.⁵²

²³ Casey v. Vanderlande Indus., Inc., 2002 WL 1496815 (W.D. Ky., June 28, 2002).

²⁴ Washington Metropolitan Area Transit Authority v. Johnson, 467 U.S. 925, 104 S. Ct. 2827 (1984).

²⁵ HCBeck, Ltd v. Rice, 284 S.W.3d 349, 353 (Tex 2009); Hunt Const. Group, Inc. v. Konecny, 290 S.W.3d 238 (Tex. App. 2008); See also Lazo v. Exxon Mobil Corp, 2009 WL 1311801 (Tex. App. May 7, 2009).

²⁶ See Rice, 284 S.W.3d at 355; Hunt Const. Group, Inc. v. Konecny, 290 S.W.3d 238 (Tex. App. 2008); Funes v. Eldridge Elec. Co., 270 S.W.3d 666 (Tex. App. 2008).

²⁷ HCBeck, Ltd v. Rice, 284 S.W.3d 349, 353, 358-359 (Tex 2009). See also Funes v. Eldridge Elec. Co., 270 S.W.3d 666 (Tex. App. 2008).

²⁸ Pogue v. Oglethorpe Power Corp., 267 Ga. 332, 477 S.E.2d 107 (1996).

²⁹ Culp v. Archer-Daniels-Midland Co., 2009 WL 2003301 (D.Neb. July 2, 2009).

³⁰ Burger v. Midland Cogeneration Venture, 202 Mich. App. 310, 507 N.W.2d 827 (1993).

³¹ See e.g. Schmidt v. Intel Corp., 112 P. 3d 428 (Or. App. 2005); Chase v. Terra Nova Indus., 728 N.W.2d 895 (Mich. App. 2007) (discussing statutory provisions for implementation of OCIP); Lambert v. Tennessee Valley Auth., 2002 WL 32059747 (E.D. Tenn., Sept. 17, 2002).

³² Pride v. Liberty Mutual Ins. Co., 2007 WL 1655111 (E.D. Wis. 2007).

³³ Ibid.

³⁴ Zuno v. Wal-Mart Stores, Inc., 200 WL 1545258 (E.D. Pa. 2009).

³⁵ Rodrigues-Novo v. Recchi America, Inc., 381 Md. 49, 846 A.2d 1048 (2004).

³⁶ American Protection Ins. Co. v. Acadia Ins. Co., 814 A.2d 989 (Me. 2003) (if contractor was covered under terms of OCIP, then OCIP carrier was responsible for workers' compensation benefits to contractor's employee, notwithstanding that contractor secured coverage for workers' compensation injuries occurring away from OCIP project site).

³⁷ Royal Ins. Co. Wausau Ins. Cos., 1994 WL 879846 (Sup. Ct. Mass., July 1, 1994) ("excess only" endorsement in contractor's individual policy controlled and resulted in OCIP as primary coverage).

³⁸ Virginia Sur. Co. v. Adjustable Forms Inc., 888 N.E. 2d 733 (Ill. App. 2008).

³⁹ National Union Fire Ins. Co. of Pittsburgh, Pa. v. American and Foreign Ins. Co. 2006 WL 4757339 (C.D. Cal. 2006).

⁴⁰ Hartford Underwriters Ins. Co. v. American International Group, Inc., et al., 751 N.Y.S.2d 175, 300 A.D.2d 24 (2002).

⁴¹ Welcome v. Just Apartments, LLC, 2008 WL 2696252 (N.J. Super. A.D.).

⁴² East Hills Metro, Inc. v. Jeffrey M. Brown Associates, Inc., 74 A.D.3d 730, 907 N.Y.S.2d 16 (2010).

⁴³ Dowd Plumbing Corp. v. Travelers Casualty & Surety Company of America, 73 Mass. App. Ct. 1120 (2009).

