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The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | November 3, 2014 • 5 min read
You Be the Judge

Court Upholds Reservation of Rights

Wellons Inc. created two thermal oxidation energy systems in 2002 for Langboard Industries in Quitman, Ga., that were designed to generate electricity to be sold to Georgia Power.

11012014_legalspotlight_electricityAfter designing and providing the systems to Langboard, at a cost of $13.7 million, Wellons agreed in 2003 to install them, at a cost of $3 million.

During the construction phase in 2004, a “tube bundle” collapsed, causing extensive property damage, but the system was ultimately placed in service by June 2005, at which time leaks were discovered in the “superheater” portion of the system, according to court documents.

To fix the leaks and seal weld the joints, Wellons hired Hunt Construction, which completed the work in March 2006. The superheater was put back into service even though leaks still occurred. Two weeks later, one of the superheater tubes “completely severed.” Wellons claimed Hunt’s faulty repair work was responsible.

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Langboard requested a new superheater, at a cost of $850,000, to be designed and installed as the current system was “not conducive to long term operation.” Wellons agreed, but did not immediately notify Lexington Insurance Co., which had issued a commercial general liability policy, with a per occurrence limit of $1 million. Lexington also had issued an umbrella policy, with a per occurrence limit of liability of $10 million.

Two months later, Hunt filed suit against Wellons for monies owed for its work. Lexington was notified through its agent, referencing the CGL policy and not the umbrella policy. Lexington issued a reservation of rights letter, notifying the company it was “investigating this matter.”

Langboard eventually filed suit against Wellons in 2007. Lexington sent another, similar reservation of rights letter.

After a jury trial in 2010, Langboard was awarded $8.4 million for breach of the purchase and construction agreements. A month later, Lexington advised Wellons it had “no obligation” to defend or indemnify it.

Wellons filed suit seeking a court declaration that the verdict was a covered loss under its CGL or umbrella policy. Both it and Lexington sought summary judgments.

The U.S. District Court for the Northern District of Georgia ruled in Lexington’s favor. On appeal to the U.S. 11th Circuit Court of Appeals, Wellons argued the reservation of rights notification needed to be more specific to comply with Georgia law.

The appeals court disagreed in May, saying that Lexington’s “defenses of noncoverage were not known …  until it concluded its investigation… .” The court also found that Wellons had never notified the company of a claim under the umbrella policy.

Scorecard: Lexington Insurance did not have to cover an $8 million jury verdict resulting from faulty construction of an energy system.

Takeaway: Insurers “must” give insureds notification of a reservation of rights, but Georgia law only recommends that specific policy terms be part of that notification.

Imitation is Not Disparagement

In 2010, Gary-Michael Dahl, manufacturer of the Multi-Cart, filed a lawsuit against Ultimate Support Systems claiming that Ultimate’s Ulti-Cart infringed on Dahl’s patent and trademark, and damaged its business and reputation, among other issues.

Both the Multi-Cart and Ulti-Cart are collapsible carts designed for the musical industry to transport music, sound and video equipment.

Ultimate sought defense under its commercial liability policy issued by Hartford Casualty Insurance Co., which denied coverage, claiming that “disparagement” was not covered by the personal and advertising injury policy terms.

The insurance company also said the policy did not cover violations of intellectual property rights.

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After Ultimate sued for coverage, the California Superior Court dismissed the lawsuit. That decision was affirmed by the Court of Appeal, and on further appeal to the California Supreme Court, Ultimate lost once again.

The state’s high court ruled in June there was no disparagement, either explicit or inferred.

The possible confusion between the two products does not imply inferiority of the Multi-Cart, the court ruled. In addition, Dahl’s claim that Ulti-Cart was a “knock-off” of the Multi-Cart, and thus derogatory of the Multi-Cart, was disputed by Dahl’s own claim that the two products were “nearly identical.”

Scorecard: Hartford did not have to provide a defense to Ultimate Support Systems in a trademark infringement lawsuit.

Takeaway: The ruling limits the scope of an insurer’s duty to defend a policyholder when the allegations involve disparagement.

Court Rules on Additional Insureds

On Sept. 13, 2010, workers of Fast Trek Steel were tightening safety cables on steel beams at Yale University’s Science Area Chilled Water Plant Shell when the unsecured beams dislodged and collapsed. One ironworker, Robert Adrian, fell to his death. Three others were injured by the falling beams.

11012014_legalspotlight_beamsAdrian’s estate and the injured men filed suit alleging negligence against, among others, Shawmut Woodworking & Supply Inc., general contractor of the construction project, and Shepard Steel Co., a steel fabrication subcontractor.

Because of workers’ compensation laws, there were no lawsuits filed against Fast Trek, which, as required by its contract with Shepard, had obtained a general liability policy from First Mercury Insurance Co. with a $1 million per occurrence coverage limitation, and an excess liability policy from National Union Fire Insurance Co., with up to $10 million of coverage.

