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Construction Litigation Leaders Forum
H B l i t i g at i o n c o n f e r e n c e s p r e s e n t s Construction Litigation Leaders' Forum Defects • Litigation • Insurance March 3 - 4, 2011 The Ritz-Carlton, Marina del Rey, CA Chairs Jeffrey D. Masters, Esq., Cox, Castle & Nicholson LLP, Los Angeles Richard H. Glucksman, Esq., Chapman, Glucksman, Dean, Roeb & Barger, APC, Los Angeles Kenneth S. Kasdan, Esq., Kasdan Simonds Weber & Vaughan LLP, Irvine, CA Rose Madruga, Esq., Vice President and General Manager, Zurich NA, San Diego sponsors Copyright © 2011 HB Litigation Conferences LLC. All rights reserved. 1175 Lancaster Avenue, 1st Floor, Berwyn, PA 19312 484-324-2755 • [email protected] www.litigationconferences.com This handbook can not be reproduced or distributed without the written consent of HB Litigation Conferences LLC. The materials contained herein represent the opinions of each contributing author, not those of HB Litigation Conferences LLC. This handbook is designed for educational purposes only and should not be construed as legal advice. Construction Litigation Leaders’ Forum Defects • Litigation • Insurance March 3-4, 2011 | The Ritz-Carlton, Marina del Rey, CA Conference Chairs: Jeffrey Masters, Esq., Cox, Castle & Nicholson LLP, Los Angeles Richard Glucksman, Esq., Chapman, Glucksman, Dean, Roeb & Barger, APC, Los Angeles Kenneth Kasdan, Esq., Kasdan Simonds Weber & Vaughan LLP, Irvine, CA Rose Madruga, Esq., Vice President, Zurich American Insurance, San Diego Thursday, March 3, 2011 7:30 Conference Registration & Continental Breakfast Sponsored by: Connell Foley LLP 8:00 The Chairs’ Views of Construction Defect Litigation •Defect claims in the current economic environment: planning, litigation and resolution •The role of case selection in today’s climate •What the future holds for defect litigation Jeffrey Masters, Esq., Cox, Castle & Nicholson LLP, Los Angeles Rose Madruga, Esq., Vice President, Zurich, San Diego Kenneth Kasdan, Esq., Kasdan Simonds Weber & Vaughan LLP, Irvine, CA Richard Glucksman, Esq., Chapman, Glucksman, Dean, Roeb & Barger, APC, Los Angeles 8:30 Important Updates on Conventional Coverage Claims •Insurance options for builders and subcontractors -Conventional GL coverage •Exhaustion •Drop Down •Allocation •Mediating the coverage issues Craig Meredith, Mediator & Arbitrator, JAMS, San Francisco Hon. Rex Heeseman, California Superior Court, Los Angeles Jon McHenry, Esq., Connell Foley, Roseland, NJ Katherine Smith Dedrick, Esq., Childress Duffy, Ltd., Chicago Donalee Pelovsky, Construction Defect Claims Manager, ACE USA, San Francisco 9:15 Morning Break 9:30 Traditional Coverage Concerns •Maximizing Coverage of the Construction Defect Claim •Major coverage issues: occurrence, property damage, major exclusions, etc. •Interplay between insurance and contractual risk transfer -Anti-indemnity statutes. -Changing terrain of additional insured coverage Dave Stern, Secretary & Vice President, West Coast Casualty Service, Inc., Westlake, CA Scott Thomas, Esq., Payne & Fears, LLP, Irvine, CA William Knowles, Esq, Cozen O’Connor, Seattle Lisa Unger-Stanton, Senior Claims ExaminerConstruction Defect, Markel West Insurance Services, Woodland Hills, CA 10:30 Wrap-sody •OCIPs •CCIPs •Claims processing •Cost analysis •Effectiveness •Efficiencies or inefficiencies •Primary differences for mediating these claims vs. traditional coverage claims John O’Meara, Esq., Bremer Whyte Brown & O’Meara LLP, Los Angeles Susan Bryan, AVP, Regional Underwriting Manager, Chartis Excess Casualty, San Francisco Diane Palumbo, Esq., Palumbo Bergstrom LLP, Irvine Erik Davis, President, RT Specialty, Los Angeles 11:15 The Carriers, Builders and Developers Speak Moderator: Glenn Barger, Esq., Chapman, Glucksman, Dean, Roeb & Barger, APC, Los Angeles Cyndy Breit, Vice President, Risk Management, Western National Group, Irvine, CA Thomas Tyrell, Vice President, HUB International Insurance Services, Inc., Anaheim Eric Michna, Assistant Vice President, Zurich North America, Construction Defect & Professional Liability Claim Services, Brea, CA 12:00 Networking Luncheon Sponsored by: Esquire Solutions 1:00 Handling Mixed and Alternative Claims •Fraud and rescission •Contractor’s licensing •Alter ego – corporations and LLCs •New ways to structure a suit: piercing the corporate veil to find new defendants •HOA governance and breach of fiduciary duty Keith Koeller, Esq., Koeller, Nebeker, Carlson, Haluck, LLP, Sacramento Barry Vaughan, Esq., Kasdan Simonds Weber & Vaughan LLP, Phoenix John Thompson, Assistant Vice President, HDI-Gerling America Insurance Company, Glendale, CA 2:15 Emerging Issues with Right to Repair Statutes: How Are They Working? •California SB 800 •Nevada Chapter 40 •Arizona’s Notice and Opportunity to Repair •Other issues, in other jurisdictions Moderator: Bruce Lorber, Esq., Lorber, Greenfield & Polito LLP, Poway, CA Joseph Kaneda, Esq., Fenton Grant Mayfield Kaneda & Litt, LLP, Newport Beach, CA David Lee, Esq., Lee, Hernandez, Landrum, Garofalo & Blake, Las Vegas William Mayer, Vice President and General Counsel, West Region, D. R. Horton, America’s Builder, San Diego 3:00 Afternoon Break 3:15 Emerging Legal and Technical Construction Defect Issues •What qualifies as an emerging trend anyway? •Evolving Testing Standards -What do industry standards really mean? -How do they relate to code standards? -What do you do when industry standards are more modernized than code? •Dealing with the new wave of Green Building: -LEED certification -Advertising initiatives -Special defect cases that arise with green initiatives -Appropriate remedies •Value Engineered ADR-is it the fast track to more efficient claim resolution? •Stigma damages •Applying new technology to collect, distribute and save field inspection data John Kilpatrick, Greenfield Advisors, Seattle Richard Gaeckle, Esq., Hoagland, Longo, Moran, Dunst & Doukas, LLP, New Brunswick, NJ Ed Martinet, Lima Consulting, Key West, FL Christopher Nutter, Associate Director, Navigant Consulting, Inc., San Francisco Jax Kneppers, President, Jax Kneppers Associates, Inc., Walnut Creek, CA 4:30 5:30 Judicial Panel •Budgetary constraints •Case management orders •Trends-court perspectives •Co-Mediating •Single day trials Moderator: George Calkins II, JAMS, Santa Monica, CA Hon. Carl West, Superior Court of California, County of Los Angeles Hon. Thierry Patrick Colaw, Superior Court of California, County of Orange Hon. Vincent J. O’Neill, Jr., Superior Court of California, County of Ventura Adjourn & Cocktail Reception Sponsored by: Cozen O’Connor Friday, March 4, 2011 8:00 Continental Breakfast Sponsored by: Brook Hollow Financial 8:30 Foreclosures, Bankruptcy, Lender Liability, Receiverships •Issues surrounding borrower liability on guaranties – what really happens to the guarantee if a property forecloses •When should receivers be used to take control and sell properties? •Considerations for completed and partially completed properties •Lender liability for construction defects to new buyers of completed and partially completed homes -The coverage trail -Warranty opportunities •Special foreclosure considerations for lenders of condominiums and other common interest subdivisions •Bankrupt developers-what is the process for remaining filings, public reports and DRE regulations issues David Wald, President & Receiver, Wald Realty Advisors, Inc., Pacific Palisades, CA Jay Steinman, Esq., Dzida, Carey, & Steinman, Irvine, CA George Calkins II, JAMS, Santa Monica, CA 9:30 Subcontractor Issues •Additional insured issues •Joint & several liability •Issue release •Mary Carter/Settling around a party/subcontractor Luke Ryan, Esq., Shinnick & Ryan LLP, San Diego Jon McHenry, Esq., Connell Foley, Roseland, NJ Bjorn Green, Esq., Demler, Armstrong & Rowland, LLP, Long Beach, CA Karen Rice, Construction Defect Claims Manager, OneBeacon Insurance, Glendale, CA 10:45 Morning Break 11:00 Worst Case Scenario: How to Prepare for a CD Trial – Mock Session •What kind of experts do you need, how to select them and what makes a good expert-perspectives from all parties •Effective opening statements/closing arguments---and use of multi media technology •Expressing your “Construction Defect” position effectively through jury instructions Moderator: Richard Glucksman, Esq., Chapman, Glucksman, Dean, Roeb & Barger, APC, Los Angeles Hon. Victoria Gerrard Chaney, California Court of Appeal, Second District, Division One, Los Angeles Bruce Mayfield, Esq., Fenton Grant Mayfield Kaneda & Litt, LLP, Newport Beach, CA Robert Carlson, Esq., Koeller, Nebeker, Carlson, & Haluck, LLP, San Diego, CA 11:45 How to Avoid Ethics Violations as Insurance Carrier Selected Defense Counsel •When is there a conflict of interest for insurer-selected counsel? (Model Rule 1.7) •Who is a client? - Does that make a difference for attorney-client privilege? •What does defense counsel need to tell the insured at the outset of the representation? (Model Rules 1.2 & 1.4) •Working with the adjuster (Model Rules 1.4 and 1.7) •Watching for and reacting to possible divergence of interests between insurer and insured (including confidentiality issues) (Model Rules 1.6 and 1.7) •Excess exposure issues (Model Rules 1.4 and 1.7) James Fischer, Professor of Law, Southwestern Law School, Los Angeles Sage Knauft, Esq., Walsworth Franklin Bevins & McCall, LLP, Orange, CA Karen Rice, Construction Defect Claims Manager, OneBeacon Insurance, Glendale, CA John Thompson, Assistant Vice President, HDI-Gerling America Insurance Company, Glendale, CA 12:45 Adjourn Faculty Biographies Thursday, March 3, 2011 8:00 The Chairs’ Views of Construction Defect Litigation Jeffrey D. Masters is a partner in the Litigation Department and co-chair of the Development Risk Management Practice Group at Cox, Castle & Nicholson LLP in Los Angeles. He has served as insurance coverage counsel for owners in connection with more than 200 owner controlled insurance programs (OCIPs or wrap-ups), both project-specific and rolling. He has nearly 30 years of experience representing owners, investors, developers, homebuilders, contractors and lenders in complex insurance coverage, construction and real estate litigation matters. He also has extensive experience structuring, implementing and enforcing insurance and risk management legal programs for projects of all sizes. Mr. Masters is a frequent lecturer for real estate industry groups such as the Building Industry Association (BIA), PCBC, the National Association of Home Builders (NAHB), Urban Land Institute and the International Risk Management Institute (IRMI). He is co-author of the educational materials and co-instructor for IRMI’s seminar series, “Construction Defect Risk Management and Insurance” (2008, 2007) and “Advanced Risk Management and Insurance Strategies For Residential Developers and Contractors” (2006), as well as for NAHB’s educational course, “Risk Management and Insurance for Building Professionals” (2003). He was an instructor for the national Wrap Insurance Conference (Mealey’s 2008), was co-chair of HB Litigation Conferences’ national wrap-up seminar (2009) and is co-chair of HB Litigation Conferences’ Construction Litigation Leaders’ Forum (2011). He authored “Exculpation, Indemnification and Insurance” for CEB’s commercial leasing series practice guides, Office Leasing: Drafting and Negotiating the Lease and Retail Leasing: Drafting and Negotiating the Lease. His articles and commentary on real estate insurance and risk management issues have appeared in the Wall Street Journal, the Los Angeles Times, Los Angeles Business Journal, Builder and Developer, Multifamily Executive, Professional Builder, Big Builder, California Real Estate Journal, The Risk Report, Contractual Risk Transfer (IRMI), Building Design and Construction, LexisNexis Real Estate Report and in various publications of California Continuing Education of the Bar (CEB). He served as a member of the California Building Industry Association (CBIA) Construction Dispute Resolution Task Force. He also served as a technical consultant on Broad Form Property Damage Coverage (Third Edition) published by IRMI and on California Liability Insurance Practice: Claims and Litigation (California CEB). Mr. Masters is rated AV, the highest rating available, by Martindale-Hubbell, which facilitates the peer review rating process for lawyers. He is a graduate of UCLA School of Law and UCLA Anderson Graduate School of Management. Richard H. Glucksman is a founding partner of Chapman, Glucksman, Dean, Roeb & Barger which has offices in Southern and Northern California. Mr. Glucksman is well known and specializes in the construction legal community for his representation of builder and business clients. He specializes in complex multi-party litigation, including construction defect claims, environmental, commercial and business litigation. Mr. Glucksman was born in Santa Monica, California. He attended the University of California, Los Angeles, where he graduated cum laude with a bachelor's degree in history. He earned his juris doctor degree from Loyola Law School. He is admitted to the State Bar of California and the Bar of the United States District Court for the Central District of California and the Eastern District of California. He is also admitted to the Bar of the United States Court of Appeal, Ninth Circuit. Mr. Glucksman is a frequent speaker and author of numerous articles. For several years, Mr. Glucksman has been named to the Southern California “Super Lawyers” list by Los Angeles Magazine. Mr. Glucksman, who is AV rated with Martindale Hubbell, is a member of numerous professional organizations, including the Los Angeles County Bar Association (Trial Lawyers Section and Business & Corporations Law Section), the Orange County Bar Association, the American Bar Association (Tort & Insurance Law Section and Environment, Energy and Resources Section), the Association of Business Trial Lawyers, the Association of Southern California Defense Counsel, the Defense Research Institute, the Building Industry Association, Construction Forum, the Environmental Forum and the ABA Toxic Torts and Environmental Litigation Committee. Kenneth S. Kasdan is the senior litigation partner of Kasdan Simonds Weber & Vaughan LLP in Irvine, California. He specializes in Construction Defect litigation, representing condominium associations, singlefamily homes and homeowners associations. Mr. Kasdan is recognized as one of the nation’s top legal experts on construction defects, and under his guidance, Kasdan Simonds has become one of California’s leading Construction Defect law firms, with offices in Irvine and Walnut Creek, CA and in Phoenix, Arizona. The firm has recovered over $570 million for clients in construction defect litigation. Mr. Kasdan is admitted to practice in California and Arizona. He is an active member of several professional and trade organizations, including the American Bar Association (Member: Business Law Section; Committee on Commercial Financial Services; Subcommittee on Interest and Usury, Credit Rights Litigation Section); State Bar Association of California, Orange County Bar Association (Member: Business Litigation Section), and the Mariposa County Bar Association. Mr. Kasdan sits as Judge Pro Tem, Orange County Superior Court, is a member of the Orange County Superior Court Judicial Arbitration Panel, as well as a member of the Orange County Trial Lawyers Association and the Construction Industry Forum. Mr. Kasdan is a published writer and speaker. Rose Marie Orcino Madruga is the Vice President of Construction Defect & Professional Liability Claim Services for Zurich American Insurance. Since 1996, she has led hundreds of claim professionals managing thousands of construction, professional liability and defect claims throughout the country. Prior to joining claims management, she was a practicing attorney in southern California, representing developers, general contractors and trade professionals. Over the past 20 years, Ms. Madruga has developed extensive knowledge in the field of construction defect and professional coverage, liability and claims administration. 8:30 Important Updates on Conventional Coverage Claims Hon. Rex Heeseman has been on the Los Angeles Superior Court since 2005. After graduating from Stanford Law School, he was an Assistant United States Attorney. Commencing in 1974, he practiced as a business litigator at private law firms and acted as an arbitrator and an expert witness, principally with reference to insurance matters. He co-authors The Rutter Group’s “California Practice Guide: Insurance Litigation.” As an Adjunct Professor, he currently teaches courses on “California Business Torts” and on “Insurance Law” at Loyola Law School. He frequently writes and lectures on those topics. He has served as an Attorney-Member of the State of California’s Judicial Council and of the Ninth Circuit’s Advisory Committee. Jonathan P. McHenry is the Chair of Connell Foley's Insurance Coverage Practice Group. Since joining the firm more than 15 years ago, Mr. McHenry has established himself as a leading member of Connell Foley’s nationally recognized litigation practice. His practice involves the representation of domestic and internationally-based clients in a variety of disputes, with a particular emphasis on serving as lead counsel in a broad range of complex insurance coverage litigation and arbitration matters. Mr. McHenry’s extensive insurance coverage experience includes matters involving general liability, environmental and mass tort claims, construction defects, products liability, subrogation, class actions, aviation law, bankruptcy protection, professional liability, personal and advertising injuries, and bad faith/extra-contractual claims. He also regularly counsels insurers in connection with the handling of complex claims prior to litigation and/or arbitration. He is also a member of various insurance law sub-committees in USLAW, the Defense Research Institute, the American Bar Association, and the New Jersey State Bar Association. Prior to joining Connell Foley, Mr. McHenry’s experience included working for the United Nations Center for Human Rights in Geneva, Switzerland and serving on the staff of the Lt. Governor of South Carolina as a speechwriter, among other endeavors. He holds a B.A. from South Carolina Honors College, University of South Carolina (1992) and J.D. from Emory University School of Law (J.D., 1995). Craig S. Meredith has successfully served as a mediator in more than 100 cases, both locally and nationally, involving complex insurance disputes, including construction defect cases, inter-carrier and insured-carrier disputes, broker disputes, bad faith litigation, bodily injury suits, and other disputes. Additionally, he has participated in more than 400 settlements of major construction litigation as coverage counsel for the developer or general contractor. Mr. Meredith is widely known for his expertise in the area of insurance coverage, having practiced exclusively in that specialty starting in 1986. His primary emphasis is on general liability coverage issues for commercial construction, construction defect, and environmental matters. He has also handled numerous matters involving property coverage and builders risk insurance. He is also known and respected for his ability to form relationships with both carrier representatives and outside counsel. Mr. Meredith is lauded for his ability to resolve coverage issues as the first step in settlement discussions that are essential to case resolution. Representative Matters include: Resolved numerous condominium lawsuits involving construction defects and underlying insurance coverage issues; Resolved numerous construction defect actions involving multiple single family homes in large developments; Participated as a “coverage mediator” within a larger mediation by resolving coverage disputes in advance of the successful mediation of the underlying action by another mediator; Successfully resolved two different cases involving the insurance coverage for golf course landslides. Donalee Pelovsky is the Claims Manager for construction defect claims for accounts written by the ACE Risk Management division. Ms. Pelovsky is located in the San Francisco office. While the majority of CD claims are venued in California and Nevada, her unit handles CD cases country wide. Ms. Pelovsky has been involved in the insurance claims industry since 1973. Her experience with construction defect litigation dates back to the late 1980’s. Katherine Smith Dedrick, a partner at Childress Duffy, Ltd., headquartered in Chicago, focuses on insurance recovery and coverage matters for policyholders. Her experience includes international and national policyholder representation in risk management/disaster recovery and insurance coverage matters. Prior to representing policyholders, Ms. Smith Dedrick was national coverage counsel for an insurance company focusing on environmental, asbestos and unfair claims practice matters throughout the United States. During this period, she gained extensive knowledge of the insurance industry and the resolution and payment of claims. She counseled many insurance company departments including underwriting and claims, as well as executive branches. In addition, she taught classes to claim handlers on how to handle claims, construe policy language, and unfair claims practices. Because of this experience and her many contacts in the insurance industry, she understands the needs of the insurance companies which facilitate resolution of claims for the policyholders. Ms. Smith Dedrick is also a principal at Risk Worldwide, a consulting firm that provides risk and insurance services to corporate, construction, and sophisticated policyholders around the world. After obtaining her law degree, Ms. Smith Dedrick received her M.B.A. from the University of Chicago in 2003. In December of 2008, she was honored by the national publication Business Insurance as one of its 2008 “Women to Watch” for her outstanding accomplishments in insurance and risk management. 9:30 Traditional Coverage Concerns William F. Knowles is a member in Cozen O'Connor's Global Insurance Group and focuses his practice on insurance coverage matters. He advises his clients concerning insurance coverage for a variety of claims, including construction defect, environmental, and general liability. Mr. Knowles has served in an advisory capacity while claims are pending and represents clients both before and after litigation with the insurer ensues. He has tried several insurance coverage cases to verdict in the state of Washington. Mr. Knowles earned his law degree, cum laude, from Seattle University School of Law, and his undergraduate degree, cum laude, from Washington State University. He is a member of the Washington and Oregon Bar Associations, as well as the Washington State Defense Trial Lawyers Association and the Defense Research Institute. David Stern, RPA, is Vice President/Secretary at West Coast Casualty Service, Inc., in Westlake Village, CA Mr. Stern joined West Coast Casualty Service in 1993 and currently has over thirty-two years of diverse experience spanning the insurer, self-insurer, third party administrator and independent adjusting arenas across the USA and internationally. Presently, Dave’s central focus has been on all aspects of construction defect claims. He has been involved in the creation of innovative methods for the reduction of claims handling expenses across the USA. Dave has testified as an expert in construction defect and insurance related matters and has been asked to be a consultant on articles involving construction featured in the Los Angeles Times, the Boston Globe, Bloomberg’s Businessweek, Big Builder Magazine, Insurance Journal and the Orange County Register. Mr. Stern speaks at seminars discussing vital issues facing the insurer and self-insurer communities. He has handled national multi-million dollar exposures including complex coverage, liability and damage issues. He is the technical supervisor for all our TPA accounts. Mr. Stern is a past Secretary of the Construction Defect Claims Managers Association (CDCMA) and presently serves as its Vice President. He is a member of the Registered Professional Adjusters Program and the Society of Insurance Trainers and Educators. Mr. Stern also serves as Secretary/Treasurer of the Malibu Lost Hills Sheriffs Booster Club (2002-present). He is an advisor to the Thousand Oaks Police Departments Charitable Foundation (2007-present) and is a founding member of the Construction Defect Community Charitable Foundation (CDCCF). Scott S. Thomas is a partner in the Insurance Law Group at Payne & Fears LLP. Mr. Thomas specializes in insurance law and has extensive experience in property insurance, casualty insurance, excess insurance, reinsurance and environmental coverage matters. Mr. Thomas was selected to Southern California Super Lawyers in 2004, 2005, 2006, 2007, 2008 and 2009. He is a member of the Orange County Bar Association Intellectual Property Section, American Bar Association Tort and Insurance Law Section and American Business Trial Lawyers Association. Mr. Thomas is the Former Chair of the Orange County Bar Association Insurance Law Section. Mr. Thomas frequently lectures on insurance coverage subjects and has written articles for business and legal publications. He was a member of the BYU Journal of Legal Studies. Prior to joining Payne & Fears LLP, Mr. Thomas was a partner in the national law firm of Robins, Kaplan, Miller & Ciresi. Lisa Unger-Stanton is a Senior Claims Examiner – Construction Defect, at Markel West Insurance Services, where she handles a variety of primary and excess Construction Defects cases nationwide. Ms. Unger-Stanton began her career in insurance in 1990 while working for Chubb & Son, Inc., in New York City. She was responsible for handling various types of general liability claims including Labor Law, Products Liability, Premises Liability, Bodily Injury, Property Damage, Advertising Injury and Personal Injury (Discrimination, Termination and Harassment). She left her position as a Senior Litigation Examiner at Chubb and joined AIGTS as a Complex Director, responsible for handling excess construction defect cases, most of which were located on the West Coast. In 1998, Ms. Unger-Stanton moved to California where she worked as a Claims Supervisor for Zurich N.A. and handled mostly construction defect primary and excess claims in California, Nevada, Colorado and Texas as well as handling some of the more complex general liability claims. In 2002, Ms. UngerStanton joined Markel (formerly known as Investors Underwriting Managers, Inc.) as a Senior Claims Examiner handling construction defect claims on the West Coast, Colorado and Arizona as well as some high exposure general liability and coverage cases. Ms. Unger-Stanton is a graduate of Colgate University where she was a double major in English and Fine Arts. 10:30 Wrap-sody Susan Bryan, AIC, ARM, CRIS, currently acts as the Regional Underwriting Manager for excess construction liability coverage for the Western Region at Chartis Excess Casualty. This includes supervising the underwriting of both wrap-up and program coverages for a wide variety of developers, contractors and trade subcontractors involved in all types of construction. Ms. Bryan spent 13 years as an adjuster handling construction defect, complex coverage and severe exposures in the Construction Defect and Major Case Units at Aetna and Royal Insurance Companies. She also spent four years as an insurance broker, working on program design and placement for construction risks and acting as a consulting resource throughout the country on coverage and claims issues. Ms. Bryan is routinely consulted and has testified at trial for her expertise in coverage and claims issues. She is a regular speaker at legal, construction and insurance industry conferences and seminars. Erik Davis is the President of the Los Angeles office of R-T Specialty Insurance Services, where he specializes in General Liability and Excess Liability construction placements. Mr. Davis leads a team of 70+ dedicated professionals that focus on placing the most difficult risks and exposures in the industry. His goal is to deliver superior, customized products for his retailer insurance partners while providing the highest level of service. Mr. Davis joined R-T Specialty in 2010. Previously he was with CRC by way of merger in 2005. Prior to CRC, he was employed with Sterling West Insurance Services where he was a Managing Partner. He was instrumental in building Sterling West into the largest independent E&S broker in the state of California. Since arriving in the business in 2000, Mr. Davis has become the largest construction casualty surplus lines broker in the United States. He has been responsible for structuring more residential Wrap-Up programs than any other individual broker nationally. Over the years, Mr. Davis has created exclusive products and proprietary coverages for his client base which extends nationally and internationally. He has had the opportunity to work with many of the largest developers and contractors in the world and successfully built a team of underwriting talent, third party vendors and individuals to support the complex deals that he specializes in. Prior to joining the surplus lines insurance industry, Davis served in the United States Air Force for six years and was stationed in Colorado Springs, Los Angeles and Aviano, Italy. At his last station, Mr. Davis managed a staff of 120 individuals and was responsible for a $5 billion operating budget. Mr. Davis has a bachelor’s degree in Business Management from the United States Air Force Academy in Colorado Springs, CO. He played football at the Air Force Academy where he was an All-America defensive end. Mr. Davis resides in Studio City, Calif. with his wife, Nicole, and six year old son, Bo, and two year old daughter, Delilah. John V. O’Meara, an AV rated attorney licensed in California, Nevada and Colorado, is the managing partner of Bremer, Whyte, Brown & O’Meara, LLP’s Los Angeles office. Mr. O’Meara’s career as a civil litigator spans 21 years and has focused in the areas of construction defect, personal injury and property damage for both plaintiffs and defendants. In addition, Mr. O’Meara is active in providing risk management advice to companies, and has broad based knowledge of insurance policies and issues. Mr. O’Meara speaks nationally and internationally on various topics to businesses, trade groups and the insurance industry. As a majority of Mr. O’Meara’s civil litigation experience concerns multi-party complex litigation, Mr. O’Meara has participated in more than 500 mediations and other forms of Alternative Dispute Resolution, and remains active in that arena. Mr. O’Meara has been a paneled arbitrator and mediator for Alternative Resolution Centers for eight years, and draws on his experience and success as an actively practicing civil litigator to create consensus between litigants and their counsel and, as a result, has a high rate of success as a mediator. Mr. O’Meara is also a Planning Commissioner with the City of Agoura Hills, California. Diane Palumbo is a founding partner of Palumbo Bergstrom LLP. She specializes in the defense of developers with a focus on risk transfer mechanisms. Ms. Palumbo's expertise includes litigation of complex construction/real estate claims, insurance coverage, products liability and casualty defense, as well as business and employment law matters. She has tried numerous, complex cases to successful conclusion, including both bench and jury trials. Ms. Palumbo counsels clients ranging from small business entities to Fortune 500 companies. 