⁴⁴ Mohegan Tribal Gaming Auth. v. Kohn Pedersen Fox Assoc., 2003 WL 23177993 (Sup. Ct. Conn., Dec. 23, 2003).

⁴⁵ Houston Casualty Co. v. St. Paul Fire & Marine Ins. Co., 2010 WL 1430097 (D.S.C. April 7, 2010).

⁴⁶ Velazques v. Metropolitan Water Dist., 2002 WL 31820222, Case No. E025952 (Cal. Ct. App., 4th Dist., Dec. 17, 2002).

⁴⁷ Alvarado v. Metropolitan Water Dist., 2002 WL 53701, Case No. E028778 (Cal. Ct. App., 4th Dist., Jan. 15, 2002).

⁴⁸ Knutson Construction Services Mid-West, Inc. v. Board of Regents, 767 N.W.2d 420 (Iowa App. 2009).

⁴⁹ Reed & Reed, Inc. v. Weeks Marine, Inc., 2004 WL 256335 (D. Me., Jan. 9, 2004).

⁵⁰ Affiliated FM Ins. Co. v. Patriot Fire Protection, Inc., 120 Wash. App. 1039 (2004).

⁵¹ AIU Ins. Co. v. Nationwide Mutual Ins. Co., 878 N.Y.S.2d 52, 62 A.D.3d 421 (2009).

⁵² Romano v. Whitehall Properties, LLC, 852 N.Y.S. 2d 645 (N.Y. Sup. 2007).

Practical Considerations in Selecting and Managing OCIP/CCIP Coverage for Construction Risks

Issues relevant to selecting the right wrap program for construction-related risks, and the challenges that can arise in managing a wrap program, are far too numerous to address individually here. Many of the considerations and problems that frequently arise, however, are addressed below.

Adequacy of Limits
In the absence of an Owner Controlled Insurance Program or Contractor Controlled Insurance Program policy with substantial per occurrence and aggregate limits (or the issuance of excess/umbrella coverage which accounts for modest primary limits), one likely outcome of the use of a wrap program is the availability of a lower aggregate limit of liability for all enrollees in the insurance program than would exist if the same enrollees obtained separate policies of liability insurance. The actual limit available to pay liability exposures is also significantly impacted by the scope of coverage afforded for defense — specifically, whether defense costs are within or outside the limit of liability.

This challenge can be addressed in a variety of ways. For example, an enrollee can participate in the Owner Controlled Insurance Program/Contractor Controlled Insurance Program while at the same time maintaining a traditional, individual policy of liability insurance. In this case, however, the potential cost savings of participation in an Owner Controlled Insurance Program/Contractor Controlled Insurance Program is surely lost, since the bid of an enrollee in the program is traditionally reduced to reflect the cost of the insurance the contractor would have obtained for itself were the Owner Controlled Insurance Program/Contractor Controlled Insurance Program coverage not being provided. If that coverage is being supplemented by a separate policy purchased by the enrollee, then insurance costs are necessarily higher than they would be by a traditional insurance approach. Furthermore, such supplemental coverage can be illusory since some Commercial General Liability policies expressly exclude liability arising from any project covered by a wrap policy such as an Owner Controlled Insurance Program or Contractor Controlled Insurance Program²¹

Since Owner Controlled Insurance Programs/Contractor Controlled Insurance Programs are typically multi-year policies, such programs often provide reinstated or "refreshed" aggregate limits on an annual basis, for the term of the policy. Whether an annually reinstated aggregate does anything more than traditional insurance would provide — i.e., the benefit of a new limit of liability for each year of the policy duration — depends on the circumstances of the loss and the language of the policy.

Finally, excess/umbrella coverage can be purchased over the Commercial General Liability limit as a backstop against the risk of inadequate project coverage. But as a practical matter, the issue is not so much whether coverage is obtained in the form of primary coverage, supplemented by excess/umbrella, or whether a single-layer wrap program is designed with a large limit of liability. The issue is cost, which is substantial (if not prohibitive) if the aim is to obtain a policy which would afford limits equal to those which would exist under the traditional insurance model requiring each subcontractor or trade engaged in work on a project to obtain separate liability coverage.

