§21.3 INSURANCE
When dealing with construction-related claims or litigation, Washington practitioners face a dilemma: is this a "construction dispute that happens to involve insurance" or an "insurance dispute that happens to involve construction"? See generally Thomas V. Harris, Washington Insurance Law (3d ed. 2010 & Supp. 2017). The modern trend is toward the latter. It is increasingly true that insurance is the driving force behind the resolution of construction disputes.
This section will cover four main topics. First, it will address the distinction between insurance contracts and indemnity agreements. Second, it will discuss the differences between "first-party" (i.e., property)
[Page 21-8]
and "third-party" (i.e., liability) insurance. Third, it will explore some of the more common issues that arise in construction insurance matters. Finally, it catalogues some real world examples and practice tips to guide lawyers dealing with these issues.
(1) The distinction between insurance contracts and indemnity agreements
Construction projects are inherently risky. Not only is there a risk that a project will not be completed "on time and under budget," there is also risk of damage occurring during or after the course of construction or from work-site injuries. Consistent with the age-old maxim that "he or she who is at fault should pay," risk on construction projects is principally transferred via two contractual mechanisms—indemnity agreements and insurance policies.
Examples of damage occurring during the course of construction include a jobsite fire, a portion of one subcontractor's work collapsing and damaging another subcontractor's work, or a failure to weather-protect the roughed-in structure that allows wind or rain to cause damage. A typical example of damage occurring after the course of construction is a misapplication of exterior siding and flashing that allows water to infiltrate the completed building envelope and cause damage to the building's framing and sheathing.
Indemnity agreements are express risk-transfer clauses in which the contracting parties themselves agree to accept or shift risk. See §21.2(1), above. Insurance policies, on the other hand, are contracts of indemnity underwritten and issued by third parties (i.e., insurers or sureties). Upon the happening of certain "covered" events, the insurer or surety agrees to pay benefits.
Indemnity agreements and insurance coverage operate independently from one another on construction projects. Stated another way, although a contractor can insure its obligations under an indemnity agreement, the two risk-transfer devices generally function separately—parties are typically bound by the indemnity provisions contained in a contract whether or not the insurance provisions are operative, and, conversely, the insurance provisions are usually binding whether or not the indemnity provisions are operative. See, e.g., George Sollitt Corp. v. Howard Chapman Plumbing & Heating, Inc., 67 Wn. App. 468, 472, 836 P.2d 851 (1992) (rejecting general contractor's attempt to apply insurance principles in interpreting a contractual indemnity provision). Just because insurance often covers a contracting party's obligations to indemnify another party, that does not mean indemnity and insurance
[Page 21-9]
provisions are somehow tied together or are mutually dependent. Most construction contracts contain separate provisions that detail each party's indemnity obligations and duties to procure insurance.
| Practice Tip: | Determining Whether a Construction Issue Involves Insurance: The first issue Washington construction practitioners often face is whether a particular construction dispute "involves insurance." Claims involving insurance arise in myriad ways. They can be stated as tort claims, contract claims, or statutory claims. The fundamental question is: "Does the particular issue I am dealing with involve 'damage' to any portion of the project, its individual components, or its surrounding environs; or does it involve 'injury' to any of its participants?" Worksite injuries typically are obvious. Whether a claim involves "property damage" is a more esoteric inquiry that generates the vast majority of construction-related insurance disputes. |
(2) "Third-party" versus "first-party" coverage
Insurance policies can insure property owned or controlled by the policyholder (i.e., "first-party" insurance), or they can insure the policyholder or other protected parties from legal liability to third parties for harm to the third party's person or property (i.e., "third-party" insurance). Examples of "first-party" insurance include property/ fire insurance and builder's risk coverage. Examples of third-party coverage are commercial general liability (CGL), directors & officers (D&O), and employment practices liability (EPLI) insurance.