11:15 The Carriers, Builders and Developers Speak Glenn T. Barger is a partner at Chapman Glucksman Dean Roeb & Barger. He is on the Board of Directors for the Southern California Defense Counsel, where he is also the Committee Chairperson for the Construction Practice Group and is a member of the Association of Defense Counsel of Northern California. He is a member of the California Building Industry Association and is on the Speaker’s & Topic’s Committee for the annual West Coast Casualty Construction Defect Seminar. His publications include “The Impact of Disappearing Carriers on Construction Defect Litigation,” The Construction Lawyer; “Additional Insured Endorsement: Their Vital Importance in Construction Defect Litigation,” The Construction Lawyer; “Additional Insured Endorsement Issues Which Are Currently Impacting Construction Defect Litigation; Managing Construction Defect Cases,” The Construction Lawyer; “Tight Building Syndrome - In The Defense Of HVAC Contractors,” HVAC Products News; “In Defense Of Tight Building Syndrome,” For The Defense. He has also been published on Mold & Environmental Litigation topics, the Crawford decision, SB 800 (Right to Repair Statutes) pre-trial motions, and indemnity issues in various publications. Mr. Barger has been a profiled speaker and a panelist at numerous industry-related seminars and presentations, including HB Litigation Construction Defect Litigation Conference (2009); Lorman’s California Mold and Construction Conference (2002, 2003); MC2 Consultants, CD Seminar (2007, 2008, 2010); Mealey’s Construction Conferences (2002, 2004, 2005); West Coast Casualty Construction Defect Seminars (2001, 2002, 2004, 2005, 2007, 2009, 2010); Association of Southern California Defense Counsel’s Annual Seminar and Construction Seminar (2004, 2009) Chairperson and speaker at Association of Southern California Defense Counsel and Construction Defect Claims Managers’ CD Seminar (2005 – 2010); and California Building Industry Association Annual Meeting (2004). Mr. Barger has trial, arbitration, and mediation experience. He has the distinction of achieving the highest rating of “AV” by Martindale-Hubbell. He specializes in Construction Litigation, Environmental, Toxic and Hazardous Substance Litigation, Commercial/Business Litigation, General Negligence, Professional Liability and Complex, Multi-Party Litigation. Cyndy Breit is Vice President, Risk Management, at Western National Group, where she is responsible for directing, developing and managing programs that identify, control, administer and transfer risk for Western National Group and its affiliated companies. Ms. Breit has 16 years of Risk Management experience, with 10 of those years spent directly in the multifamily industry. Ms. Breit joined Western National Group in 2001 and has done an exemplary job in designing and implementing expanded and highly effective loss mitigation control programs. Western National Group is a multifaceted company working in the fields of development, construction, property management and ancillary services. Western prides itself as one of the largest builders of multifamily housing in Southern California and manages more than 25,000 multifamily residential units in California, Utah and Nevada. Eric Michna has more than 22 years of experience in the insurance industry managing commercial and personal lines claims, including 18 years managing construction defect operations with American International Group, Travelers and Zurich North America. In October 2005, Mr. Michna joined Zurich North America as Assistant Vice President of Construction Defect & Professional Liability Claim Services in Brea, California. He is currently responsible for the overall management of construction defect claims for all lines of business nationwide. During his career, Mr. Michna has served in multiple management capacities nationwide managing construction defect, product liability, construction site injury, third party mold/bodily injury, product liability and professional liability claims in all of the states. In 1986, Mr. Michna received his B.A. in Business Economics from University of California, Santa Barbara. Tom Tyrell is Vice President with HUB Insurance Services in Anaheim, CA, where he works with construction contractors and the real estate industry to provide them with their special needs for insurance and bonding coverages. With more than 30 years of insurance experience focused on the building industry, Mr. Tyrell is a 1974 graduate of California State University, Northridge with a Bachelor of Science degree in Finance. Before joining HUB, he served in senior management roles with several national insurance companies. Mr. Tyrell is a member of the Southern California Contractors Association and is a past president of the Surety Underwriters Association of Southern California. The father of three grown children, Mr. Tyrell and his wife reside in Orange, CA. HUB is the tenth largest broker in the United States (Business Insurance) and ranked eleventh in the world (Best’s Review). With 22 regional offices and over 4,500 employees, HUB is a member of Worldwide Broker Network with the ability to address the global insurance needs of our customers. 1:00 Handling Mixed and Alternative Claims Keith D. Koeller is the founding partner of Koeller, Nebeker, Carlson and Haluck LLP. Founded in 1986, the firm celebrates its 25th anniversary this year. For the last 30 years, Mr. Koeller has focused his practice on the representation of developers and general contractors in both residential and commercial construction litigation. Mr. Koeller has handled significant claims concerning construction defect, construction delay, inverse condemnation, nuisance, bodily injury, and wrongful death. The firm currently has approximately 75 attorneys with offices in California, Nevada, and Arizona. Mr. Koeller is AV rated by Martindale-Hubbell. He is a Past Chair of the Orange County Bar Association, Construction Law Section. He has been named a Southern California Super Lawyer in 2009, 2010, and 2011. In 2003, he was awarded the Larry Syhre Commitment to Service Award at the West Coast Casualty Construction Defect Conference. Also in 2009, he was awarded the prestigious Judge Jerrold Oliver Commitment to Excellence Award. Mr. Koeller has been an innovator in the development of alternative strategies for resolution of construction defect claims and is a frequent speaker at leading industry seminars concerning important topics impacting construction litigation. Mr. Koeller and his wife have raised 5 children, served their church, coached numerous youth athletic teams, and enjoyed countless opportunities to serve others in their community. John J. Thompson, a California native, began his insurance career in 1982 with AIG, followed by 13 years with CIGNA Property and Casualty. Mr. Thompson joined Gerling America Insurance Company in 1999 and in 2007 the company merged with "Haftpflichtverband der Deutschen Industrie" and is now HDI-Gerling America Insurance Company, with US headquarters in Chicago, Illinois. HDI-Gerling provides insurance solutions for medium to large commercial and industrial clients with complex risks around the world. Mr. Thompson is currently a Vice President and is the Branch Claims Manager in the Glendale, California office. Mr. Thompson supervises construction defect, product liability, general liability, toxic tort, mold bodily injury, and property damage claims, in all of the states. As past President of the Construction Defect Claims Managers Association (2004–2007), Mr. Thompson was instrumental in fostering carrier cooperation and knowledge, which is paramount to successfully handling construction defect claims. Mr. Thompson was a past recipient of the Larry Syhre Award. Mr. Thompson has also been invited to speak at numerous seminars on a variety of topics including construction defects. In his free time, Mr. Thompson is an avid Los Angeles Laker and Dodger fan. Barry C. Vaughan is a partner in the law firm of Kasdan, Simonds, Weber & Vaughan LLP and practices out of its home office in Irvine, California. A graduate of the University of Chicago Law School, Mr. Vaughan has been practicing law in various state and federal courts in Colorado and California since 1981. He has a broad background in a wide variety of various kinds of civil litigation, ranging from western water rights through civil RICO to motion picture finance and Superfund, to name a few. In the construction defect arena, he has represented both plaintiffs and defendants in California for well over a decade and is a familiar face in both the Superior Courts and Courts of Appeal. 2:15 Emerging Issues with Right to Repair Statutes: How Are They Working? Bruce W. Lorber founded the Lorber, Greenfield & Polito in 1980. His practice emphasizes the representation of developers and general contractors in construction defect claims. Over the last 30 years he has defended several thousand claims asserted against various members of the construction industry which total well in excess of several billion dollars. Mr. Lorber has been a featured speaker before numerous organizations, including the Building Industry Association, West Coast Casualty, the Community Associations Institute, the San Diego County Bar Association, the California/Nevada Consumer Attorney Association, the San Diego County Superior Court, the Nevada State Bar, Lorman Group, and various insurance companies. He has served as arbitrator, mediator, and Judge Pro Tern for the San Diego Municipal and Superior Courts. He is currently a member of the Association of Southern California Defense Counsel, the San Diego Defense Lawyers Association, the San Diego Bar Association, the California Bar Association, the Nevada Bar Association, the Colorado Bar Association, the Arizona Bar Association, and the American Board of Trial Advocates. Mr. Lorber was born and resides in San Diego, California. He received his Bachelor of Science in Economics from Southern Oregon College in 1974 and his J.D. from the University of San Diego in 1977. He was admitted to the California Bar in 1977, the Nevada Bar in 1996, the Colorado Bar in 2000, and the Arizona Bar in 2006. He is also admitted to practice before the U.S. District Courts for the Southern and Central Districts of California, the U.S. District Court for the District of Nevada, the U.S. Court of Appeals for the Ninth Circuit, and the United States Supreme Court. Joseph Kaneda, a member of the California State Bar since 1992, the Nevada State Bar since 1996, and the Arizona State Bar since 2006, is a partner in the law firm of Feinberg Grant Mayfield Kaneda & Litt, LLP. He graduated from the University of California, Irvine in 1989 with a Bachelor of Arts degree in Political Science and a minor in Art History. Mr. Kaneda received his Juris Doctor degree from McGeorge School of Law in May, 1992. Mr. Kaneda is also a member of the Federal Bar for the Central District of California, Orange County Bar Association, Clark County Bar Association, Consumer Attorneys of California, and Nevada Trial Lawyers Association. In 2010 Los Angeles Magazine named Mr. Kaneda as a Southern California Super Lawyer for a fourth time, an honor bestowed upon the top 5% of all lawyers in Southern California. Mr. Kaneda devotes his practice to the representation of homeowners and consumers throughout California, Nevada and Arizona. David S. Lee is the founding member and managing partner of Lee, Hernandez, Landrum, Garofalo & Blake. Mr. Lee graduated with honors from the University of Southern California, receiving his Bachelor of Arts in English Literature and Language in 1991. He then attended Pepperdine University School of Law and received his Juris Doctorate from that institution in 1994. Mr. Lee is a member of the Federal and State Bars of California and Nevada, and has appeared before the Nevada Supreme Court. Following graduation, he joined a leading California law firm, where he focused his practice on complex civil litigation including construction defect, governmental torts and medical malpractice. Through his California law firm, Mr. Lee then opened the predecessor office to the Firm in Nevada in October 1996. Throughout his career, Mr. Lee has focused his practice in California and Nevada on the representation of “target” defendant contractors (master developers, subdivision developers and general contractors) in all construction related claims. Mr. Lee tried to verdict one of the first construction defect cases in Southern Nevada. Mr. Lee is frequently a featured speaker at local and national seminars on construction defect litigation, including a special engagement at the Nevada State Bar Convention. Mr. Lee has also served as one of the Bar’s representatives (on behalf of developers and general contractors) on multiple committees to improve pre-trial and trial procedure for construction defect cases in the State of Nevada. William Mayer is Vice President and General Counsel for the West Region of D. R. Horton, America’s Builder [NYSE: DHI], the largest homebuilder in the United States. During his tenure at Horton, he has been responsible for resolving construction defect disputes through mediation, arbitration and litigation in several states. Mr. Mayer also participated in implementing Horton’s owner controlled insurance program (OCIP). Prior to joining D. R. Horton, Mr. Mayer was in private practice in San Diego, California. During that time, he was appointed Chair of the Common Interest Development Subsection of the Real Property Law Section of the State Bar of California, and he authored a variety of articles and spoke frequently on common interest development legal issues. Mr. Mayer has also spoken nationwide on CSR ethics issues. In addition, Mr. Mayer has taught both undergraduate and graduate courses in business law and business ethics. Mr. Mayer is active in the San Diego community, including having served on the Board of Directors of the Museum of the Living Artist, and currently serving as Vice Chair of the Board of Trustees of the Museum of Man, in Balboa Park. 3:15 Emerging Legal and Technical Construction Defect Issues Richard W. Gaeckle is a Partner in the Construction Law Practice Group at Hoagland, Longo, Moran, Dunst & Doukas. He is also the team leader for the Green Building practice group formed in 2009. After a brief time in private practice, Mr. Gaeckle joined Hoagland Longo in 2003. The majority of his work focuses on construction litigation and general consultation, with an emphasis on representing design professionals. Clients include architects, engineers, landscape architects, golf course architects, interior designers, surveyors, professional planners, and contractors. He has successfully litigated for his clients in the New Jersey civil courts as well as through binding construction arbitration and administrative boards. His experience includes defense of professional malpractice claims, condominium litigation claims, construction site personal injury claims, property damage claims, design defect claims, delay damage claims and claims arising from inspection and contract administration. In addition, Mr. Gaeckle represents professionals and contractors in copyright claims and collection matters and provides general consultation services to his clients. From 2007 to 2010, he was named to the "Rising Star" list by New Jersey Super Lawyers magazine. Mr. Gaeckle also became a LEED Accredited Professional in March 2009 which was instrumental to the firm forming the Green Building practice area. John A. Kilpatrick, PhD, is the CEO of Greenfield Advisors, a 34-year-old real estate advisory firm headquartered in Seattle, Washington, as well as the Managing Partner of Greenfield Capital Management and Greenfield Development. His Ph.D. is in Real Estate Finance, and prior to joining Greenfield he taught real estate and corporate finance at the University of South Carolina. He was also one of the founders, and the first Administrator, of the South Carolina Supercomputer Network. Dr. Kilpatrick is currently a Visiting Scholar in Real Estate at the Zicklin School of Business, Baruch College, City University of New York, and serves on the Finance Department Advisory Board for Washington State University. Dr. Kilpatrick is the author of four books on real estate and contributing author to three others, as well as the author of over 100 monographs, scholarly journal articles, and working papers. He is a Fellow of the American Real Estate Society (and serves on its Technology Committee), the Membership Chair of the Real Estate Counseling Group of America, and is on the Editorial Board of the Journal of Sustainable Real Estate. He previously served on the Publications Board of the Appraisal Institute, and on the review panel for the journal Real Estate Economics. Dr. Kilpatrick is featured in the current editions of Who’s Who in America and Who’s Who in Business and Finance. He has been featured in the Wall Street Journal, the New York Times, the Boston Herald, and numerous other major periodicals. He is a contributing author to the American Bar Association’s forthcoming Brownfield’s, 3rd edition. Dr. Kilpatrick is a highly sought-after speaker and lecturer on real estate, finance, and economic topics. His recent invited speaking engagements include presentations to the U.S. Senate Subcommittee on Science, Space, and Technology, the Asian Real Estate Society’s annual meeting in Shanghai, China, to Institutional Investor magazine’s Integrated Wealth Management conference in New York City, and to the Seattle Hedge Fund Society. Dr. Kilpatrick is also a private pilot and an accomplished boater. He is the immediate Past Commodore of the Seattle Rotary Mariners, the yachting fellowship of the Seattle Rotary Club, and a former Bridge Member of the International Yachting Fellowship of Rotarians. He is active in numerous civic, social, and fundraising endeavors. John and his wife, Lynnda, live in Issaquah, Washington, and have four children. Greenfield Advisors focuses on complex real estate advisory services, including investment management, litigation support, and workout consulting. Jax Kneppers has more than 30 years of experience in the construction consulting business. His background and education in engineering, construction, estimating, and scheduling has served well in the forensic engineering practice. Mr. Kneppers has served as an expert witness in thousands of cases including high profile cases such as the MGM Hotel, IBM Plant Damage, North Slope Oil Production Facility, Weyerhaeuser Class Action, Haas Business School, H3 Highway, Hawaii, Golden Gate Bridge Seismic Retrofit, CROET Facility, and thousands of construction defect cases. In addition to expert witness/litigation work, Mr. Kneppers is active in the construction practice including consulting with professional organizations, industry groups, contractors, developers, and government agencies to promote better practice and practical solutions to complex construction related problems. Jax Kneppers Associates, Inc. (JKA), is a multidisciplinary consulting firm providing services in forensic, civil, structural, and architectural professions as well as cost estimating, scheduling, and project management. JKA has provided solutions for projects from concept to completion for more than 2,500 projects since its founding in 1989. Ed Martinet possesses an unparalleled understanding surrounding the complexities of the construction defect industry, the nuances of insurance coverage and effective mediation techniques. His industry experience spans more than 32 years and includes more than 350 million dollars in projects, 3,500+ consulting assignments, hundreds of depositions and more than 75 trials/binding arbitrations/judicial references in both state and federal court. Mr. Martinet is a licensed General Contractor in multiple states and holds a B.S. in Construction Management. Mr. Martinet founded MC Consultants more than 20 years ago and guided the firm to its current nationwide position. He left MC Consultants to launch Lima Consulting, whose neutral experts specialize in the swift resolution of complex construction related claims and cases. Under Mr. Martinet’s guidance, Lima Consulting is trailblazing a unique conflict resolution process that is effective in reducing time, stress and expenses for its clients. Learn more about Mr. Martinet and Lima Consulting at www.limasolutions.com. Christopher Nutter, AIA, is an Associate Director in the San Francisco office of Navigant Consulting, Inc. He possesses more than a decade of experience in forensic analysis of defective construction, architectural standard of care cases, and issues involving water intrusion and mold in addition to traditional design practice. Mr. Nutter performs technical analyses of design and construction processes and performance for corporations, developers, municipalities, contractors, design firms and insurers. He also provides opinions regarding errors and omissions, defective design and construction, building and building envelope performance, and standard of care. Mr. Nutter holds degrees from the University of California at Berkeley and the Massachusetts Institute of Technology. Mr. Nutter is a LEED Accredited Professional and an NCARB certified architect licensed in multiple states. 4:30 Judicial Panel George D. Calkins II is a nationally recognized mediator and arbitrator with more than 35 years of legal experience, including two decades as a neutral. He has presided over thousands of complex ADR proceedings involving diverse legal and factual issues and partnered with the courts to resolve numerous complex cases. Mr. Calkins is well respected for his knowledge and innovative settlement strategies in resolving cases including those in business, real estate, public works, contracts, partnerships, suretyship, insurance, products liability, environmental/land use, construction and construction defects and professional negligence. Hard on process, but not on people, Mr. Calkins delivers sound results in an imperfect world. “George has an exceptional ability to assimilate complex factual and legal positions, and to separate the important issues from the irrelevant,” confirms one attorney client. George Calkins brings years of commercial mediation and arbitration experience to resolving business and industry-based cases. He is respected both as an expert in the field and as a good listener who does his homework. Respectful yet focused, Mr. Calkins helps counsel and clients find common ground. Many colleagues concur: “Calkins’ strongest assets are his credibility and tireless work ethic. He settles complex cases at every phase of litigation, and that is the measure of an exceptional mediator.” Prior to his current position, Mr. Calkins was a Partner with Cox, Castle & Nicholson from 19802008, during that time he was an Attorney (1980-1994), Attorney and Part-Time Mediator/Arbitrator (19942000), and Full-Time Mediator/Arbitrator (2000-2008). Mr. Calkins holds a B.A. from the University of California, Los Angeles (1968) and J.D. from Loyola University School of Law (1973). Hon. Thierry Patrick Colaw was appointed to the Orange County Superior Court by Gov. Pete Wilson in August 1997. He has presided over criminal and predominantly civil trials since being appointed. From 2006 to 2010 he presided over class actions, complex multi-party civil cases, toxic torts, multi-party product liability cases, construction defect cases, and California Environmental Quality Act (CEQA) cases in Department CX -104 of the Complex Civil Department of the Orange County Superior Court. He now presides in C25 of the Superior Court managing and trying unlimited civil jurisdiction cases. Judge Colaw has lectured as a panelist for The Rutter Group, California Center for Judicial Education and Research [CJER], Continuing Education of the Bar [CEB], the Orange County Bar Association, and the Orange County Superior Court Temporary Judge Training Program. He is a member of the Orange County Chapter of the American Board of Trial Advocates [“ABOTA”], former President of the Robert J. Banyard Inn of Court, a member of the Executive Committee of the Orange County Superior Court, a member of the Board of Governors of the Orange County Chapter of the Association of Business Trial Lawyers, a Member of the ABTL Judicial Advisory Council from since 2005, and a member of the Board of Directors of the California Judges Association from 2007 to 2010. Judge Colaw has been presented with the Judge of the Year Award by ABOTA as well as Judge of the Year by the Business Litigation Section of the Orange County Bar Association. He has been awarded the Jerrold Oliver Award by the Orange County Trial Lawyers Association as the top trial judge for 2005 and the Judicial Civility Award by the Robert J. Banyard Inn of the American Inns of Court. Judge Colaw practiced law in the field of civil litigation and trials for 18 years with an emphasis on negligence law and business cases as a partner in the AV rated firm Hunt, Colaw & Adams. He was a member of the Board of Directors of the Orange County Bar Association from 1983 to 1995, a Faculty Member of the College of Trial Advocacy of the Bar Association, and a member of the State Bar Committee on the Administration of Justice from 1988-1992. He is a Member of the American Board of Trial Advocates. After four years of military service in the United States Navy including two tours of duty in Vietnam, Judge Colaw returned to college and graduated Cum Laude from U.C.L.A. in 1974. He received his law degree from the University of Santa Clara School of Law in 1977. He then took and passed the California, Arizona, and Colorado state bar exams and was admitted to practice in each state. Judge Colaw is married and lives in South Orange County with his wife Jeri. They have been married thirty years and have two grown sons, one a graduate student at UC Hastings School of Law and the other an undergrad at U.C.L.A. Hon. Vincent J. O’Neill, Jr., has served on the municipal and superior courts of Ventura County since 1992, and has been an adjunct professor of criminal law at Ventura Colleges of Law since 2004. Judge O’Neill began his career in the criminal Division of the Los Angeles office of the California Attorney General. He spent 13 years in the Ventura County District Attorney’s office, including eight years as Chief Deputy District Attorney. He has also taught confessions law to members of the bench and bar. He is the author of O’Neill’s California Confessions Law (published commercially since 1993, updated annually; currently available from Thomson-West), among other articles, book reviews and case summaries appearing in the Los Angeles Lawyer (1979), CDAA Case Digest (1982-83), Journal of Juvenile Law (1983), Prosecutor’s Brief (1984-85, 1989), Criminal Justice Journal (1989), and Los Angeles Daily Journal (1999-2000). Judge O’Neill received his undergraduate degree from Loyola Marymount University in 1974 and his law degree from UCLA School of law in 1977. Hon. Carl J. West was appointed as a judge of the Los Angeles Municipal Court from 1994 -1996. Following his appointment to the Los Angeles Superior Court in 1996, he was assigned to a felony trials department for approximately one year. From 1997 through 2001, he was assigned to a direct calendar civil department in the North Central District. Since April 2002, Judge West has been assigned to the Complex Litigation Panel. Judge West is a frequent panelist and lecturer on topics involving complex case management, electronic discovery, toxic torts, and various substantive and procedural topics of interest to civil judges and litigators. In his current assignment as a member of the Complex Litigation Panel, Judge West is frequently involved with cases involving consumer-related class actions, securities and commercial claims, toxic and mass tort claims, and insurance coverage claims involving significant primary and excess exposure. Judge West earned his Bachelor of Arts degree at Occidental College. He earned his Juris Doctor from Loyola Law School. Prior to his career on the bench, Judge West was in private practice, primarily involved in personal injury, commercial, and real estate litigation. He was an associate with the firms of Stockdale, Peckham, Estes, Ramsey, Lawler & Iroillo and Severson, Werson, Burke & Melchior prior to joining the Pasadena firm of Hahn & Hahn, were he remained as a partner until his appointment to the bench in 1994. Friday, March 4, 2011 8:30 Foreclosures, Bankruptcy, Lender Liability, Receiverships George D. Calkins II is a nationally recognized mediator and arbitrator with more than 35 years of legal experience, including two decades as a neutral. He has presided over thousands of complex ADR proceedings involving diverse legal and factual issues and partnered with the courts to resolve numerous complex cases. Mr. Calkins is well respected for his knowledge and innovative settlement strategies in resolving cases including those in business, real estate, public works, contracts, partnerships, suretyship, insurance, products liability, environmental/land use, construction and construction defects and professional negligence. Hard on process, but not on people, Mr. Calkins delivers sound results in an imperfect world. “George has an exceptional ability to assimilate complex factual and legal positions, and to separate the important issues from the irrelevant,” confirms one attorney client. George Calkins brings years of commercial mediation and arbitration experience to resolving business and industry-based cases. He is respected both as an expert in the field and as a good listener who does his homework. Respectful yet focused, Mr. Calkins helps counsel and clients find common ground. Many colleagues concur: “Calkins’ strongest assets are his credibility and tireless work ethic. He settles complex cases at every phase of litigation, and that is the measure of an exceptional mediator.” Prior to his current position, Mr. Calkins was a Partner with Cox, Castle & Nicholson from 19802008, during that time he was an Attorney (1980-1994), Attorney and Part-Time Mediator/Arbitrator (19942000), and Full-Time Mediator/Arbitrator (2000-2008). Mr. Calkins holds a B.A. from the University of California, Los Angeles (1968) and J.D. from Loyola University School of Law (1973). Jay Steinman is a partner with Dzida, Carey & Steinman in Irvine, CA. His practice emphasizes all aspects of negotiating, structuring and documenting the sale, leasing and financing of residential and commercial real estate developments, the planning and development of residential and commercial common interest subdivisions and negotiating and structuring distressed real property work-outs. Mr. Steinman represents numerous private and public developers, lenders and investors in transactions involving improved and unimproved land, including purchase and sale; financing; planning and development of residential and commercial common interest developments; drafting of documentation used in the development of common interest developments; working with local governmental authorities on issues related to the subdivision, entitlement, development and sale of commercial residential real estate developments and negotiating and structuring distressed real property work outs. Mr. Steinman has represented clients in the conversion of over 30,000 apartment units to stock cooperative or condominium use and has special expertise in conversions in the City of Los Angeles which has the most detailed regulatory scheme for conversions in Southern California. Mr. Steinman has participated on various panels discussing real estate development and has lectured on real estate development in extension programs at the University of California Irvine. He also provides pro bono assistance to charitable groups including Families Forward, a non-profit organization that provides housing and assistance to families in Orange County and Habitat for Humanity. Mr. Steinman has an undergraduate degree from California State Polytechnic University and is a graduate of University of Southern California Law Center. David D. Wald is the President of Wald Realty Advisors, Inc., which he founded in 1990. Since that time, the firm has gone on to complete assignments for more than 200 clients, including more than 65 lenders. The Firm’s experience encompasses most property types including office buildings, condominiums, tract homes, apartments, industrial, retail, senior care, hotel, motel, recreational facilities and historic properties along with highly specialized niche properties such as golf courses, public schools, oil and gas fields, gas stations, car washes, marina and marine industrial facilities, ranch land and mixed-use specialty entertainment retail. Mr. Wald is a member of the Board of Directors of the California Receiver’s Forum (LA/OC Chapter); a licensed California real estate broker; a licensed California general contractor; a Certified Shopping Center Manager (CSM) as designated by the International Council of Shopping Centers (ICSC); has been a speaker at the USC Crocker Symposium, ICSC, the California Receiver’s Forum and various distressed asset conferences; has written published articles on various aspects of the real estate industry and writes the commercial real estate blog, As We See It. Mr. Wald has taught programs for law firms on receivership and related workout and OREO issues. He has been a faculty member at three California Receiver’s Forum Loyola Receivership Law and Practice Seminars on the subjects of Construction Development Projects, Mechanics Liens, HOA Matters and Unique Insurance Issues; Completion and Sale of Housing Projects in Receivership; and Operational Issues in Receivership. Mr. Wald has also been a speaker on two California Bankers Association webinars on the completion and sale of residential subdivisions in receivership. Mr. Wald has been appointed receiver for the Superior Courts of Los Angeles County, Orange County, Santa Barbara County, Ventura County, San Luis Obispo County, San Bernardino County, Riverside County, Imperial County, San Diego County, Monterey County and Santa Clara County, as well as the United States District Court Los Angeles Division; and has acted as a rents, issues and profits receiver, an equity receiver and as a referee. 