Both Shepard and Shawmut sought defense and indemnification from First Mercury as “additional insureds” of that Fast Trek policy. Liberty Mutual — which had issued a liability policy to Shepard and is currently providing a defense to Shepard and Shawmut under a reservation of rights — also demanded that First Mercury assume that defense.

First Mercury demurred, contending, among other reasons, that Shawmut was not included in the definition of additional insured, and that even if Shawmut and Shepard were included, there was no coverage because Fast Trek was not named in the underlying lawsuits.

The U.S. District Court for the District of Connecticut disagreed.

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It ruled that when Shepard hired Fast Trek as its subcontractor — and as Shawmut’s sub-subcontractor — the agreement expressly incorporated the Shawmut-Shepard contract, and that it was “immaterial” that there was not a “direct contractual relationship” between Shawmut and Fast Trek.

In addition, it ruled that the accident was arguably caused by Fast Trek and that the reason Fast Trek was not named in the underlying lawsuits was due to the exclusive remedy rule of workers’ compensation law.

Scorecard: First Mercury must defend and indemnify the general contractor and subcontractor in the workplace death and injury lawsuit.

Takeaway: A sub-subcontractor need not be explicitly included in a contract for coverage to be extended.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Claims Trends

Examining Claims Losses

Marine, aviation and energy sector losses accounted for much of the losses. Employee training would help.
By: | September 24, 2014 • 7 min read
090113RiskReport_CostaConcordia

Marine-related claims — skewed by the expensive Costa Concordia loss — resulted in the highest insurance claim losses, by dollar amount, according to a recent report by Allianz Global Corporate & Specialty.

The top causes of claims losses between 2009 and 2013 were, in order: ship and boat grounding, fire, aviation crash, earthquake, storm, bodily injury (including fatalities), flood, professional indemnity, product defects and machinery breakdown, according to AGCS’ Global Claims Review 2014.

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The report listed the top causes of loss and emerging trends, based on more than 11,000 major business claims in 148 countries, each costing more than €100,000 ($136,455).

“This report is the first of its kind, and it demonstrated the kind of technical understanding we have and the fact that we continue to invest in our claims departments and technical training,” said Terry Campbell, AGCS vice president, regional claims head, in New York City.

“While the losses analyzed are not representative of the industry as a whole, they give a strong indication of the major risks which dominate industrial insurance,” according to the report, which noted that the claims involve other carriers as well.

Within the marine industry, rising claims inflation along with the growing problem of crew negligence and the high cost of wreck removal have all contributed to a worrying rise in the cost of claims, according to the report.

However, frequency of claims, especially from cargo losses, appears to be declining.

Repair costs resulting from a grounding have increased in recent years due to improved technology of underwater machinery, said Rob Winn, area vice president, marine claims, Arthur J. Gallagher & Co. (AJG)

Items such as drop-down thrusters and multi-pitch props are often damaged in a grounding and are very expensive to repair, he said.

Video: This CNN segment shows some of the salvage operation involving the Costa Concordia.

While the grounding numbers in 2012 were skewed by the Costa Concordia loss in 2012, groundings were relatively infrequent (8 percent) in the insurer’s report. Crew negligence was more often a main driver of claims, with it being listed as a potential contributing factor in more than six in 10 claims over $1.4 million.

“Those companies that invest in training and education can see a significant reduction in the number of ship groundings and related incidents,” Campbell said.

Bumpy Triche, regional executive vice president at Arthur J. Gallagher Risk Management Services Inc. in New Orleans, said shipping companies involved in global trade rely heavily upon foreign crews, and so it’s “imperative” that training and operational manuals are done in the preferred languages of their multinational crews.

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Crew training also should be done on the particular navigational electronic system used on the vessel where the crew will be assigned, he said.

“Boats working in our local waters here in Louisiana need to be aware of the impacts of diminishing wetlands and coastal erosion and the effect on bayous and other inland waterways,” Triche said. “They may not realize they are now in much shallower water than what the navigational charts might depict, and can get stuck.”

Not only are the vessels operating in shallower water as a result of coastal erosion, but they are also encountering pipelines that were originally on land, Winn said. Those pipelines are not properly buried and are hazards to navigation.

As “blue water” vessels age and offshore vessels become larger and more sophisticated, companies should proactively address maintenance problems and “not use their hull policy as a maintenance program,” Triche said.

Aviation Claims Rising

Improvements in airline safety have led to far fewer catastrophic losses overall, despite 2014’s extraordinary loss activity, according to the AGCS report.

However, the cost of aviation claims is rising, driven by the widespread use of new materials and rising aircraft complexity, as well as more demanding regulation and the continuing growth of liability-based litigation.

Video: The Canadian Broadcasting Corp. reports on the shooting down of MH 17 over Ukraine, which may result in insurers’ insisting that airlines avoid “hot spots.”

