James W. Bryan | Nexsen Pruet | September 12, 2017
Construction defect claims often include coverage disputes spiced with allegations of bad faith designed to turn up the heat on the insurer. The Fourth Circuit, in its review of one such recent North Carolina case, held while the insured prevailed on its contract claim, there was no bad faith. Delay, without other, aggravating factors is not enough to establish the malice or reckless indifference to consequences necessary to reach the level of bad faith. Westchester Surplus Lines Ins. Co. v. Clancy & Theys Construction Co., 683 Fed.Appx. 259 (4th Cir. 2017).
Westchester involved a dispute over insurance coverage for a general contractor’s liability for defective design of a building foundation. A joint venture, in which Clancy was a partner, was hired to construct a mid-rise student housing building in Raleigh, North Carolina. In September 2011, after construction was well under way, a portion of the building began to lean, damaging other portions of the building. The owner demanded a remedy that would result in no risk to it, or its lender. Following agreement on a repair plan, the joint venture initiated a mediation process with potentially responsible subcontractors seeking allocation of the $14.4 million repair costs. This resulted in agreement that 10.5 million would be paid on behalf of subcontractors, leaving the remaining damages to be absorbed by the joint venture. Clancy sought reimbursement of its share from Westchester under general and professional liability policies.
Upon receiving the owner’s demand for repair in September 2011, Clancy notified Westchester of the potential claim. Clancy was unable to contact the Westchester representative assigned to the claim who, unbeknownst to Clancy, had left the employ of Westchester. After about a month, Clancy established contact with another Westchester employee assigned to the claim. After providing all of the communications between Clancy and the owner, Westchester was silent for another two months. As Clancy pressed for a coverage determination, Westchester requested an accounting of costs and a copy of the joint venture agreement, all of which Clancy provided. Eventually, in May 2012, Westchester informed Clancy it believed its policy did not cover Clancy’s obligations for the construction damages but it was not issuing a formal denial of coverage. Indeed, three months later, Westchester stated it was still investigating the coverage issue. In September, 2012, Clancy complained of Westchester’s year long delay and threatened suit. In response, Westchester filed its action for a declaratory judgment that its policy afforded no coverage. Clancy counterclaimed alleging Westchester’s breach of contract and tortious breach of contract based upon Westchester’s failure to timely investigate, failure to timely issue a coverage opinion, failure to properly defend, failure to assist in mitigating damages, and failure to indemnify for covered losses. Clancy also alleged Westchester acted in willful, wanton disregard of its duty to defend and indemnify, entitling Clancy to extra-contractual damages.
In May 2014, the district court denied summary judgment for either party on the contract dispute but entered summary judgment for Westchester on Clancy’s claim for bad faith tortious breach of contract, finding “in order to recover for tortious breach of an insurance contract, an insured must show that the refusal to pay on the insurance contract was based not on honest disagreement or innocent mistake, but rather on ‘malice, oppression, willfulness and reckless indifference to consequences.’”
The district court concluded
Though there is much dispute present in the record regarding when and whether Clancy notified Westchester of a claim against it, the record does not support that Westchester acted with malice, oppression, or a reckless indifference to consequences. Where courts have found that a refusal to settle an insurance claim was an act of bad faith there has been ample evidence to show not only delay in investigation but also other aggravating factors such as the offer of a woefully low settlement amount, reliance on estimation of damage and repairs submitted by a clearly unqualified professional, and evidence that the insurance company “stirred up hate and discontent” against its insured by making false accusations regarding the insured’s participation in the loss…While the record certainly reflects that Westchester does not think Clancy is entitled to indemnity and defense, Clancy has not demonstrated the presence of sufficient aggravating factors, nor an opinion that Westchester’s actions were not reasonable or appropriate within industry practices, and summary judgment in favor of Westchester is appropriate on Clancy’s tortious breach of contract claim.
A year later, in a bench trial as to the remaining issues, the district court found Westchester owed Clancy coverage for its portion of the loss, less its deductible, plus applicable interest. Westchester appealed and Clancy cross- appealed. The Fourth Circuit affirmed the bench trial judgment on the contract claim, rejecting Westchester’s argument that the joint venture’s liability was separate and distinct from the liability of each of its members. As to the bad faith claim based upon delays in Westchester’s investigation, the Fourth Circuit concluded summary judgment in favor of Westchester was proper, relying on North Carolina law requiring, “malice, oppression, willfulness [or] reckless indifference to consequences” in order to establish tortious breach of contract.
Though an unpublished decision, Westchester reflects a North Carolina trend; delay-based extra-contractual claims in construction defect cases do not end well for the insured. The procedural history of Westchester demonstrates a common pattern and the court’s opinion demonstrates a frequent result.