[Page 21-10]
|
Practice
Tip: |
Policyholders and their counsel should be careful about using the labels "first party" and "third party". Because certain administrative codes and statutes bestow benefits based on what type of insurance is involved, an insurer or a court might deem the reference to "third-party insurance" as an admission that the policyholder is not a "first-party" policyholder. For example, the Insurance Fair Conduct Act (IFCA), Chapter 48.30 RCW refers to "first party" claimants. See RCW 48.30.015 ("Any first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys' fees and litigation costs, as set forth in subsection (3) of this section."). Despite this language, several Washington district court judges have held that IFCA applies to liability insurance. See, e.g., Navigators Specialty Ins. Co. v. Christensen Inc., 140 F. Supp.3d 1097, 1102 (WD. Wash. 2015) ("This Court concludes that the IFCA, as written and as intended, confers a right of action to first-party claimants whether under a first-party or third-party insurance contract."). The better strategy is to simply refer to an insured as "the insured" or "the policyholder." To assert IFCA, prelitigation notice must be provided pursuant to RCW 48.30.015. |
(3) First-party coverages
Issues related to first-party coverages on construction projects are discussed below.
(a) Property insurance
The typical property insurance policy covers "physical loss" or "risk of physical loss" to the insured's own property or property in which the insured has an "insurable interest." See, e.g., Harris, Washington Insurance Law §48.05. The policy is usually structured as "all-risk"—a list of exclusions and conditions follow an all-encompassing promise to pay, such as "we insure against any physical loss that is not excluded." See Findlay v. United Pac. Ins., 129 Wn.2d 368, 378, 917 P.2d 116 (1996) ("In an all-risk homeowners insurance policy, any peril that is not specifically excluded in the policy is an insured peril."). "All-risk policies generally allocate risk to the insurer, while specific peril policies place more risk on the insured." Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501, 514, 276 P.3d 300 (2012).
[Page 21-11]
(b) Builder's risk insurance
Builder's risk insurance is a common first-party coverage that insures against physical damage to a construction project while construction is underway. See 1 Steven Plitt et al., Couch on Insurance §1:53 (3d ed. 1997 & Supp. 2018) ("A builder's risk policy ordinarily indemnifies a builder or contractor against the loss of, or damage to, a building he or she is currently in the process of constructing."). The policy typically covers both the portion of the project that has already been constructed and the equipment, supplies, and materials that will be incorporated into the project (assuming they are on site—see below).
Most builder's risk policies are written on an "all-risk" basis— they cover any risk of loss or damage that isn't excluded or otherwise limited. Coverage "typically applies not only to property at the construction site, but also to property at off-site storage locations and in transit. Builders risk insurance can be written on either a completed value or a reporting form basis; in either case, the estimated completed value of the project is used as the limit of insurance." Int'l Risk Mgmt. Inst., Glossary, Builders Risk Policy, https://www.irmi.com/online/insurance-glossary/terms/b/builders-risk-policy.aspx (last visited May 25, 2018); see also Harris, Washington Insurance Law §48.05.
A builder's risk policy typically insures the owner, general contractor, and subcontractors "as their interests may appear." That phrase is consistent with Washington insurance law, which requires an insured to have an "insurable interest" in the subject of any insurance contract—that is, an economic interest. See RCW 48.18.040(2) ('"Insurable interest' as used in this section means any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage."); Woolstein v. Yorkshire Ins. Co., 97 Wn. App. 201, 985 P.2d 400 (1999).
| Practice Tip: | Probably the most important drafting issue regarding builder's risk insurance is ensuring that the parties' contract clearly states which party is responsible for buying the insurance. See, e.g., Frank Coluccio Constr. Co. v. King County, 136 Wn. App. 751, 761-62, 150 P.3d 1197 (2007). Construction contracts typically allocate responsibility to either the project owner or the general contractor. |
(c) The "efficient proximate cause" rule
When excluded and insured perils combine to cause a loss (e.g., excluded "weather conditions" combine with insured "water...
