It Doesn’t Hurt to Ask: Why Construction Contractors Should Always Request a Defense

Matthew Guy and David Toney | Adams and Reese

The “Duty to Defend” is a term of art used to describe an insurance company’s obligation to defend policyholders against claims made under a liability insurance policy. In the context of workplace injuries, a recent ruling from the United States Court of Appeals for the Fifth Circuit (applying Texas law) demonstrated how important it is for employers to request this defense from their insurance carriers – regardless of whether or not the employer thinks the insurance company will provide coverage. Moreno v. Sentinel Insurance Co. (5th Cir. 2022).

Construction contractors should take note of the case as a timely reminder of the importance of providing notice to insurers of claims even if they think there may not be coverage.

Summary of the Case

In July 2016, Osman Moreno fell from a ladder while working as a painter for N.F. Painting. Moreno then sued N.F. Painting and the owner of the project, Beazer Homes, for damages in Texas state court. N.F. Painting had a “Business Owner’s Policy” with Sentinel Insurance but believed that the policy would not respond to Moreno’s suit because it thought Moreno was its employee and, therefore, covered under worker’s compensation. N.F. Painting did not contact Sentinel to request a defense under its liability policy, even when Moreno amended his claim to allege that he was an independent contractor and not an employee. However, N.F. Painting’s co-defendant, Beazer Homes, did not hesitate to contact Sentinel about Moreno’s suit.

In 2019, without notifying Sentinel, N.F. Painting and Moreno agreed to a $1,627,541.35 judgment. Roughly one month later, Moreno sued Sentinel for breach of contract. The case was removed to federal court.

Moreno argued that Sentinel breached its insurance contract with N.F. Painting because it refused to pay the agreed judgment on N.F. Painting’s behalf. The trial court disagreed and dismissed Moreno’s suit against Sentinel. On appeal, the Fifth Circuit affirmed, finding that N.F. Painting had not satisfied the notice requirements of its policy with Sentinel. Accordingly, the Fifth Circuit held that Sentinel had not breached its insurance contract by not defending N.F. Painting and by not paying the proposed judgment against N.F. Painting. Put differently, Sentinel could not be blamed for N.F.’s Painting’s decision to handle the matter on its own.

Finally, the Fifth Circuit noted that Sentinel “did not have an obligation to sua sponte inject itself into the state court action” and that N.F. Painting’s inability to control N.F. Painting’s defense of Moreno’s injury claim, together with N.F. Painting’s agreement to entry of judgment against it in the amount of approximately $1.6 million, constitute prejudice as a matter of law, which also defeated the claim.

Key Takeaways

It appears that Sentinel would have defended N.F. Painting in the suit against Moreno if N.F. Painting would have requested a defense. However, because N.F. Painting failed to ask, Sentinel was not required to defend N.F. Painting. Put another way, Sentinel had no duty to defend – unless and until – N.F. Painting requested the defense. It is worth noting that Sentinel still learned about the suit through Beazer Homes. Still, in the eyes of the Fifth Circuit, this was not sufficient – the notification had to come directly from N.F. Painting. Indeed, in the words of the Fifth Circuit, “despite having knowledge and opportunity, an insurer is not required to simply interject itself into a proceeding on its insured’s behalf.”

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Insurers Must Defend Allegations of Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    Granting the insured’s motion for partial judgment on the pleadings, the court determined the insurers had a duty to defend. Suez Treatment Solutions, Inc. v. Ace Am. Ins. Co. & Liberty Mut. Fire Ins. Co., 2022 U.S. Dist. LEXIS 59044 (S. D. N. Y. March 30, 2022). 

    Suez Treatment Solutions, Inc. held policies from Chubb and Liberty Mutual Fire Insurance Company to cover its operations in connection with the development of a pollution treatment system in North Carolina. When the project ultimately failed, an underlying action sought damages from Suez, alleging breach of contract, negligence, and fraud. Suez filed this case seeking a declaratory judgment that Chubb and Liberty were each obligated to defend and indemnify Suez in the underlying case. 

    The City of High Point hired Suez to upgrade the facilities at its wastewater treatment plant staring in 2021. Because mercury levels were too high in emissions from sewage-sludge incinerators, Suez began working on the installation of a Mercury Removal System. After installation, a leak occurred in a component known as the heat exchanger. The leak caused the system to shut down and weeks-long repairs began. 

    The underlying complaint alleged that the day after the system shut down for repairs, Suez and its subcontractor left and did not instruct High Point on how the system should be monitored during the shutdown. The shutdown caused an increase of the carbon monoxide levels. High Point contacted Suez who instructed the plant to open an outlet damper to evacuate the heat. This action caused temperatures to increase, however. A fire ignited, and the burning carbon created high concentrations of toxic sulphur-dioxide gas. It was alleged that fire created health and safety hazards at the treatment plant and surrounding area. The fire was finally extinguished almost a month after the shutdown by dumping the carbon out of the unit. 

    According to the City, Suez did nothing to repair the unit for months. When attempts to repair were made, they were fruitless. Another fire occurred during the planned start-up, causing extensive damage to the system. 

    High Point sued for breach of contract, breach of warranties, negligence, negligent misrepresentation, fraud, and unfair and deceptive trade practices.  

    When a defense was denied, Suez sued Chubb and Liberty for a declaratory judgment. The Chubb policy was a Contractors Pollution Liability and Errors & Omission Policy that ran from July 24, 2016 to July 24, 2017. Liberty issued a CGL policy with a policy period from March 1, 2016 to March 1, 2017. Suez moved for partial judgment on the pleadings.