9:30 Subcontractor Issues Bjorn Green is a partner with Demler, Armstrong & Rowland, an AV rated defense firm located in Long Beach, CA. Mr. Green manages the firm’s construction practice, which primarily focuses on the defense of construction contractors, subcontractors and materials suppliers involved in civil litigation. Over the course of a 17 year career with the firm, he has tried or arbitrated numerous matters to conclusion, and has resolved well in excess of 1000 cases for his clients through mediation or other forms of dispute resolution. Jonathan P. McHenry is the Chair of Connell Foley's Insurance Coverage Practice Group. Since joining the firm more than 15 years ago, Mr. McHenry has established himself as a leading member of Connell Foley’s nationally recognized litigation practice. His practice involves the representation of domestic and internationally-based clients in a variety of disputes, with a particular emphasis on serving as lead counsel in a broad range of complex insurance coverage litigation and arbitration matters. Mr. McHenry’s extensive insurance coverage experience includes matters involving general liability, environmental and mass tort claims, construction defects, products liability, subrogation class actions, aviation law, bankruptcy protection, professional liability, personal and advertising injuries, and bad faith/extra-contractual claims. He also regularly counsels insurers in connection with the handling of complex claims prior to litigation and/or arbitration. He is also a member of various insurance law sub-committees in USLAW, the Defense Research Institute, the American Bar Association, and the New Jersey State Bar Association. Prior to joining Connell Foley, Mr. McHenry’s experience included working for the United Nations Center for Human Rights in Geneva, Switzerland and serving on the staff of the Lt. Governor of South Carolina as a speechwriter, among other endeavors. He holds a B.A. from South Carolina Honors College, University of South Carolina (1992) and a J.D. from Emory University School of Law (1995). Karen Rice is the National Construction Defect Claim Manager for OneBeacon Insurance (OBI) in Glendale, CA. Prior to joining OBI in October of 2004, she was the AVP of National Construction Defect claims and Western States ACE Risk Management claims with ACE USA. Ms. Rice is a co-chair of the Construction Committee for the Counsel on Litigation Management and has sat on the DRI Construction Law Steering Committee for the last four years. She is the past President of the Construction Defect Claim Manager Association and was the Chair of the Speakers and Topics Committee for the Annual West Coast Casualty Construction Defect Seminar. She has been a frequent lecturer at various CD seminars throughout the country, including ALFA, Defense Research Institute, Association of Southern California Defense Counsel, West Coast Casualty Annual Construction Defect Seminar, Mealey’s, CPCU All-Industry Day, and the American Bar Association. Ms. Rice earned her Bachelor degree from University of California at Santa Barbara and her Masters in Business Administration from the University of Laverne. Luke P. Ryan focuses his practice on construction defect litigation. He has experience on both the plaintiffs' and insurance defense sides. He has also handled general civil litigation, products liability, and real estate litigation matters. Mr. Ryan has represented thousands of California homeowners since 1993, and has recovered millions of dollars for them. In the case of Lu v. Superior Court (1997) 55 Cal. App. 4th 1264, Mr. Ryan was instrumental in advocating the Grand Lincoln Village Homeowner Association's position to the Court of Appeal about the importance of having a comprehensive Case Management Order (CMO) in complex construction defect cases. Mr. Ryan has a Bachelor of Science degree in Chemistry from the University of Nebraska and a Juris Doctor from the University of San Diego School of Law. While attending law school, he was a member of the University of San Diego Law Review and a tutor in the academic support program. He received American Jurisprudence Awards in Contracts and Conflicts of Law. A prolific author, he has been published in the California Regulatory Law Review and California Litigation Magazine. Before his legal career, Mr. Ryan completed ten and one-half years of Naval Service as a commissioned officer in the United States Navy as a Special Warfare Officer, S.E.A.L. Professional Associations: San Diego County Bar Association, Los Angeles County Bar Association, State Bar of California (1993), State Bar of Arizona (2004), State Bar of Nevada (2005). 11:00 Worst Case Scenario: How to Prepare for a CD Trial – Mock Session Hon. Victoria Gerrard Chaney was confirmed as an Associate Justice on the Court of Appeal, Second District, Division One on July 1, 2009, following her nomination by Governor Arnold Schwarzenegger, after having served 19 years on the bench as a trial judge. Justice Chaney was appointed by Governor George Deukmejian to the Los Angeles Municipal Court in 1990 and elevated to the Los Angeles Superior Court by Governor Pete Wilson in 1994. She presided over criminal cases in Compton, a civil docket at the Mosk Courthouse, and, from 2000 until her elevation to the appellate court, class actions and complex litigation at the Central Civil West courthouse, in the court's Complex Litigation Division. Prior to attending law school, Justice Chaney was a registered nurse at the LAC-USC and Cedars-Sinai medical centers, including work with psychiatric patients on a lockdown ward. She keeps her nursing registry current. Before appointment to the bench, Justice Chaney was an associate with Dryden Harrington and Swartz and then served eleven years in the Los Angeles City Attorney's Office, the last ten as an assistant city attorney in the office's Civil Liability Division. From an eightcent wrongful sales tax case to a multi-million-dollar faulty plumbing case, from acid spills in Nevada to oil spills in the Los Angeles Harbor, from bananas in Nicaragua to villagers in Myanmar, from boating-under-theinfluence to x-ray scanning to view beneath the clothing of prison visitors, and from Bridgestone Tires to the Walt Disney Concert Hall, Justice Chaney presided over many fascinating cases while on the bench in the superior court’s Complex Litigation Division. Currently, Justice Chaney hears a wide panoply of cases, including criminal, civil, family law, probate, dependence and writs of habeas corpus. Robert C. Carlson is a partner at Koeller, Nebeker, Carlson & Haluck, LLP, and is licensed to practice law in both the State of California and the State of Nevada. He is also admitted to most of the United States District Courts in California, the United States District Court for the District of Nevada, the United States Court of Appeals for the 9th Circuit and the Supreme Court of the United States. He is a graduate of the United States Naval Academy at Annapolis, Maryland, and served as an officer in the United States Marine Corps as a pilot of the F-4 Phantom aircraft. While in the Marine Corps, then Captain Carlson served as his squadron’s legal officer. He attended the Naval Justice School for non-lawyers in Newport Rhode Island and graduated with honors. That experience and subsequent work as the squadron legal officer caused then Captain Carlson to go to law school at night and pursue his law degree. He left the Marine Corps in 1979 and completed law school in 1980, graduating with Honors. He passed the California bar on his first attempt and was admitted to practice law in California in May 1981. He tried his first jury trial in August of that year. Since being admitted to the practice of law in the State of California and subsequently in the State of Nevada, Mr. Carlson has tried numerous cases to verdict before both juries and judges. He has represented such diverse clients as the Republication Party of the State of California and members of the California Government Workers Union, developers and homeowners. Several of his trials resulted in reported appellate decisions, including a landmark case in the State of Nevada concerning class actions. He is a member of the American Board of Trial Advocates (ABOTA). Mr. Carlson has been married to his wife, Elizabeth, for 37 years and has three grown children. Bruce Mayfield graduated from the University of California, Hastings College of Law and began his career as a prosecutor for the Ventura County District Attorney. Thereafter, Mr. Mayfield’s practice has been limited to civil litigation on behalf of people damaged as a result of the wrongful conduct of others. He has tried more than 50 jury trials to verdict. Mr. Mayfield has held an AV rating from Martindale-Hubbell for more than 20 years. He is a noted speaker on the topics of courtroom skills, trial tactics and construction defect litigation. Mr. Mayfield is a past member of the Board of Directors of the Consumer Attorneys of California, a past President of the Ventura County Trial Lawyers Association and a past member of the Board of Directors of the Ventura County Bar Association. Mr. Mayfield is licensed to practice law in California, Nevada and Arizona. 11:45 How to Avoid Ethics Violations as Insurance Carrier Selected Defense Counsel James M. Fischer is Professor of Law at Southwestern Law School in Los Angeles, California. He has taught Insurance Law and Professional Responsibility for over 15 years and has authored numerous papers on both subjects. He also chaired the Committee on Professional Responsibility and Ethics for the Los Angeles County Bar Association (LACBA). Professor Fischer has served on the California State Bar Committees on Professional Responsibility and Conduct, Legal Malpractice Insurance, and the Administration of Justice. Sage R. Knauft is a partner in the general litigation department at Walsworth, Franklin, Bevins, & McCall. His practice areas include business litigation, employment practices, construction law, products liability, premises liability, and public entity litigation. Throughout his career, he has successfully represented a wide variety of clients, including private companies and individuals, municipalities, manufacturers, distributors, and subcontractors in complex and multiple party litigation. Mr. Knauft has been involved in several trials and binding arbitrations and has handled numerous mediations involving these types of claims. In addition to his litigation and arbitration experience, Mr. Knauft frequently gives lectures and presentations in employment practices liability. Karen Rice is the National Construction Defect Claim Manager for OneBeacon Insurance (OBI) in Glendale, CA. Prior to joining OBI in October of 2004, she was the AVP of National Construction Defect claims and Western States ACE Risk Management claims with ACE USA. Ms. Rice is a co-chair of the Construction Committee for the Counsel on Litigation Management and has sat on the DRI Construction Law Steering Committee for the last four years. She is the past President of the Construction Defect Claim Manager Association and was the Chair of the Speakers and Topics Committee for the Annual West Coast Casualty Construction Defect Seminar. She has been a frequent lecturer at various CD seminars throughout the country, including ALFA, Defense Research Institute, Association of Southern California Defense Counsel, West Coast Casualty Annual Construction Defect Seminar, Mealey’s, CPCU All-Industry Day, and the American Bar Association. Ms. Rice earned her Bachelor degree from University of California at Santa Barbara and her Masters in Business Administration from the University of Laverne. John J. Thompson, a California native, began his insurance career in 1982 with AIG, followed by 13 years with CIGNA Property and Casualty. Mr. Thompson joined Gerling America Insurance Company in 1999 and in 2007 the company merged with "Haftpflichtverband der Deutschen Industrie" and is now HDI-Gerling America Insurance Company, with US headquarters in Chicago, Illinois. HDI-Gerling provides insurance solutions for medium to large commercial and industrial clients with complex risks around the world. Mr. Thompson is currently a Vice President and is the Branch Claims Manager in the Glendale, California office. Mr. Thompson supervises construction defect, product liability, general liability, toxic tort, mold bodily injury, and property damage claims, in all of the states. As past President of the Construction Defect Claims Managers Association (2004–2007), Mr. Thompson was instrumental in fostering carrier cooperation and knowledge, which is paramount to successfully handling construction defect claims. Mr. Thompson was a past recipient of the Larry Syhre Award. Mr. Thompson has also been invited to speak at numerous seminars on a variety of topics including construction defects. In his free time, Mr. Thompson is an avid Los Angeles Laker and Dodger fan. The Chairs’ View of Construction Defect Litigation • Jeffery Masters, Esq., Cox, Castle & Nicholson, LLP • Richard Glucksman, Esq., Chapman, Glucksman, Dean, Roeb & Barger, APC • Kenneth Kasdan, Esq., Kasdan, Simonds, Weber & Vaughan, LLP • Rose Madruga, Esq., Vice President, Zurich, San Diego HB LITIGATION CONFERENCES PRESENTS Construction Litigation Leaders’ Forum March 3 – 4, 2011 The Ritz Carlton, Marina del Rey, CA HB Litigation Conference Outline – March 3rd, 2011 8:30 a.m. - Important Updates on Conventional Coverage Claims Presenter: Jonathan P. McHenry, Esq. Connell Foley LLP A. The “Occurrence” Requirement – Is Defective Construction an “Occurrence”? 1. Majority Rule – Most states hold that CGL policies generally do not provide coverage for faulty workmanship resulting in damage to the insured’s work itself. Consequential damage to third party property may be covered. 2. Exceptions 3. Current Trends and Case Studies: Colorado House Bill 10-1394 “Concerning Commercial Liability Insurance Policies Issued to Construction Professionals” Is CGL Coverage Available to General Contractors for Faulty Workmanship of Subcontractor? o Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp., 2010 WL 5027147 (3d Cir. Dec. 10, 2010). o U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007) o General Sec. Indem. Co. of Arizona v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo. App. 2009) B. Discussion of Other Recent “Occurrence” Cases Trigger of Coverage, Allocation and Drop Down 1. Trigger of Coverage The Four Main Trigger Methodologies: i. Exposure - Focuses on initial exposure to harm that ultimately causes damage. ii. Injury-in-Fact - Focuses on time of actual damage. iii. Manifestation - Focuses on when damage is discovered. iv. Continuous - May implicate multiple policies from initial exposure through manifestation. Current Trends and Case Studies o Pennsylvania General Ins. Co. v. American Safety Indem. Co., 185 Cal.App.4th 1515 (Cal. Ct. App. 2010) o Langan Engineering and Environmental Services, Inc. v. Greenwich Ins. Co., et al., 2008 WL 5146538 (D.N.J. December 2008) o Builders Mutual v. Wingard Properties, 2010 WL 3893701 (D.S.C. 2010) o Colorado H B 10-1394 2. Allocation and Drop Down Issues SHORT SUMMARY OF RECENT CALIFORNIA CASE LAW By Rex Heeseman Contractors Warranty Endorsement As a condition precedent to coverage, a “contractors warranty endorsement” requires that the insured procure a hold harmless agreement and a certificate of insurance from each subcontractor naming the general contractor as an additional insured. The practical effect often is to shift the risk of any loss caused by the subcontractor’s negligence to that subcontractor and its insurer. [North American Capacity Ins. Co. v. Claremont Liab. Ins. Co. (2009) 177 CA4th 272, 279, 99 CR3d 225, 232] Products-Completed Operations The “products-completed operations hazard” extends to covered bodily injury or property damage, which has happened during the policy period following completion of the insured’s work or operations. [Pennsylvania Gen. Ins. Co. v. American Safety Indem. Co. (2010) 185 CA4th 1515, 111 CR3d 403, 416-417] For a variety of reasons, including the “hefty premium” charged, some policies contain an endorsement excluding this hazard. [Baker v. National Int. Ins. Co. (2009) 180 CA4th 1319, 1339, 103 CR3d 565, 580, fn. 4] Whether a building has been “put to its intended use” in order to be “deemed complete” is a question of fact. An occupied house has not necessarily been “put to its intended use” if substantial additional construction work is continuing. [North American Capacity Ins. Co. v. Claremont Liab. Ins. Co. (2009) 177 CA4th 272, 286-287, 99 CR3d 225, 237-238] The Baker court addressed the insured’s inspection and repair of its bus, months after its sale. The policy’s “use of the disjunctive conjunction ‘or’ … unambiguously advised [the insured] that a claim alleging bodily injury arising either from ‘product’ or from ‘work’ was excluded from the policy’s coverage.” Therefore, a claim arising from “work,” occurring off the insured’s premises, was not covered, “without regard to whether that work was or was not ‘related’ to a ‘product.’” “Montrose Exclusion” An insurer can limit its liability to damages which first arose during the policy period. [Pennsylvania Gen. Ins. Co. v. American Safety Indem. Co. (2010) 185 CA4th 1515, 111 CR3d 403, 411-412] Prelitigation Procedures A developer cannot require its homeowner to comply with statutory prelitigation procedures after its own contractual alternative prelitigation procedures were found unenforceable. [Anders v. Superior Court, 2011 DJDAR 2137 (5th DCA)] Bringing Money To The Table: Resolving Disputes Presented At Construction Litigation Leader’s Forum The Ritz Carlton, Marina del Rey, CA March 3-4, 2011 Katherine Smith Dedrick, J.D. MBA Partner Childress Duffy, Ltd. Principal Risk Worldwide, LLC 500 North Dearborn, Suite 1200 Chicago, Illinois 60654 (312) 494-0200 Bringing Money To The Table To Help Resolve Disputes By Katherine Smith Dedrick Property Policies: Commercial and Residential Builders’ Risk Policies All Risk Policies These policies typically provide that the carrier “will pay for direct physical loss to property described in Dwelling, Other Structures, or Personal Property resulting from an occurrence.” This level of dwelling coverage is what is known in the insurance industry as “allrisk” property coverage. All risk insurance policies protect the insured in cases where the loss or damage to property is difficult or impossible to explain. The insured’s burden under an all risks policy is limited. The insured need only show that a fortuitous loss occurred. A fortuitous event is any event that is dependent on chance. Pillsbury Co. v. Underwriters at Lloyd’s, London, 705 F. Supp. 1396, 1399 (Dist. Minn 1989). The insured need not prove the cause of the loss or damage. Pillsbury Co. 705 F.Supp. at 1399. The burden then shifts to the insurer to prove that an express exception to coverage applies, as well as the dollar amount that should be excluded from coverage. Id. Ensuing Loss Language The following policy language is an example of what is referred to as “ensuing loss” policy language: “1. We will not pay for loss caused by or resulting from any of the following: d. wear and tear, marring, scratching, deterioration; e. inherent vice, hidden or latent defect or any quality in property that causes it to damage or destroy itself” For the causes of loss described above, except collapse, we do cover resulting loss or damage to covered property unless the resulting loss is itself caused by a cause of loss described in Property Losses Not Covered.” Emphasis added. ••• 3. We do not cover loss caused by any of the following. However, any ensuing loss not excluded in this policy is covered.” c. faulty, inadequate or defective: (1) planning, zoning, development, surveying, sitting; (2) design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; (3) materials used in repair, construction, renovation or remodeling; or (4) maintenance….” Emphasis added. The ensuring or resulting loss exception typically results in coverage in the following situations: A resulting loss is covered even if a defective product is a “but for” cause of the loss. The intent of the exclusion and exception is to exclude only that portion of the loss attributable to the defective product. In other words, losses that are defective products are not covered, while those that result from the defective product are covered. The exclusion and exception, read together, operate to eliminate the conduct or defect from consideration in analyzing the cause of resulting damage; only the actual risk causing the resulting physical damage is subject to the coverage analysis. To the extent that cause is neither excluded nor excepted in the applicable policy, coverage exists for the damage which resulted from the defective product. The following cases present situations where this type of “ensuing loss” policy language buttressed the insured’s claim where construction defects contribute to a loss. Buscher v. Economy Premier Assurance Co., 2006 WL 268781 (D. Minn. 2006); Phillips v. USAA, 146 SW 3d 629, 633 (Tenn. Ct. App. 2004). See generally, Pillsbury Co, 705 F. Supp. at 1400. In Buscher v. Economy Premier Assurance Co., 2006 WL 268781 (D. Minn. 2006), the Minnesota district court found the carrier liable for the resulting or ensuing loss. There, water from wind-driven rain, melting ice, or snow penetrated the exterior building envelope of the insured’s home due to defective construction. This penetration caused physical damage to the interior wall assembly components. Wall cavities in the home contained high levels of moisture, which caused soft or questionable sheathing and damaged other components of the interior wall assembly. The Minnesota federal district court concluded that the policy’s construction defect exclusion did not exclude water damage resulting from a construction defect. The district court reasoned that nothing in the language of the exclusion indicated that it extended to any loss resulting, however remotely, from construction defects. The district court further reasoned that a reading of the construction defect exclusion that extended that exclusion only to loss directly related to an actual construction defect was consistent with the requirement that courts read exclusions in insurance contracts narrowly against the insurer. Relying upon Buscher, a similar conclusion was reached by an Illinois federal district court in McGrath v. American Family Mutual Insurance Co., 2008 WL 4531373 (N.D. Ill. 2008). In that case, external water or moisture (rain, melting ice or snow, or ambient humidity) penetrated the exterior brick walls of the insured’s home. The insurer argued that the policy excluded any loss connected to or caused by a construction defect. The insureds, in contrast, argued that the policy only excluded losses directly related to the construction defect, such as the cost to correct the faulty brick walls. Because they sought only reimbursement for the loss resulting from the interior water damage (damaged drywall, insulation and the like), the insureds contended that the exclusion was not applicable. The federal district court found in favor of the insureds and concluded that while the plain language of the construction or design defects exclusion expressly excluded the cost to correct the construction defect, the resulting damage was covered. In Eckstein v. Cincinnatti Ins. Co., 469 F.Supp.2d 444, 445 (W.D. Ky. 2007), the insureds’ home suffered water damage. The Ecksteins brought claims in state court for faulty construction against the contractors and in federal court against Great Northern for breach of contract, bad faith and violation of the Consumer Protection Act. The federal court denied the insurance company’s argument that the insureds were judicially estopped to take what the carrier argued were “inconsistent positions.” The federal court specifically held that it: “does not view Plaintiffs’ position as clearly inconsistent with its position in state court . . . in other words, the Ecksteins acknowledged that faulty construction was the baseline problem. Their argument here is simply that events occurred after the faulty construction, which arguably provide an exception to the ‘faulty construction’ exclusion. This is not an inconsistent position to that taken in state court.” Eckstein, 469 F.Supp.2d at 452. In Eckstein, the carrier relied, in part, on the “Faulty planning, construction, or maintenance” exclusion which provides: “We do not cover any loss caused by the faulty acts, errors or omissions of you or any other person in planning, construction or maintenance. It does not matter whether the faulty acts, errors or omissions take place on or off the insured property. But we do insure ensuing covered loss unless exclusion applies. “Planning” includes zoning, placing, surveying, designing, compacting, setting, specifications, developing property and establishing building codes or construction standards. “Construction” includes materials, workmanship, and parts or equipment used for construction or repair.” Id. Emphasis added. However, the Court noted that the policy covered ensuing loss (see emphasis added above). The Court found that there was nothing in the policy to indicate that an ensuing loss must be the result of a separate cause from the excluded loss. The Court explained: “To the contrary, the policies are clear that faulty construction losses are excluded, but losses taking place afterward, or as a result of faulty construction, are covered. The exclusions still apply despite the applicability of the ensuing loss provision. For example, water damage ensuing from a defective roof is covered as an ensuing loss, but the exclusion for faulty construction excludes coverage to repair the roof. Such an interpretation is consistent with the reasonable expectations of the insureds.” Id. at 454. Depending upon the policy language, as long as insureds are requesting money to repair, for instance, the water damaged portion of their home; not money to repair defects, the carrier may owe coverage. Therefore, there is a difference between the cost to repair all the damage to the building, which includes any repair for defects, and the estimates to repair the water damage. But often the insured is entitled to coverage, even if a defect or poor design or construction partially caused it. See also Sentinel Management Co., v. New Hampshire Ins. Co., 563 N.W.2d 296 (1997) (upholds ensuing loss exclusion for release of asbestos fibers and resultant contamination of insured apartment buildings). In Phillips v. United Services Automobile Assoc., 146 S.W.3d 629 (Ct. App. Tenn. 2004), the court addressed the ensuing loss provision in another water damage context: “We begin our analysis by noting that the plaintiff's insurance policy, under the section entitled “Perils Insured Against,” broadly insures “against risks of direct physical loss to [the plaintiff's dwelling].” This broad grant of coverage, which obviously would cover water damage, is then immediately followed by a list of exceptions to coverage. ••• In addition, the policy excludes “[f]aulty, negligent, inadequate or defective ... design, specifications, workmanship, repair, construction ... materials used in repair, [or] construction....” However, any loss ensuing from such faulty workmanship or construction is covered, provided it is not excepted or excluded elsewhere in the policy.” Phillips, 146 S.W.3d at 633 In Phillips, the plaintiff's claim for water damage ensuing from the negligent installation of EIFS was a separate peril and coverage was provided under the policy: “In summary, we hold that the plaintiff's claim for water damage arising from the faulty design or negligent installation of EIFS is covered under his insurance policy and is not excepted or excluded under the policy language. To the extent that the policy language could be given another reasonable interpretation that would effectively deny coverage, the ambiguity that would be created by two reasonable interpretations would, under the law, have to be resolved in favor of the interpretation favorable to the insured. Id. at 636. Anti-Concurrent Causation In cases discussing “ensuing loss” the comparison to more restrictive anti-concurrent cause language is often discussed. The argument is often that if the carriers did not want to pay for ensuing loss, they certainly know how to use other more restrictive language as is evidenced by the fact that such restrictive language is often included within other sections of the same policy. For instance, the following is an example of what is commonly referred to as anticoncurrent cause language: “we do not cover loss or damage caused directly or indirectly by any of the following. Such loss or damage is not covered regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” Insurance law employs the concept of proximate cause for purposes of determining whether the specific type of injury caused by the specific type of physical act or event was intended to be covered under the terms of the subject policy. Where a covered and an excluded cause combine to produce a loss, the concurrent cause doctrine mandates that coverage shall be provided when a loss would not have occurred but for the joinder of independent covered and excluded causes. However, parties can contract around the concurrent cause and efficient proximate cause doctrines though the express anti-concurrent cause (“ACC”) provision: Commercial Property Form (CP 10 30) Homeowners Form (HO 00 03) ACC Limited to B.I. Exclusions If carriers intend to exclude coverage when defective design or construction, in combination with a covered risk (like water), either simultaneous or sequentially, caused damage, then they can and do express that intent. Pace Properties, Inc. v. American Mfrs. Mut. Ins. Co., 918 S.W.2d 883 (Mo. App. 1996). Chinese Drywall & Insurance Implications 1. Typical Allegations Plead in Chinese Drywall Complaint In the typical Chinese Drywall case involving an “all risk” policy, the insurer is going to deny liability based on three exclusions: (1) Pollution or Contamination; (2) Gradual or Sudden Loss; or (3) Faulty, Inadequate or Defective Planning. Therefore, the complaint should contain three key allegations: 1. A pleading that the insurer agreed to “pay for direct physical loss of or damage to Covered Property, caused by or resulting from any Covered Cause of Loss.” 2. A pleading that the Covered Property “sustained a direct physical loss of or damage to the existing, in-place drywall systems at the insured premises.” 3. A pleading that the direct physical loss “also resulted in covered ensuing loss to other covered components of the Buildings and or Property covered under the policy.” 