You Have Insurance for a Reason

In April of 2005, the Minnesota Court of Appeals issued a decision in the case of Westfield Insurance Company v. Kroiss. That case dealt with two separate issues regarding the relationship between an insurance company and a homebuilder which it had insured. Kroiss Homes was in the business of residential construction. Kroiss had commercial general liability Insurance from Westfield Insurance Company, covering the time frame from October 8, 1993, through May 5th of 1995. Kroiss was sued by seven different homeowners for construction defects in homes built by Kroiss during the times that Kroiss was insured by the Westfield policy. The policy which Westfield had issued was an “occurrence” policy which means Westfield had a duty to defend Kroiss and indemnify Kroiss for any property damage that occurred during the period the policy covered. The actions by the homeowners alleged that the defective construction by Kroiss had caused damage to them in the form of water intrusion, but were not specific as to exactly when the water damage occurred. Not surprisingly, Westfield stated that because the complaints did not say there were “occurrences” during the policy period, it had no duty to defend Kroiss.

Kroiss was not willing to accept Westfield Insurance Company’s denial of coverage and apparently made repeated requests for Westfield to reconsider and defend the lawsuits. In order to bring closure to the matter, Westfield started a Declaratory Judgment Action against Kroiss, asking the Court to rule that it had no duty to defend Kroiss. In that Declaratory Judgment suit, Kroiss counter-claimed asking the Court to find that Westfield in fact did have such a duty.

The Court of Appeals looked at the question of Westfields’ duty to defend. It first stated the long standing principal that an insurer’s duty to defend an insured is broader than its duty to actually pay damages on a claim. The Court found that although to trigger coverage there must be damages during the period the policy is in force, the injury need not be “diagnosable, compensable, or manifest when the policy is in force.” The Court relied on the silicone breast implant litigation for the principal that where damages may be spread over a period of time, the liability for such damages may be split among different insurers based on those periods of times and when primary damage occurred. The Court held that in this case, it was possible that damages to the home could have occurred during the policy coverage period and whether, in fact, that happened would have to be determined at trial. In essence, it placed the burden on the insurance company to prove that there was no damage within the coverage period to avoid defending the insured. If it was possible that some of the damage occurred during that period, they at least had the duty to participate in the defense of the claim.

The importance of this decision is not limited to Kroiss alone. It provides guidance for all builders in a couple ways. First, Kroiss had several different insurance policies and companies covering it from the time the houses were built until the suit was brought. In fact, at least two of the insurance companies who insured Kroiss after Westfield did assume defense of Kroiss in the lawsuits by the homeowners. However, Kroiss kept after Westfield to assume coverage for the gap in time where Westfield was the CGL insurer. This shows the importance of saving insurance information much longer than you may save other documents. In fact, with the potential for litigation stretching well into the future, it may be a good idea never to purge files containing your past insurance information. If a case does arise from years back, your attorney will no doubt ask who your insurers were from the time you built the house until the present, and the easier it is to compile that information, the quicker the matter may be tendered to the insurance company for defense. Kroiss is also important for the lesson that the claim should be tender to every insurance company the builder had from the date of the construction to the date of the complaint. Often times it is appropriate only to tender the claim to the current insurer, but most builders do not have sufficient skills in reading and interpreting insurance contracts to know whether that is correct in every instance. In a case where damages and liability may be spread over many years, it is necessary that each insurer who may have some duty to defend or indemnify the builder be put on notice from the very beginning that there is a potential for their participation in the lawsuit.

Every builder hopes to avoid getting into the situation that Kroiss found itself, that being sued by one or several homeowners.

However, the possibility of that happening is one of the reasons that builders pay substantial sums in insurance every year. It is important to take the right steps to know who your insurers are and notify all of them promptly in the event of the claim to insure yourself of the protections you have purchased.

Roger Justin is licensed to practice law in Minnesota State and Federal Courts, as well as North Dakota and Wisconsin, and deals extensively representing builders in regard to construction defect litigation.