United States: How To Fight For Coverage In Solar Panel Defect Claims

Originally published on Law360 (June 10, 2013)

Recently, the New York Times reported that "the $77 billion solar industry is facing a quality crisis just as solar panels are on the verge of widespread adoption." Reporter Todd Woody cited multiple reports of double-digit defect rates for installed components, mostly manufactured in China.

If the situation is as bad as the Times article implies, a wave of large lawsuits could be coming against solar panel manufacturers, the component manufacturers that supplied parts or materials used in the making of those panels, the panel distributors and dealers and the contractors who installed the panels.

Given the pace at which solar panels have been installed worldwide in recent years, and the pressure on manufacturers to cut prices and hence corners, this litigation wave could make the battles over liability and insurance coverage for Chinese drywall seem like a small claims dispute.

What can these businesses expect when they turn to their insurance companies for help with these claims?

Because solar panels are built into real property, insurance claims will be analyzed much as they have been for other waves of defective building materials. Over the last 25 years, these included Chinese drywall, exterior insulation finishing systems (EIFS), polybutylene plastic plumbing systems that leaked or burst after installation, asbestos-containing building materials (ACBM) and many others.

In short, we've been here before — and unfortunately, the history shows that insurance companies will refuse to honor coverage on many of these claims and will aggressively fight when policyholders are forced to sue for their coverage benefits. Here is a brief preview of likely insurance industry defenses and appropriate policyholder responses.

The Business Risk Doctrine

Insurance companies: Commercial general liability policies should not and do not cover property damage to the policyholder's own work or product and were never intended to do so.

Policyholders: The provisions of the policy fairly read as a whole, the drafting history of the policy and the industry's own current interpretation of it all contradict this simplistic notion. CGL policies provide a limited measure of malpractice coverage to its policyholders.

The "CGL Policies Aren't Performance Bonds" Argument

Insurance companies: CGL policies aren't performance bonds and therefore shouldn't be interpreted to cover the policyholder's defective work or product.

Policyholders: Insurance policies should be interpreted according to their terms, not simplistic rules of thumb. Again, the CGL policy has a limited malpractice component.

The Legally Obligated Requirement

Insurance companies: Tort claims, but not contract and warranty claims, are legal obligations, such that the latter do not satisfy the policy's "legally obligated" requirement.

Policyholders: What the policy means by "legally obligated" is that the claim must be adjudicated to the point that a binding judgment, arbitration award or settlement is required before the insurance company is required to pay the claim.

The As-Damages Requirement

Insurance companies: The majority of the damages sought in these cases are for economic damages, not damages for covered "property damage."

Policyholders: CGL policies cover not only property damage but also any and all damages resulting from covered property damage, including all economic damages.

The Occurrence Requirement

Insurance companies: The "occurrence" requires an accident, and the property damage involved with the solar panels was too reasonably foreseeable to qualify as an accident.

Policyholders: We certainly did not foresee any appreciable chance of the property damage that was later experienced.

The Property Damage Requirement

Insurance companies: Deterioration of the policyholder's work or product itself does not satisfy the "property damage" requirement.

Policyholders: The physical deterioration of the panels clearly satisfies the policy's "physical injury to tangible property" definition of "property damage."

The Contractual Liability Exclusion

Insurance companies: This exclusion for liability that is "contractually assumed" bars coverage for breach of contract and breach of warranty claims.

Policyholders: According to the policy drafters' intent, current insurance industry usage and the most reasonable interpretation of the exclusion's wording, "contractually assumed" liability refers to the policyholder's assumption of a third party's liability, such as by indemnity agreement. Therefore, the exclusion does not apply to liability to bar coverage for ordinary breach of contract and breach of warranty.

The Performing Operations Exclusion

Insurance companies: The property damage arises out of policyholder contractors' operations, so the exclusion applies.

Policyholders: The exclusion only applies to property damage actually occurring while those operations are being actively being performed, not afterwards.

