Chinese Drywall Additional Insured Issues Contact: Lee Ogburn  Kramon & Graham, P.A.   Contact: Mark Miller  Greenberg Traurig  

- 2 - Topics I.A.I. Relationships II.A.I. Endorsements III.A.I. Coverage vs. Named Insured’s Indemnity Coverage IV.Policyholder Strategy Issues / Choice of Law V.Scope of A.I. Coverage VI.Vendor’s Endorsements VII.Priority of Coverage (A.I. vs. Named Insured Coverage) VIII.Questions and Answers

- 3 - Part I Additional Insured Relationships

Products Liability Insurance Distributor’s Insurance Builder’s Insurance Homeowner’s Policy Installer’s Insurance Chinese Manufacturer Distributor Installer Builder Homeowner $ Purchase AI Chinese Drywall Additional Insured Relationships

Installer’s Insurance Installer Home Builder Insured (contract) Certificate of Insurance Additional Insured (contract) Contract 1. Indemnity 2. Insurance requirements Home Builder As Additional Insured

- 7 - Part II AI Endorsements (scheduled and blanket endorsements)

- 8 - Additional Insured Endorsements  The Additional Insured is an insured under the policy  Coverage for an Additional Insured is created by two types of Endorsements □ Scheduled  Typically on ISO Form  The additional insured must be identified on the schedule  The coverage provided by different editions varies dramatically □ Blanket  No standard form

- 9 - Scheduled Endorsements  The most common scheduled endorsement is the □ “WHO IS AN INSURED is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of “your work” for that insured by or for you.” □ What does “liability arising out of your work” include? □ Does this endorsement provide coverage for completed operations injury or damage?

Changes in the  “liability arising out of your ongoing operations performed for that insured.”  Adds exclusion to endorsement: the insurance does not apply to bodily injury or property damage “occurring after: a;; work… to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed.”

: The Current State of Play  “…Liability or bodily injury or property damage…Caused, in whole or in part, by: □ Your acts or omissions; □ The acts of omissions of those acting on your behalf; □ In the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.” □ Plus, the completed operations exclusion.

Blanket Additional Insured Endorsements  Who is an insured is amended to include any person or organization that the insured has agreed or is required by contract to add as an additional insured  No ISO version until There are lots of different forms in use.  To determine the significance of the endorsement, one must look at the underlying contract.

AI Endorsements: Typical Issues  Is the endorsement on all of the triggered policies?  Does the endorsement provide coverage for completed operation injuries?  Has notice been provided to the AI carrier?

AI Endorsements: Policyholder Strategies  More restrictive endorsements may not preclude A.I. status  Concept of “completed operations” is an unrelated concept  Need to review endorsement language closely

AI Endorsements: Policyholder Strategies  “liability arising out of your ongoing operations performed for that insured.” □ If damage occurred starting when drywall was installed, such loss would be attributable to the ongoing operations of the installer. □ If Installer is still doing work for home builder, its operations are ongoing. □ Contract with installer may obligate installer to repair or replace drywall which constitutes ongoing operations.

AI Endorsements: Policyholder Strategies  Exclusion: the insurance does not apply to bodily injury or property damage “occurring after... Work...to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed.” □ Site, typically not listed as individual home – rather listed as address of home builder. □ Depending on contract with installer, work at site may not be completed until installer has remedied the situation. □ Even on individual home level, damage occurred before work was completed.

Part III Contrast between AI coverage and coverage for the named insured’s contractual indemnity obligations

AI Coverage vs. Contractual Indemnity Coverage  Fundamental Rules: “An insurer’s duties are defined by what it contracted to do, not by what the insured contracted to do.” WINDT, INSURANCE CLAIMS & DISPUTES, 4 th ED. Policy terms, not underlying contract provisions, define the scope of additional insured coverage. An additional insured has direct rights under the policy; a contractual indemnitee does not.

Contractual Indemnity Provisions  Analysis starts with the underlying contract. □ What is the scope of the underlying promise of indemnity:  Include defense?  Include indemnity against indemnitee’s sole negligence? –“Clear and unequivocal” terms required for such a promise. See Charles Poe Masonry, Inc. v. Spring Lock Scaffolding Rental Equipment Co., 374 So. 2d 487 (Fla. 1979).  Satisfy requirements of applicable state law? § –A specific monetary limit on the extent of indemnity is required, Fla. Stat. Ann. §  Next, consider whether policy covers the insured’s indemnity obligation.

