(Introduction) Getting a Handle on Large Construction Defect Claims


Having studied, worked with and litigated coverage issues under the commercial general liability (CGL) policy for twenty years, large construction defect claims, particularly those involving commercial and multi-unit residential buildings, pose some of the most complex claims encountered by those of us practicing insurance coverage law. The intent of this multi-part series is to break down the issues in an understandable format and provide an education ready resource for CGL insurers, general contractors, subcontractors, suppliers, tradesmen, in-house counsel, claims professionals and anyone else involved in Minnesota construction defect litigation.

This series will consist of at least twelve parts:

Part I provides an overview of the major coverage issues involved in large construction defect litigation. Before analyzing the insuring clause requirements, policy exclusions, allocation and primary/excess issues, the subcontractor’s CGL needs to get a handle on its three potential and distinct exposures: (1) liability related to its named insured subcontractor’s defective or faulty work; (2) liability related to its named insured subcontractor’s indemnity obligation to the general contractor under the subcontract agreement; and (3) liability to the general contractor as an additional insured under the policy.

Parts II-V focus on the second exposure: liability resulting from a subcontractor’s contractual indemnity obligation to the general contractor under the subcontract agreement.  Part II focuses on the anti-indemnity statute and its impact, the subcontractor’s obligation to obtain and maintain insurance to cover its indemnity obligation and the Minnesota Supreme Court’s decision in Holmes v. Watson-Forsberg Co., 488 N.W.2d 473, 475 (Minn. 1992), which recognized that indemnity agreements in building and construction contracts are enforceable if the subcontractor agrees to insure that risk.

Part III addresses the “strict construction” test used to interpret indemnity clauses and Minnesota case law determining whether the language of the indemnity clause at issue obligated the subcontractor to indemnify the general contractor for the latter’s own negligence.

Part IV deals with the specific requirements of the “insured contract” coverage of the subcontractor’s CGL policy and a host of subsidiary issues such as whether: (1) the subcontract agreement qualified as a “building and construction” contract pursuant to Minnesota statute 337.01; (2) the indemnity agreement is enforceable pursuant to Minnesota statutes 337.05, subd. 5 (because coupled with an obligation to insure the indemnity obligation); (3) the indemnity agreement, if enforced, would violate public policy; (4) there was a causal nexus between the subcontractor’s work and the injury or damage at issue; (5) the indemnity agreement extends to completed operations losses if the injury or damage occurred after the subcontractor completed its work; and (6) a finding of fault is required before the indemnity obligation is triggered.

Part V involves the obligation of a subcontractor and its CGL insurer with regard to the defense costs (attorney’s fees) the general contractor incurs in the defense of a construction defect lawsuit and whether such costs may be covered under the “insured contract” provisions of the subcontractor’s policy or the supplementary payments coverage.

Part VI-IX (which have not yet been posted) will address the second exposure:  liability to the general contractor as an additional insured under the subcontractor’s CGL policy. Subcontract agreements frequently require the subcontractor to add the general contractor to the subcontractor’s CGL policy as an additional insured.  There is considerable confusion surrounding the purpose of additional insured endorsement (“AIE”) coverage and whether the general contractor qualifies for coverage, particularly in light of recent AIE forms which substantially reduce the circumstances under which a general contractor will qualify for coverage.  Parts VI-IX will address these issues in detail.

The final posts in the series will address the third exposure:  whether and to what extent the subcontractor’s CGL policy affords coverage to the subcontractor (and general contractor) for the “property damage” at issue.  These posts will address the insuring clause requirements (e.g., “occurrence,” “property damage,” “because of” property damage, etc.) and policy exclusions (primarily the “business risk” exclusions) or attached endorsement. Claims involving progressive or continuing damage which potentially involve successively liable insurers pose additional issues (e.g., allocation, known loss/loss in progress, expected damage, etc), which will also be addressed in these posts.

I invite any and all comments you may have regarding the posts in this series as well as suggested content. As noted, the intent of this series is to provide an education ready resource for CGL insurers, general contractors, subcontractors, suppliers, tradesmen, in-house counsel, claims professionals and anyone else involved in Minnesota construction defect litigation.  I am attempting to integrate over twenty years of coverage related opinions and research into this series.  At the conclusion of the posts, I will be assembling all of the materials into seminar materials for GCL insurers, industry groups and others interested in CD litigation.  To the extent I have missed an issue or case or you question the analysis, please feel free to add a comment to the blog, send me an email to greg@gjohnsonlegal.com or contact me at (612) 718-6908.  Thank you.

Mr. Johnson has represented CGL insurers, general contractors, subcontractors and suppliers in large commercial and multi-unit residential construction defect claims for twenty years. He successfully handled the seminal construction defect case in Minnesota, Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006), and has authored several articles on insurance coverage for construction defect claims including Contractual Risk Transfer, Hold Harmless and Indemnity Agreements and Additional Insured Coverages (Wells Fargo March 15, 2009) and Liability Allocation Issues: “Other Insurance” & the Wooddale Home Builder Construction Decision (Minnesota Defense Lawyers Association Insurance Law Institute, Jan. 25, 2007).

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

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One Response to (Introduction) Getting a Handle on Large Construction Defect Claims

  1. Found your website via Twitter feed, loving the articles, thankyou.

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