Differing Premium Bases for OCIP/CCIP Programs
Retrospective rating plans in which the ultimate cost of an insurance product is variable, and determined only on the basis of the claims and payments over the period of the policy, sometimes occur in other commercial insurance products (such as workers' compensation policies), but they are a common feature of Owner Controlled Insurance /Contractor Controlled Insurance programs. Under this approach, where losses and claims paid determine the ultimate cost of the insurance, the total premium cost of the Owner Controlled Insurance Program/Contractor Controlled Insurance Program product is not guaranteed, but is instead subject to adjustment. Consequently, there is an element of financial uncertainty which does not exist in the traditional Commercial General Liability insurance context, where the policy premium is more typically fixed and guaranteed regardless of the claims occurring on the policy.

Fixed cost Owner Controlled Insurance/Contractor Controlled Insurance programs are written, but the premium cost is higher due to the uncertainty on the part of the carrier of its ultimate financial exposure.

Control Over the Program
As the names of the products reveal, the controlling entity in the case of an Owner Controlled Insurance Program is the owner; the controlling entity in the case of a Contractor Controlled Insurance Program is the contractor. The cost in terms of time and expense in managing and administering an Owner Controlled Insurance/Contractor Controlled Insurance program can be substantial. Managing the enrollment of the employees of all contractors on the project for purposes of workers' compensation coverage and subsequent claims for workers' compensation benefits alone can be daunting.

This management function of an Owner Controlled Insurance/Contractor Controlled Insurance program can be undertaken by the named insured owner or contractor, by a third party administrator, or by the carrier issuing the Owner Controlled Insurance Program/Contractor Controlled Insurance Program.²² As addressed more fully in a subsequent article in this series, Owner Controlled Insurance Program/Contractor Controlled Insurance Program plan documents purporting to place obligations on parties to the Owner Controlled Insurance Program/Contractor Controlled Insurance Program policy, and even those which merely facilitate the coverage, can create legal obligations on the part of both the parties and facilitators.

²¹ Colony National Ins. Co. v. The Teaford Co., Inc., 2010 WL 45339369 (N.D. Ga. Oct. 26, 2010) (Owner Controlled Insurance Program exclusion in enrollee's separate Commercial General Liability policy precluded any supplemental coverage under the Commercial General Liability policy over the Owner Controlled Insurance Program).

²² Liberty Mut. Ins. Co. v. Massachusetts Water Resource Authority, 2007 WL 1977940 (Mass. Super. 2007) (Carrier issuing Owner Controlled Insurance Program policy identified as program administrator pursuant to a written contract with the Owner).

Introduction
Insurance issues continue to play a significant role in any construction project. Although insurance products have evolved in an effort to address policy conflict and cost concerns, issues remain that often lead to conflict between owner, contractors, subcontractors and/or their insurers on the resolution of claims. An understanding of the available products and the process of responding to a claim before and after litigation is critical to the management of these matters.

This series will:

1. provide an overview of the unique policy products that are available for construction projects, including a discussion of the considerations that are essential to the selection and management of the programs;
2. discuss the deficiencies that have been identified by courts nationwide in the use of certain controlled insurance programs;
3. address the issues that arise when a claim occurs and, more specifically, discuss the tender process and the defenses to coverage that may be raised by notified carriers;
4. provide an overview of litigation considerations with an in-depth discussion of the forum selection process; and,
5. provide an overview of evidentiary and settlement issues that often arise in the disputes involving construction insurance claims.

What Kind Of Insurance Is Appropriate For A Given Project?