2. Case Law Eastern District of Louisiana In In Re: Chinese Manufacturer Drywall Products Liab. Litig., MDL No. 2047 (E.D. La. February 9, 2011, the Eastern District of Louisiana denied motions from insurers to dismiss certain cases within the multidistrict Chinese drywall litigation for failure to join indispensable parties to the lawsuits, specifically, subcontractors. The litigation arose from the wide-spread manufacture, sale and distribution of Chinese Drywall in the hurricane-battered South. Numerous consumers of the drywall complained of foul odors and corrosive damage to metals and electronic devices. The insured homeowners sought coverage under their homeowner policy for damage to insured’s property caused by the Chinese Drywall. In the case, the insurers argued that the subcontractors who procured the insurance policies for the plaintiffs should be a party to the pending lawsuits within the multidistrict litigation. The Court held that the subcontractors were not required parties and that multidistrict litigation would be the most efficient forum for resolution of all the claims. Eastern District of Virginia However, the Eastern District of Virginia in Norfolk held that an insurer was not liable for homeowner’s claim for damages caused by Chinese drywall. In this case, the ensuing loss provisions in the policy were not applicable because none of the losses claimed qualified as ensuing losses. Although the Chinese Drywall damage occurred gradually over a period of time, it was considered only a single loss from a single discrete injury. Further, the loss would be excluded under the corrosion exclusion. The Court emphasized the narrowness of its holding. The Court noted that it could not rule out the possibility of that future losses might be covered under a policy’s ensuing loss provision. TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699 (E.D. Va. 2010). Appraisal Provisions The Appraisal Provision: The policy charges the Appraisal Panel “to determine the amount of the loss.” Itasca Paper Co. v. Niagara Fire Ins. Co., 175 Minn. 73, 77 (Minn. 1928). Therefore, the Appraisal Panel must determine the amount of damage and “whether the damage resulted from causes covered by the policy or from other causes not covered.” Id. Contractual Risk Transfer Presented by: William F. Knowles Cozen O’Connor 500 Attorneys • 22 Offices www.cozen.com © 2008 Cozen O’Connor. All Rights Reserved. Three Ways to Shift Risk • purchase own general liability insurance coverage • obtain a written indemnification agreement from any subcontractor who works on the project • require naming as an additional insured on the subcontractor’s general liability policy © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Indemnity Provision © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Three Types of Contractual Indemnity • Indemnitor agrees to indemnify for everything except “sole negligence or willful misconduct” of the indemnitee • Indemnitor agrees to indemnify the indemnitee without specifically addressing the negligence of the indemnitee • Indemnitor agrees to indemnify the indemnitee for vicarious liability only © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Basic Rules of Contractual Indemnity • Indemnity right accrues when indemnitee’s become fixed and absolute • In short, when the indemnitee pays or is legally adjudged obligated to pay damages to a third party • Thus, is monetary extent of indemnity obligation is undefined until conclusion? © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com What About Defense of Indemnitee? • Crawford v. Weathershield, 44 Cal. 4th 541 (2008) – Indemnitee tendered defense to indemnitor before a ruling on fault – Holding: if defense is called for in indemnity agreement, then indemnitor must provide indemnitee with immediate defense © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Coverage For Indemnification Obligation • Is it an “insured contract”? That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement. © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Coverage For Indemnification Obligation • The indemnitee’s reasonable defense costs will be included as damages and, thus, subject to the policy’s limit of liability • revised Supplementary Payments section of the 1996 ISO CG form creates a defense obligation in favor of an indemnitee in limited circumstances – payments will not be deemed damages for bodily injury or property damage and will not reduce the available limits of insurance © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Insurance Provision © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Typical Insurance Provision • A certificate of insurance, standing alone, is generally not sufficient to confer additional insured status to a certificate holder like the general contractor • Some policy forms automatically provide additional insured status to anyone with whom the named insured contracts or the contract requires © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Relationship between Indemnity Agreement and Insurance Agreement • The majority of courts confronting this issue have refused to look to the language of the indemnity contract to construe additional insured coverage, unless the indemnify contract is specifically incorporated into the insuring agreement. © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Additional Insured Endorsement © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Evolution of Additional Insured Endorsement (1985-1990’s) • liability arising out of “your work” • liability arising out of your “ongoing operations” • “A person’s or organizations status under this endorsement ends when your operations for that insured are completed.” • Exclusions! © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Evolution of Additional Insured Endorsement (to present) • Liability arising from the sole negligence of the named insured • Vicarious liability of the named insured © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Blanket Endorsements • Additional Insured status established by a requirement in the underlying agreement between named insured and alleged additional insured • Issues: – Written contract? – In effect before loss? © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Blanket Endorsements • 10 Ellicott Square Court Corp. v. Mountain Valley Ind.Co., 2010 WL 5295420 (2d Cir.2010) – Agreement was not executed before loss – Court ruled primary insurer did not have an AI relationship with the tendering party © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com The Scope of Additional Insured Coverage • majority of courts equate “arising out of” with “causally connected with.” © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Additional Insured Coverage for Completed Operations Pardee Construction Co. v. Insurance Company of the West, 92 Cal.Rptr.2d 443, 454 (Cal. 2000) •The Pardee court found the CG 20 10 endorsements provided completed operations coverage limited only by the phrase “liability arising out ‘your [the named insured’s] work for [the additional insured] by or for you.” © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com •The Pardee court gratuitously referred to the 1993 ISO revisions to CG 20 10 that restricted coverage for an additional insured to “ongoing operations” of the named insured. In interpreting this revision, the court stated: “This revised language effectively precludes application of the endorsement’s coverage to completed operations losses.” © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Ongoing Operations • United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 2011 WL 240520 (10th Cir. 2011)(applying CO law) • Weitz Co., LLC v. Mid-Century Insurance Co., 181 P.3d 309 (CO App. 2007) • Hartford Ins. Co. v. Ohio Cas. Ins. Co., et al., 189 P.3d 195 (WA App. 2008) © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Late Notice to Additional Insurer • Liberty Insurance Underwriters v. Great American Ins. Co., 2010 WL 3629470 (SDNY 9/17/10) – General contractor was an AI – 4/06 accident; 1/07 GC sued; 10/07 GC third party suit against NI/subcontractor – 1/08 GC tenders to subcontractor’s broker (but fails to include underlying pleadings) – 3/08 AI denied due to late notice © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Coordination of Coverages • Additional insured’s own coverage will likely be implicated by construction defect claims – implicates construction and interplay of “other insurance” provisions – Where enforceable, “other insurance” provisions delineate respective obligations of competing policies © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Coordination of Coverages • Some manuscript additional insured endorsements provide that additional insured coverage on subcontractor’s policy is primary • CG 00 55 endorsement makes additional insured coverage primary © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Coordination of Additional Insured Coverage with Named Insured Coverage Some additional insurers have been issuing additional insured endorsements that state that coverage is only excess unless the subcontractor, “had agreed in a written contract for this insurance to apply on a primary or contributory basis.” The additional insurers have been refusing to defend and/or indemnify because the additional insured has its own insurance. © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Coordination of Additional Insured Coverage with Named Insured Coverage • The Court of Appeals of New York rejected the additional insurer’s argument and found the additional insurer to have primary obligation, despite the “excess insurance” reference in the additional insured endorsement. Pecker Iron Works of New York, Inc. v. Travelers Ins. Co., 99 N.Y.2d 391, 786 N.E.2d 863; 756 N.Y.S.2d 822; 2003 N.Y. Lexis 116 (2003). © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Other New York Cases • BP Air Conditioning Corp. v. One Beacon Ins. Group, 8 N.Y.3d 708 (2007) – Bodily injury claim – Insurer argued that “liability arising from ongoing operations” cannot be resolved until the case is resolved – Duty to defend based on allegations in the complaint © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Other New York Cases • Worth Const. Co. Inc. v. Admiral Ins. Co., 10 N.Y.3d 411 (2008) – Bodily injury claim – Tender to stair subcontractor’s insurer – Evidence: stair sub not on job at time – Allegation: stair construction defect – Concession by injured party: stair sub not at fault – Conclusion: no obligation owed by AI insurer © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Other New York Cases • Regal Const. Corp. v. National Union Ins. Co. of Pittsburgh, 15 N.Y.3d 34 (2010) – Bodily injury claim – Claimant fell on trusses painted by the AI – AI insurer agreed to defend AI but started DJ – Court found some connection between the claim and named insured’s ongoing operations © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Other New York Cases • Stellar Mech. Serv. of New York, Inc. v. Merchants Ins. of New Hampshire, 903 N.Y.S.2d 471 (2d Dept. 2010) – Bodily injury – Amended complaint named AI and NI – AI tender rejected because insurer felt the claim did not arise from NI’s work – DJ involved defense and indemnity – Holding: duty to defend, but no duty to indemnify (a “reasonable possibility of coverage”) © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Presley Homes, Inc. v. American States Ins. Co., 90 Cal.App.4th 571, 108 Cal.Rptr.2d 686 (2001) • The Presley court held that first, American States had a duty to defend the additional insured, and second, where an additional insurer has a duty to defend, the obligation generally applies to the entire action © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Self-Insured Retentions • Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App.4th 1466 (2010) – Developer tendered CD claim to subcontractors and additional insurers – Additional insurer insisted on subcontractor (and not developer) pay the SIR – Court agreed with additional insurer © 2008 Cozen O’Connor. All Rights Reserved. 500 Attorneys • 22 Offices • www.cozen.com Contractual Risk Transfer Presented by: William F. Knowles Cozen O’Connor 500 Attorneys • 22 Offices www.cozen.com © 2008 Cozen O’Connor. All Rights Reserved. RUMINATIONS ON CONSTRUCTION DEFECTS AS AN “OCCURRENCE:” DEVELOPMENTS AND IMPLICATIONS Scott S. Thomas Payne & Fears LLP CONSTRUCTION LITIGATION LEADERS’ FORUM March 3-4, 2011 Marina Del Rey, CA I INTRODUCTION If you want to start a fight, walk into a room full of insurance coverage lawyers and shout “What is an “occurrence”?” Then watch and be entertained as mayhem ensues. The South Carolina Supreme Court recently addressed this issue and, while the Court may have gotten it wrong (it decided that property damage resulting from faulty construction is not caused by an “occurrence”), it certainly got it right when it said: In analyzing difficult and complex issues which arise in these cases, courts have taken differing approaches. The result is an intellectual mess. Crossman Communities v. Harleysville Mut. Ins. Co., et al., 2011 S.C. LEXIS 2 (2011) Indeed, the fuzzy thinking about this issue abounds. For example, a newsletter recently published by a Midwest law firm contains this headline: In Arizona, Construction Defects Are Not “Occurrences.” At the same time, another commentator declares that Arizona has “adopt[ed] the majority position that faulty workmanship can constitute an occurrence.” Bruner & O’Connor on Construction Law, Ch. 11, §11:76, referring to Lennar Corp v. Auto-Owners Ins. Co., 214 Ariz. 255, 151 P.3d 538, 545-546 (2007). 1 Today’s discussion focuses on the third prong of the three-prong prima facie coverage formula (i.e., (1) “property damage” (2) “during the policy period” (2) “caused by an occurrence”), the “occurrence” requirement and, specifically, this question: “When do construction defect claims satisfy the “occurrence” requirement?” We will focus on the following issues: 1. What is the current state of the law on the issue? Is there a majority and/or a trend? If so, what is it? 2. How do we explain the widely divergent views expressed by courts on the issue? 3. Is there a solution to the lack of certainty and predictability created by these divergent views? II. WHAT IS THE CURRENT STATE OF THE LAW? The answer, of course, is “It depends.” It depends on the facts of the case. Here are the real questions: 1 Bruno & O’Connor actually got it right. 1. When faulty workmanship does not result in physical injury of any kind, is it an “occurrence?” 2. When faulty workmanship does result in “property damage,” but only to the faulty work (or defective component) itself, is that “property damage” caused by an occurrence? 3. When faulty workmanship results in “property damage” to other components of the finished structure, but not to other property, is that “property damage” caused by an occurrence? 4. When faulty workmanship results in “property damage” not only to other components of the finished structure, but also to other property, is that property damage caused by an “occurrence?” And these questions break down, in turn, into even still another level based on (a) whether the work was performed by the insured itself (i.e., the general contractor), or on the insured’s behalf by someone else (i.e., a subcontractor); (b) whether the “property damage” was concurrently caused by an event or condition other than faulty workmanship or defective components; and (c) whether the third-party claim against the insured sounds in contract or tort. Given these variations on the factual theme, it is not surprising that courts have reached widely divergent conclusions on the issue. These may be broken down into the following categories: 1. Faulty workmanship itself is not an “occurrence.” 2. Faulty workmanship itself is an “occurrence.” 3. Faulty workmanship that results only in physical injury to the faulty work itself is not an “occurrence.” 4. Faulty workmanship that results only in physical injury to the faulty work itself is an occurrence. 5. Faulty workmanship that results in physical injury to other components of a finished structure is still not an “occurrence.” 6. Faulty workmanship that results in physical injury to other components of a finished structure is an occurrence. 7. Faulty workmanship that results in “property damage” to third-party property is not caused by an “occurrence.” 8. Faulty workmanship that results in “property damage” to third-party property is caused by an “occurrence.” Notwithstanding dicta in some opinions to the contrary, the majority view appears to be that when faulty workmanship or defective components result in “property damage,” that property damage is “caused by an occurrence.” One survey concludes that of the forty-eight states that have addressed the issue, 2 thirty conclude that construction defects resulting in property damage are an “occurrence,” eight conclude they are not, four conclude they are, but only when property damage to other property results, and in six states the law is unclear. Defective Construction As An “Occurrence,” www.sdvlaw.com. Our survey of cases decided since January 1, 2008, concludes that: (1) If we do not include the “faulty workmanship standing alone” cases (i.e., cases in which there was no “property damage”), twenty-five cases applying the law of twenty states held that when property damage results from faulty workmanship or defective components, it is caused by an “occurrence.” Seven cases applying the law of six states held to the contrary. (2) With respect to the “faulty workmanship standing alone” scenario, eight cases in eight states held that faulty workmanship in the absence of resulting property damage does not constitute an “occurrence.” Two cases in two states held that it does. (See spreadsheet attached.) III. HOW DO WE EXPLAIN THE APPARENT INCONSISTENCIES AMONG THESE DECISIONS? How does one explain these apparently inconsistent results? There are a number of common themes that run through these cases: 1. Several “no occurrence” cases reach this conclusion because, they say, a breach of contract or warranty categorically cannot be an “occurrence.” See, e.g., Group Builders v. Admiral Ins. Co., 123 Hawaii 142, 341 P.3d 67 (2010); Kentucky Farm Bureau Mut. Ins. Co. v. Blevins, 268 S.W. 3d 368 (Ky. App. 2008). California and other states have explicitly rejected the notion that a claim sounding in contract cannot be an occurrence. See, e.g., Vandenberg v. Superior Court, 21 Cal. 4th 615 (1999); U.S. Fire Ins. Co. v. J.S.U.B., 979 So. 2d 871 (Fla. 2007). 2 These cases include opinions by the state’s highest appellate court, intermediate appellate courts and U.S. District Courts or Circuit Courts applying state law. 2. Some decisions conflate the notion of intentionally committing an act (without regard to what the insured may intend the consequences of the act to be) and committing an act with the intention of causing (or the reckless disregard for the likelihood of causing) harm. See, e.g., Lamar Homes v. Mid-Continental Ins. Co., 242 S.W. 3d 1 (Tex 2007), which correctly points out this distinction and rejects the notion that “intentionally” performing work that turns out to be faulty, without intending that the work result in damage, is not an “occurrence.” See also Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 151 P.3d 538, at ¶¶26-29 (2007) 3. A few cases rely on obsolete precedent. For example, a recent New Jersey case, Pennsylvania Natl. Mut. Cas. Ins. Co. v. Parkshore Development Corp., 2010 WL 5027147 (December 10, 2010), relies on a 1979 New Jersey Supreme Court case, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979), which construed the 1966 ISO “your work” exclusion without the Broad Form Endorsement that creates the “subcontractor exception” to the exclusion as negating coverage for construction defect claims. Weedo did not undertake an analysis of the threshold “occurrence” issue. But this has not stopped courts from later relying on it for the proposition that construction defects are not an “occurrence.” See also Kvaerner Metals v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888 (2006), which relies on earlier authority interpreting the long-obsolete “actively malfunctioning” language used in the “ business risk” exclusion used in ISO policy forms until the early 1970’s. 4. The “no occurrence” cases are conceptually inconsistent with the architecture of the insurance policy. Specifically, the “your work” exclusion contained in the standard ISO CGL form that is the platform for almost every commercial liability policy includes the “work of others” exception. This language contemplates that when there is property damage to the insured’s work, but that work was “performed on [the insured’s] behalf by a subcontractor,” there may be coverage under the policy. Thus, cases holding that property damage to a structure sold by a homebuilder but built entirely by subcontractors is not caused by an “occurrence” ignore this policy architecture. 3 5. Refusing to consider “extrinsic evidence” may result in a “no occurrence” holding that is skewed by the arbitrary pleading of the third-party claimant. For example, Kvaerner, supra, refused to consider evidence outside the pleadings, ignoring, among other things, expert reports that clearly outlined resulting property damage. 6. Some cases simply apply an inherently narrow – some would say too narrow -definition of “occurrence,” or “accident:” [W]e believe that, even if the person performing the act did not intend or expect the result, if the result is the ‘rational and probable” consequence of the act [citation omitted] or, stated differently, the ‘natural and ordinary’ consequence of the act [citation omitted], it is not an ‘accident.” Stoneridge Development Co., Inc. v. Highland Glen Assoc., 382 Ill. App. 3d 831, 888 N.E.2d 633 (2008)(progressive damage to townhome consisting of cracking and, ultimately, its 3 See, e.g., Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 151 P.3d 538 (2007)(rejecting the insurers’ argument that the “your work” exclusion buttresses their “no occurrence” argument) uninhabitability, resulting from the movement of “unsuitable structural bearing soils,” is not caused by an “occurrence”). The Stoneridge definition is arguably inconsistent with the notion of “subjective fortuity” that is the foundation of the “occurrence” requirement. And, were it applied to common negligence scenarios, it would render most liability coverage illusory. For example, an ugly collision with another vehicle is the “rational and probable” consequence of speeding through a red light. No one would argue that there is no coverage for a personal injury lawsuit against the driver whose negligent running of the red light causes such an accident. But that is the result of the reasoning employed by Stoneridge. IV. THE PROBLEM: “DO I HAVE COVERAGE OR DON’T I?” These inconsistent results lead to a fundamental problem for policyholders: Managing the liability risks presented by construction defect claims when they may have coverage under their liability insurance policies in one state, but not in another, under the same policy. For example, insurers responding to construction defect claims in California have acknowledged for decades that construction defect claims satisfy the “occurrence” requirement. Indeed, California courts settled this issue long ago. 4 Thus, homebuilders whose experience with construction defect claims began (as most did) in California would have a reasonable expectation that their liability insurance policies provide the same coverage elsewhere. This panel does not have an answer to the problem. But it does ask these questions: 4 Does it make sense that an insurance policy mean one thing in one state and mean something else in another state? Does it make sense that a developer, homebuilder or contractor be protected against construction defect claims in one state, but not in another state? How do we respond to the insurance industry mantra that “We are bound to follow the law? Our job is simply to interpret our policies as the courts in a given state tell us to interpret them?” Is there an underwriting solution to this problem? If insurance companies really intended not to insure against property damage claims arising out of faulty workmanship, why didn’t they amend their policy forms or endorse their policies to this effect when courts started finding coverage for such claims many, many years ago? See, e.g., Geddes & Smith, Inc. v. St. Paul-Mercury Indem. Co., 334 P.2d 881 (Cal. 1959); Economy Lumber Co. v. Ins. Co. of No. Amer., 204 Cal. Rptr. 135 (1984); Maryland Cas. Co. v. Reeder, 270 Cal. Rptr. 719 (1990). RECENT DEVELOPMENTS: OCCURRENCE VS. NO-OCCURRENCE Faulty workmanship standing alone Property damage only to faulty workmanship Property damage to other components of structure caused by insured’s own work Property damage to other components caused by work of others No Occurrence North Carolina Georgia Montana New Hampshire Ohio South Carolina Arkansas Kentucky Indiana Illinois Hawaii Wisconsin 5 South Carolina Illinois New Jersey Occurrence Mississippi Wisconsin Colorado 6 Wisconsin Arizona Georgia Arkansas Texas Minnesota Maryland Virginia Washington Oregon Florida Ohio Indiana 5 Property damage to other components caused by faulty work and a discrete cause Property damage to property other than the structure South Carolina Iowa Massachusetts Illinois Arkansas South Carolina Wisconsin The court found that to the extent the damage was caused by the insured’s having induced the homeowner to enter into the remodeling contract by making intentional misrepresentations, the damage was not caused by an “occurrence.” But the court also acknowledged that to the extent the damage was caused by negligent construction, it may have been caused by an occurrence, but was, in either event, excluded by the policy’s “your work” exclusion. Stuart v. Weisflog’s Showroom Gallery, Inc., 311 Wis. 2d 492 (2008). 6 See Colo. Rev. Stat. §13-20-808(3), which states that “In interpreting a liability insurance policy issued to a construction professional, a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.” RECENT CONSTRUCTION DEFECT “OCCURRENCE” CASES Breezewood of Wilmington Condominiums Homeowners’ Ass’n, Inc. v. Amerisure Mut. Ins. Co., 335 Fed.Appx. 268 (4th Cir 2009) (Table) (applying North Carolina law) (holding that costs of repair, bringing property to contractual expectations and homeowners’ association’s loss of use of the property due to contractor’s faulty workmanship were not covered by the builder’s policy because they were not allegations of actual “property damage;” additionally, water damage due to the faulty workmanship of the insured’s subcontractor was excluded from coverage pursuant to the “your work” exclusion) Lyerla v. AMCO Ins. Co., 536 F.3d 684 (7th Cir. 2008) (applying Illinois law) (holding that homeowner’s claim against insured homebuilder for failure to follow agreed-upon plans, specifications and failure to complete construction on time was not an occurrence). Forster v. State Farm Fire & Cas. Co., 2010 WL 4751714 (Ga. App. Nov. 24, 2010) (holding that failure to complete renovations or improper renovations by subcontractor hired by insured renovator were not an occurrence because it was unclear whether the claims related strictly to the work contemplated or to damage to other property). CMK Development Corp. v. West Bend Mut. Ins. Co., 395 Ill.App.3d 830 (1st Dist. 2009) (holding that defects to home built by insured developer was not an occurrence because there were no allegations of damage to “other property” than the home itself; additionally, there was no coverage arising from the homeowner’s breach of contract claims to recover losses due to the diminished value of their home) T.R. Bulger, Inc. v. Indiana Ins. Co., 901 N.E.2d 1110 (Ind. App. 2009) (reversing summary judgment in favor of insurer because genuine issue of material fact as to whether the damages alleged related only to the replacement and repair costs of faulty installation of heating system or economic damages for breach of contract, in which case there would be no occurrence, or whether the damages alleged related to damages to other parts of the house, in which case there would be an occurrence) Lloyd A. Twite Family Partnership v. Unitrin Multi Line Ins., 2008 MT 310, 346 Mont. 42, 192 P.3d 1156 (2008) (holding that insured builder’s construction of housing projects that denied equal use and access to persons with disabilities was an occurrence because the denial of access did not cause actual bodily injury) Concord General Mut. Ins. Co. v. Green & Co. Bldg. and Development Corp., 8 A.3d 24 (N.H. 2010) (holding that carbon monoxide leak caused by faulty chimney construction that was not to code by subcontractor hired by insured developer was not an occurrence because the carbon monoxide caused no physical or tangible alteration to any property) Westfield Ins. Co. v. R.L. Diorio Custom Homes, Inc., 932 N.E.2d 369 (Ohio App. 12 Dist 2010) (holding that homeowner’s allegations of insured’s failure to construct home in workmanlike manner, failure to construct home in timely manner, and misrepresentation as to time and expense were not occurrences because negligent workmanship is not an accident and because the policy was not intended to protect against business risks) Architex Ass’n, Inc. v. Scottsdale Ins. Co., 27 So.3d 1148 (Miss. 2010) (holding that allegations that the subcontractor failed to follow contract plans, building codes and repair defects are an occurrence becase the insured builder’s policy unambiguolsy provided coverage for unexpected negligence of its subcontractors) Liebovich v. Minnesota Ins. Co., 751 N.W.2d 764 (Wis. 2008) (holding that insured homeowner’s building their house too close to a shoreline in violation of a restrictive covenant, thereby causing claim to be brought by neighbor, was an occurrence under a “private client group” policy that included both accidental and non-accidental offenses) Lexicon, Inc. v. ACE American Ins. Co., 627 F.3d 1087, 1091 (8th Cir. 2010) (applying Arkansas law) (holding that negligent welding of a silo by a subcontractor hired by insured general contractor that caused damage to the silo itself was not an occurrence, but collateral damage to other equipment caused by the collapse of the silo was an occurrence) Continental Western Ins. Co. v Oaks Development Co., 768 N.W.2d 519 (Iowa App. 2010) (Table) (holding that repairs needed for roof shingles, installation due to defective roofing construcion by subcontractor were not occurrences under insured construction manager because the claims only alleged damage to the roof itself, and under Iowa law an “occurrence” requires damage to other property) United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 2001 WL 242443 (10th Cir. January 27, 2011) (recognizing that the Colorado Legislature’s enactment of COLO. REV. STAT. § 13-20-808 requires a presumption that faulty construction work is an accident, but failing to reach a determination of whether the facts in this case—damaged hardwood floor allegedly caused by the insured subcontractor’s negligent installation—was or was not an occurrence) Lenzke v. Brinkmann Pools, LLC, 2010 WL 5158235 (Wis. App. Dec. 21, 2010) (acknowledging that there was no dispute that cracks in pool floor installed by insured were occurrences, but affirming summary judgment in favor of insurer due to “your work” exclusion) Group Builders, Inc. v. Admiral Ins. Co., 123 Hawai‘i 142, 231 P.3d 67, 73 (Haw.App. 2010) (holding that insured subcontractor’s faulty construction, causing mold damage was not an occurrence because the claim was based on breach of contract) Stoneridge Development Co., Inc. v. Essex Ins. Co., 382 Ill. App. 3d 731, 321 Ill. Dec. 114, 888 N.E.2d 633, 654 (2d Dist. 2008), appeal denied, 229 Ill. 2d 660, 325 Ill. Dec. 16, 897 N.E.2d 264 (2008) (holding that cracks in the structure’s foundation were not occurrences because they were the natural and ordinary consequences of the insured developer’s faulty soil compaction). Cincinnati Inc. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (KY 2010) (holding that insured homebuilder’s faulty construction, standing alone, was not enough to qualify as an occurrence) The Cincinnati Ins. Co. v. G.L.H., Inc., 2008 WL 2940663 (Ohio App. Aug. 1, 2008) (reversing summary judgment awarded to insurer because claims of water damage to condominiums due to construction defects by insured developer were arguably an occurrence) Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Ins. Co., 2011 WL 93716 (S.C. Jan 7, 2011) (holding that property damage to condominiums caused by insured developer’s negligent construction was not an occurrence where the damage to the property is no more than the natural and probable consequence of faulty workmanship such that the two cannot be distinguished) Stuart v. Weisflog's Showroom Gallery, Inc., 2008 WI 86, 311 Wis. 2d 492, 753 N.W.2d 448 (2008) (holding that damages to home caused by insured remodeler’s failure to comply with building codes and the remolding contract was not an occurrence because the underlying claim was pled as a misrepresentation) Home Owners Management Enterprises, Inc. v. Mid-Continent Cas. Co. (5th Cir. 2008) (applying Texas law) (following the 2007 Texas Supreme Court holding in holding of Lamar v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) and finding that structural damage resulting from construction defects were occurrences because the allegations were for unintended defects) Century Sur. Co. v. Hardscape Constr. Specialties, Inc., 578 F.3d 262 (5th Cir. 2009) (holding that insured subcontractor’s faulty construction of a swimming pool was an occurrence) Wilshire Ins. Co. v. RJT Constr., L.L.C., 581 F.3d 222 (5th Cir. 2009) (holding that structural damage caused by negligent repairs of insured foundation repair company was an occurrence) Aten v. Scottsdale Ins. Co., 511 F.3d 818 (8th Cir. 2008) (applying Minnesota law) (holding that water damage caused to other parts of the home by insured homebuilder’s failure to properly pour and grade the basement floor was covered) 7 Desert Mountain Properties, Ltd. Partnership v.Liberty Mut. Fire Ins. Co., 225 Ariz. 194 (Ariz. App. Div. 1 2010) (holding that structural damage to homes built by insured homebuilder due to poor soil compaction was an occurrence) 8 QBE Insurance Co. v. Couch Pipeline & Grading, Inc., 303 GA.App. 196 (2010) (holding that insured contractor’s defective grading work was an occurrence because there was no evidence that the insured intended to cause the damages) Hathaway Development Co., Inc. v. American Empire Suprlus Lines Ins. Co., 3601 Ga.App. 65, 686 S.E.2d 855 (GA Ct. App. 2009) (holding that damages caused by insured plumbing subcontractor’s faulty installation of dishwasher plumbing was an occurrence because claim was based on negligence, not breach of contract) Auto Owners Ins. Co., Inc. v. Newman, 285 S.C. 187 (2009) (overruled by Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Ins. Co., 2011 WL 93716 (S.C. Jan 7, 2011) (holding that the insured’s faulty application of stucco was not in itself an occurrence, but the leakage caused by the faulty application was) Pine Oak Builders, Inc. v. Great American Lloyds Ins. Co., 279 S.W.3d 650 (Tex. 2009) (holding that water damage caused by insured homebuilder’s defective installation of stucco was an occurrence) 9 7 The court recognized that some of the defective work in this case may have been done by subcontractors, but this does not appear to change the outcome. 8 It was not clear in this case whether the work was actually done by insured homebuilder or a subcontractor. Also, the court only impliedly holds that there was an occurrence; the opinion isn’t very clear. 9 It was not clear in this case whether the work was actually done by insured homebuilder or a subcontractor Grimes Const., Inc. v. Great American Lloyds Ins. Co., 248 S.W.3d 171 (Tex. 2008) (following the 2007 Texas Supreme Court holding in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) and holding that physical damage to home caused by insured homebuilder’s defective workmanship was an occurrence) Pennsylvania Nat. Mut. Cas. Ins. Co. v. Parkshore Development Corp., 2010 WL 5027147 (3rd Cir. Dec. 10, 2010) (holding that water damage to condominiums caused by subcontractor’s faulty workmanship in sealing the windows was not an occurrence under insured developer’s policy because the only damage was to the completed property itself) Hathaway Development Co., Inc. v. Illinois Union Ins., 274 Fed.Appx. 787 (2008) (insured general contractor’s policy did not cover damage to apartment complexes caused by subcontractor’s faulty pipe and water line installation because, though accidentally caused, it was caused by intentional acts) State Farm Fire & Cas. Co. v. Diner Concepts, Inc., 370 Fed.Appx. 56 (11th Cir. 2010) (applying Georgia law) (holding that insured’s breach of sales contract and breach of express warranty of freedom from defect were not occurrences because the insured knew that it was delivering a structure built on a foundation not meant to accommodate it) Kentucky Farm Bureau Mut. Ins. Co. v. Blevins, 268 S.W.3d 368 (Ky. App. 2008) (holding that water damage to home’s interior by defectively installed counterflashing on the windows and roof by vendor’s builder was not an occurrence under the insured vendor’s policy because the underlying claim was based on breach of contract) Stanley Martin Cos. v. Ohio Cas. Group, 313 Fed. Appx. 609, 2009 WL 367589 (4th Cir. Feb 12, 2009) (applying Virginia law) (holding that subcontractor’s defective work that caused damage to insured general contractor’s non-defective work was an occurrence). Trinity Homes LLC v. Ohio Cas. Ins. Co., 2010 WL 5174967 (7th Cir. Dec. 22, 2010) (applying Indiana law). (reversing summary judgment in favor of insurer of general contractor who was sued for structural problems caused by subcontractor’s faulty work, in light of the holding in Sheehan Construction Co. Inc. v. Continental Casualty Co. 935 N.E.2d 160 (Ind. 2010)) Mid-Continent Cas. Co. v. Titan Const. Corp., 281 Fed. Appx. 766 (9th Cir. 2008) (holding that negligent construction by a subcontractor causing damage to condominium was an occurrence under insured construction company’s policy because there were no allegations of an intentional breach of contract) MW Builders, Inc. v. Safeco Ins. Co. of America, 267 Fed. Appx. 552 (9th Cir. 2008) (holding that damage to hotel caused by faulty installation of exterior insulation and finishing system by insured’s subcontractor was an occurrence). Auto-Owners Ins. Co. v. Pozzi Window Co, 984 So.2d 1241 (FL 2008) (holding that subcontractor’s faulty installation of windows was an occurrence because the insured builder did not expect or intend the subcontractor’s negligence) Sheehan Construction Co., Inc. v. Continental Casualty Co., 935 N.E.2d 160 (Ind. 2010) (insured contractor’s policy covered leaks caused by subcontractor builder’s faulty sealing of windows, roofing, chimney and vents) Stiggers v. Erie Ins. Co., 2008 WL 963138 (Ohio App. 8th Dist. April 10. 2008) (affirming summary judgment for insurer because, although allegations that insured’s subcontractor did not complete construction of addition to home and that the work was defective and had to be removed might be sufficient to invoke coverage as an occurrence, coverage was properly denied due to the “work performed” exclusion) Travelers Indem. Co. of America v. Tower-Dawson, LLC, 299 Fed.Appx.277 (4th Cir. 2008) (Table) (applying Maryland law) (holding that costs to replace collapsed retaining wall and damages to adjacent federally-protected wetlands cased by the re-installation were not occurrences because the subcontractor was contractually obligated to deliver a capable retaining wall to insured builder, and because the damage to the wetlands was an intentional act necessary to correct the defect in the original wall). National Union Fire Ins. Co. of Pittsburgh, PA v. Modern Continental Const. Co., Inc., 27 Mass.L.Rptr. 16 (Mass. Super. 2009) (holding that damage to traveling vehicles, death of a passenger and property damage to roadway caused by collapse of freeway tunnel during construction were occurrences because, while small cracks or leaks might be an expected result of the insured’s faulty workmanship, it was unlikely that the insured intended to expecte for a portion of the tunnel to completely collapse) Auto-Owners, Ins. Co. v. Rhodes, 682 S.E.2d 857 (S.C. App. 2009) (holding that property damage to landowner’s property caused by collapse of poorly erected advertising sign was an occurrence under insured sign company’s policy because the collapse of the sign was unexpected) Toldt Woods Condos. Owner's Ass'n. v. Madeline Square, LLC, 314 Wis.2d 259, 757 N.W.2d 850 (Table) (Wis. Ct. App. 2008) (holding that damage to adjacent property caused by insured’s negligent erosion control were occurrences) HB Litigation Conferences Presents Construction Litigation Leaders’ Forum Wrap-sody March 3, 2011, 10:30am Susan B. Bryan, Chartis Insurance Erik Davis, R-T Specialty, LLC John V. O’Meara, Esq., Bremer Whyte Brown & O’Meara LLP Diane O. Palumbo, Esq., Palumbo Bergstrom LLP PALUMBO BERGSTROM 1 attorneys The Wrap Market Six years ago, in a market far, far away……. Premium for a $2M/$2M/$2M defense inside limit was as much as $1.5M. $8M excess cost an additional $1.5-$2M. Additional limits had very few markets so many projects carried short limits. This applied to most condo and many residential single family home projects. 2 The Wrap Market Today……. The insurance market is in an unusually soft market cycle; prices are low, coverage broad and markets are abundant. A $2M/$2M/$2M defense inside Wrap for a California condo project can be found for $100,000 or less. The market is down 50% or more in many cases for similar projects, such as limits and broader coverage. 3 The Wrap Market Hot Wrap products currently offered: General Liability – only Wraps for large commercial projects. Apartment Wraps with trigger to convert to condo for additional premium. Broken project/distressed asset Wraps. Contingent Liability Wraps. 4 Wrap Dynamics Contracts involving developer, general contractor and all subcontractors should address the following in conjunction with the Wrap: Indemnity clauses Insurance requirements – does Wrap replace or supplement all other insurance? Responsibility for reimbursement of deductibles or SIRs Cross suits exclusion Severability clause 5 Wrap – PROS Generally reduces insurance costs or at least makes costs more manageable. Allows subcontractors who otherwise may not be insurable to be covered. Allows for a comprehensive risk management program: easier to administer one policy and ensure that it remains in effect for the entire length of the statute of limitations. 6 Wrap – PROS (con’t) Litigation management can be much easier with only two parties as opposed to numerous parties with different or lack of insurance. Defense is generally more unified. When the Wrap policies are project specific, there is not an issue with the limits being used for other projects/losses. 7 Wrap - CONS Need to “guess” amount of proper coverage – underinsured or over-insured? Wraps often have large deductibles but this is shared by enrollees in the bid process. Insolvency of parties or unwillingness/inability to satisfy SIR/deductibles. Exclusions may apply to all parties, creating potential for large gaps in coverage. Materials/Manufacturing claims typically not covered because suppliers and manufacturers are not enrolled. 8 Wrap – CONS (con’t) If all Wrap parties are named defendants, conflicts can be asserted and the Wrap may deplete its limits on defense costs. Wrap-insurer insolvency issues. Triggers for Completed Operations. 9 Subcontractor Issues Insurance Credit Reduction - “Any bid submitted to GC by Sub shall be reduced to reflect all of Sub’s savings on costs of insurance as a result of the coverages provided by GC under the Wrap Up Policy.” Self-Insured Endorsement - “Sub agrees to pay owner, upon demand, an amount equal to the greater of $5,000 or the deductible or SIR specified in Sub’s CGL policy.” Attorney Selection – “Owner shall maintain unilateral authority to select counsel to represent the enrolled parties’ interests, and Sub agrees to waive any 10 conflict.” Subcontractor Issues (con’t) Subcontractor as Insured – “The furnishing of a Wrap policy shall not limit any responsibility of Sub imposed by the contract documents, including any obligation to defend or indemnify owner.” Limitations on Coverage – “Owner makes no warrantee that the coverage provided in the Wrap is adequate to cover Sub for risks and exposures faced by Sub.” Other Insurance – “Participation in the Wrap does not eliminate Sub’s obligation to maintain insurance and provide additional insured coverage to owner.” Changes in Coverage – “Owner reserves the right to change or eliminate Wrap coverage at its sole discretion. Sub, then, will have 30 days to secure and maintain insurance coverage as specified in this contract.” 11 Broken Projects What if developer goes insolvent, project is foreclosed and/or project becomes bank owned? LLC single-purpose entities Mid-size to large single family home developer with large retentions or captives Lack of reserving in captives with the belief they can fund Need to know who will satisfy potential SIRs for coverage. Brokers must assist clients in assessing potential gaps in coverage. Due diligence – contractors must be aware of signs that developer is having difficulties. 12 Hybrid/Mixed Claims HYBRID/MIXED Claims - combinations of Pre-Wrap and Post-Wrap homes included in the litigation. Determine which homes are and are not covered under the Wrap policy. Should lawsuit be bifurcated? Cross-complaints pose challenges. Representation/conflict issues. 13 Litigating Wrap Cases If policy is burning limits, consider advising plaintiffs’ counsel early. Identify Non-Wrap parties as soon as possible; identify risk transfer options. Wrap participants may have their own counsel involved. Wrap coverage issues could create conflicts. 14 Settling Wrap Cases Because Wrap carrier(s) may be responsible for 100% of the settlement, a structured settlement may be beneficial. The settlement terms should follow the policy language. Include all entities who are enrolled even if they were not sued since the Wrap must protect (especially in policy limits settlements) all enrollees. Consider potential future plaintiffs. Consider future claims (bodily injury). 15 CA Anti-Indemnity Statute AB2738 In all residential construction contracts entered into after 1/1/2009, general contractor or developer: Must make certain disclosures regarding details of Wrap-ups to Wrap participants. May require bid credits or other compensation for the wrap-up premiums from the subcontractors. May charge a deductible or SIR in the event a claim is made implicating subcontractors’ scope of work. 16 California AB2738 New Indemnity Flowchart Builder or general contractor provides written tender of the claim to subcontractor. • Tender must include all information received by builder from claimant relating to claims arising out of subcontractor’s scope of work. •Tender has same effect as legal proceeding. Subcontractor has two options Option 1: Defend claim with counsel of its choice. Requires subcontractor to: • provide builder written notice within 90 days of receipt of tender. • “control” defense for any claim (or portion) of claim to which defense obligation applies. • provide complete defense of builder for any claims resulting from subcontractor’s scope of work (including vicarious liability). • become responsible to builder and claimant for liability arising out of trade’s work. If subcontractor breaches (by failing to timely and adequately perform its obligations), builder can seek: • compensatory damages • consequential damages • reasonable attorney fee • liquidated damages Builder bears burden of proof Option 2: Pay a reasonable allocated share of builder’s defense fees and costs. Requires subcontractor to: • pay a reasonable requirement. • pay within 30 days of an invoice from the builder. • pay on an ongoing basis builder’s or general contractor’s defense costs during pendancy of the claim. • defense costs subject to reallocation. Note: builder or contractor shall allocate shares of payment based on the extent of subcontractor’s work and uncollected amounts can’t be collected from other subcontractors. If builder does not reallocate fees within 30 days after end of case, subcontractor can seek: • compensatory damages. • consequential damages • interest on the fees • attorney fees Subcontractor bears burden of proof If subcontractor breaches (by failing to timely and adequately perform its obligations), builder can seek: • compensatory damages • consequential damages • reasonable attorney fees • interest on defense costs • interest on indemnity costs (from date incurred) • liquidated damages 17 Builder bears burden of proof QUESTIONS? PALUMBO BERGSTROM attorneys 18 California AB2738 New Indemnity Flowchart • • • • • Applies to residential construction contracts entered into after January 1, 2009. Subcontractor does not have to defend or indemnify general contractor nor builder for claims arising out of general contractor or builder’s negligence or for claims not arising out of the subcontractor’s scope of work. Cannot be waived by the parties in contract. Builder or general contractor provides written tender of the claim to subcontractor. Tender must include all information received by builder from claimant relating to claims arising out of subcontractor’s scope of work. Tender has same effect as legal proceeding. Subcontractor has two options Option 1: Defend claim with counsel of its choice. Option 2: Pay a reasonable allocated share of builder’s defense fees and costs. Requires subcontractor to: • provide builder written notice within 90 days of receipt of tender. • “control” defense for any claim (or portion) of claim to which defense obligation applies. • provide complete defense of builder for any claims resulting from subcontractor’s scope of work (including vicarious liability). • become responsible to builder and claimant for liability arising out of trade’s work. Requires subcontractor to: • pay a reasonable requirement. • pay within 30 days of an invoice from the builder. • pay on an ongoing basis builder’s or general contractor’s defense costs during pendancy of the claim. • pay defense costs subject to reallocation. If subcontractor breaches (by failing to timely and adequately perform its obligations), builder can seek: • compensatory damages • consequential damages • reasonable attorney fees • liquidated damages Builder bears burden of proof. Note: builder or contractor shall allocate shares of payment based on the extent of subcontractor’s work and uncollected amounts can’t be collected from other subcontractors. If builder does not reallocate fees within 30 days after end of case, subcontractor can seek: • compensatory damages • consequential damages • interest on the fees • attorney fees Subcontractor bears burden of proof. If subcontractor breaches (by failing to timely and adequately perform its obligations), builder can seek: • compensatory damages • consequential damages • reasonable attorney fees • interest on defense costs • interest on indemnity costs (from date incurred) • liquidated damages Builder bears burden of proof. © 2011 Palumbo Bergstrom LLP Caution: Distressed Commercial Properties By Susan M. Bryan | January 14, 2011 The American landscape is littered with partially built, financially distressed or bank owned properties. Whether they are towering condos, gleaming hotel resorts, urban mixed use or suburban office space, many of these are now seeking new investors, developers and contractors to complete what someone else began in a rosier economic environment. While many of these properties can look like great bargains on the surface, failing to properly investigate the background and potential roadblocks for future development can result in losses rather than profits. The three main areas that must be explored are property condition assessment, legal issues and encumbrances, and the insurability of the project. These issues are relevant not only to the buyer of the property but also for all the contractors and subcontractors involved in both the original and post transfer phases of construction. Project Assessment Anyone considering the purchase of a partially completed structure should first engage experts who can assess the viability of the project. Construction engineers can assess the condition of the property, determining not only what has been properly completed and what work remains to finish the project, but also what existing work may need to be repaired or remediated. In many instances, a developer in financial difficulty might try to cut corners and make changes to the original plans and specifications or substitute inferior (cheaper) materials. A purchaser should not only retain a qualified construction expert for the physical inspection and documentation of pre-purchase work, but should also check for available city inspection documents, change orders, and course of construction inspection documents and/or photos. Many of these documents can be difficult to locate. A buyer should have the original plans and specifications reviewed by qualified professionals to ensure they are code compliant and errorfree. Also, if the prospective purchaser wishes to alter the project from its originally approved size or use, architects and local building department experts may also need to be consulted. A prospective purchaser should also engage expert transactional (acquisition, insurance and tax) and construction attorneys to complete the due diligence required prior to the execution of a letter of intent and through the negotiation process in order to obtain all warranties and representations necessary to clarify assumption of liabilities and avoid post contractual lawsuits. Insurance Questions Lastly, the question of insurance coverage can be a labyrinth if there is not proper insurance coverage counsel to determine who will be legally responsible for problems or deficiencies in the original construction; whether recovery from the original parties (developers or contractors) is possible or if such liabilities will be assumed by the acquiring parties. This issue is paramount in the acquisition of a distressed construction project and should be resolved during the negotiation period, in order to avoid surprises in the future. Determination of the availability of insurance for the original developer and contractors is very important because if traditional insurance was in place for them, then each contractor may have its own insurance program. Even if the developer ends up in bankruptcy, contractors’ liabilities may be covered in coming years by their individual insurance, subject of course to the specific terms and conditions in their policies. However, if the project was originally covered by a Wrap-Up (OCIP or CCIP), then the issues become more complex. A Wrap-Up program of insurance covers all enrolled parties under a single policy; thus, the applicability of that policy must be assessed, as well as the policies of those participants in the construction project who were not enrolled. Attention should also be paid to the deductible or self-insured retention on the wrap policy. If the policy requires the SIR to be satisfied only by the sponsor or First Named Insured, a developer who is bankrupt or unable to satisfy the SIR creates a question as to whether, and under what circumstances, the policy will respond to a claim. This and other issues may potentially create an “all or nothing” coverage situation for all enrolled participants under an original Wrap-Up program. A prospective purchaser of distressed construction projects needs to get guidance from coverage attorneys on this issue. Tips for Insuring Distressed Assets The following are some suggestions that can be used by all parties, no matter which side of the distressed construction project they are on: • Original contractors on a project should be aware of any signs that the developer is having financial difficulties. Late payments, change orders for cheaper building components or deleting expensive architectural elements can be a sign that there is financial uncertainty. • If a Wrap-Up insurance program is in effect, check the policies with attention to SIR language and completed operations triggers. You may also seek to add in a contractual obligation requiring that notice be given to enrolled contractors in the event the wrap is cancelled (commonly by the premium finance company), extended or allowed to expire. • Brokers will need to assist their clients in assessing any gaps or coverage issues in the original insurance and then work to find the best way for their clients to insure their liabilities and exposures for the project going forward. Successor owners and contractors are well-advised to seek experts’ counsel from attorneys and consultants prior to purchasing a financially distressed construction asset. • Proper use of experts is instrumental in deciding whether a project ultimately results in a profit or a loss. Susan Bryan, AIC, ARM, CRIS, is assistant vice president and regional underwriting manager for Chartis Excess Casualty – Construction Division. She is based in San Francisco and may be reached at [email protected]. THE CARRIERS, BUILDERS AND DEVELOPERS SPEAK Cyndy Breit, Vice President, Risk Management, Western National Group Eric Michna, Assistant Vice President, Zurich North America, Construction Defect & Professional Liability Claim Services Thomas Tyrell, Vice President, HUB International Insurance Services, Inc. Moderator: Glenn Barger, Chapman Glucksman Dean Roeb & Barger RISK TRANSFER IN 2011 Risk Transfer in 2011 Introduction and Opening Comments Additional Insured Endorsements/Certificates of Insurance Indemnity Issues, Including Crawford, AntiIndemnity Statutes Available Coverage and Exclusions Dealing With Gaps, Shortfalls, Missing Carriers, Out of Business Parties, SIRS Impact On Moving Litigation Toward Resolution Additional Insured Endorsements/Certificates Available Additional Insured Coverage Completed Operations Coverage Commercial v. Residential Contract Requirements v. Availability Cost Sharing Agreements Certificates of Insurance With Cancellation Notice Indemnity Contract Requirements Impact of Crawford Decision Coverage Issues—Including Requiring Developer, GC to Obtain Indemnity and Additional Insured Coverage Anti-Indemnity Statute Shortfalls Gaps In Coverage Making Up Shortfalls Missing Carriers Out of Business Subcontractors SIRs—Can They Be Satisfied Impact on Resolving Cases In The Trenches Today Getting Coverage Types of Claims Attacking The Plaintiff’s Claims/Available Defenses SB 800 Wraps Resolution The Future—Beyond 2011 Available Coverage Minimizing Risk Transfer of Risk Predictions THE CARRIERS, BUILDERS AND DEVELOPERS SPEAK Cyndy Breit, Vice President, Risk Management, Western National Group Eric Michna, Assistant Vice President, Zurich North America, Construction Defect & Professional Liability Claim Services Thomas Tyrell, Vice President, HUB International Insurance Services, Inc. Moderator: Glenn Barger, Chapman Glucksman Dean Roeb & Barger HANDLING MIXED AND ALTERNATIVE CLAIMS John Thompson Assistance Vice President, H.D.I. – Gerling Barry Vaughan, Esq. Kasdan, Simonds, Weber & Vaughan, LLP Keith D. Koeller, Esq. Koeller, Nebeker, Carlson & Haluck, LLP ALTER EGO 1. WHY ARE ALTER-EGO CLAIMS MORE PREVALENT NOW THAN IN THE PAST? 2. WHAT ARE THE LEGAL REQUIREMENTS TO ESTABLISH ALTER EGO LIABILITY? 3. WHAT CHALLENGES POSED TO DEFENSE COUNSEL? 4. WHAT COMPLICATIONS FOR INSURANCE AND CLAIMS HANDLING? WILLFUL MISCONDUCT 1. THE POTENTIAL WILLFUL MISCONDUCT EXCEPTION TO THE 10-YEAR STATUTE OF REPOSE? 2. THE ACOSTA TEST. 3. DEFENSE COUNSEL RESPONSE AND POTENTIAL INDEMNITY RIGHTS. Pine Terrace vs. Windscape, (2009) 170 Cal. App. 4th 1. 4. INSURANCE CONCERNS. FRAUD & RESCISSION 1. FRAUD CLAIMS FALL OUTSIDE S.B. 800. 2. RECISSION MAY BE MORE ATTRACTIVE WITH FALLING PROPERTY VALUES. 3. DAMAGE ISSUES. 4. INSURANCE HURDLES. 5. INSURANCE RESCISSION ACTIONS BASED ON MISREPRESENTATIONS OR NON-DISCLOSURE. HOA GOVERNANCE AND BREACH OF FIDUCIARY DUTY 1. INCREASED HIGH AND MID-RISE CONDOMINIUM CLAIMS BRING POTENTIAL BREACH OF FIDUCIARY CLAIMS AGAINST DEVELOPER. 2. STATUTORY HOA GOVERNANCE REQUIREMENTS CONCERNING INITIATION OF C.D. LITIGATION AND POST-COMPLETION NOTIFICATION REQUIREMENTS. NUISANCE AND INVERSE CONDEMNATION 1. DEFENSE RESPONSE TO NUISANCE CLAIMS. 2. THE ELEMENTS OF AN INVERSE CONDEMNATION CLAIM. 3. THE DAMAGE-RECOVERY ISSUES Emotional Distress Attorney’s Fees SUMMARY 1. ALTER EGO 2. WILLFUL MISCONDUCT 3. FRAUD AND RESCISSION 4. HOA GOVERNANCE AND BREACH OF FIDUCIARY DUTY 5. NUISANCE AND INVERSE CONDEMNATION EMERGING ISSUES WITH RIGHT TO REPAIR STATUTES: How Are They Working? Bruce W. Lorber, Esq. Lorber Greenfield & Polito, LLP William Mayer, Esq. Vice President & General Counsel, D.R. Horton, West Region David Lee, Esq. Lee Hernandez Landrum Garofalo & Blake Joe Kaneda, Esq. Fenton Grant Mayfield Kaneda & Litt, LLP SOME STATES THAT NOW HAVE A FORM OF STATUTORY RIGHT TO REPAIR STATUTE FOR CONSTRUCTION DEFECT CLAIMS ARIZONA CALIFORNIA COLORADO HAWAII NEVADA TEXAS WASHINGTON BRIEF OVERVIEW OF COMMON ELEMENTS OF STATUTES NOTICE COMPLIANCE WITH STATUTORY DEADLINES OPPORTUNITY TO INSPECT/TEST OPPORTUNITY TO REPAIR COMPENSATION OR REPAIR DEFINTION OF DEFECTIVE CONDITION RELEASE? STATUTORY “ENTITLEMENTS” MEDIATION/ADR DEFAULT TO LITIGATION ISSUES THAT ARISE DURING THE “NOTICE” PHASE WHERE DO THE INSURANCE AND INDEMNITY RIGHTS GO DURING THE STATUTORY RIGHT TO REPAIR PROCESS? DEALING WITH STATUTORY DEADLINES THAT ARE NOT REALISTIC? ISSUES WHICH ARISE IN MOVING FROM THE “INSPECTION/TEST PHASE” TO AN OFFER TO PAY MONEY &/OR UNDERTAKE REPAIR WHAT RELEASE DO YOU THINK YOU ARE ENTITLED, IF ANY? HOW DO WE NOW DEAL WITH ISSUES OVER WHICH THERE IS NO AGREEMENT THAT A DEFECTIVE CONDITION EXISTS? ARE THERE OTHER LEGAL CLAIMS THAT EXIST BEYOND THE STATUTORY FRAMEWORK , i.e. FRAUD, PERSONAL INJURY, OR CONTRACT? WE HAVE TO PAY HOW MUCH MORE BEYOND THE REPAIR? IS MEDIATION/ADR REALLY WORKING IN THE RIGHT TO REPAIR SCHEME? HOW DOES ALL OF THE RIGHT TO REPAIR EFFORT PLAY OUT WHEN THE CLAIM DEFAULTS TO LITIGATION? APPENDIX C National Overview of Notice of Repair Laws State Statute Description Alaska Alaska Stat. §§ 09.45.881‐.899 (2006) Provides for a right to repair and notice to the builder, and limits the damages recoverable if the builder’s proposals are rejected. Arizona Ariz. Rev. Stat. Ann. §§ 12‐1361 to ‐1366 (2003 & Supp. 2008) Provides contractors of both single dwellings and multi‐unit complexes with a 90 days notice of defect with right to repair. California Cal. Civil Code §§ 895‐ 945.5 The builder may choose to opt into SB 800, which requires the builder to make disclosure upon notice of defect by the homeowner within 30 days. The builder may then inspect the defects within 14 days and offer to compensate the homeowner, repair the defect, or submit the matter to mediation. The homeowner must go through these procedures prior to filing suit. Colorado Colo. Rev. Stat. §§ 13‐ 20‐801 to ‐807 (2008) This act requires notice of a potential claim to be given 75 days prior to filing an action, or 90 days in the case of commercial properties. The statute of limitations is then tolled for 60 days. The claimant must then allow an inspection to be completed within 30 days of service of the notice. Within 30 days of completion of the inspection or 45 days in the case of residential property, the construction professional may send an offer to settle or an agreement to remedy the claim. The claimant must accept in writing within 15 days of delivery. If the offer is not accepted, the construction professional is liable for damages and attorney fees not to exceed $250,000. If no offer is made, the homeowner may file suit. Florida Fla. Stat. Ann. §§ 558.001‐.005 (West 2006 & Supp. 2008) A homeowner must provide the construction professional at least 60 days notice of a claim before bringing an action regarding a single‐family home, an association representing fewer than 20 residences, a manufactured modular home, a duplex, triplex, or quadraplex. Construction professionals are entitled to at least 120 days notice of actions involving an association representing more than 20 residences. Professionals in receipt of such notice who wish to allege the responsibility of other contractors, subcontractors, and construction professionals for noticed defects must pass on the notice within 10 days or 30 days of receipt, depending on whether the claim involves more than 20 units. The subsequently noticed contractors then have 15 or 30 days. Finally, construction professionals in receipt of a plaintiff’s notice have 45 or 75 days to respond. This statute governs ALL property, not just residential property. Georgia Ga. Code Ann. §§ 8‐2‐ Provides that a claimant must provide written notice of a claim to the 35 to ‐43 (2004 & Supp. contractor 90 days before initiating an action and that the contractor 2006) has 30 days to respond upon receipt of said notice. Hawaii Haw. Rev. Stat. Ann. §§ 672E‐1 to ‐13 (LexisNexis 2007) Provides for a contractor’s right to repair upon receipt of notice of a claim, which requires notice of defects and claims to be served on the contractor no later than 90 days before filing an action. 