Contractual Indemnity – The Underlying Contract Insured’s obligation:  Is the insured obligated by the subcontract to defend the indemnitee on an “as you go” basis? □ “Indemnify and hold harmless” – probably not □ “Defend and indemnify” – probably so Insurer’s obligation:  Must the indemnitor’s insurer provide a defense to the indemnitee?  Generally “no,” but don’t forget to check the Supplementary Payments provisions.

Contractual Indemnity – The Underlying Contract  The insurer’s duty to defend the indemnitee on an “as you go” basis. □ Supplementary payments provision:  “If we defend an insured against a “suit” and an indemnitee of the insured us also named as a party…we will defend the indemnitee if all of the following conditions are met:”  Underlying indemnity obligation is part of the “insured contract.”  There is no conflict between the insured and the indemnitee and the insurer can use the same lawyer to defend both.

Coverage for the Insured’s Contractual Indemnity Obligations  The “Contractual Liability” Exclusion: □ “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.  Exceptions: □ Liability “the insured would have in the absence of contract or agreement; □ Liability assumed in an “insured contract.”

Coverage for the Insured’s Contractual Indemnity Obligations  There are two exceptions to a typical “Contractual Liability: exclusion: □ Liability the insured would have in the absence of the contract or agreement = liability resulting from the fault of the insured. □ “Insured contract” = a contract in which the insured assumes the tort liability of another party.  “Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”  Check the language of the particular policy.

Coverage for the Insured’s Contractual Indemnity Obligations  If the insured’s contractual obligation to defend the indemnitee is covered, must the insurer defend the indemnitee “as you go?” □ The insurer is contractually obligated to defend indemnitee “as you go” only under conditions set forth in supplementary payments provision. These payments do not impair limits. □ Otherwise, the insurer may choose to provide defense to indemnitee, but these payments do impair limits.  Case by case.  If liability is clear.  With notice to the insured.

Summary of AI Coverage and Contractual Indemnity Coverage  The additional insured and contractual indemnity analyses are different; □ Additional insured:  Additional insured party is a policyholder  Protects against the sole fault of the additional insured □ Contractual indemnity:  Only the direct insured is policyholder  Does not provide protection against the sole fault of the indemnitee □ Always check the language of both insurance policy and underlying contract;

AI Coverage and Contractual Indemnity Coverage Policyholder Considerations  If an AI, Insurer must defend and indemnify as if policyholder was a named insured  AI insurer can not escape ultimate liability for loss under this theory: □ If Installer is liable □ If Installer must indemnify under contract with home builder □ Home builder can sue installer, and installer’s liability is backed up by AI insurance carrier. □ Ultimately, AI carrier must pay for loss.

Part IV Policyholder Strategy Issues and Choice of Law

Current AI Actions  AI insurance carriers have taken three approaches: □ Deny coverage based on pollution exclusion □ Deny additional insured status □ Investigate, do nothing.  All three approaches amount to a denial of coverage, if lawsuits have been tendered  Relieves policyholder of so-called prohibition on voluntary payments and duty to cooperate

Current AI Actions  AI insurance Carrier Must Make Defense Determination for Tendered Lawsuits □ A liability insurer’s duty to defend a claim is typically determined from the allegations in the complaint considered in conjunction with the provisions of the policy. See, e.g., Baron Oil Co. v. Nationwide Mutual Fire Ins. Co., 470 So. 2d 810, 813 (Fla. 1st DCA 1985). □ This is commonly known as the "eight-corners" rule. Guideone Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006); Johnson v. Misirci, 955 So. 2d 715 (La. Ct. App. 2007). □ Under this “eight-corners” rule, an insurer must decide, yes or no as to a defense, based entirely on what is presented in the four corners of the complaint and the four corners of the policy.

Current AI Actions  AI Insurer can not investigate forever □ At a minimum, AI insurer must make a defense determination before Answer is due □ Claims statutes may further set outside limits on making defense determination. See Fla. Statute Section (insurer must raise coverage defenses within 30 days and to inform insured of defense within 60 days thereof).

Policyholder Strategies  Balanced approach considering all available coverage (direct and AI) □ Consider, trigger, allocation, limits and deductibles for both direct and AI coverage. □ Direct insurance carriers may pick up coverage. □ Likely to see a situation where direct insurers are pursuing coverage for and with insureds (builders / developers). □ Priority of recovery for subrogation funds (against AI carriers) may become important. “Insured made whole” is majority rule (policyholder takes first dollar of recoveries against AI insurer to satisfy deductibles and SIR’s).