While aviation crashes were the top causes of loss in terms of number of claims (23 percent) and value (37 percent), on-the-ground incidents accounted for 18 percent claims in number, and 15 percent in value, according to the report.

Bird strikes were a notable cause of loss, averaging $22.8 million every year from 2009 to 2013, with a total of 34 incidents.

Bradley Meinhardt, AJG area president and managing director, aviation, in Las Vegas, said that aviation safety innovations over the past several decades include enhanced ground proximity warning systems, terrain awareness and warning systems,and traffic collision avoidance systems.

Such systems offer pilots increased situational awareness in a semi-autonomous environment, reacting to synthetic voice instructions, he said.

“Even in a potentially disastrous situation contemplating an airspace controller’s error, the aircraft may be saved by these on-board systems,” Meinhardt said. “These innovations have literally changed the landscape of aviation safety.”

While all of these systems reduce workload, pilots still need to be prepared to fly the aircraft themselves if the systems go awry, he said.

“Pilots should manually fly their aircraft every so often – one airline pilot tells me he routinely flies one of the five flights he has on a given day,” Meinhardt said.

Aircraft manufacturers are using alternative, lightweight materials to make aircraft lighter and more capable to fly longer distances, said Peter Schmitz, chief executive officer of Aon Risk Solutions’ national aviation practice in New York City.

However, manufacturers need to continue to improve newer generation aircraft and perhaps consider making them more capable to withstand issues like severe turbulence and outside interferences, he said.

“Airlines also have to seriously consider whether they should fly over hot spots where there is conflict, after what happened to Malaysian Airlines over Ukraine this summer,” Schmitz said.

“But the commercial issue becomes, how far does the plane have to go around such hot spots. Is the public willing to spend longer periods onboard the plane and potentially pay more to satisfy those safety requirements?”

Energy Sector

For the energy sector, the cost of claims is increasing due to higher asset values combined with increasingly complex and interrelated risks, according to AGCS. The rising cost of business interruption and emerging risks such as cyber threats and new technologies will also make for a more challenging future environment.

Fire is the No. 1 cause of energy losses, according to the report, both by number (45 percent) and value (65 percent), followed by blow-out (18 percent and19 percent, respectively).

Machinery breakdown, explosion, natural hazards such as storms and contingent business interruption, were the other main causes of loss, according to the report.

Bruce Jefferis, chief executive officer of Aon’s energy practice in Houston, said that because the energy sector has very high-valued assets, losses are typical more costly than losses in many other industries.

“Even if it’s a relatively minor incident at a refinery or a petrochemical plant, it doesn’t take much to lose a lot of dollars,” Jefferis said.

“Even with the best safety and loss control procedures, natural disasters and other incidents can still cause damage which results in significant loss of property and business interruption.”

Stuart Wallace, AJG area executive vice president, energy practice, in Houston, said the energy sector is growing “incredibly,” both in traditional markets like Texas, Oklahoma and Louisiana, and new areas of the country like the Bakken Formation in Montana, North Dakota, South Dakota and parts of Canada.

“But with the growth comes a higher demand for people, and at times, the hiring pool becomes a big challenge, and energy companies are likely not hiring the most experienced, trained, people to work on crews or drive vehicles — and that tends to lead to accidents,” Wallace said.

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Moreover, energy companies are now in areas that historically haven’t had infrastructure such as pipelines and roads, he said.

With the lack of infrastructure, trucking accidents have seen an increase due to road conditions, less qualified drivers and start-up transportation companies with less experience in transporting oil or gas.

“To lessen accidents, it starts at the beginning with better hiring practices, then ongoing training, continuing education, and monitoring of employees’ performance and accident rates, particularly for workers’ compensation and automobile liability,” Wallace said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at riskletters@lrp.com.
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Sponsored: Liberty Mutual Insurance

Construction’s New World

The underwriting of construction risk is undergoing a drastic change, one that may take many years to resolve.
By: | November 3, 2014 • 5 min read

Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.

Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.

All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.

The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.

A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.

Doug Cauti characterizes the current construction market.

Talent and Margins

For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.

“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.

Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.

Doug identifies one of the top risk management issues facing construction firms today.

Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.

Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.

“There are a lot of contractors out there competing for business,” Cauti said.

“Margins are going up but not at the same rate as the industry’s recovery,” he added.

Financing and Risk Transfer

Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.

In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.

A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.

SponsoredContent_LM“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction

Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.

But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.

As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.

“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.

That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.

Doug discusses emerging approaches to construction.

Legal and Regulatory

Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.

Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.

“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.

But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.

In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.

Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.

Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.

Doug outlines another top risk management issue facing construction firms in today’s booming market.

Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.

Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.

A Strategic Approach

The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.

Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.

In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.

Doug discusses how his area can provide value to project owners and contractors.

For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at douglas.cauti@libertymutual.com.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.


Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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