October 2006

Insurance Coverage and Construction Law Bulletin - Wooddale Update

The Insurance Coverage and Construction Law Bulletin is published by the Insurance Coverage Practice Group  along with our Construction Law Practice Group at Arthur, Chapman, Kettering, Smetak & Pikala, P.A. to keep our clients informed of the ever-changing complexities of Minnesota law.  In this issue:

The Wooddale Formula: Allocating Indemnity and Defense Costs for Construction Defect Claims – Wooddale Builders v. Maryland Casualty, et. al
by Theodore J. Smetak

Below is a summary of the Wooddale Case, for an in-depth discussion of the case and Minnesota's coverage trigger rules, click here.

The Minnesota Supreme Court issued a long-awaited decision in Wooddale Builders, Inc. v. Maryland Cas. Co., ______N.W.2d _____ (2006WL2828672) (Minn. Oct. 5, 2006) which literally provides a formula, a "simple" algebraic process with which to calculate the allocated share of covered damages due to a water intrusion case where there is no single, discrete and identifiable event. Wooddale and its refinement to the pro-rata-by-time-on-the-risk allocation method is clearly applicable to those "difficult cases" where the damages cannot be shown to be traceable to a discrete event. The insurers participating in Wooddale essentially asked the court to refine the pro-rata method to water intrusion cases; the parties did not ask and the court did not rule whether a pro-rata allocation method should be applied.

The supreme court repeatedly emphasized that it was not being asked to declare that water intrusion cases were subject to the "exception" (so as to properly involve pro-rata allocation) or whether they could be subject to the "general rule" (which would make the insurer on the risk at the first moment of damage due to a single, discrete and identifiable event solely responsible for all damages and all defense costs.) Kootenia Homes remains an example of how the "general rule" applies even to water intrusion cases, depending upon whether the facts can be established so as to identify a single event (much as in a pollution case a single spill triggers one, but only one, policy year.) The fact the insurers stipulated no such single event could be found and that all insurers agreed to pro-rata-by-time-on-the-risk allocation might reflect the realities of water intrusion cases, which makes the formula all the more significant.

The parties also agreed on other points including that the beginning point for liability allocation was the date of closing of sale on each separate home. Insurers considered "on the risk" (and thus potentially allocated a share of the total damages for which the insured is liable) included the insurer whose policy period covered the date of closing and every other occurrence-based liability insurer for subsequent policy years including the year in which the insured received notice of claim with regard to a given home.

The opinion provides a bright line rule: No insurer issuing an occurrence-based policy for any year after notice of claim is "on the risk" for that home. Because once the insured receives notice of a claim from that moment forward, ongoing damages are not insurable but are instead more akin to "expected" (and thus excluded) damages which are outside the normal bounds of insurance as a "known loss."

By bracketing the time an insurer is "on the risk" within those years Wooddale clearly excuses liability insurers that provided coverage after the date of notice but before date of remediation. Date of remediation plays no real role other than to peg the end date for determination of damages. For allocation purposes, date of remediation does not indicate which insurers are "on the risk."

The new allocation formula uses policy years as the unit of measurement, the method of sharing by comparison. For sake of the formula, each insurer whose policy is considered "on the risk" has a share based upon the full policy year(s) during which that insurer provided coverage. (Time on the risk, then, is a function of policy years without narrower refinement.)

The allocated share assigned to each insurer "on the risk" is determined by the number of "policy years" that insurer was on the risk for that specific home, compared to the sum total of all policy years for which the insured carried insurance applicable to that home.

Wooddale discusses the potential that an insured might not have insurance for some of the triggered policy years. If the insured failed to have insurance during each year between date of closing and notice of claim, the insured might be assigned responsibility for a share of the damages that should have been insured…but only if the insured was voluntarily uninsured. Wooddale claimed insurance was not available; the record did not establish why. So the supreme court has remanded to determine if Wooddale was voluntarily or involuntarily uninsured for the years lacking a policy. The answer will determine the ratio: if Wooddale was voluntarily uninsured then Wooddale will be assigned an allocated share of the damages for each "policy year." But if Wooddale was involuntarily uninsured, then the insurers who were "on the risk" will simply divide the total covered damages among themselves, pro-rata, without allocating a share to Wooddale.

What about sharing of defense costs? The supreme court did not agree to use the same pro-rata by time-on-the-risk allocation method for sharing of defense costs despite that such was the formula proposed by the insurers for sharing indemnity. The supreme court instead held that when multiple insurers are all exposed to the duty to defend under the pro-rata-by-time-on-the-risk method, and those insurers participate in providing a defense to a common insured "but recovery of defense costs is not barred by the Iowa National rule," defense costs should be apportioned equally among those insurers. (Per capita, one share per insurer but not based upon "policy years" at all.) In Wooddale, the insurers had intentionally waived the need for a Loan Receipt agreement and instead asked how to share the defense costs when all insurers were participating but where they could not agree upon the method of dividing shares of responsibilities for defense costs. (Some insurers were "on the risk" for only one policy year; others for two or three years out of seven or nine years. Sharing equally, then, yielded different results than if a time on the risk comparison was to be used.)

If you have any questions concerning these changes or any other matter, please do not hesitate to contact one of the members of the Arthur Chapman Construction or Insurance Coverage Practice Groups.