2010 Chapman, Glucksman, Dean, Roeb & Barger 1 APPENDIX C National Overview of Notice of Repair Laws State Statute Description Idaho Idaho Code Ann §§ 6‐ 2501 to ‐2504 (LexisNexis 2004) Notice of a claimed defect must be provided to the builder, and the builder must serve written response requesting an inspection, offering to compromise, or stating that the claim is disputed within 21 days. If the inspection or offer is rejected, written notice must be served and an action may be filed. If no response is given within 30 days, then the offer may be terminated upon written notice. If inspection is allowed, the builder must serve within 14 days a written offer to remedy, an offer to compromise and settle, or a statement that the builder will not engage in a repair. Indiana Ind. Code Ann. §§ 32‐ 27‐3‐1 to ‐14 (LexisNexis 2002 & Supp. 2008) Permits the recovery of attorneys’ fees and costs by the contractor where the homeowner has unreasonably rejected a repair offer, limits damages, and specifically does not require additional notice for subsequent defects. Kansas Kan. Stat. Ann. §§ 60‐ 4701 to 4710 (2005) This law requires that the contractor be given notice prior to filing of an action by a homeowner. If no notice is given, the action is dismissed without prejudice. The statute limits damages, specifically requires additional notice for subsequent defects, places burdens on insurers to assist in the process, and sets forth requirements for homeowners to maintain their property. Kentucky Ky. Rev. Stat. Ann. §§ 411.250‐.266 (LexisNexis 2005) Written notice must be served on the construction professional prior to the filing of the claim. Within 21 days, the professional must respond in writing, either proposing inspection, offering to compromise and settle, or stating that the claim is disputed. Rejection of the builder=s response by the homeowner must be written. If not received within 30 days after the claimant=s receipt of the response, the construction professional may terminate the offer by serving written notice and the claimant may then bring an action. Within 14 days after completion of the inspection, the professional must serve a written offer to cure the defect, an offer to compromise and settle, or a written statement that the construction professional will not proceed further to remedy the defect. Rejection or acceptance must be in writing. The offer may be withdrawn upon written notice if no response is received within 30 days from the claimant. Notice of the contractor=s right to inspect must be in the contract. Louisiana La. Rev. Stat. Ann. §§ 9:3141 to :3150 (1997 & Supp. 2008) Before a homeowner may undertake any repair himself or institute any action, the homeowner must give the builder written notice within one year after knowledge of the defect, advising of all defects, and giving the builder a reasonable opportunity to comply. Minnesota Minn. Stat. Ann. §§ 327A.01‐.08 (West 2004 & Supp. 2008) Provides a provision that allows the vendor the right to inspect and offer to repair the alleged damage within 30 days of receipt of notice of a claim. Furthermore, construction contracts must re‐state statutory warranties and these warranties are non‐waivable. Mississippi Miss. Code Ann. §§ 83‐ 58‐1 to ‐17 (1997 & Supp. 2008) The “New Home Warranty Act” requires a homeowner to notify the builder within 90 days of discovering a defect and give the builder a reasonable amount of time to repair the defect. 2010 Chapman, Glucksman, Dean, Roeb & Barger 2 APPENDIX C National Overview of Notice of Repair Laws State Description Missouri Mo. Ann. Stat. §§ 436.350‐.365 (West 1992 & Supp. 2008) Contractors have a right to repair when they have given homeowners advanced notice of their right to repair. Michigan Mich. Complete Laws Ann. § 339.2411 & .2412 There is NO right to repair law; however, homeowner claims to the State Contractor’s Licensing Board must conform to the alternative dispute resolution process, where provided by contract or delineated by statute. Montana Mont. Code Ann. §§ 70‐ 19‐426 to ‐428 (2007) This law creates a set of statutes of limitations and limited recoverable damages. Nevada Nev. Rev. Stat. §§ 40.600‐.695 (LexisNexis 2006 & Supp. 2007) Title 40 requires the homeowner to give notice of defects to all parties responsible. The builder has 90 days to respond by proposing monetary compensation or disclaim liability all together. A homeowner may also submit a question to the State Contractor’s Board regarding the need for repairs, appropriate methods of repair, sufficiency of repairs, or respective rights and responsibilities of homeowners and builders. New Hampshire N.H. Rev. Stat. Ann. §§ 359‐G:1 to :8 (LexisNexis 1995 & Supp. 2008) Homeowners are required to provide builders with written notice 60 days before filing a lawsuit alleging defects. The builder then has 30 days to inspect, repair and/or offer to settle. N.J. Stat. Ann. §§ 46:3B‐1 to ‐20 (West 2003) Prior to making a claim for defects covered by the warranty, a homeowner shall notify the builder of the defects and allow a reasonable time period for repair. If the repairs are not satisfactory or made within a reasonable amount of time, the homeowner may then file a claim against the new home warranty security fund. N.Y. Gen. Bus. Law §§ 777 to 777b (McKinney 1996) Under the housing merchant implied warranty, written notice of a claim of a defect must be received by the builder prior to the commencement of any action. The owner shall afford the builder reasonable opportunity to inspect, test, and repair the defect. N.D. Cent. Code § 43‐ 07‐26 Requires written notice within 6 months after knowledge of the defect and provides the contractor a “reasonable time” to inspect and/or repair. “Reasonable time” is defines as 30 business days. Ohio Ohio Rev. Code Ann. §§ 1312.01‐.08 (Lexis Nexis 2008) Comprehensive legislation regarding a building code, contractor licensing, and a right to repair. The law affords contractors 60 days notice before a homeowner may file a defect suit so that the contractor may institute his right to cure. Oklahoma Okla. Stat. Ann. Tit. 15 § 765.6 (West 1993 & Supp. 2007) Where provided for in a construction contract, a contractor may be entitled to 30 days notice to repair any defects before the homeowner files a defect action. Or. Rev. Stat. §§ 701.560‐.605 (2007) Contractor licensing guidelines and builder notice and right to repair requirements. S.C. Code Ann. §§ 40‐ 11‐510 to ‐570 (2001 & Supp. 2008) Right to repair providing for notice and involvement of subcontractors early in the process. New Jersey New York North Dakota Oregon South Carolina Statute 2010 Chapman, Glucksman, Dean, Roeb & Barger 3 APPENDIX C National Overview of Notice of Repair Laws State Statute Description South Dakota S.D. Codified Laws § 21‐ 1‐16 Grants construction professionals rights to notice of defect and 30 days opportunity to inspect or repair before a homeowner may file suit. Tennessee Tenn. Code Ann. §§ 66‐ 36‐101 to ‐103 (2004) Provides that a claimant, before filing an action against a contractor, subcontractor, supplier or design professional shall try to serve notice of a claim within 15 days after discovery of the defect. However, failure to serve within 15 days does not bar the filing of an action. Texas Virginia Va. Code Ann. §§ 55‐ 70.1(D) Any defect discovered after July 1, 2002 must first be made known to the vendor by written notice of the nature of the warranty claim. After such notice, the vendor shall have a reasonable period of time, not to exceed 6 months, to cure the defect that is the basis of the warranty claim. Washington Wash. Rev. Code Ann. §§ 64.50.005‐.060 (West 2005) Construction professional provided a right to 45 days notice of a homeowner’s defect suit in order to cure the defects. This also governs warranties and establishes an alternative dispute resolution process for multi‐unit condominiums. West Virginia W. Va. Code Ann. §§ 21.11A‐1 to ‐17 (LexisNexis 2008) Provides for a right to repair once the claimed damages rise above a $5,000 threshold. Wis. Stat. Ann. §§ 895.07, 101.148 (West 2004 & Supp. 2007) Establishes a notice and opportunity to repair framework under which the contractor who worked on the allegedly defective construction is entitled to 90 days notice of a claimant’s intention to file a claim. Wisconsin Tex. Prop. Code Ann. §§ Comprehensive approach to construction defects, including litigation 27.001‐.007 (Vernon review boards and limitations on damages. 2000 & Supp. 2008) 2010 Chapman, Glucksman, Dean, Roeb & Barger 4 Emerging Legal and Technical Construction Defect Issues Rich Gaeckle and Christopher Nutter 1. The role of green building standards and practices in disputes Contradictory legislation New codes Standard of Care o Applicable standard of care ‐ average architect/engineer o "Green" standard of care ‐ specialist standard? o Representations as to standard of care o Identification as LEED AP / LEED GA and impact on standard of care Appeals Damages i. Green Building Incentives: ‐ tax credits ‐ financing ‐ zoning / density ii. Energy performance iii. Marketability 2. Risk Management and Insurance in green building Contractual considerations ‐ scope of work (duty) / standard of care / limitations of liability Additional players ‐ commissioning agent, LEED consultant ‐ and their roles/liability insurance ‐ insurance products / coverage concerns / policy exclusions / endorsements Emerging Legal and Technical Construction Defect Issues Jax Kneppers 1. Data Collection Basics 2. Traditional Methodology 3. Developing Technology 4. Current Technology John Kilpatrick 1. Valuation/Appraisal in construction defect situations: basic issues 2. Stigma – what do the Courts have to say 3. Recent Lessons Learned – Chinese Drywall, Mold, EIFS 4. Danger areas for unschooled appraisers and the attorneys who engage them 5. Issue on The Horizon – Green Buildings, Credit Market Meltdowns Ed Martinet 1. CD Case Handling Differences between East and West Coast 2. Current Technologies That Can Be Utilized For CD Cases 3. New Approaches To CD Case Handling a. VE‐ADR b. Reducing Case Handling Timelines c. Reducing case Handling Costs Emerging Green Risks The Future Is Green Although new design and construction in the United States may have dramatically slowed during the recent recession, the rate of change within the industry has not slowed at all. The last few years have seen the adoption of new building and energy codes as well as widespread incorporation of voluntary standards that are intended to produce less wasteful and more environmentally‐sensitive remodels and new construction. While these changes are generally heralded as positive steps, their collective impact on the building industry has not yet been fully evaluated nor have the new risks that come with these new materials, new construction methods, and new compliance requirements. One thing is for sure ‐ the new standards, voluntary or mandatory, are not going anywhere. Here’s why: • Public entities, representing the majority of construction dollars being expended today, are demanding improved environmental practices ‐ these civic projects are defining current construction practices which will, over time, also alters the standard practices in the industry • Even when the standards are optional, a strong argument can be made for the direct economic benefits of sustainable design and construction including decreased operating costs, increased building values, increased occupancies, and higher rents (“Global survey on Corporate Real Estate and sustainability,” CoreNet, 2009). Furthermore, for approximately the same cost as traditional design (“Cost of Green Revisited” Davis Langdon, 2007), a Green building will consume 26% less energy than a traditional building (“Assessing Green Building Performance,” GSA Public Buildings Service, 2008). As a result, private developers are clamoring for professionals with the experience to deliver green projects. • In many cases, design professionals are now obligated to present sustainable options to their clients whether or not they are code requirements (see Canon IV of the 2007 AIA Code of Ethics & Professional Conduct); professional ethics also drive change In fact, over the last few years the legal and contractual requirements to comply with previously voluntary standards have become the rule rather than the exception in both private and public construction projects. But who is responsible for nailing down this moving target of laws and standards? What happens when the Green standards are not met? What are the risks and can they be avoided? If they can’t be avoided, who is responsible? To answer these questions a brief review of the standards is necessary. The Standards Although the standards do vary widely, they seem to follow the same basic tenets ‐ encouraging consideration of the siting of the building, the energy required to operate the building, the materials that are used in its construction, the management and consumption of water, and the quality of air inside and outside. Numerous competing and complementary standards have been developed to Legal Disclaimer: The opinions and information provided herein are provided with the understanding that the opinions and information are general in nature and do not relate to any specific project or case. Because each project and case is unique and professionals can differ in their opinions, the information presented and opinions shared are those of the author and should not be considered the position or opinion of Navigant Consulting. This information presented should not be applied to any particular set of facts with the expectation of achieving a particular outcome discussed herein. evaluate these criteria and they continue to be revised and updated at a fairly rapid pace. Standards also vary state by state and country by country and they use different methods of measuring success. GBI’s Green Globes, Build It Green’s GreenPoint rating, ILBI’s Living Building Challenge, NAHB’s Green Building, EPA’s Energy Star, BRE’s Environmental Assessment Method, and the USGBC’s Leadership in Energy and Environmental Design (LEED) certification are just a few of the currently published standards. LEED is the most recognizable of these standards and the one most commonly cited when Green building is being discussed. LEED is also a good example of the shifting nature of the standards as it too has undergone significant revisions within the last year. To further complicate matters, referenced standards from independent organizations such as ASHRAE, ASTM, and ANSI, which also undergo regular revision, are often incorporated into the basic requirements for these standards. This is certainly the case with LEED. Green building standards are increasingly becoming mandatory on local, state and federal levels and may apply to new buildings as well as significant remodels. According to one count, 45 states, 132 cities, 35 counties, 28 towns, 35 state governments, and 13 federal agencies are currently requiring some form of Green Building standard for qualifying construction projects (Crowell & Moring, 2010). In some cases the detailed standards have been incorporated into code documents but in other cases the requirements, such as the need to meet a particular LEED certification level, is the only stated standard. It is also not uncommon to find both methods employed at once. For example, in California, the California Green Building Standards Code (Cal Green) includes a combination of mandatory and voluntary requirements which are spelled out in some detail. At the same time, in San Francisco, CA, the Green Building Ordinance 13C requires and cites passages in the LEED and GreenPoint standards. While it is true that there have always been conflicts between Federal, State, and local regulations that must be reconciled by local building officials, it is still unclear how, or if, some of the more subjective and conflicting requirements will be enforced. This is the current state of Green Building standards – a hodgepodge of local, state, and national referenced requirements and voluntary standards that are based on a combination of tightly defined performance criteria sprinkled with a little bit of subjectivity. Sound risky? It is. The Risks All design and construction projects have inherent risks that will be borne by the various participants ‐ errors and omissions in the construction documents, untimely design changes, and delays during construction, just to name a few. In a Green design project these risks are still present but they are now accompanied by numerous new concerns. The risks vary by project and are highly dependent on the requirements set forth by local jurisdiction and on any voluntary requirements that may be made mandatory by the project’s contract provisions. For the purposes of illustration, the matrix below looks at the LEED certification standard. Ten risk factors associated with LEED projects are listed in the matrix as are the parties who will likely bear that risk if a dispute arises. © Navigant Consulting, Inc., 2009 While there have not yet been many publicly disclosed disputes specifically related to Green building issues, disputes that include some Green building element are definitely on the rise. A sampling of them can be found below. They are numbered according to the corresponding item in the matrix above. 2/3 ‐ The design or construction may not meet the desired level of certification: Since Green design may be tied to financial incentives, specific contract requirements, or code and statutory requirements, the failure to meet specific criteria may result in substantial financial damages. In one of the most publicly discussed cases, Shaw Development v. Southern Builders, it was initially thought that the “Captain’s Galley” condominium construction failed to meet the “Silver certification level” set forth in the construction contract (Circuit Court, Somerset County, Maryland, Case No. 19‐C‐07‐011405). In fact, the dispute was over a state tax credit that was lost because the project was delayed and ultimately the case settled so no final court opinion was rendered. Either way, the relationship between the sustainable nature of the design, a prerequisite for the available tax credits, and the lawsuit is clear. 5 ‐ Certification can be challenged and possibly rescinded: In addition to the risk of initially failing to meet a particular certification level, there is also a risk of losing it later on. Made explicit in LEED Version 3, it is possible for anyone to challenge the certification that a building is granted by the USGBC. One of these challenges has already been widely publicized. A Wisconsin high school, Northland Pines, was granted a LEED Gold rating in 2006 but was later found, at the time of the challenge, to not be in compliance with the requirements. While it appears that in this case the original Gold certification will be preserved now that the problems have been corrected, it was not without cost ‐ $40,000 was expended by the school district and $60,000 was expended by the USGBC (6/22/10 VC News‐Review, Eagle River, WI). It is conceivable that a similar challenge could result in a building being stripped of its title and its associated cache and value. 6 ‐ Untested Green materials, assemblies, and systems may fail: New performance requirements for mechanical equipment and new sourcing requirements for materials may lead into uncharted waters. While some products are existing products being re‐launched as Green, others have not yet been tested for durability or performance on actual buildings and may lead to unexpected and potentially negative outcomes. In a case recently filed in New York, Steven Gidumal et al. v. Site 16/17 Dev. LLC, et al., the developer of a LEED Gold‐hopeful condominium building in Battery Park City is being sued for a variety of alleged construction defects including the inadequacy of the “green” heating system and excessive air infiltration at the curtain wall (“Condo Owners Go for Green with Suit,” 5/29/2010, Wall Street Journal). While the case is primarily focused around the misrepresentations of the Seller, the alleged defects are closely tied to the overall performance of the building and of its Green systems. 7 ‐ Operational targets of energy and water use may be higher than expected: Since energy consumption and water use are considered to be core issues in sustainable design, it shouldn’t come as a surprise that Owners and their prospective tenants are often focused on these items. Although the design must meet acceptable performance standards and the as‐built systems must be commissioned to ensure that they are functioning properly, currently no analysis of the building itself is required. As was the case with the Northland Pines case mentioned above, it was notable inefficiencies in the mechanical system that initially led the challengers to inquire about the overall approval. Mitigating the Risks It is the Owner and its Architect/Engineering professionals that typically carry the most risk in a Green project. Nevertheless, it is in the interest of all participating parties to work to clearly allocate the risks before any work is performed. Having proper and coordinated contracts is a critical first step in this. In a Green project, contracts should allocate all special compliance requirements that are associated with the work including any specifics in the design, construction, commissioning, or documentation of the project. For example, if the project is slated to be LEED certified at any level, proper documentation related to disposal of materials must be secured during the course of construction as it may not be possible to obtain it later. This may require the participation of the general contractor, several subcontractors, and a LEED consultant. Since this item is typically associated with the means and methods of construction, the risk and ultimate responsibility for failure would likely fall to the contractor or to its subcontractors. Most issues are not this clear cut and, even in this example, since LEED certification is achieved by simultaneously complying with numerous requirements, the overall failure to comply may be attributable to a combination of contractor, owner, architect, engineer, and consultant errors. It is also very important to ensure that contracts for Green construction projects do not provide any guarantees, particularly guarantees to meet subjective compliance levels (e.g. guarantees of LEED Gold certification). While it is the implicit and in some cases explicit requirement for the designer and the builder to comply with building codes and regionally applicable statues, offering guarantees or promises that the completed design or completed building will be certified at a particular level by an independent organization such as the USGBC creates exposure that will not be covered by a standard insurance policy. This would be the equivalent of an architect guaranteeing an owner planning commission approval for its project – impossible and imprudent. Model contract forms and language are available from a variety of industry groups including the Associated General Contractors of America (Consensus Docs 310 Green Building Addendum) and the American Institute of Architects (Owner Architect agreement B214‐2007). In addition to adopting appropriate contracts, further consideration must also be given to the makeup and leadership of the project team. If at all possible, team members should have experience with Green design and construction and understand the new procedures and processes that are required. At the very least, project participants must be open to the type of collaborative working environment that will be required. This has been consistently cited as the number one reason for success in Green projects (“Project Management and Green Buildings: Lessons from the Rating Systems” Peng Wu and Sui Pheng Low, ASCE, April 2010). Collaboration minimizes risk. Throughout the project it is important to regularly revisit any previously stated or defined sustainable design goals and to check that they are being satisfied. This is true during design and during construction. For many professionals, this type of quality control review is already standard practice to ensure compliance with construction documents, with code, and with owner requirements. If it is not, it should be included as a contract requirement. Finally, tight definition of roles and responsibilities as they relate to the project’s Green requirements must be established at the beginning of the project to avoid any confusion as the project proceeds. For example, a single agent should be assigned to stay current on the federal, state and local environmental laws that impact the project and to keep the other participants informed of them throughout design and construction. For LEED V3 projects, environmental compliance must be maintained continuously from the date of registration until the building receives a certificate of occupancy or it runs the risk losing its certification. How can compliance be maintained if it is not known? It can’t. Sharing this type of knowledge throughout the project minimizes risk for all of the project participants. Dodging Disputes Clearly sustainable design is not just a passing fad. Measures that help to conserve energy, water, and material resources and preserve air quality are creeping into federal, state and local codes and ordinances at an ever increasing rate. The voluntary and mandatory requirements take many forms and are constantly evolving, adding additional complexity to all new design and construction. Although the design professionals and the contractors may share in some of the risk, particularly as new designs and new construction techniques are ironed out, it is ultimately the building Owner who owns the majority of the risk. By anticipating the specific risks associated with Green building and by managing them throughout the project, typical pitfalls can be dodged and many disputes can be avoided altogether. In the future all construction will be Green, in one way or another, so there is no time like the present to understand it and to plan for its risks. By Christopher Nutter, NCARB, AIA, LEED BD +C Mr. Nutter is an Associate Director with Navigant Consulting Inc., is a LEED BD+C Accredited Professional and a NCARB certified architect who regularly provides forensic and dispute consulting services to Design and Construction Industry clients and their counsel. Navigant Consulting, Inc. (NYSE: NCI) is a specialized, international consulting firm combining deep industry expertise and integrated solutions to assist companies and their legal counsel in enhancing stakeholder value, improving operations, and addressing conflict, performance and risk related challenges. Page 8 New Jersey Architect Volume 3 • 2008 THE “GREEN” ARCHITECT: An examination of liability in a Green World By: Richard W. Gaeckle, Esq. What does it mean to be “Going Green”? For design professionals it may mean increased exposure to liability. The growing national trend to promote environmentally friendly construction and achieve sustainable design has been the source for recent legislation enacted in New Jersey and around the country. While efforts in New Jersey began several years ago with regulations requiring new school construction to be designed according to LEED® guidelines, recent legislation now requires that the design and construction of certain public buildings meet an LEED® silver rating (or the equivalent two globe rating of the Green Globes Program). These legislative developments certainly have garnered most of the attention in the arena of green building. But the question remains as to the effect that such developments may have on the standards of care and potential liability for the design professional in a Green World. In New Jersey, architects, engineers, landscape architects, and other design professionals are held to the same standard of care as the average design professional in the same or similar communities. In that regard, design professionals are required to use that degree of judgment, knowledge, skill, and taste which design professionals of ordinary ability possess and exercise, in the same or similar communities, at the time the design professional performs his or her services. However, in light of recent legislation which seemingly sets the standards to which the design itself must comply, will the design professional now be held to the standard of the average “green” architect (or the average “green”engineer or landscape architect)? Moreover, standardized construction contracts, such as the new AIA documents, now emphasize the green movement and even place obligations on architects to educate their clients on environmentally responsible design and to advocate the use of environmentally friendly building materials. Will we eventually see that the average architect (or, again the average engineer or landscape architect) for standard of care purposes is in fact the average “green” architect? This seems likely. The green architect should expect to see an increased emphasis placed on the preparation of project specifications and details, the review of product submittals, and in the performance of contract administration in the Green World. Keeping in mind that green certification is driven by the number of points achieved, the design professionals’ performance should be driven accordingly in the preparation of specifications and details as well as in the review of product data. High performance sustainable construction implicates several new design techniques. Traditional specifications and details may be inadequate for these modern designs (eg. light shelves result in additional building penetrations requiring the need for additional flashing, end dams, etc., which should be detailed on the construction documents). Additionally, while specific products cannot be green-certified, several product factors will assist in achieving the desired green points and certification (eg. waste management, recycled content, and embodied energy totals of the products used will affect the green points awarded). Technical data should be reviewed carefully before being stamped “Approved”to ensure maximization of green points. Finally, while “means and methods” have never been within the scope of the design professionals’ charter, the nature of green building and sustainable design places added significance on the design professionals’ administration function. The project must be viewed as a single building system, rather than as individual systems and components, since the green project will be measured as a whole and not based on one or two building systems (eg. a high performance geothermal system will not realize its full potential if the exterior wall system is substandard). When observing the project “for general conformance with the design” the green architect must remember that the “design” is the green building itself. “AM I COVERED?” INSURANCE CONSIDERATIONS FOR THE DESIGN PROFESSIONAL “GOING GREEN” RICHARD W. GAECKLE, ESQ., LEED AP 1 The emergence of green building and sustainable design has introduced the world of building construction to new territory in the realm of energy savings and design implementation requiring new innovations in project delivery. On the flip-side, green building has also introduced new avenues of liability and exposure to design professionals beyond the traditional risks inherent in performing professional design services. Most business savvy design professionals make the wise decision