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
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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
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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.
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Additional Insured Endorsement
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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!
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Evolution of Additional Insured Endorsement
(to present)
• Liability arising from the sole negligence of the
named insured
• Vicarious liability of the named insured
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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?
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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
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The Scope of Additional Insured Coverage
• majority of courts equate “arising out of” with
“causally connected with.”
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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.”
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•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.”
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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)
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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”)
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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.
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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
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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 susan.bryan@chartisinsurance.com.
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
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
ARIZONA
CALIFORNIA
COLORADO
HAWAII
NEVADA
TEXAS
WASHINGTON
BRIEF OVERVIEW OF COMMON
ELEMENTS OF STATUTES
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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
greenbuilding@hoaglandlongo.com.
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







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3/3/11
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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
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Review & Edit
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Comparison Reports
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14
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Features & Benefits
Imfuna
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Jax Kneppers Associates, Inc.
JKA uses this soon to be
released technology to improve
efficiencies by 30%
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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
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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
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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 info@greenfieldadvisors.com.
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.