The Incorrectly Performed Work Exclusion

Insurance companies: The policyholder contractor's work was incorrectly performed.

Policyholders: This exclusion does not apply to completed operations, and the property damage to the panels occurred after their operations were completed.

The Your-Product Exclusion

Insurance companies: This exclusion bars coverage for property damage to the manufacturers' or distributors' own products.

Policyholders: Once the panels were combined with the onsite labor of building them into the real property there, they ceased being "products" in that sense, all in accordance with the definition of "your products" in the policy itself, which says the exclusion cannot apply to real property.

The Your-Work Exclusion

Insurance companies: This exclusion bars coverage for property damage to panel installation contractors' own work.

Policyholders: By an exception at the end of the exclusion, it cannot apply to property damage to either their subcontractors' work or where the property damage arises from subcontractors' work.

The Impaired Property Exclusion

Insurance companies: This exclusion applies because the property damage arose from a "defect, deficiency, [or] inadequacy ... in 'your product' or 'your work.'"

Policyholders: The exclusion is incomprehensible, ambiguous and therefore unenforceable. Further, it does not apply to property that has been physically injured, which is the case with the deteriorated panels.

The Product Recall Exclusion

Insurance companies: The liability here is for a product recall; therefore, this exclusion applies.

Policyholders: A product recall involves withdrawing products that have not yet failed but which are being withdrawn from use because of a known or suspected defect that may cause them to fail in the future. Most of these claims only involve panels that have actually failed.

How Claims and Litigation May Play Out

How much liability will be covered in the end? That depends on too many factors to give a general prediction. The insurance companies' arguments will be weak in most cases, but they raise numerous issues, giving courts many opportunities to become confused and make the wrong decision on a critical issue. (That is, of course, why they raise such a long list of issues.) For policyholders, however, it generally pays to push back against these asserted coverage defenses, in many cases, following through with litigation.

The various U.S. jurisdictions are deeply divided over some of the coverage issues discussed above, so the question of which state's law applies in a given case will often be the first bone of contention. Once notice of the claim is given to the insurance company, in many cases, both parties will feel compelled to race to file the first lawsuit over coverage in their preferred jurisdiction.

Therefore, policyholders expecting big claims should have their coverage counsel in place and on top of the issues well before those claims come in and be prepared to furnish prompt notice to the insurance company. That way, a quick but well-analyzed response can be executed when the claims do come in — which, in some cases, will mean filing suit almost as fast as filing notice.

Once a claim is made against a policyholder, some jurisdictions are very strict in their enforcement of "timely notice" provisions requiring policyholders to notify their insurance companies within a fixed period, sometimes as short as a week, after learning about a potential loss or liability. So, it is very important that policyholders be prepared to give that notice promptly.

The fight over coverage will be very hard on small policyholders who do not have the legal sophistication or the financial and personnel resources to simultaneously fight the liability claims and intelligently pursue their coverage claims.

Larger policyholders who have those resources will probably fare well to reasonably well in the end — but usually only after a long fight. Larger claimants who expect that their targeted solar panel defendants will be insolvent before they can collect on their claim should tailor their liability claims toward the defendants' insurance coverage as insurance coverage will usually survive bankruptcy as a source for satisfying their claims against insolvent policyholders. Of course, this works much better if the coverage analysis is done before the liability suit is filed.

For all concerned, anticipation and thorough advance preparation may prove decisive in determining the extent of coverage and the outcome of coverage disputes.

Scott Turner is of counsel at Anderson Kill. He is a construction insurance attorney with experience securing insurance recoveries for property losses and in securing defense and indemnification for liability resulting from construction disputes and defects.

About Anderson Kill

Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estate, Trusts and Tax Services, Corporate and Securities, Antitrust, Bankruptcy, Real Estate and Construction, Public Law, Government Affairs, Anti-Counterfeiting, Employment and Labor Law, Captives, Intellectual Property, Corporate Tax and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes – with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Ventura, CA, Stamford, CT, Washington, DC, Newark, NJ and Philadelphia, PA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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