to invest in professional liability insurance to cover the risks of an unfortunate error or omission. However, in the environment of green building and sustainable design, traditional liability insurance may not be adequate to cover the risks and potential exposure of a failed green project. For the design professional considering “going green” the question which must be asked is: “Am I covered?” The standard professional liability insurance policy covers architects, engineers and other design professionals for wrongful acts arising from the performance of their professional services. Such policies will typically define the term “professional services” to mean services that the insured is legally qualified to perform for others in the insured’s practice as an architect, engineer, land surveyor, landscape architect, construction manager, scientist, or technical consultant – or similar language to that effect. These same policies will exclude coverage for any express warranties or guaranties other than guarantees that the insured’s professional services will conform to the generally accepted standard of care. Some policies may even exclude consequential damages arising from contractual obligations in certain circumstances. The concern then becomes whether a design professional is covered by his or her existing professional liability policy for services involving green building. This concern is predicated on three principal aspects of green building. The first is the fact that green building, while certainly becoming more mainstream as time goes on, often involves services beyond traditional architectural/engineering and construction administration raising the question of whether such services are “professional services” within the policy coverage. Second, green building projects, and especially those adhering to a specific green building rating system, often include project objectives which may be beyond those considered to be within generally accepted standards of care implicating concerns of guarantees and warrantees which would otherwise be excluded from coverage. Finally, in the event that a green project is not delivered per the owner expectations, the damages which flow from such failure may be in the form of lost financing, tax incentives, energy savings and marketability which could be considered consequential in nature arising from the contracts for design and construction. For example, assume that an owner wishes to develop a green building project which, when completed should achieve a LEED Silver rating per the USGBC LEED-NC guidelines.1 Part of the owner’s motivation for a development achieving this certification is the allowance of additional square footage than otherwise permitted by local zoning laws, state and local grant money and low interest financing made available for such projects, tax credits and incentives, reduction of energy costs and acquisition of energy credits, and the overall marketability of the property. In order for the 1 LEED is an acronym for Leadership in Energy and Environmental Design. The LEED Green Building Rating System was established by the United Stated Green Building Council (USGBC) for the purposes of defining and measuring green buildings. While several rating guidelines and pilot programs have been created since its inception, LEED-NC (LEED Green Building Rating System for New Construction & Major Renovations) provides a set of performance standards for the design and construction of commercial, institutional and high rise residential developments. owner to realize these goals, a LEED Silver rating must be achieved and the owner makes this a requirement in all contracts for design and construction. In order to achieve the LEED Silver rating, the project must adhere to specific design and construction guidelines for certification not otherwise required by state construction and energy codes. In addition, there are procedures which must be followed for project registration, design and construction submissions, and ultimate certification not otherwise required in the typical construction project. Further, in order to achieve the desired certification, the LEED guidelines require commissioning and in some cases enhanced commission by a Commissioning Authority (CxA). These requirements may raise an issue of whether the insured architect or engineer is performing professional services within the scope of his or her practice. Moreover, it is certainly within the owner’s benefit to require that the project delivered will achieve the desired LEED rating, otherwise the efforts and expense of achieving the same would be meaningless. This raises a concern of whether agreeing to deliver a specifically rated project, which arguably requires performance beyond the general standard of care, will constitute a guarantee or warrantee triggering an exclusion in coverage. Finally, while the owner may certainly end up with a functioning development, should the project fail to achieve the desired LEED Silver rating the sought after “green” incentives may be in jeopardy or unobtainable. In such instance, will these consequential damages be covered by the traditional professional liability policy? Certainly, there are arguments which can be made on both sides of the coverage issue. Arguably, green building, green consulting or green commissioning services may fall within the broad definition of professional services. As to the concerns of whether agreeing to furnish a specific green result will constitute a guarantee or warrantee, a carefully worded contract can certainly help to alleviate this risk. Finally, as to the damages resulting from a green project, one can certainly argue that such are not consequential, i.e., arising from contract, but rather a proximate result of a deviation from the standard of care, i.e, negligence and thus covered. Again, a carefully worded contract would assist in this regard. Even so, it is untold how the insurance industry will respond to green building claims against design professionals. Coverage may certainly be excluded, limited, or subject to a reservation of rights for the reasons discussed above. Also, a variety of insurance coverage is presently being made available to owners, contractors, and most recently design professional as an endorsement to their existing policies for green building projects. The fact that such green coverage is available may suggest that not having it means that one is not covered for claims arising from green projects. Again, this is an unchartered territory and the design professional must proceed with caution. While time will certainly tell how green building will effect professional liability coverage, for now, the prudent design professional should inquire and ensure that coverage is available for those green services which he or she proposes. It is too late at the end of the project to question whether a claim, which given the nature of green building project may be substantial, will be covered by insurance... or the unfortunate design professional alone. 1. Richard W. Gaeckle is a senior associate in the Construction Law department of the New Brunswick, New Jersey based law firm, Hoagland, Longo, Moran, Dunst & Doukas, LLP. He is a LEED Accredited Professional (LEED AP) and the team leader of the firm’s Green Building practices group. His practice focuses on construction law and the representation of design professionals with an emphasis in green building issues. He may be reached at [email protected]. Jax Kneppers Associates, Inc. Applying new technologies to collect, distribute, and save field inspection data. 3/3/11 2 Jax Kneppers Associates, Inc. 1. Data Collection Basics What kind of data is being collected? What is the purpose for collecting this data? Identifying the location, context, and date related to the information collected 3/3/11 3 Jax Kneppers Associates, Inc. 2. Traditional Methodology Field work : Written notes Dictation Forms Photographs (film camera, digital, or video) Instrumentation and test equioment 3/3/11 4 Jax Kneppers Associates, Inc. 2. Traditional Methodology Office work: Transcribe notes Incorporate field data into spreadsheet Set up data base to capture data Associate research data with field documentation Prepare and distribute reports 3/3/11 5 Jax Kneppers Associates, Inc. 4. Current Technology 3/3/11 Photographs Predetermined schedules and forms Field modifications Voice recognition / Dictation Transfer of information to cloud storage Universal accessibility Historical data capture Sharing information 6 Basic Capabilities 3/3/11 7 Mobile Data Collection Search your inspected properties or add a new property 3/3/11 Select where you are inspecting Enter details about the space & item 8 Review & Send to Cloud 3/3/11 9 Log-in & Manage Your Properties 3/3/11 10 Review & Edit 3/3/11 11 Create and Share Reports 3/3/11 12 Comparison Reports 3/3/11 13 Generate PDF reports 3/3/11 14 All-in-One Solutions Features & Benefits Imfuna Photos - Geolocate - Time stamp User friendly standardized Workflow Notes Integrated data Cloud storage - Secure - Accessible - Transportable Web Client editing Auto Re-inspect using previous reports Auto creation of standard reports Auto creation of comparison reports Collaborative reporting & approvals Jax Kneppers Associates, Inc. JKA uses this soon to be released technology to improve efficiencies by 30% 3/3/11 Data input is standardized Information is consolidated Data is immutable Collaborative data sharing Audit trail 16 Construction Defects: The Appraisal Challenges John A. Kilpatrick, Ph.D. Greenfield Advisors LLC March 3, 2011 www.greenfieldadvisors.com Suite 650 – 2601 4th Avenue Seattle, Washington, USA 98121 +01-206-623-2935 Construction Defects: The Appraisal Challenges 1.What does the appraisal literature tell us about stigma? 2.What is the operative relationship between engineering/architecture work and appraisal? 3.What are the current valuation issues? What’s on the horizon? Construction Defects: The Appraisal Challenges Why Appraisal? Are engineering claims “trumped” by market value arguments? Pre- and post-remediation stigma Construction Defects: The Appraisal Challenges Stigma? For example…. •Perceptions of risk •Incurable aspects of the deterioration •Market perceptions •Increased monitoring/bonding costs •Increased required rate of return (for commercial properties) Construction Defects: The Appraisal Challenges Dangers to unschooled appraisers – Appraisers held liable to homeowners (American Law Review, 1983, 2002) Appraisers required to indeminfy lenders (University of Illinois Law Review, 1984) Construction Defects: The Appraisal Challenges Empirical Evidence -- residences Pre-remediation – homes may be utterly unmarketable Post-remediation – discounts ranging to 30% to 40% or even more Construction Defects: The Appraisal Challenges Empirical Evidence – commercial property Rapid cost/benefit analysis Increase in cap/discount rate Construction Defects: The Appraisal Challenges Is stigma compensable? Alfert, et. al, (2005, Florida Bar Journal) Mayer v. Sto Construction Defects: The Appraisal Challenges Current/Future Trends Green Buildings Impact of the credit market melt-down Dr. John Kilpatrick is an economist and the Managing Partner of Greenfield Advisors, specializing in economic market and valuation analysis, principally in real estate matters, headquartered in Seattle. Dr. Kilpatrick holds a Ph.D. in Finance from the University of South Carolina, where he also taught Real Estate and Corporate Finance in the Moore School of Business. He served as the founding Administrator of the South Carolina Supercomputer Network and as the Secretary/Treasurer of the Academic Coalition for Intelligent Manufacturing Systems, based in Washington, DC. Dr. Kilpatrick is the author of four books and numerous journal articles. He is a frequent speaker before national groups, including the U.S. Senate Subcommittee on Science, Technology, and Space and the National Trust for Historic Preservation. His work in real estate finance has been the subject of recent articles in the New York Times, the Boston Globe, and the Wall Street Journal. He is the author of the forthcoming chapter on Brownfield Valuation in the Lexis-Nexis Matthew Bender’s Brownfield Law and Practice. In 2001, the National Park Service honored Dr. Kilpatrick by producing a monograph summarizing his work in the valuation of historic neighborhoods. His recent clients include the U.S. General Services Administration, the Hearst Family, the Japan Real Estate Institute, and numerous private investors, corporations, university endowments, trusts, and law firms. Among his other honors, Dr. Kilpatrick is a member of the Faculty of Valuation of the Royal Institution of Chartered Surveyors (UK) and is featured in the 2006 edition of Who’s Who in America. SUITE 650, 2601 FOURTH AVENUE SEATTLE, WASHINGTON 98121 PHONE 206-623-2935 FAX 206-623-2985 SUITE 100, 1870 THE EXCHANGE ATLANTA, GEORGIA 30339 PHONE 770-951-7028 HTTP://WWW.GREENFIELDADVISORS.COM Construction Defects — Appraisal Challenges A Greenfield Advisors White Paper John A. Kilpatrick, Ph.D., MRICS February 1, 2011 Over the years, the appraisal profession has recognized the complexity of valuing property with construction defects. Sanders (1996), in a frequently-cited Appraisal Journal article, categorized construction defects along side geotechnical problems as being so complex that market participants rarely understand or appreciate the full ramifications. As such, in our experience, many market participants simply refuse to buy homes with ether existing or remediated construction defects problems. In both the pre– or postremediation state, this naturally leads to a diminution in property value, often labeled as “stigma” — a term which Greenfield introduced into the appraisal lexicon nearly 20 years ago. Over the years, Greenfield has been frequently asked to take a leading role in applying valuation methods to these complex problems. We have constantly been at the forefront in the cuttingedge issues, from synthetic stucco (EIFS) in the 1990’s to Chinese Drywall today. Greenfield Advisors -- Construction Defects February 1, 2011 Page 2 The purpose of this paper is threefold: 1. To reflect on the appraisal methodology developed over the past two decades, with particular emphasis on why post-remediation property still suffers from stigma. 2. To illustrate the connectivity between enginering work and market value determinations, focusing on the questions which appraisers need to have answered before the valuation process can begin. 3. To look at current issues, and take a look forward at some issues on the horizon. Why do you need an appraiser? It seems simple enough — the remediation costs should be the basis for damages, and that’s an architecture or structural engineering thing, right? However, that logic fails on two accounts. First, there is a common defense argument — which is substantiated in case law in many jurisdictions — that the recovery cannot exceed any reduction in market value suffered by the property. Hence, if they are able to craft a convincing argument that the property has gone up (or at least stayed the same) in value despite the construction defects, then the injured property owner may not be able to recover the cost of remediation. Of course, this flies directly in the face of real estate realities. Damaged property is generally worth less than comparable, undamaged property, which is a reality that courts generally understand. However, it is not enough to simply provide a checklist of remediation costs and expect the jury to connect the dots between market value and physical injury. The compelling testimony usually needs to be offered by an appraiser who is experienced in these matters. depreciation may be curable or incurable, and the latter points to one of the explanations of post remediation stigma (see the discussion which follows). Sales Comparison — This approach is one of the more difficult ones, particularly for appraisers inexperienced in construction defects problems. It generally requires some sort of matched-pairs or hedonic-type analysis of the impact of a construction defect, and then this impact is included as an adjustment in a sales adjustment grid. However, this approach, when properly executed, can provide highly compelling and easily understood evidence. Income analysis — While generally applicable for income producing property, this set of methodologies gives the greatest insight into the thinking of commercial property investors. Second, of course, there is the issue of stigma, which can be either pre-remediation or postremediation. Stigma is real, and it results from a variety of market forces, such as: Perceptions of risk Incurable aspects of the deterioration Market perceptions Increased monitoring/bonding costs Increased required rate of return commercial properties) (for The linkage between physical damages and market value diminution can be explained in three different ways, consistent with generally accepted approaches to value: The appraisal profession continues to study these problems, and offers up important guidance to attorneys and their clients on the complex valuation issues. In addition to the extensive work by Greenfield, other scholars in the field have contributed important works to the body-ofknowledge. For example, two papers on construction defects were “cover-featured” on the Appraisal Journal (both authored by Greenfield). In 2002, a paper on construction defects won the best valuation paper award at the annual meetings of the American Real Estate Society. The Cost Approach — The remediation costs of physical damages constitute what appraisers call physical or functional depreciation, depending on the nature of the damage itself. Also, the Ironically, most appraisers are unschooled in this complex field, and that lack of training has frequently come back to haunt them. For example, articles in the American Law Review GREENFIELD ADVISORS LLC SUITE 650, 2601 FOURTH AVENUE SEATTLE, WASHINGTON 98121 PHONE 206-623-2935 FAX 206-623-2985 HTTP://WWW.GREENFIELDADVISORS.COM GREENFIELD ADVISORS LLC SUITE 100, 1870 THE EXCHANGE ATLANTA, GEORGIA 30330 PHONE 770-951-7028 Greenfield Advisors -- Construction Defects February 1,2010 Page 3 (1983, 2002) discuss appraisers being held liable for failure to take into account the valuation impacts of construction defects. Malloy (1984), writing in the University of Illinois Law Review, documents appraisers being required to indemnify lenders who lost money in construction defects situations. Post-Remediation Stigma Why doesn’t stigma simply ameliorate when the construction defects are remediated? Two principal forces are at work. First, the same factors which led to pre-remediation stigma are still very real. Survey research consistently shows that buyers, when offered the chance to purchase either a property which has never been damaged, or one which was damaged but remediated, will prefer the former over the latter. To induce buyers to purchase a damaged-butremediated property, significant discounts must be incurred. For construction defects linked to health hazards (e.g. — Chinese Drywall, mold, EIFS, water intrusion) these discounts range to 30% - 40% or even higher. Chinese Drywall cases, there is significant market perception that even nails and hurricane straps are compromised by the off-gassing. Since these things cannot be easily removed and replaced (or efficiently substituted), the market demands a discount to compensate for future increases in maintenance, the reduced economic life of the structure, and the simple hassle of dealing with the problem. Does this market perception affect commercial or income-producing properties? In short, probably worse. Commercial properties are subject to significantly more due diligence, and property owners are less likely to compromise. Second, many construction defects cannot be fully remediated in an economically efficient fashion. For example, water intrusion or mold may affect structural members which cannot be replaced, but have a foreshortened structural or economic life as a result of the damage. This incurable physical depreciation constitutes a very real deduction to the appraised value. In the current McGuire Building case, which is ongoing (coincidentally, in Seattle), something as simple as failure to properly treat the ends of supporting cables will probably lead to the demolition of a 26-story, 9-year-old apartment building. Why? Property owners — and potential subsequent buyers — will do the simple math and recognize that the remaining economic life of the building is simply not worth the expense of increased maintenance, increased risk, and eventual demolition at a date much sooner than typically expected. In McGuire, commercial investors had the time and money to invest in significant due-diligence, which took into account the cost-benefits and the long term value of the building. What does the appraiser need to know? Is stigma compensable? One of the most important questions is While we are Greenfield are not attorneys, and do not pretend to practice law, it is clear — and certainly has been our experience — that Courts understand this issue. Alfert, et. al. (2005), writing in the Florida Bar Journal, document the increasing rational for that. In Meyer v. Sto, a widely-cited synthetic stucco case, Greenfield testified to a 30% post-remediation stigma loss to the property owner, with which the jury concurred. Will they get it all? As trivial as it sounds, this really is at the heart of the valuation problem. In the case of Chinese Drywall, it is apparent that the remediation protocols set out by the Court are rigorous, but may still require ongoing testing and bonding costs to be born by the homeowner or subsequent buyer. In water intrusion cases, for example, the longterm increase in moisture levels cause a significant foreshortening of the life of wood and metal supports, such as beams, sills, plates, and studs. In GREENFIELD ADVISORS LLC SUITE 650, 2601 FOURTH AVENUE SEATTLE, WASHINGTON 98121 PHONE 206-623-2935 FAX 206-623-2985 HTTP://WWW.GREENFIELDADVISORS.COM We are aware that the current Chinese Drywall protocols do not call for post-remediation stigma compensation. Despite our extensive work on this issue, we did not testify in the “bell-weather” trial which gave rise to this decision. It is clear, GREENFIELD ADVISORS LLC SUITE 100, 1870 THE EXCHANGE ATLANTA, GEORGIA 30330 PHONE 770-951-7028 Greenfield Advisors -- Construction Defects October 25,2010 Page 4 however, that while post-remediation stigma was testified to, the Court did not find that testimony to be well supported. Lesson learned? This indicates the very real need to craft a well-supported set of documentation supporting property value losses when readying for trial. Future trends? While it is always challenging to forecast the future, some trends already seem to be emerging in the valuation field which have significant implications for construction defects situations. Green Buildings — At Greenfield, we’ve long been strong proponents of Green construction in all of its forms. Nonetheless, we recognize that many unschooled players are entering the field with much empirical experimentation to be accomplished at the risk of investors. Two problems seem to be emerging in this arena. First, What if they got it wrong? Second, what implications are there for the non-Green properties. The first question seems patently obvious — investors who purchase interests in a supposedly Green building, at a higher cost than a non-Green building, may be disappointed if expected outcomes do not materialize. What if “certifications” are revoked at some point in the future due to unforeseen circumstances? What implications does all of this have for the value of the building? The second questions stems from a recent University study into the “benefits” of Green buildings. A large, Chicago firm had their new offices designed to be “Green” including top-ofthe-line air filters and other environmentally important features. When University researchers approached the firm to write a case study on the gains from the new offices, they were rebuffed. The firm had been advised by their attorneys that the degree of “improvement” was so great that they were potentially Loss in value caused by exposed to litigation by structural or geotechnical clients and employees for problems must take into ac“exposure” to the inferior, count the cost to repair the old spaces. damages and the residual loss in value after the rehave pairs— Does this implications for “non” Green buildings? In other — Sanders, writing in the words, does construction Appraisal Journal, 1996 of a non-Green space, when “Green” is an option, constitute a construction “defect”? Only the Courts will let us know. The market melt-down — While rising tides may lift all boats, sinking tides don’t act as fairly. In today’s tightened credit market, post-remediation buildings will have a more difficult time getting both debt and equity financing. Money will be Greenfield Advisors was founded in Seattle in 1976 to provide high-level analysis and consulting services on complex real estate problems, with a focus on economic, market, and valuation studies. Over the years, Greenfield has advised attorneys, investors, government agencies, trusts, and university endowments on a variety of real estate problems. Today, Greenfield Advisors is recognized as one of the world’s leading appraisal firms for valuation of impaired properties. Greenfield Advisors can be reached at 206-623-2935 or via the internet, www.greenfieldadvisors.com and [email protected]. Dr. John A. Kilpatrick is the President of Greenfield Advisors and a Visiting Scholar in Real Estate at the Zichlin School of Business, Baruch College, in New York City. His Ph.D. is in Real Estate Finance, and he is one of the nation’s leading expert witnesses on real estate matters in courts throughout the U.S. Dr. Kilpatrick is the author of four books and a contributing author to three others, including the recently published Brownfields, 3rd ed., from the American Bar Association. He is a Fellow of the American Real Estate Society, a Member of the Faculty of Valuation of the British Royal Institution of Chartered Surveyors, a National Appraisal Standards Instructor for the Appraisal Foundation, the Membership Chairman of the Real Estate Counseling Group of America, and serves on the Editorial Board of the Journal of Sustainable Real Estate. GREENFIELD ADVISORS LLC SUITE 650, 2601 FOURTH AVENUE SEATTLE, WASHINGTON 98121 PHONE 206-623-2935 FAX 206-623-2985 HTTP://WWW.GREENFIELDADVISORS.COM GREENFIELD ADVISORS LLC SUITE 100, 1870 THE EXCHANGE ATLANTA, GEORGIA 30330 PHONE 770-951-7028 IMPACT OF FORECLOSURES, BANKRUPTCIES AND RECEIVERSHIPS ON CONSTRUCTION DEFECT CLAIMS George Calkins Dave Steinman Dave Wald 2 Use of Receiverships to Take Control of and Sell Distressed Residential Developments • Use of receiverships is an emerging trend. • Historically, receiverships have been used solely to manage and maintain property pending foreclosure. • Previously, foreclosure was exclusive remedy for lenders. 3 Use of Receiverships to Take Control of and Sell Distressed Residential Developments (cont'd) • Receivership process can offer more flexibility and advantages to lender than foreclosure. • The receiver is appointed by the court to take possession of the property and assume responsibility for management and sale the property. 4 Use of Receiverships to Take Control of and Sell Distressed Residential Developments (cont’d) • The receiver will market the property, usually through a bidding process. • The proceeds of the sale of the property to the lender, less costs. • Title insurance is available subject to certain limitations. 5 Use of Receiverships to Take Control of and Sell Distressed Residential Developments (cont’d) • Benefits to receiverships include: – – Lender does not have to wait until the foreclosure process to remove the owner as manager; Receiver steps into the shoes and will usually have authority from the courts to settle or litigate claims arising from mechanics lien stop notices and construction bonds. 6 Use of Receiverships to Take Control of and Sell Distressed Residential Developments (cont’d) – – Receiver has the authority to complete the project or shut it down. Sale by receiver will net greater proceeds than a foreclosure sale. This is principal reason for emergence of receivership sales in recent downturn. 7 Use of Receiverships to Take Control of and Sell Distressed Residential Developments (cont’d) • Receivership process may vary depending on whether there is an assignment of risk clause in the deed of trust. • If there is no assignment of risk clause and the property value is less than debt (CCP Section 564(b)(2)) enables the lender to appoint a receiver to take possession pending a judicial foreclosure. 8 Receivership Operations • Statutory authority for appointment of receiver is CCP Section 564(b), which allows receiverships in cases “where necessary to preserve the property or rights of any party.” • Note: there are no “current” case law on receivership sale. 9 Receivership Operations (cont’d) • Possible conflict between foreclosure law and receiverships laws. • Property that is appropriate for receivership when the lender has a “probable” interest that is in danger of loss, removal or material injury. • Receiverships are appropriate where specific performance of an assignment of rent in a trust deed is present. 10 Receiverships Can Be Expensive • Courts employ receiverships only when a less drastic alternative remedy such as route of possession injunction attachment, etc., are inadequate. • Receivership may be used in combination with other remedies such as injunctions, etc. 11 Receiverships Can Be Expensive (cont’d) • A receivership is costly because the receiver may be a manager of a business who must pay attorneys, post a bond, hire professionals, accountants and the receiver may have to pay someone else to manage property. • The receiver uses the receivership estate income to pay receivership expenses. 12 Receiverships Can Be Expensive (cont’d) • However, if such funds are insufficient, the court may allow a receiver to borrow money by issuing a certificate (promissory note) to the lender with a lien on the estate property as security and grant priority status to that lien. (See, Title Insurance & Trust Company v. California Development Company, 171 Cal. 227, 231 (1950)). 13 Receiverships Can Be Expensive (cont’d) • A receivership is uneconomical unless the amount of money involved is enough to justify the expense, or the potential harm to the property exceeds the receivership cost. • Appointment of a receiver is the court’s discretion. 14 Receiverships Can Be Expensive (cont’d) • This discretion is very broad and where reasonable minds might differ. • An appointment of a receiver will not be reversed. 15 Who Pays Receivership Expenses • Receivership fees and expenses have historically been paid by the assets of the receivership estate. • The person or entity who requests the receivership or for whose benefit the receivership is created, is generally not liable for the expenses incurred during a receivership . (Ephraim v. Pacific Bank, 129 Cal. 589 (1900)). 16 Who Pays Receivership Expenses (cont’d) • However, in receiverships employed to sell distressed real property as an alternative to foreclosure, the lender is generally the party requesting appointment of the receiver and may pay for the cost of the receiver. • Lenders requesting the appointment of a receiver should not exercise any control over the receiver. 17 Receiver Liability • Court may hold receiver liable for expenses of the receivership when the estate funds are insufficient or the cost associated with unapproved or improper activities. • A receiver must be alert to the fact that a court may object to certain expenditures at the final accounting stage leaving the receiver holding the bag. 18 Receiver Liability (cont’d) • Court approval of receivership actions comes at the end of the underlying action when the court must approve or disapprove each of the receivership expenses. • An understanding of a receivers’ duty is critical to recognizing potential receiver liability for expenses and deficits. • Receiver holds money as a custodian for party who court determines is entitled to it. 19 Receiver Obligations • Create a workable finance and management plan upfront. • Properly inform the court if the estate/business cannot be run without a loss. • Obtain court authority to borrow money or to pay interest and financing charges. • Hire counsel, particularly where legal is crucial in dealing with mortgages, foreclosure process and potential liability of third parties to the receivership estate. 