Presenting a live 90-minute webinar with interactive Q&A Navigating Performance Bonds, Subcontractor Default, and CGL Coverage for Defective Workmanship and Property Damage TUESDAY, DECEMBER 13, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Michele Leo Hintson, Esq., Partner, Shumaker Loop & Kendrick, LLP , Tampa, Fla. Kirk D. Johnston, Partner, Smith Currie & Hancock , Atlanta Michael S. McNamara, Partner, Pillsbury Winthrop Shaw Pittman , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Navigating Performance Bonds, Subcontractor Default, and CGL Coverage for Defective Workmanship and Property Damage Presented by: Michele Leo Hintson Kirk D. Johnston Michael S. McNamara
Performance Bonds and CGL Coverage Michele Leo Hintson Shumaker, Loop & Kendrick, LLP Mhintson@slk-law.com.com 813.227.2338 6
I NTRODUCTION • Background and Experience • Goals for Today 7
T HE T YPICAL C ASE Surety issues performance and payment bond on a Project • Certificate of Occupancy issued • • Notice of potential construction defect is sent to surety Surety determines through investigation that poor • workmanship attributable to the principal and its subcontractors • Lawsuit is filed against Surety, principal and its Subcontractors • Surety begins strategic plan regarding its avenues of recovery 8
T HE S URETY B OND V . I NSURANCE What is “Bonded and Insured” 9
T HE S URETY B OND V . I NSURANCE The Underlying Agreement or Contract • ― Insurance ― Business risk management tool ― Only a Two party contract ― The Carrier pays that loss which is covered under the Policy ― Surety Performance Bond ― At least a three party agreement (the “tripartite” relationship) ― Issued by the Surety on behalf of the Principal ― The Bond insures completion of the Project ― The construction contract is usually incorporated by reference 10
T HE S URETY B OND V . I NSURANCE • The Security Provided by Each Instrument ― Insurance ― Protects the Insured against risk of accidents ― Performance Bond ― Protects the obligee against a default of the principal 11
T HE S URETY B OND V . I NSURANCE • The “Money” ― Insurance ― premium paid is formulated to cover potential losses and the risk associated with such losses ― Performance Bond ― premium is paid to guarantee that the principal satisfies its obligations afforded under the Contract 12
T HE S URETY B OND V . I NSURANCE The Risk • ― Insurance ― Losses are just “part of the business” ― Rates are adjusted to cover the forecast of loss ― Performance Bond ― Losses are not expected and bonds are issued only in theory to those whose risk of a default is low ― Sureties can seek recovery from the principal and indemnitors as a result of the loss (the “GAI”) 13
T HE S URETY B OND V . I NSURANCE Claims • ― Insurance ― Claims must be covered by policy, and exclusions exist that preclude coverage ― Carrier does not expect payment by insured ― Performance Bond ― Contract and Bond form define coverage (completion) ― payment expected by principal 14
T HE S URETY B OND V . I NSURANCE Florida Specific Issues Bad Faith Claims Attorneys’ Fees 15
T HE S URETY B OND V . I NSURANCE The “Duty to Defend” • ― Unique to Insurance ― Implications for Surety if Principal Not Defended Elements • ― Florida follows “Eight Corners Rule” ― If there is question of coverage, insurer must defend an entire suit ― Insured required to defense even if true facts later show no coverage ― All doubts as to coverage resolved in favor of insured 16
T HE S URETY B OND V . I NSURANCE • The “Duty to Indemnify” ― Must determine when “property damage” “occurs” under the policy to “trigger coverage” ― Florida is in flux as to when coverage is triggered ― Manifestation Theory (when the damage first manifests itself) ― Injury in fact (when the property damage actually occurs) 17
T HE S URETY B OND V . I NSURANCE -T HE S URETIES R IGHTS AS AN A SSIGNEE AND S UBROGEE OF I TS P RINCIPAL When a surety sustains a loss, it stands in the shoes of its principal • • A surety may obtain standing to sue its principal’s CGL carrier either as an “assignee” or “equitable subrogee”, or both ― Surety has been found to have claims as a first party claimant under policy Subrogation arises when a surety paid a judgment for the principal’s • wrongs or towards a settlement to resolve the claims of the principal Courts have held that if a principal has a right to a defense against • an obligee’s claim, the surety also by law benefits from such a defense 18
P OTENTIAL A VENUES OF R ECOVERY BY THE S URETY AGAINST A CGL C ARRIER • Equitable Subrogation • Assignment • Contractual Indemnity • Additional Insured Status 19
P OTENTIAL A VENUES OF R ECOVERY BY THE S URETY AGAINST A CGL C ARRIER • Equitable Subrogation ― Little case law authority ― Western Word Ins. Co., Inc. v. Travelers Indem. Co., 358 So. 2d 602 (Fla. 1 st DCA 1978) ― Difficult avenue for surety based upon lack of case law 20
P OTENTIAL A VENUES OF R ECOVERY BY THE S URETY AGAINST A CGL C ARRIER Contractual Indemnity • ― Case law supports a surety recovery under this theory ― Indemnity Obligation commonly falls within the definition of “insured contract” ― Merrick Const. Co., Inc. v. Hartford Fire Ins. Co ., 449 So.2d 85 (La. App. Ct. 1984) ― Spirco Environmental, Inc. v. American Int’l Spec. Lines Insur ., 555 F .3d 637 (8 th Cir. 2009) 21
P OTENTIAL A VENUES OF R ECOVERY BY THE S URETY AGAINST A CGL C ARRIER Assignment • ― “Anti - Assignment” clause in CGL policies ― Basic tenant of Florida law that the policyholder may freely assign post-loss insurance claims, even with such a clause ― Lack of specificity of assignment ― Prior courts found that GAI assignments do not constitute an assignment of rights of the principal to sue its CGL carrier for insurance coverage (specifically as it relates to recovery of its attorneys’ fees) 22
P OTENTIAL A VENUES OF R ECOVERY BY THE S URETY AGAINST A CGL C ARRIER • Additional Insured Status ― Surety generally will not be considered “additional insured” under principal’s policy ― If principal was required to be additional insured under subcontractor policy, may have avenue of recovery against subcontractor CGL policy 23
B EST P RACTICES AND P OINTERS FOR S URETIES /P RINCIPALS U PON R ECEIPT OF P OTENTIAL C LAIM • Perform coverage analysis early ― Use books and records rights to get all applicable policies and certificates of insurance ― Request information about subcontractors’ Insurance ― Put carrier on notice immediately 24
B EST P RACTICES AND P OINTERS FOR S URETIES /P RINCIPALS U PON R ECEIPT OF P OTENTIAL C LAIM • Conduct a Factual Investigation ― Is there still coverage under the Bond? ― Is there an occurrence? ― Is this limited to defective workmanship? ― Is there property damage? ― Are there ongoing operations at the site? 25
CGL Coverage for Defective Workmanship and Property Damage Kirk D. Johnston Smith, Currie & Hancock LLP kdjohnston@smithcurrie.com 404.582.8052 26
Parts of the CGL Policy Declarations • Insuring Agreement • Exclusions • Exceptions • • Definitions • Endorsements 27
Declarations 28
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