Traditional Construction Risk Insurance Products and the Trend Favoring "Wrap" (OCIP and CCIP) Policies
The Owner Controlled Insurance Program ("OCIP") and the related Contractor Controlled Insurance Program ("CCIP") are programs of construction-related insurance coverage under which the owner, developer, general contractor and eligible subcontractors become named insureds under one "wrap" policy covering a particular site and/or project. The aim of such programs is to make insurance for construction risks more "equitable, uniform and efficient ... [by] eliminat[ing] the costs of overlapping coverage and delays caused by coverage or other disputes between the parties involved in the project and, at the same time, protect[ing] all the contracting parties by bringing the risk of loss from the project within the insurance coverage of the OCIP."¹ Other stated advantages are decreased premium costs, reduced likelihood of coverage gaps arising from uninsured trades on a project, and the avoidance of coverage disputes which could otherwise arise among multiple carriers on a risk.²

These are optimistic goals, presumably with a firm basis in theory. However, the actual circumstances of a particular risk, loss or claim will ultimately determine whether the goals are met in practice. Wrap programs can involve multiple carriers, rather than all coverages being issued by a single company,³ and therefore the possibility of intra-carrier disputes are not always obviated. Additionally, claims can arise among and between enrollees/participants in the Owner Controlled Insurance Program/Contractor Controlled Insurance Program, and notwithstanding the goal of obtaining coverage for all trades that may be involved in a project, insured status is often linked to the contractual terms of the project, which may exempt certain classes of contractors or require proper paperwork for a contractor to be included as an insured under the Owner Controlled Insurance Program.⁴ Moreover, insurance professionals and commentators debate the extent to which wrap products actually result in lower premium costs to plan enrollees, and the answer likely varies depending upon the project, the scope of the coverage, and the cost of the policy. Finally, although not within the scope of this discussion, implementation of an Owner Controlled Insurance Program may involve regulatory issues, concerns over public bidding processes and compliance with statutory insurance provisions for public projects.⁵

Whether they are or are not efficient, cost effective insurance products, commentators and the insurance industry acknowledge the increased frequency of Owner Controlled Insurance Programs, Contractor Controlled Insurance Programs and similar wrap products as the favored mechanism for insuring construction risks large and small. Indeed, innumerable departments, divisions and agencies of federal, state and municipal entities consider the Owner Controlled Insurance Program/Contractor Controlled Insurance Program model of insurance so superior to the traditional, multi-carrier insurance model as to mandate enrollment for contractors bidding on public projects. Wrap programs are consequently due significant consideration both in terms of project planning pre-construction, and after claims or litigation arise.

Typical Insurance Products Involved in Construction Risks
The risks inherent in construction activities are many, and the insurance products reasonably necessary to cover potential damages and liabilities are equally numerous. Two products that are outside the scope of the typical wrap program are Builder's Risk⁶ insurance and surety products like the Performance Bond and the Payment Bond. With due acknowledgement for the fact that generality breeds unreliability, Builder's Risk policies typically afford first party property coverage to the builder or owner against loss of or damage respecting construction activities in progress;⁷ surety products¸ inter alia, ensure the completion of the project and the payment of the involved entities. As with all insurance products, the risks covered vary significantly by the coverage forms at issue.⁸

On the other hand, the insurance products which may potentially be encompassed by wrap policies like an Owner Controlled Insurance Program or Contractor Controlled Insurance Program include Commercial General Liability ("CGL") insurance, Workers' Compensation and Employer's Liability insurance, Professional Liability insurance, Environmental Liability insurance, and Excess/Umbrella Insurance. The Owner Controlled Insurance Program or Contractor Controlled Insurance Program can delineate which coverages it provides and which types of coverage the contractors on the project must obtain on their own.⁹ Whether or not the project is insured under an Owner Controlled Insurance Program or Contractor Controlled Insurance Program, it is likely that all or most of these coverages will be obtained. A summary of each product is discussed below.

Commercial General Liability¹⁰
Commercial general liability ("CGL") policies are the most commonly available insurance in the event of a construction loss and pay "on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage ... caused by an occurrence."