20 Receiver Obligations (cont'd) • Pay taxes and expenses. • Must adhere to all mandatory reporting duties under statute and local court rules. • No undisclosed or secret arrangements. • Maintain accurate record keeping and accounting reports. • No contracts and obligations to extend beyond the probable receivership term without court approval. 21 Sale of Residential Real Estate Developments Through Receivership • Benefits of using a receiver to sell residential real estate development: – Sale time line is controlled by court, no foreclosure statutes. – Allows property and project information to be compiled and evaluated. – Allows management and settlement of mechanic’s lien claims. 22 Sale of Residential Real Estate Developments Through Receivership (cont'd) – Allows receiver to identify, protect and maintain property and other collateral. – Prevents theft and damage to property. – Complete and maintain erosion control and drainage improvement. – Lender does not take title to the property. 23 Sale of Residential Real Estate Developments Through Receivership (cont’d) – May insulate the lender from construction defect claims (Note: increased risk if receiver completes construction). – May generate higher sales price than foreclosure (But note: cost of receivership and need to settle mechanic’s liens and cost ). 24 Sale of Residential Real Estate Developments Through Receivership (cont’d) – Sale of the property is pursuant to court order which includes provisions protecting receiver and lender. – Court order will authorize sale of property (including individual residences) “AS-IS”, subject to a general release. 25 Insurance Obtained by Receiver • Builder’s risk/course of construction WRAP insurance obtaining New Builder’s Risk/WRAP Policy, by the time construction start date scheduled and when the contractor is selected. 26 Insurance Obtained by Receiver (cont'd) • Obtain tenure tail coverage, etc. • Need for lender to be covered under project insurance. 27 Receivers Can Sale Real Estate Free and Clear of Mechanic’s Liens • Lenders can seek to avoid construction defect liability by utilizing receiverships to sale subdivisions and avoid taking title to the property. • Lenders can in many instances utilize receivers appointed by the court to complete projects and sale the units on a retail basis, pursuant to the borrower’s original plan. 28 Receivers Can Sale Real Estate Free and Clear of Mechanic’s Liens (cont’d) • Mechanic’s liens are nearly always subordinate to the lender’s deed of trust, the foreclosure of which eliminates the mechanic’s lien (but note “pre-start” claims). • Selling real property in receiverships and paying off the first deed of trust can be accomplished through receiverships in many instances. 29 Receivers Can Sale Real Estate Free and Clear of Mechanic’s Liens (cont’d) • Issues can arise when the lender’s title insurance policy shows an exception at the time the loan was originated for construction contracts that commenced before the first deed of trust was recorded. In those circumstances, foreclosure would not eliminate the mechanic’s liens. 30 Lender Construction Defect Liability In Foreclosure • California Law generally protects lenders from construction defect liability if they act strictly as a lender (foreclosure and sale). • However that protection may be lost if a lender completes improvements to the property and/or sells residences to homebuyers. 31 Lender Construction Defect Liability In Foreclosure (cont’d) • If a lender places newly constructed residences on the market it may be viewed as the “developer” under California law (SB 800) and may therefore have strict liability for construction defects. • One of the principal reasons for emergence of sales through receivership is avoidance of lender construction defect liability (note risks associated with lender control over receivership process). 32 Impact Of Insurance Maintained By Original Developer • Original developer insurance coverage will likely not provide coverage for lender or the purchaser of the property for construction defect claims. • Even if the lender is a named insured, the policy may no longer be effective if the homes are not offered for sale by the original developer (insured). 33 Impact Of Insurance Maintained By Original Developer (cont'd) • Even if original developer coverage is effective the lender may not be authorized to pay the SIR or deductible. • This issue is complicated in multi-family developments where the developer has already sold some residences. 34 Home Buyer Warranties In Receivership Sale • The sale order issued by the court will provide that the receiver and lender are not a developer, that buyers purchase AS IS with release; no warranty is provided (However there is a question as to the enforceability of AS IS and release clauses in the sale of residences). • Uncertainty whether a later court would determine that the lender was a “developer” and therefore obligated to provide the warranties required under SB 800 (1 year fit and finish and through functionality standards up to 10 years on other components). 35 Home Buyer Warranties In Receivership Sale (cont'd) • Receiver does not have that practical ability to provide a direct homebuyer warranty and customer service. • There are 3rd parties that sell warranty and extended coverage that will provide customer service to home buyers. • However, most 3rd party limited warranties provide very limited coverage, particularly in the context of major construction problems. 36 Home Buyer Warranties In Receivership Sale (cont'd) • If the receiver completes construction of the project should the contractor and/or subcontractors provide warranties/customer service if the sale is “as-is” (inconsistency)? • Does the receiver have to comply with Section 1102.6 of the California Civil Code which requires sellers of residences to provide certain a disclosure which includes numerous representations and warranties that may create additional liability for the receiver and lender. 37 Home Buyer Warranties In Receivership Sale (cont'd) • Note: If the project is subject to a public report issued by the California Department of Real Estate 1102.6 does not apply,. however if the residences being sold are more than 3 years old the DRE requires that buyers be provided with a disclosure very similar to the disclosure in Section 1102.6. 38 Will Sale Through a Receivership Cut Off Construction Defect Liability? • Sale of property is through order of a court and receiver is agent of the court. • Plaintiff counsel may argue against validity of receivership order. • Some courts have refused to appoint receiverships taking the position that receivership is not an alternative to complying with California foreclosure law. However this does not appear to be the prevailing view at the trial court level. 39 Will Sale Through a Receivership Cut Off Construction Defect Liability? (cont'd) • Foreclosure law was created primarily to protect debtors and many of those protections are missing in a receivership sale. • In the future homebuyer counsel may attack the validity of the receiver appointment order in an effort to assert construction defect claims against the lender. 40 Will Sale Through a Receivership Cut Off Construction Defect Liability? (cont'd) • Homeowner counsel may also allege that the lender was essentially the “developer” since it requested appointment of receiver; approved budget and agreements for sale of property; approved sale price of property; paid receiver expenses and received the proceeds of sale. • If the receiver completes construction of the project and the lender pays for construction costs homebuyer counsel will argue that such actions makes the lender a “developer”. 41 Will Sale Through a Receivership Cut Off Construction Defect Liability? (cont'd) • Courts may chose to look at the lender as a “developer” since California courts are not inclined to leave home buyers with no remedy for construction defects (another reason for receiver/lender to acquire sufficient insurance). • Impact of foreclosure on construction defect claims. 42 Will Sale Through a Receivership Cut Off Construction Defect Liability? (cont'd) • Impact of receivership sale on construction defect claims. • Impact of developer Bankruptcy on construction defect claims (difference between Chapter 7 and 11). 43 Impact of Bankruptcy on Construction Defect Claims • Chapter 7-No discharge for developer entity only individuals. • Chapter 11-Developer entity can be discharged but impact on CD claims is uncertain – – – – Claims existing at time of filing Claims discovered after discharge Sophistication of Plaintiff Was plaintiff noticed and part of Chapter 11 proceeding 44 Impact of Bankruptcy on Construction Defect Claims (cont'd) • Impact of Bankruptcy on Insurance coverage. – Is carrier released if developer is discharged – What if SIR or deductible is not paid. 45 Worst Case Scenario: How to Prepare for a CD Trial • Moderator: Richard Glucksman, Esq., Chapman, Glucksman, Dean Roeb & Barger, APC • Hon. Victoria Gerrard Chaney, California Court of Appeal, Second District, Division One, Los Angeles. • Bruce Mayfield, Esq., Fenton, Grant, Mayfield, Kaneda & Litt, LLP • Robert Carlson, Esq., Koeller, Nebeker, Carlson & Haluck, LLP Experts • Selection, Retention & Preparation Opening Statements • Purpose and Important Tips Closing Arguments • Purpose and Important Tips Jury Instructions • Importance and How to Use Jury Instructions • Judicial Counsel’s proposed new and revised Civil Jury Instructions; Including new series on Construction Law “ETHICS 101 FOR INSURANCE CARRIER SELECTED DEFENSE COUNSEL” HB Litigation Conference Construction Litigation Leaders’ Forum Marina del Rey, CA March 4, 2011 James Fischer Sage R. Knauft, Esq. Professor of Law Southwestern Law School Los Angeles, CA Walsworth, Franklin, Bevins & McCall, LLP Orange, CA Karen Rice John Thompson Construction Defect Claims Manager One Beacon Insurance Co. Glendale, CA Assistant Vice President HDI-Gerling America Insurance Co. Glendale, CA Overview Conflicts of Interest Who is the Client? Defining the Role of Defense Counsel Working with the Carrier Reacting to Divergence of Interest Between Carrier and Insured Excess Exposure Issues Hypotheticals and Discussion 2 Conflicts of Interest Conflicts of Interest Model Rule 1.7 • Prohibits concurrent conflicts if: Representation of one client directly adverse to another client Representation “materially limited” by responsibilities to other client, former client, third person or personal interest of the attorney • When can potential conflicts be waived? 4 Conflicts of Interest Model Rule 1.8(f) • Restricts payment of fees by someone other than the client • Duty to maintain client’s confidential information even if payment comes from carrier • Consent by virtue of insurance agreement – carrier authorized to select defense counsel 5 Conflicts of Interest Conflict Checks • List of other current or former clients also named in the litigation • Duties to former clients (Model Rule 1.9) Waivers • When are they required? • Informed written consent to representation 6 Who is the Client? Who is the Client? Tripartite Relationship – in CA, both the insured and the carrier are the client Some other states are 1 client jurisdiction – only the insured is the client Duties to Insured and Carrier • Ordinarily they are aligned • What if they conflict? 8 Who is the Client? Duty to Maintain Insured’s Confidential Information (Model Rule 1.6) Duty to Communicate with Client (Model Rule 1.4) Coverage disputes CA Civil Code Section 2860 – Cumis counsel 9 Defining the Role of Defense Counsel Defining the Role of Defense Counsel What should insurance retained counsel tell the insured at the outset of the representation? Model Rules 1.2 and 1.4 – Scope of Representation and Communication Coverage advice Advise client re: right to independent counsel? 11 Working with the Carrier Working with the Carrier Model Rule 1.4 – Duty to Communicate Carrier status reports – privileged? Taking direction from Carrier • Litigation Strategy • Settlement Authority What if insured disagrees with Carrier’s instructions to counsel? 13 Recognizing and Reacting to Potential Divergence of Interests Recognizing and Reacting to Potential Divergence of Interests Model Rule 1.6 – Duty to Maintain Confidential Information When counsel learns information from the insured, under what circumstances may it be shared with the carrier? Under what circumstances should it be shared with the carrier? 15 Recognizing and Reacting to Potential Divergence of Interests Dilemma – What if Counsel learns confidential information from the insured that is adverse to the carrier? Handout – State Bar of California Standing Committee on Professional Responsibility and Ethics: Formal Opinion No. 1995-139 Counsel learns information that demonstrates insured has no coverage or committed fraud to get coverage 16 Recognizing and Reacting to Potential Divergence of Interests Potential Issues • Defending covered and uncovered claims (ex: negligence and fraud) • Insured’s deductible and consent to resolve claims • Communication with coverage counsel for either the insured or the carrier • Punitive damages allegations • Affirmative relief sought by insured 17 Excess Exposure Issues Excess Exposure Issues Duty to investigate other potential coverage? Counsel’s liability to excess carriers 19 Hypo #1: The Recalcitrant Insured Hypo #1 – The Recalcitrant Insured Insured general contractor installed skylight flashings and is sued by owner for water damage due to leaking Counsel is retained by carrier to defend insured with no reservation of rights Counsel determines that installation was probably negligent and so advises carrier, insured is adamant that it did nothing wrong 21 Hypo #1 – The Recalcitrant Insured May counsel concede liability and try damages issue only? What if carrier instructs counsel to settle claim within policy limits? What if insured has a sizable deductible and does not consent? 22 Hypo #2: The Collusive Insured Hypo #2 – The Collusive Insured Owner sues insured general contractor and painting subcontractor when paint delaminates and causes property damage Insured GC denies liability to retained counsel and blames painting sub Later it is learned that sub’s carrier is insolvent and GC is the owner’s son GC called as adverse witness by owner at trial and admits liability 24 Hypo #2 – The Collusive Insured May counsel impeach the insured with his prior inconsistent statements? If not, what should counsel do? 25 Hypo #3: The Conniving Insured Hypo #3 – The Conniving Insured Insured general contractor is sued for property damage allegedly caused by its negligence at a job site, owner claims no pre-existing damage to the property Carrier appoints counsel and investigates claim, authorizes settlement up to $250k Counsel offers $195k and informs insured his deposition is postponed while owner considers offer 27 Hypo #3 – The Conniving Insured Insured informs counsel that owner made claim to subcontractor six months ago for same damages but he doesn’t want counsel to inform carrier of this because owner is an important customer What should counsel do? 28 Hypo #4: The At-Risk Insured Hypo #4 – The At-Risk Insured Same facts as Hypo #1 (leaking skylight and insured adamantly disputing liability) Carrier unconditionally accepts defense and appoints counsel Policy limits are $1m – owner makes a timelimited policy limits demand 30 Hypo #4 – The At-Risk Insured Counsel believes expected value of the claim is $750k based on following: Probabilities Expected Value 5% possibility of defense verdict 10% possibility of verdict of $100k 30% possibility of verdict of $300k 20% possibility of verdict of $500k 25% possibility of verdict of $1m 10% possibility of verdict of $3m $0 $10k $90k $100k $250k $300k 31 Hypo #4 – The At-Risk Insured What information should counsel communicate to carrier? Should counsel inform insured of communication with carrier? Should counsel obtain insured’s informed consent to the communication with carrier? What should counsel do if insured instructs counsel not to communicate with carrier? 32 Questions THANK YOU! James Fischer Sage R. Knauft, Esq. Professor of Law Southwestern Law School Los Angeles, CA Walsworth, Franklin, Bevins & McCall Orange, CA Karen Rice John Thompson Construction Defect Claims Manager One Beacon Insurance Co. Glendale, CA Assistant Vice President HDI-Gerling America Insurance Co. Glendale, CA Editor's Note: State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule. THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT FORMAL OPINION NO. 1995-139 ISSUE: To whom does an attorney owe duties when he or she acts as insurance defense counsel and is hired by an insurer to represent an insured in the substantive defense of the insured's case? Specifically, to whom are the duties owed: (a) where counsel discovers information that demonstrates the insured has or may have no coverage; or (b) where the attorney learns the insured has perpetrated a fraud for the purpose of obtaining coverage? DIGEST: The attorney owes his or her loyalty to the insured, even where there are duties which are ordinarily owed by the attorney to the insurer. This means that in situations where matters adverse to the insurer are discovered, even where the insured has failed to be candid with the insurer or the attorney, the attorney may not reveal these matters to insurer, and may be required to withdraw. AUTHORITIES INTERPRETED: Rules 3-310, 3-500 and 3-700 of the California Rules of Professional Conduct. Business and Professions Code section 6068, subdivision (e) and 6068, subdivision (m). Civil Code section 2860. DISCUSSION Representation of an insured by an attorney hired by the insurer is a common litigation event. In most of these cases, no overt conflict of interest exists between insurer and insured. In State Bar Formal Opinion No. 1987-91, this committee quoted from American Mutual Liability Insurance Co. v. Superior Court (1974) 38 Cal.App.3d 579, 592 [113 Cal.Rptr. 561, 571]: In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. Conceptually, each member of the trio . . . has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct, as well. Case law predating rule 3-310 of the California Rules of Professional Conduct1 assumes, as the above quote indicates, that the insured may ordinarily be represented without a separate, specific written disclosure to insurer and insured -- or a written consent from insurer and insured -- other than the insurance contract itself. Rule 3-310(B)(3), however, requires written disclosure to all clients where, inter alia, "[t]he member has or had a legal, business, financial, professional, or personal relationship with another person or entity the member knows or reasonably should know would be affected substantially by resolution of the matter." Moreover rule 3-310(C)(1) requires that the informed written consent of each client be obtained where there is ". . . representation of more than one client in a matter in which the interests of the clients potentially conflict." Rule 3-310 may seem at odds with some case law dicta. Clearly, insurer is denominated a "client" by case law -- albeit in dicta as discussed infra -- and is substantially affected by the insured's matter. But while insurer is indeed a client in some respects - the ongoing relationship with the member, the payment of fees, etc. -- it is a client whose rights under case law are clearly The State Bar of California Formal Opinion No. 1995-139 © 1995 The State Bar of California. All rights reserved. Reprinted with permission. No part of this work may be reproduced, stored in a retrieval system, or transmitted in any medium without prior written permission of The State Bar of California. limited. (See infra.) Where a member complies with the mandates of this opinion to protect the interests of the insured, his or her additional compliance with rule 3-310 is not necessary for two reasons: First, given the unusual, perhaps unique, interrelationship of insurer, insured and counsel, the contract of insurance itself, drafted by the insurer for its own benefit, provides more than adequate disclosure under rule 3-310(B)(3) to the insurer.2 Second, the "potential conflict" trigger of rule 3-310(C)(1) is never pulled because, as seen infra, when such a conflict manifests itself, case law resolves any potential conflict in that matter by mandating a resolution in favor of the represented insured and against the non-represented, non-party insurer. Put another way, case law instructs that ultimately, there can be no conflict between insurer and insured since, as discussed infra, the insured will always prevail where an issue is created between them. (See L.A. Cty. Bar Formal Opn. No. 464.) Thus, the notice to and waiver by the insured is superfluous.3 Where a known conflict of interest does exist, the insured may be entitled to independent counsel. (San Diego Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358 [208 Cal.Rptr. 494].) Civil Code section 2860 dictates guidelines for when an insurer owes a duty to an insured to provide independent counsel. When there are separate, independent counsel for both insurer and insured, they "shall cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured." (Civ. Code, § 2860 (f).) But the insured's independent counsel, freed from serving two clients, owes his or her fiduciary duties entirely to the insured and should maintain decision-making control over the litigation on the insured's behalf. (See L.A. Cty. Bar Formal Opn. No. 464.) The issue is more complex in evaluating the responsibilities of a lawyer where a conflict between insurer and insured arises, and there is not independent counsel for both insurer and insured. This can occur, inter alia, where a coverage problem is known to exist,4 or where counsel becomes aware of problems during the course of the representation. Although insurance defense counsel's representation of divergent interests can be attempted "provided there is full disclosure and consent," this dual role cannot diminish counsel's responsibility to the insured. (Betts v. Allstate Insurance Co. (1984) 154 Cal.App.3d 688, 715-716 [201 Cal.Rptr. 528].) The attorney is obligated at all times to protect the insured/client and may not act in any way which prevents "devoting his entire energies to his client's interest." (Ibid. quoting from Anderson v. Eaton (1931) 211 Cal. 113, 116 and Klemm v. Superior Court (1977) 75 Cal.App.3d 893, 901-902 [142 Cal.Rptr. 509].)5 It is the obligation of any attorney to keep clients "reasonably informed about significant developments" relating to the case. (Rule 3-500; Bus. & Prof. Code, § 6068, subd. (m).) For the insurance defense counsel, this communication must include a duty to disclose "all facts and circumstances . . . necessary to enable each of his clients to make free and intelligent decisions regarding the subject matter of the representation." (Lysick v. Walcom (1968) 258 Cal.App.2d 136, 151 [65 Cal.Rptr. 406] [criticizing a lawyer who communicated a third party demand in excess of policy limits only to insurer, and not to insured].) It is also the duty of any attorney to maintain inviolate the confidences of a client and to preserve at every peril to himself or herself the client's secrets. (Bus. & Prof. Code, § 6068, subd. (e).) Thus, if an insured reveals matters to the attorney in confidence, and these matters are not intended to be heard by the insurer, the attorney may not reveal them to the insurer, regardless of the relationship between them. (American Mutual Liability Insurance Co. v. Superior Court, supra, 38 Cal.App.3d at p. 592.) The same analysis applies to any secrets of the insured/client learned by the attorney during the course of the representation.6 This means that, even where the attorney has a close ongoing relationship with an insurer, and from a business perspective considers insurer an important "client," in any particular representation it is the obligation to protect the insured's confidences and secrets which is paramount. Thus, if, for example, the attorney gains information during the course of representation which the attorney believes demonstrates that the insured is actually not entitled to coverage, the attorney nevertheless owes a duty to the insured/client not to reveal this information to the insurer. This is true even where the attorney comes to believe that the insured has fraudulently created a situation in which coverage appears to exist where it actually does not. For example, an insured might claim to be driving a vehicle when the actual driving was done by a friend or family member who was not insured. Even in these relatively extreme situations, the requirements of Business and Professions Code section 6068, subdivision (e) prevent disclosure to anyone, including the insurer, of material harmful to the insured. (Price v. Giles (1987) 196 Cal.App.3d 1469, 1473 [242 Cal.Rptr. 559]; Pennix v. Winton (1943) 61 Cal.App.2d 761 [143 P.2d 940].) In coverage question situations where there has not been a Civil Code section 2860 disclosure and consent to the representation, or where subsequent to disclosure and consent, new information has come to light which affects the question of coverage, the attorney may be required to withdraw. Such withdrawal is governed by rule 3-700. In any matter which is The State Bar of California Formal Opinion No. 1995-139 © 1995 The State Bar of California. All rights reserved. Reprinted with permission. No part of this work may be reproduced, stored in a retrieval system, or transmitted in any medium without prior written permission of The State Bar of California. pending in litigation, permission must be obtained by the tribunal before withdrawal may be accomplished. (Rule 3-700(A).) Depending on the circumstances and the reasons for withdrawal, termination of employment may be permissive or mandatory. The line between mandatory and permissive withdrawal is not always a clear one. Where insurance defense counsel is confronted by new information which changes the apparent coverage situation of insurer in a way not contemplated in an initial disclosure and consent between insurer and insured, continued representation may place counsel in the position of representing conflicting interests. This may best be understood if counsel evaluates the information he or she cannot reveal to insurer from the point of view of that insurer -- that is, is the information something which counsel devoted to insurer's interests would ordinarily be obligated to reveal, but for the dual loyalties involved? Withdrawal in such situations is best viewed as being mandatory, as continued representation would place counsel in the position of representing conflicting interests in violation of rule 3-310(C)(2). Where counsel learns that the intentional wrongful acts of insured have damaged insurer, such as where insurer has accepted coverage based on insured's fraudulent assertions, or where the insured has concealed material facts from the insurer, not only does a conflict of interest exist, but the member has learned that the insured/client has acted in a manner injurious to the insurer. When these circumstances are viewed together, withdrawal is required. (Rules 3-700(B)(1) & 3-700(B)(2).) Moreover, in such circumstances, failure to withdraw would involve the lawyer, who is billing the insurer, in the perpetuation of insured's fraudulent efforts to have insurer pay defense costs. Where such withdrawal is necessary, however, it may be done only with express court approval (rule 3-700(A)(1)), and only where it is accomplished in a manner which does not prejudice the rights of the insured, while protecting confidential communications. (Rule 3-700(A)(2).) It is imperative that, although withdrawal may be required, assiduous effort be made to accomplish it in such a way as does not disclose the very information which caused the attorney to seek withdrawal in the first place. Moreover, given the ongoing relationship between the attorney and the insurer, special care must be taken by the attorney during the withdrawal process to protect the reasons for withdrawal. This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar. 1 All rule references are to the Rules of Professional Conduct of the State Bar of California. 2 We speak here of those situations where the lawyer's role is as counsel providing substantive defense to the insured, and thus not "coverage counsel" responsible for addressing coverage issues. This limited scope of representation should be clearly delineated and understood between attorney and insurer to avoid requiring further compliance with rule 3-310(B). 3 Counsel has an obligation, however, to be circumspect in communications with the insurer, which continues to "hold the purse strings" under the insurance contract, so that matters are not disclosed to insurer which could be adverse to insured. 4 San Diego Federal Credit Union v. Cumis Insurance Society,Inc., supra, 162 Cal.App.3d at p. 358, implies that the existence of insurance coverage issues gives rise to the insured's right to independent counsel. Other courts disagreed that this is always the case (see, e.g., McGee v. Superior Court (1985) 176 Cal.App.3d 1265 [221 Cal.Rptr. 421]), and Civil Code section 2860 (b), passed subsequently, also expresses a narrower view. After stating that the insurer's outright denial of coverage presents no conflict, the statute continues: "[H]owever, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist". (Emphasis added.) 5 The conclusions expressed in this opinion apply generally to an insurer's in-house defense counsel retained to defend an insured. However, additional considerations not addressed in this opinion may also be applicable. 6 The term "secrets" is defined in Business and Professions Code section 6068, subdivision (e), and interpreted, inter alia, in California State Bar Formal Opinion Number 1980-52 and Los Angeles County Bar Formal Opinion Number 456. The existence of such secrets necessarily limits the communication that insurer/client would ordinarily be entitled to, as described above. This is best viewed by understanding that at the point at which a conflict develops, the insurer is no longer a client in the usual sense, because the "overlapping and common" interest described in American Mutual Liability Insurance Co., supra, 38 Cal.App.3d at pages 591-592, no longer exists. Thus, when courts in insurance conflict cases have referred to duties owed to "the client," they necessarily mean the insured/client. Indeed, it is the insured who is to be "protect[ed] . . . in every possible The State Bar of California Formal Opinion No. 1995-139 © 1995 The State Bar of California. All rights reserved. Reprinted with permission. No part of this work may be reproduced, stored in a retrieval system, or transmitted in any medium without prior written permission of The State Bar of California. way," (Betts v. Allstate Ins. Co., supra, 154 Cal.App.3d at p. 715), and who is entitled to the same efforts from counsel that would be owed had insured personally hired the attorney. (Lysick v. Walcom, supra, 258 Cal.App.2d at p. 136.) Indeed, it is worth noting that both American Mutual Liability Insurance Co. and Betts v. Allstate Insurance Co., as well as other cases which refer to both the insured and insurer as clients do so for the sole purpose of emphasizing the protections that must be afforded the insured/client. Thus, the reference, in dicta, to the insurer as a client, is a use of the term "client" which is materially different from the traditional use of that term. . The State Bar of California Formal Opinion No. 1995-139 © 1995 The State Bar of California. All rights reserved. Reprinted with permission. No part of this work may be reproduced, stored in a retrieval system, or transmitted in any medium without prior written permission of The State Bar of California.