Policyholder Strategies  Balanced approach may include litigation against AI carrier. □ Choice of law matters.  Pollution exclusion is one issue. While applicability of the pollution exclusion can not be determined without significant expert analysis in any jurisdiction, some states preclude application of the pollution exclusion in this situation. See, e.g., Doerr v. Mobile Oil Corp., 774 So.2d 119 (La. 2000). Insurers have argued, although incorrectly, that the opposite is true in other jurisdictions. See, e.g. Deni Assoc. of Florida v. State Farm Fire & Casualty Ins. Co., 711 So. 2d 1135 (Fla. 1998).  Other issues should be analyzed as well, including, number of occurrences, trigger, allocation business risk exclusions, and scope of recoverable damages.

Part V Scope of Coverage for Additional Insureds

The Scope of Additional Insured Coverage  “Liability arising out of ‘your work’?”  Completed Operations Coverage?  Was the endorsement in place when the bodily injury of property damage occurred?

“Liability arising out ‘your work’”  “Liability arising out of ‘your work’”? □ Some courts find “but – for” liability is enough:  Merchants Ins. V. U.S.F.&G., 143 F.3d 5 (1 st Cir 1998).  Admiral Ins. V. Trident, 988 S.W.2d 451 (Tex 1999). □ Other courts require some connection to conduct of named insured:  “the injury causing act must somehow be related or connected to Sasco’s performance of the work under the subcontract beyond its mere presence on the jobsite.” St. Paul v. American Dynasty, 124 Cal.Rptr.2d 818 (2002).

Florida Law  The meaning of “arising out of” is broader than proximate causation;  But “some casual connection or relationship” is required. □ Taurus Holdings, Inc. v. U.S. Fidelity & Guaranty Co., 913 So. 2d 528 (Fla. 2005).

Other Frequently Encountered Scope of Coverage Issues  The application of exclusions in the policy to the additional insured: □ Is coverage for the additional insured broader than for the insured? No  See Pulte Home v. Fidelity and Guaranty Co., 2004 WL ; National Union v. Liberty Mutual, 234 F. App’x 190 (5 th Cir. 2007). But see Swank Enterprises, Inc. v. All Purpose Services, Ltd., 154 P.3d 52 (Mont. 2007).  How do excursions apply? “You” and “Your” = the Named Insured; “Your product” and “Your work” = product and work of the Named insured □ Check the policy language □ Certificates of insurance

Part VI Vendor’s Endorsements

CG – Additional Insured Vendors Endorsement  Gives “insured” status under manufacturer’s policy to certain named organizations with respect to the distribution or sale of the named insured’s products □ Modifies “Who Is An Insured” section of policy to include vendor as an additional insured arising out of “your products” □ Eight Exclusions – (1) contractually assumed liability, (2) warranty not authorized by insured, (3) intentional change to products, (4) repackaging, (5) vendor’s failure inspect, make adjustments, test, or service, (6) installation, servicing, (7) incorporation into other vendor “thing or substance”(8) vendor’s sole negligence.

Part VII Priority of Coverage Issues

Allocating Coverage Among Multiple Insurers  How do multiple AI insurers share defense and indemnity? □ Indemnity: neither pro rata nor “all sums” – payment on behalf of direct insured generally viewed as satisfying indemnity obligation to additional insured.  Defense: □ “other insurance” provisions apply; □ Little guidance in case law. Need to be proactive with other insurers to reach cost share, which is frequently based on relative importance of work; □ Presley Homes v. American States Ins. Co. 108 Cal. Rptr. 2d 686 (2001); or additional insured is only a party to the insurance contract with respect to scope of work.

More Issues Concerning Allocation Among Multiple Insurers  Allocation between the additional insured carrier and the direct carrier for the additional insured. □ “an indemnity agreement between the insureds or a contract with an indemnification clause…may shift an entire loss to a particular insurer notwithstanding the existence of an “other insurance” clause in its policy.”  Wal-Mart Stores, Inc. v. RLI Ins., 292 F.3d. 583 (8 th Cir. 2002) (quoting Lee R. Russ & Thomas F. Segalla, 15 Couch on Insurance, Section 219 (3 rd ed. 1999).  St. Paul Fire & Marine Ins. Co. v. Lexington Ins. Co., 2006 WL (S.D. Fla. 2006), notes a majority of jurisdictions give “controlling effect” to indemnity obligations of one insured to another over “other insurance” clauses in the insurance policies.

Part VIII Questions & Answers