The bodily injury or property damage must take place within the policy period and it does not matter when claim or suit is brought.

A general liability policy is "triggered" when "bodily injury" or "property damage" takes place during the policy period.¹¹ When the injury/damage "occurred" is important and may trigger coverage under older policies.

While many types of claims are limited to a two, three or six year statute of limitations, some high-exposure claims have very long tails, such as: environmental, asbestos, construction defect and intellectual property claims. It is important to critically assess the nature of the damage/loss at issue and determine whether bodily injury or property damage potentially occurred during a policy period. Depending on applicable law,¹² multiple policy periods may be triggered by a loss.

Professional Liability
Commercial General Liability insurance is usually the first choice to cover a loss, but is not the only type of policy that may potentially apply. In addition to losses associated with bodily injury or property damage, a professional liability policy may cover non-physical, or purely economic, damages. For instance, if a project sustains cost-overruns and loss of revenue because of design errors, a policy limited to bodily injury and/or property damage coverage would not cover these non-physical losses. In comparison, most professional liability policies cover these consequential type losses.

Professional liability insurance provides coverage for claims alleging mistakes in technical or highly-skilled areas of work. Such work is commonly defined as "professional services." In the construction context, professional services include:

• Design Work (structural, civil, soil)
• Planning
• Land surveying
• Mechanical and electrical engineering
• Construction management services (logistical work associated with the construction process, including scheduling and project site safety).

Professional liability policies are usually "claims made" policies and require: (1) that the conduct subjecting the insured to liability occur during the period of coverage, and (2) that the party allegedly aggrieved by such conduct make a "claim" against the insured during the period of coverage.¹³

A professional liability policy is intended to work in harmony with the coverage afforded under a Commercial General Liability policy. In the construction context, a professional liability policy insures those risks that involve the technical design, engineering and other skilled work associated with a construction project. The Commercial General Liability policy is intended to address liability for the other aspects of a construction project that concern "general negligence," falling outside the scope of professional services. Indeed, the majority of Commercial General Liability policies contain exclusions for work that is considered to involve professional liability.

For a variety of reasons, a claim cannot always be neatly packaged into one particular type of coverage and may overlap between various types of policies. This professional vs. general liability debate has been an ongoing battle courts have confronted on numerous occasions. To illustrate — a construction manager may act as a general contractor and provide management services. In this scenario, classifying an error involving project oversight as either a professional or non-professional act can be difficult. This is illustrated by two cases reaching divergent conclusions.

For example, in a case from the New York Appellate Division, the court held, that a project engineer's failure regarding project safety management did not involve professional negligence: "It is clear that [Engineer] Seelye's alleged failure in the underlying action to make sure that the contractor at a renovation site remained in compliance with both its contract and the relevant safety laws did not require Seelye's engineering acumen, but rather normal powers of supervision and observation."¹⁴

Conversely, a New York federal court concluded that the project architect's general oversight responsibilities involved "construction management," affording coverage under its professional liability policy for claims involving a construction crane that toppled over. In so holding, the court rejected the insurer's argument that the architect was not engaging in construction management because he did not perform "design work, construction means and methods, site safety, or duties assumed or required to be performed by the Construction Manager."¹⁵

Excess/Umbrella Policies
True excess insurance policies will usually "follow form," providing the same coverage as their primary counterparts and generally have no obligation to respond to a claim until the primary insurer's policy limits have been exhausted. Oftentimes, increased limits are provided by umbrella policies, which, like excess insurance, schedule the Commercial General Liability policy as "underlying," but provide coverage according to the terms and conditions of a stand alone policy. Depending upon the program, umbrella coverage may be the first layer above the Commercial General Liability policy, with "follows form" excess coverage existing over the umbrella.

