Last year delivered several landmark decisions in the world of risk management. To keep you up to date, we’ve created a two-part series of important cases that could affect your risk mitigation plans. Loss prevention sometimes is a moving target. Knowing what is happening inside the courtroom provides a valuable strategy for staying ahead of changes and keeping your company protected.
The Case: Employers Mut. Cas. Co. v. Estate of Buckles
Case Overview: Continental Resources Inc. owned/leased a well site in Alexander, North Dakota. Continental had a master service contract with BH Flow Testing for well tests at the site. BH subcontracted the work to a company called Black Rock, which in turn subcontracted it to Black Gold Testing. Zachary Buckles died while working for Black Gold Testing at the Continental site. When the Buckles Estate filed a wrongful death lawsuit, Continental sought defense from Black Rock’s commercial general liability (CGL) policy through Employers Mutual. The insurance company denied the defense request citing that Continental was not considered an additional insured under Black Rock’s policy.
The Decision: On appeal, the Montana Supreme Court sided with Employers Mutual and determined Continental had no coverage rights under Black Rock’s policy. The court affirmed that Continental did not meet the requirements for automatic additional insured status because:
- A contract was not executed between Black Rock and Continental before Buckles’s death
- The Liability Extension Endorsement on Black Rock’s policy limits coverage to specified relationships in which a third party is named as an additional insured and is the manager or lessor of a premises or equipment leased to Black Rock. Continental did not meet these endorsement requirements.
- Continental was named as an “additional interested party” within the policy only as it related to an amendment adding a waiver of subrogation. The “additional interest” language did not translate to “additional insured” because it was specific only to the waiver and made no adjustments to the “Who Is An Insured” section of the CGL policy.
- Always have a signed contract – In the event of a loss or litigation, a signed contract must be in place. Verbal agreements or even written correspondence absent of an executed legal document may not hold up in court. Plus, Continental had no proof through a signed contract to show additional insured coverage was required.
- Beware of blanket endorsements – Continental expected automatic upstream coverage, but Black Rock’s CGL policy required a scheduled endorsement by specifically naming the third party. The policy also avoided blanket coverage by limiting it to specific groups to which Continental did not apply. (For more on this topic, check out our article Blanket Endorsements: The ‘Am I Covered’ Checklist)
The Case: J.A. Street & Assocs., Inc. v. Bitco Gen. Ins. Corp
Case Overview: Property developer Thundering Herd Development, L.L.C. entered into an agreement with general contractor J.A. Street & Associates, Inc. for a commercial shopping center project named Merritt Creek Farm. In the contract, Street agreed to oversee site preparation and the construction of the buildings. The contract included covenants requiring all work be performed “in a good and workmanlike manner” and that the general contractor “provide competent supervision of all phases of the work” and ensure the work is “performed with a high degree of expertise and workmanship”. First a landslide occurred creating nearly $750,000 in property damage to Thundering Herd. Other building damage then occurred due to sloughing, land movement and settling. Thundering Herd sought restitution from Street citing their failure to properly ensure competent work. Street’s insurer Bitco General Insurance Corporation denied defending its insured. Bitco claimed Street’s policy did not cover property damage from faulty construction as it relates to liability from a breach of contract.
The Decision: The West Virginia Supreme Court affirmed Bitco’s position largely due to the contractual liability exclusion contained within its CGL policy. The exclusion states that insurance coverage does not apply to bodily injury or property damage for which the insured is obligated to pay damages “by reason of the assumption of liability in a contract or agreement.” While the court acknowledged that the events at Merritt Creek may constitute occurrences resulting in property damage, because Thundering Herd sought compensation due to Street’s failure to fulfill its contractual duties, the liability exclusion voided Bitco’s duty to defend or indemnify Street. Because coverage was absent from the CGL policy, there also was no coverage from Street’s umbrella and excess policies.
- Understand CGL policy exclusions – For its decision, the court referred to Vernon Williams & Son Construction, Incorporated v. Continental Insurance Company. That case states that the risk covered by a CGL policy is the possibility that the completed goods or products of an insured will cause injury or damage to something other than the completed work itself. Put another way, “the policy in question does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident.” The Vernon Williams case acknowledged that insureds may be liable under contract law for defective work, but those liabilities do not apply to the CGL policy, which is limited to tort liability for physical damage to others.
- CGL policies are not “all-risk” policies – Far too often insureds assume their work is always covered by their CGL policy, which may not be the case. CGL policies provide indemnification for insureds as a result of tort liability for a third party’s damages. However, the policy is not intended to serve as a guarantee of work and does not assume liability for economic loss incurred by a damaged party as such.
Check out Part II of our series on cases impacting risk management in 2020. And, if case law is not your specialty, call myCOI. We have the technology and insurance expertise to help keep your company safe and away from litigation without you having to enroll in law school.