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ONGOING OPERATIONS ADDITIONAL INSURED …

1 | P a g e ONGOING OPERATIONS ADDITIONAL INSURED ENDORSEMENTS: THE DISCUSSION CONTINUES Sandra Calin Partner, Kramer, deBoer & Keane, LLP ONGOING OPERATIONS and completed OPERATIONS when does one end and the other begin? The answer is not always clear, which means that the insurance analysis for construction defect claims is not always as straightforward as we might like. Generally speaking, there are two types of construction defect claims. Some claims arise during the course of construction, such as when some component work must be ripped out and replaced because it is already damaging another trade s work.

industry are CG 2010 (11/85) for completed operations claims and CG 2010 (109/93) for ongoing operations. Their pertinent language is as follows: Who is An Insured (Section II) is amended to include as an insured the person or

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Transcription of ONGOING OPERATIONS ADDITIONAL INSURED …

1 1 | P a g e ONGOING OPERATIONS ADDITIONAL INSURED ENDORSEMENTS: THE DISCUSSION CONTINUES Sandra Calin Partner, Kramer, deBoer & Keane, LLP ONGOING OPERATIONS and completed OPERATIONS when does one end and the other begin? The answer is not always clear, which means that the insurance analysis for construction defect claims is not always as straightforward as we might like. Generally speaking, there are two types of construction defect claims. Some claims arise during the course of construction, such as when some component work must be ripped out and replaced because it is already damaging another trade s work.

2 That is referred to as an ONGOING operation claim because, even though a particular trade s work might be completed , the entire project has not been put yet to its highest and best use. Until that date, particular trades may be called back to the project, which is still ONGOING . The other type of construction defect claim is known as a completed OPERATIONS claim because the project was completed before the claim is made (or suit is filed). Typically a Notice of Completion or Certificate of Occupancy is recorded to signify when construction was at least substantially completed , but that does not always happen.

3 We then search for invoices and payment records to determine when the construction was substantially completed . As can be imagined, sometimes this analysis is more of an art than a science. Knowing the type of construction defect is extremely important when one is analyzing an ADDITIONAL INSURED ( AI ) tender. AI Endorsements ( AIEs ) generally are of two types as well, either for completed OPERATIONS claims or ONGOING OPERATIONS claims. The most well-known ISO forms within the insurance industry are CG 2010 (11/85) for completed OPERATIONS claims and CG 2010 (109/93) for ONGOING OPERATIONS .

4 Their pertinent language is as follows: Who is An INSURED (Section II) is amended to include as an INSURED the person or organization shown in the Schedule, but only with respect to liability arising out of your work for that INSURED by or for you. [ISO Form CG 2010 (11/85)] Who is An INSURED (Section II) is amended to include as an INSURED the person or organization shown in the Schedule, but only with respect to liability arising out of your ONGOING OPERATIONS performed for that INSURED . [ISO Form CG 2010 (10/93)] In analyzing the AI tender, we must compare the AIE with the underlying facts of the claim in order to determine whether the claim falls within the scope of coverage afforded by the AIE contained in the policy.

5 The Fourth District California Court of Appeal dealt with this issue in Pardee Construction Company v. Insurance Company of the The case involved a large residential tract housing project built in a San Diego suburb over multiple phases in the mid-to-late 1980s. The developer s subcontracts included the 1 Pardee Construction Co. v. Ins. Co. of the West, 77 1340 (2000). 2 | P a g e requirement that each trade contractor maintain completed OPERATIONS CGL coverage, and that the developer be named as an ADDITIONAL INSURED on the policy.

6 The homeowners association sued the developer for construction defects in 1995, and the developer tendered its defense to the trade contractors insurers. Some of the carriers provided the developer with a defense, but only as to claims arising out of their named INSURED s scope of work in this pre-Presley2 era. Other carriers declined the developer s tender, which left the developer with an unfunded amount of defense costs which it was required to pay itself. The case eventually settled and the developer funded part of the settlement.

7 Shortly thereafter, the developer sued the recalcitrant carriers for breach of contract, bad faith, fraud and declaratory relief. The trial court granted dispositive motions in favor of the carriers, and the developer appealed. The Court of Appeal reversed, finding in favor of the developer because the AIEs contained comparable language found in the CG 2010 11/85 form quoted above; the Court of Appeal held that they applied to completed OPERATIONS claims such as these and were not limited to project-specific claims. The Pardee case is best known today for dictum concerning its interpretation of the CG 2010 (10/93) ONGOING OPERATIONS AIE form.

8 This dictum, which did not affect the holding of the case, has fueled subsequent discussion about whether that endorsement affords ADDITIONAL INSURED coverage for completed OPERATIONS claims. The Court of Appeal, in reliance on insurance industry commentaries, stated: Moreover, in 1993, the Insurance Services Office (ISO) revised the language of the form 2010 endorsement utilized by the insurance industry to expressly restrict coverage for an ADDITIONAL INSURED to the ONGOING OPERATIONS of the named INSURED . This revised language effectively precludes application of the endorsement's coverage to completed OPERATIONS losses.

9 [Citation.] One insurance commentator stated regarding the 1993 revisions of the standard ADDITIONAL INSURED endorsement forms: The restriction of coverage in the two endorsements to only ONGOING OPERATIONS makes it clear that ADDITIONAL insureds will have no coverage under the named INSURED s policy for liability arising out of the products- completed OPERATIONS exposure.. The effect of this change restricting the coverage to ONGOING OPERATIONS is, however, much more profound on [form 2010]. Previous editions of [that form] contained no completed OPERATIONS exclusion and, thus, could be called on to cover an ADDITIONAL INSURED for liability arising out of the products- completed OPERATIONS hazard.

10 Similarly, construction industry and underwriting spokespersons have echoed this assessment: " completed OPERATIONS Coverage. Prior to the 1993 .. revisions, the standard ISO ADDITIONAL INSURED endorsements provided the ADDITIONAL INSURED with coverage for liability arising out of your OPERATIONS performed for the ADDITIONAL INSURED , which included completed OPERATIONS . More recent editions of these endorsements provide coverage only with respect to your ONGOING OPERATIONS , which effectively eliminates coverage for completed OPERATIONS .


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