Moreover, for both Umbrella and Excess policies, the insured's duty to provide notice typically only arises when the insured reasonably believes that an occurrence is likely to involve the umbrella/excess coverage.¹⁶ If there is even a possibility that the relevant damages will implicate the umbrella or excess policy, the prudent policyholder should immediately put both carriers on notice to avoid any possibility of late notice disclaimer and ensure the umbrella/excess carrier has the opportunity to timely investigate the claim as needed, or to associate in the defense of any suit being provided by the primary carrier.

Builders Risk
As noted, builders risk insurance is a type of first party property insurance most common in the construction context because it insures property undergoing a fundamental change during the policy period.¹⁷ The covered risk on the date of project commencement (usually an empty plot of land) is vastly different from the risk insured on the date of project completion (a finished structure). The insured property is a work-in-progress consisting of three separate segments: (1) the part of the project that has been completed; (2) the part that is being worked-upon; and, (3) the part that is not yet begun. Consequently, builders risk insurance covers the on-site building materials and components that are being moved, assembled, and put into place.¹⁸

Builders risk insurance is non-standardized coverage — policy language varies from one form to the next, often significantly. However, while there is no common policy form, the majority of builders risk policies condition coverage upon the presence of the three following criteria: (1) a "loss" to (2) "covered property" (3) caused by a "covered cause of loss".¹⁹ While the policy is typically purchased by the owner of the project, it will usually name certain contractors as insureds, or at the very least, insure the contractors' interest in the project. Thus, a builders risk policy covering a project should be available regardless of who caused the property damage.

Environmental Liability Coverage
The standard Commercial General Liability form contains a pollution exclusion for damage or injury "arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants," and broadly define "pollutant" as "any solid, liquid, gaseous or thermal irritant or contaminant". There is a morass of case law interpreting various pollution exclusions and wording — old and new — and the extent to which a Commercial General Liability policy will or will not respond to a particular liability which may or may not properly be characterized as arising from a pollutant, irritant, or contaminant is not susceptible to reliable generalities and is beyond the scope of the within discussion.

Various pollution liability products are available that are designed to specifically address an insured's potential exposure for environmental risks and pollution conditions which may be encountered as a result of the insured's operations. These products include Contractors Pollution Liability ("CPL") insurance, Premises Pollution Liability ("PPL"), which is also referred to as Pollution Legal Liability ("PLL") and Environmental Impairment Liability (EIL) insurance. The scope of coverage varies, but these forms generally cover third party liability for and the costs of defending alleged injury, clean up and property damage arising out of pollution conditions respecting the insured site, and first party coverage for government mandated clean up costs.²⁰

¹ Pride v. Liberty Mut. Ins. Co., No. 04-C-703, slip p. at 2, 2007 WL 1655111 (E.D. Wis. June 5, 2007), citing J. Loveless, "Construction Insurance: Do you Only Get What You Pay For?" 78 N.Y. St. B.A.J. 10 (March-April 2006).

² J. R. Evans and J. S. Berry, "Construction Defect Coverage Law: Past, Present and Future", New Appleman on Insurance, Current Critical issues in Insurance Law (December 2008).

³ See Southeast Wisconsin Professional Baseball Park District v. Mitsubishi Heavy Industries America, 738 N.W. 2d 87 (Wis. App. 2007) (four companies issued five policies, "layered" under an Owner Controlled Insurance Program covering the construction of a stadium).

⁴ See Waco Scaffolding Co. v. National Union Fire Ins. Co. of Pittsburgh, PA., 1999 WL 980629 (Ohio App., October 28, 1999).

⁵ See Liberty Mut. Ins. Co. v. Louisiana Ins. Rating Comm., 696 So.2d 1021 (La. App. 1997) (dispute over rulemaking and rating process for Owner Controlled Insurance Program); Independent Ins. Agents of Oklahoma, Inc. v. Oklahoma Turnpike Auth., 876 P.2d 675 (Okla. 1994) (approval process for Owner Controlled Insurance Program under statutory provisions regulating insurance for public projects).

