Litigation Management

SPECIFICALLY SPEAKING | CONSTRUCTION

L e g i s l a t i n g the Meaning of “Occurrence”

Why Can’t We Just Fight the Common Enemy?

By Jack Levy, Roy Leeds and Micaela Isler

Recent court decisions holding that construction defects do not constitute an “occurrence” under commercial general liability (CGL) policies have been met with legislative response in Colorado, South Carolina and Hawaii. Colorado’s legislation was passed into law, Hawaii’s legislation was deferred in its state Senate and the South Carolina bill passed the full Senate.

Industry groups for insurers and contractors have been opposing each other on these efforts, but because these two industries have channeled their energy into drawing lines in these debates, they have perhaps missed the opportunity to work together to defeat a common enemy — non-meritorious construction defect claims. Aside from the potential legal problems associated with legislating the meaning of insurance policy terms, it can’t be ignored that free market principles have and will continue to drive the insurance industry.

If construction defects are legislated to be covered under insurance policies, this will encourage more lawsuits. When it becomes impracticable to write this risk in Colorado, South Carolina or wherever this kind of legislation may spread, contractors may be left alone to face a voraciously hungry plaintiffs’ bar.

The industry as a whole also needs to be more aggressive in defending some construction defect claims, even when settling them may be more cost effective. In the long run, settling those cases can lead to the filing of more cases as claimants see the company as an easy target.

In support of the bill in Hawaii, the Hawaiian Building Industry
Association essentially argued that contractors have entered into
contracts assuming that coverage exists for property damage re-
sulting from construction defects, this risk is reflected in premiums
and carriers had been providing coverage for such claims up until
the Group Builders’ decision. The Hawaii Insurers Council opposed
the bill as unnecessary and likely leading to additional market dis-
ruption and lawsuits. The Council was concerned that retroactive
effect may not sur-
vive legal challenge
and that the legisla-
tion intrudes on the
prerogative of the
judiciary by direct-
ing courts how to in-
terpret policies. They
also believe the free
market responds to the needs of construction professionals — in
fact, several insurers have already responded to the Group Builders
decision by restoring coverage through endorsements
While the Council’s concerns are legitimate, what is missing from
the debate is any reference to the root cause of the problem —
rampant, non-meritorious lawsuits against contractors by an or-
ganized, coverage savvy, plaintiff’s bar. Insurance
and contractor industry groups should use this
opportunity to join forces, redefine the issues,
and defeat this common foe.

The Texas Governor recently presented a package of civil justice reforms designed to discourage non-meritorious lawsuits and increase the efficiency of litigation. This includes imposing risk of cost on those who insist on pursuing frivolous lawsuits, providing for the prompt and fair resolution of lawsuits up to $100,000, so that litigants have a chance to have their cases resolved without excessive time and expense. The reforms also allow a pre-trial appeal of trial court rulings on issues of law that will determine the outcome of the lawsuit, rather than having the parties incur the expense and time of a full trial before the dispositive issues of law are resolved on appellate review.

For the good of the order, both insurance companies and contractors should unite and focus on treating the cause that has spurred these legislative enactments, rather than debating the symptoms. If this legislative trend continues, and if the underlying issues fail to be resolved, contractors and insurers alike will be in a world of hurt.

Jack Levy is a shareholder with the Portland, Oregon, office of Smith, Freed & Eberhard, P.C. Micaela A. Isler is Regional Manager, State Government Relations for Property Casualty Insurers Association of America. Roy Leeds is Litigation Manager for Custard Insurance Adjusters.