Liveblogging WCCCDS: Construction Defect Claims and Insurance

“Why do We Need to Know Certain Things and How Decisions are Made . . . Construction Defect Claims and Insurance: A Primer on Insurance from a Claims Professional’s Point of View”

Phyllis Modlin, Todd Schweitzer, Teresa Wolcott and Lee Wright

Prior to the panel beginning, representatives from Disney performed a choreographed safety demonstration, accompanied by Herbie Hancock’s Watermelon Man.

Disclaimer: The panel was careful to point out that this discussion should not be taken as a representation of the opinions of various insurance carriers, etc.

Survey: Approximately 1/3 of respondents indicated this was their first year attending WCCCDS, and another 1/3 indicated they have attended 2-5 years. Another survey indicated that 2/3 of attendees are attorneys.

The claims professional’s role begins with a complaint, arbitration petition or notice of claim identifying the insured party. The claims professional must conduct an investigation to establish the insured’s scope of work, contracts, dates of involvement and expert reports. An insurance policy contains two elements: insuring agreement and exclusions.

What is a suit? The Insuring Agreement requires defense of a suit. There can be statutory definitions, but not every claim is in fact a “suit.” It is really up to the carrier to determine whether or not the claim will be defended. There are times when a large case includes arbitration requirements for some contracts, but not all. In the end, it depends on whether or not the carrier wants to proceed with arbitration.

From the carrier perspective, Schweitzer said, “Know your audience,” when it comes to issuing coverage letters. He recommends that the coverage letter be concise and that it accurately communicates what the company’s coverage position is. Discussion between the claims adjuster and the insured is essential.

Deductible vs. SIR

Deductible: “Carrier has an immediate defense obligation and bills the insured for dedcutible once it is paid. Self-Insured Retention: “A stated amount that must be paid by the Named Insured.” When the Named Insured cannot satisfy the SIR, who can satisfy it? RTFP (short for “read the f___ing policy”) This can become a complicated issue.

Additional Insured Tenders

AI endorsements are not being included in policies these days, but the legacy of policies from the early ’00s means that these still come up. The key to AI endorsements is to make sure the communication from counsel is thorough. AI endorsements also vary from state to state. There is conflicting law regarding coverage during operations.

Defending the Named Insured

Sometimes the insurer has the right to select defense counsel. One of the most import things that carriers are looking for from defense counsel is meaningful and accurate reporting, as well as setting appropriate reserves. At the beginning of the case, the carrier needs to know the defense strategy and be presented with some understanding regarding whether the case can be defended. The worst mistake that the defense counsel can make is to force the adjuster to request additional funds. Attorneys need to accurately analyze the risk exposure and continually update the carrier. The carrier “wants to partner with the defense,” Wright said. “I want your opinion – that’s why we hired you.” Successful defense attorneys are truly partners with the carrier. In many situations, the relationship between builders, carriers, owners, etc., is bigger than any individual case. The carrier wants to get the insured out of the case as quickly as possible, for as little money as possible.

Setting reserves is subject to the carrier’s internal policies, but is generally very early on in the case. The defense counsel needs to “use some guts,” according to Modlin regarding the value of the case and what is going to be required to settle the case. Perhaps worth noting, not setting appropriate reserves inhibits the ability of counsel to get paid.

Use of Experts

Wright said, “we need to have a better business relationship with our experts.” Sometimes cutting into another building isn’t going to improve the outcome of the case. Discovery is very expensive, so the expert should help the carrier to develop an appropriate strategy. Carriers do not enjoy spending $300,000 on discovery, only to settle the case for $50,000. Although sometimes that is effective, Wright indicated that those cases are the exceptions to the rule. It is important to understand that many carriers view money spent on discovery as separate from money spent on indemnity.

Defending the Additional Insured Issues

  • Choice of counsel
  • Reporting requirements
  • Allocation methods
  • “Recalcitrant carriers”


Survey: Has the mediation process improved since this time last year? 83% of respondents say NO! Should more CD cases be taken to arbitration or trial? 55% say yes.

When it comes to mediation, the issue of cost of defending versus the cost of settling involves significant risk. Trying a case is incredibly costly for a carrier, so counsel needs to provide clear direction. Wolcott: “It is going to take everyone in this room [to improve the mediation process].” Coverage issues need to be put “on the table” early on so that they can resolved. The goal: resolve cases by second, third, or fourth, rather than the eighth or ninth. According to Schweitzer, there are usually only a few key issues that drive each case, and that is where the focus should be. To improve the mediation process, it will require more “hard work” prior to mediation. Cases need to be evaluated realistically.

Considerations for “going all the way” (to arbitration or trial):

  • Make a decision regarding strategy early on
  • A “win” in a construction defect case doesn’t necessarily mean $0 paid on behalf of the insured. The defense cost of repair is a key indicator for evaluating “success.”

“Arbitration is like communism. Great idea, but doesn’t work in practice.” – Lee Wright

Image courtesy gluemoon