⁶ Discussed Below in further detail

⁷ Couch on Insurance 3d, §§1:53, 155:43.

⁸ Id., §1:53.

⁹ See USF and G v. Employers Cas. Co., 672 F. Supp. 939 (E.D. La. 1987) (Owner Controlled Insurance Program did not provide automobile coverage and contractors had to obtain automobile coverage on their own).

¹⁰ Increasingly, Commercial General Liability insurance for a project will be included in the project wrap-up program, either an owner controlled insurance program ("OCIP") or contractor controlled insurance program ("CCIP"), discussed in more detail in an upcoming part in this series.

¹¹ See, e.g., Smith v. Hughes Aircraft Co., 22 F.3d 1432, 1440-41 (9th Cir. 1993); American Home Prods. Corp. v. Liberty Mut. Ins. Co., 565 F.Supp. 1485 (S.D.N.Y. 1983); Keene Corp. v. Insurance Co. of N. Am., 667 F.2d 1034, 1040 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007 (1982).

¹² As described in more detail in an upcoming part in this series, the method for analyzing "trigger" varies from state to state and can lead to different outcomes.

¹³ A third condition required under a more-stringent form of a "claims made" policy, known as a "claims made and reported policy" is that the insured must provide notice of the claim to the insurer within the policy period.

¹⁴ Reliance Ins. Co. v. National Union Fire and Ins. Co. of Pittsburgh, 262 A.D.2d 64 (N.Y. App. Div. 1999). at 65.

¹⁵ Continental Cas. Co. v. JBS Constr. Mgmt., No. 09 CV CIV. 6697, 2010 WL 2834898 (S.D.N.Y. July 1, 2010). at *5.

¹⁶ See, e.g., Trustees of Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890, 896 (3d Cir. 1987) (the policy "unambiguously sets out an objective standard for the time at which notice was required. The policy required notice whenever the Insured had information from which it might ‘reasonably conclude' that an occurrence was ‘likely to involve' the policy.").

¹⁷ Property insurance operates on a first-party basis and compensates the insured for damage to its own property (whereas Commercial General Liability and professional liability insurance reimburses the insured for its liability to a third party).

¹⁸ See Village of Kiryas Joel Local Dev. Corp. v. Ins. Co. of N. Am., 996 F.2d 1390, 1392 (2d Cir. N.Y. 1993) and Fireman's Fund v. Structural Sys. Tech., Inc., 426 F. Supp. 2d 1009 (D. Neb. 2006): "Builders risk" insurance is a unique form of property insurance that typically covers only projects under construction, renovation, or repair ... The purpose of builder's risk insurance is to compensate for loss due to physical damage or destruction caused to the construction project itself. A policy of insurance containing a "builder's risk" clause or clauses should be construed reasonably and if uncertain in meaning, in favor of the contention of the insured so as to cover if possible a risk obviously sought to be insured.

¹⁹ See, e.g., Harbor Communities, LLC v. Landmark Am. Ins. Co., No. 07-14336, 2008 WL 2986424. At *2 (S.D. Fla. Aug. 4, 2008) (quoting Landmark Amer. Ins. Policy Coverage Form, # LHQ334573); Oceanside Pier View, L.P. v. Travelers Prop. Cas. Co. of Am., No. 07 CV 1174, 2008 WL 7822214, at *3 (S.D. Cal. May 6, 2008) (quoting Traveler's Ins. Co.'s builder's risk provisions); Turner Constr. Co. v. Ace Prop. & Cas. Ins. Co., 2004 U.S. Dist. LEXIS 24142 (S.D.N.Y. Dec. 1, 2004); Phillips Home Builders v. Travelers Ins. Co., 700 A.2d 127, 128 (Del. 1997).

²⁰ New Appleman Insurance Law Practice Guide, V. 4, 42.11[2] (2010).