One of the seminal no “loss” cases is Level 3 Communications, Inc. v. Federal Ins. Co., 272 F.3d 908 (7th Cir. 2001), penned by the esteemed jurist Judge Richard Posner. This past month, Judge Posner, writing for the Seventh Circuit, issued another no “loss” decision, finding in favor of the insurer. Ryerson Inc. v. Federal Ins. Co., --- F.3d ----, 2012 WL 1216282 (7th Cir. Apr. 12, 2012) (Illinois law).

We thought it was interesting to note three recent cases in three different jurisdictions, each of which concluded—on summary adjudication—that there is no coverage under a CGL policy for construction defect claims.

Lenex Steel Co. v. Rockhill Ins. Co. (Ill. Cir. Ct. 2012) 

The insured was obligated to pay a $1.2 million settlement of an underlying bodily injury claim. The insured and one of its primary insurers argued that "additional insured" coverage applied under the client's umbrella policy, and that the client was therefore obligated to contribute to the settlement. Adopting BatesCarey LLP's reasoning, an Illinois state court held that the client umbrella insurer had no obligation to contribute to the settlement because all primary coverage, including the insured's own primary coverage, was not exhausted. The court not only granted summary judgment, but at BatesCarey LLP's request it also sanctioned the insured and its counsel for pursuing a frivolous lawsuit by awarding the client its reasonable attorneys' fees and costs.

In many states, courts have found that the faulty workmanship of a construction contractor that damages the contractor’s own work is not an accident and, therefore, not an “occurrence.” General Sec. Indem. Co. of Arizona v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo.Ct.App. 2009); Auto-Owners Ins. Co. v. Home Pride Companies, Inc., 268 Neb. 528, 684 N.W.2d 571 (Neb. 2004) (faulty workmanship, standing alone, is not covered under a standard CGL policy); Oak Crest Const. Co. v. Austin Mut. Ins. Co., 329 Or. 620, 998 P.2d 1254 (Or. 2000) (no occurrence where insured sought cost of correcting subcontractor's deficient work); Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888 (Pa. 2006).

Alfred Siegel v. Certain Underwriters at Lloyds (C.D. Cal. 2011)

A California federal court agreed with BatesCarey LLP's arguments that a declaratory judgment action filed by IndyMac Bancorp's bankruptcy trustee was "non-core" to the bankruptcy. Therefore the court found that judicial efficiency supported withdrawing the reference to the bankruptcy court. After the reference was withdrawn, the trustee voluntarily dismissed the action.

Kevin Fox v. Will County State’s Atty. (N.D. Ill. 2011)

BatesCarey LLP's client issued an excess policy to an insured county, which was sued, along with two sheriff deputies, for civil rights violations by a man falsely accused of murder. The primary insurer paid for the county's and deputies' defense, which resulted in an uncovered multi-million dollar punitive damage award. The insured's assignee argued that the excess insurer had failed in bad faith to accept a settlement offer and was required to pay the punitive damage award. BatesCarey LLP argued that the excess insurer did not control the defense and thus could not have breached any duty to settle. An Illinois federal court adopted BatesCarey LLP's reasoning on summary judgment and held that the excess insurer was not obligated to pay the punitive damage award.

Pacific Emp. Ins. Co. v. GLOBAL Reinsurance Corp. (E.D. Pa. 2011)

BatesCarey LLP obtained judgment for its reinsurer client by convincing a federal court that the "follow the fortunes" doctrine did not require the reinsurer to pay expenses in addition to the limits of liability on a facultative certificate. By moving for judgment on the pleadings, BatesCarey LLP foreclosed the cedent from taking any discovery and obtained victory immediately after the cedent filed its responsive pleading.

Construction companies generally do not expect to be targets of tort liability for the injuries of their employees.  They are protected by workers compensation laws against such claims.  It follows then that general liability insurance policies do not expect to insure the tort injuries of the insured’s employees, because the insured should have no tort liability for its employees’ injuries.  However, a quirk of the various contracts that are entered into between construction companies does allow for an employer to find itself paying for the tort injuries of its employees, in which case the employer’s liability insurer may foot the bill.  This strange quirk where an employee’s damages are ultimately paid by his employer and the employer’s insurer are known as “action over claims.”  This article explains what an “action over” claim is, and what steps insurers are taking to avoid insuring such claims. 

Arrowood Surplus Liurancenes Ins. Co. v. Westport (D. Conn. 2010) (January 2010), aff’d (2d Cir. 2010)

The cedent sought reinsurance for $6.7 million for claims that arose from occurences taking place after the termination of the reinsurance contract. The cedent argued that the "follow the fortunes" doctrine bound the reinsurer to pay any claims under a reinsurance policy, regardless of the reinsurance contract limitations. The district and appellate courts, however, fully agreed with BatesCarey LLP's argument that the client reinsurer had only agreed to cover risks insured by the cedent during the time limits of the reinsurance contract.

Reinsurance disputes arise when an insurer treats claims as multiple occurrences to force the insured to pay multiple retentions, but that same insurer treats the same claims as a single aggregated occurrence for purposes of reinsurance. In the past, reinsurers have found success when challenging aggregation by citing language in the reinsurance contract. However, in a recent New York case, the reinsurer was successful in challenging a cedent’s aggregation even without specific aggregation language in the reinsurance contract. The reinsurer was not required to follow its cedent’s fortunes.