Minnesota Supreme Court Considers Damage and Defense Cost Allocation in
Construction Defect Claim
October 2006
In Wooddale
Builders, Inc. v. Maryland Casualty (Minn. Oct. 5, 2006), a general contractor
of single-family homes sued to determine the obligation its commercial general
liability (CGL) insurers to defend and indemnify it against multiple claims
of defective construction resulting from water intrusion to homes constructed
by Wooddale from 1991 to 1999.
by Kevin
Merriman
Goldberg
Segalla LLP
Wooddale began to receive claims from homeowners in late 2000. The homeowners
claimed that Wooddale's defective construction resulted in water intrusion and
mold growth due to leaky windows, inadequate flashing, and water penetration
through building paper and vents through which wind-driven water entered the
home. The condition existed since construction of the homes.
The parties agreed that damage to the homes was not caused by a single, identifiable
event, but by repeated water intrusion occurring over an extended period of
time, with continual, progressive, and indivisible damage. The claims fell into
three categories.
In some cases, Wooddale received notice of the claim and completed remediation
before the expiration of the last of its applicable insurance policies in November
2002. In other cases, Wooddale received notice of the claim, but had not completed
remediation before the expiration of the last of its applicable policies in
November 2002. In at least one case, Wooddale did not receive notice of the
claim, nor did it complete remediation, before its last applicable policy expired
in November 2002.
Between November 1990 and November 2002, five insurers provided CGL coverage
to Wooddale. Wooddale did not have coverage for water intrusion damage after
2002. The parties agreed that the appropriate method for apportionment of liability
among the insurers was pro rata by time on the risk, and that the starting point
for the liability allocation period for each claim was the closing date on the
purchase of the home. The parties disagreed, however, about the appropriate
end date for the liability allocation period, as well as the appropriate method
by which to allocate defense costs.
Allocation of Damages
The Minnesota Supreme Court was asked to resolve the proper allocation of
damages, both among individual insurers and among the insurers and Wooddale.
In the court's view, this question raised several issues:
- Each insurer's time on the risk
- The total period over which liability is to be allocated
- The total damages to be allocated
The court found the relationship between these issues, and therefore the
allocation of damages among the individual insurers and Wooddale, could be best
understood as an equation: A/B X C = D. In the court's equation, A is each insurer's
time on the risk, B is the total period over which liability is allocated, C
is the total damages to be allocated, and D is the damages allocated to each
individual insurer.
Factor A—Each Insurer's Time on the Risk
First, the court considered each insurer's time on the risk, which the court
concluded required consideration of two additional issues: (1) which insurers
are obligated to indemnify Wooddale with respect to a particular claim and therefore
are on the risk; and (2) whether the insurers on the risk are deemed to be on
the risk for all or only part of each triggered policy.
With respect to issue (1), the court held that only those insurers that provided
coverage to Wooddale between the closing date of a particular home and Wooddale's
receipt of notice of claim with respect to that property are on the risk for
that claim. The court reasoned that, although damage-in-fact is the trigger
of coverage, the terms of the policies prevent an insurer from becoming liable
for damages during the insurer's policy period if the property damage was "expected"
before the policy period began. As a result, once Wooddale received notice of
claim with respect to a particular home, any subsequent damage with respect
to that claim was "expected," and all subsequent insurance policies excluded
coverage for damage with respect to that claim. The court found additional support
for its conclusion in the "known loss" and "loss-in-progress" doctrines.
Concerning issue (2), the court considered whether the insurers on the risk
are deemed to be on the risk for all or only part of each triggered policy.
To answer this question, the court first determined whether an insurer remains
on the risk through the end of a triggered policy period, or if the insurer
is on the risk only through the actual date of notice of claim. The court concluded
that each of the policies provided coverage for "property damage" that "occurs
during the policy period," which the court concluded meant that the insurer
agreed to indemnify the insured for damages that occur during the entire policy
period, including the part of the policy period that runs after notice of the
claim.
The court held, therefore, that the insurer that provided coverage to Wooddale
on the date of notice of a particular claim remains on the risk through the
end of the policy period in which Wooddale received notice of that claim. The
court also considered whether the beginning date for the time on the risk of
the first triggered policy is (1) the actual date of closing on the home, or
(2) the beginning date of the policy period in which the closing occurred. For
similar reasons, the court held that the period of time on the risk for the
first policy triggered by damage to a home begins on the beginning date of the
policy period in which the closing on the home occurred.
The court held, therefore, that "the insurers on the risk with respect to
a claim are those insurers that insured Wooddale between the closing date of
the home involved and the date on which Wooddale received notice of the claim
with respect to that home, and that all insurers on the risk are deemed to be
on the risk for the entire period of each triggered policy."
Factor B—Total Period over Which Liability Is Allocated
Next, the court considered the definition of the total period over which
liability is to be allocated. Here, the parties disagreed as to the proper end
date. The court held that "when an insured has continuous insurance coverage
through notice of claim, the total period over which liability is allocated
is the sum total of each individual insurer's period of time on the risk, i.e.,
the sum total of the time periods identified under factor A." But this, the
court held, becomes more complicated when the insured lacks insurance coverage
for a part of the period over which the damages occur.
The record did not indicate the reasons for Wooddale's lack of coverage after
November 2002, but the possibility that coverage was available to Wooddale after
November 2002 presented the question whether an insured should receive the benefit
of coverage for periods during which it may have deliberately purchased no coverage
and paid no premiums. For allocation purposes, the question is whether the insured
should be responsible for all or part of any time periods during which the insured
lacked insurance coverage. The court concluded that the insured should bear
the burden for periods of deliberate self-insurance, but not when the coverage
was otherwise unavailable.
Thus, the court held that under the pro-rata-by-time-on-the-risk method:
- if no insurance coverage was available for uninsured periods, the liability
allocation period ends with the end of the policy year in which the insured
received notice of claim or with the end of the last period of insurance
coverage, whichever is earlier. If other insurance coverage was available
for uninsured periods, then the liability allocation period includes the
time period that the insured was voluntarily self-insured and ends with
the end of the policy year in which the insured received notice of claim
or with the date of notice of claim, whichever is later.
Factor C—Total Damages To Be Allocated
The court held that the total damages to be allocated with respect to each
affected home are the total damages Wooddale is legally obligated to pay with
respect to that home, regardless of whether the damages occurred during the
total period over which liability is allocated. The court reasoned that under
each policy at issue, the insurer had agreed to pay "those sums that the insured
becomes legally obligated to pay as damages because of 'bodily injury' or 'property
damage' to which this insurance applies." This language, the court found, indicated
that the insurers had agreed to pay their allocated share of all amounts Wooddale
is legally obligated to pay as damages.
Factor D—Damages Allocated To Each Individual Insurer
Finally, the court held that the result of applying factors A, B, and C is
factor D, which represents the amount of damage allocated to each individual
insurer. The court then applied the equation to each of the three scenarios
presented to determine each insurer's allocation of damages. In doing so, the
court acknowledged that its resolution of the case leaves questions unanswered,
and that the holdings should be limited to the facts presented.
Allocation of Defense Costs
In an issue of first impression, the court also considered the apportionment
of defense costs among insurers when the pro-rata-by-time-on-the-risk method
is applied to an allocation of damages. The court held that when the pro-rata-by-time-on-the-risk
method applies to the allocation of damages, and insurers participate in providing
a defense to a common insured (but recovery of defense costs is not barred by
the Iowa National rule*), defense
costs are apportioned equally among insurers whose policies are triggered. The
court rejected a time-on-the-risk allocation for defense costs.
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