    Chubb relied upon a Products Liability Exclusion to deny coverage. The exclusion barred coverage for any suit against Suez “arising out of or related to” “[a]ny goods, products or equipment designed, manufactured, sold, supplied or distributed by [Suez].” The underlying complaint alleged that Suez supplied the mercury removal system that caused the loss and that Suez served as a sales force and distributor. Other underlying allegations, however, related to professional services rendered at the facility, therefore falling outside the scope of the Products Liability Exclusion and triggering a duty to defend. There was a question of fact with respect to whether the damages arose entirely from the “design, manufacture, sale, supply or distribution” of the mercury removal system by Suez, or if other actions taken by Suez – such as a failure to train or supervise – also gave rise to the damage at the High Point facility. Therefore, the Products Liability Exclusion did not, at this stage, preclude coverage as a matter of law. 

    Numerous issues of fact meant that Liberty also had a duty to defend. Liberty argued there was no occurrence because the damage arose from faulty workmanship. But Liberty read the underlying complaint too narrowly. The complaint alleged damage beyond the property Suez supplied, caused by an accident or repeated exposure to conditions. For example, the underlying complaint alleged that the fire damaged other components of the system.

    The business risk exclusions in Liberty’s policy also did not bar coverage because issues of fact were present. Further, although the underlying complaint alleged “design and oversight responsibilities” were breached, the Professional Liability Exclusion did not bar coverage because the underlying complaint did not allege that the property damaged arose solely out of a failure to render professional services. 

    Therefore, the court granted Suez’s motion against both Chubb and Liberty, granting declaratory relief with respect to the duty to defend. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

No Duty to Defend Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii

    The court determined the insurer had no duty to defend construction defect claims asserted against the insured. Pa. Nat’l Mut. Cas. Ins. Co. v. River City Roofing, 2022 U.S. Dist. LEXIS 38226 (E.D. Va. March 3, 2022).

    Branch Builds, Inc, was the general contractor for Shock Valley View Genesis, LLC (“Genesis”) in charge of constructing apartments. River City Roofing was a subcontractor for all roofing, aluminum and composition siding at the project. River City contracted and warranted its materials and work, agreed to indemnify Branch, and agreed to make Branch an additional insured under its CGL policy. 

    After completion of the project, Genesis reported defects in the construction. The roof, aluminum and composition siding allowed water intrusion and property damage to the apartments. Branch repaired and compensated Genesis for all damage done to the apartments. Branch then sued River City and another subcontractor and demanded judgment of $3,000,000. 

    River City’s CGL policy was issued by plaintiff insurer. River City failed to pay premiums and the policy was cancelled while construction was ongoing. The insurer filed suit seeking a declaratory judgment that it had no duty to defend or indemnify River City. Branch answered the complaint, but River City never made an appearance or filed an answer. 

    The insurer argued there was no duty to defend because the policy was cancelled. The underlying complaint, however, did not say that the policy was cancelled before the end of the policy period. Consequently, the policy cancellation did not guide the court’s determination on the duty to defend. 

    The court looked to the exclusions. The “Your Work” exclusion barred coverage for “property damage to your work arising out of it or any part of it.” The alleged damage to the apartments was River City’s own work. River City was hired to handle the roofing, which Genesis alleged was faulty and led to water intrusion. Any resulting damage to the portion of the property not built by River City, but which was caused by River City’s defective job performance, would be property damage “arising out of” River City’s work.

    The “impaired property’ exclusion barred coverage for damage to certain portions of the property other than River City’s work. Branch argued the work by River City was defective in workmanship and materials and that defective work caused damage to the roof itself, and other parts of the property. Further, Branch repaired the roofing deficiencies. Therefore, the exclusion applied. 

    Every allegation Branch alleged against River City was excluded by on the the exclusion. No accident occurred, and the alleged damage was entirely attributable to River City’s own work, or arose out of River City’s work, and was able to be repaired. Therefore, summary judgment was granted to plaintiff on the duty to defend.

    The motion was denied, however, on the duty to indemnify. A ruling on the duty to indemnify had to be deferred until after a final ruling in the underlying case.  

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Federal Courts Reject Insurers’ Attempts to Recoup Defense Costs Expended Under Reservation of Rights

Anthony L. Miscioscia and Margo Meta | White and Williams

In situations where there is a dispute over a duty to defend, an insurer may provide a defense to its insured, subject to a reservation of rights, to not only deny coverage for a defense, but also to file a declaratory judgment action and recoup defense costs in the event it is determined there is no duty to defend. But are defense costs recoupable? Last week, federal trial courts in Georgia and Pennsylvania answered this question with a resounding “no”.

In Chemical Equipment Labs, Inc. v. Travelers Property Casualty Company of America, Case No. 19-3441, 2022 U.S. Dist. LEXIS 61298 (E.D.Pa. Mar. 31, 2022), the United States District Court for the Eastern District of Pennsylvania was called to determine whether Travelers Property Casualty Company of America (Travelers) was entitled to reimbursement of defense costs after it was determined that it had no duty to defend its insured in an arbitration for breach of a charter agreement. The Travelers’ policies did not contain an express reimbursement provision. The court found that Travelers was not entitled to reimbursement because under Pennsylvania law, “[r]eimbursement of defense costs requires an express provision in the written insurance contract.”

Similarly, in Mt. Hawley Insurance Company v. East Perimeter Pointe Apartments LP, Case No. 20-cv-3529, 2022 U.S. Dist. LEXIS 61885 (N.D. Ga. Apr. 1, 2022), the United States District Court for the Northern District of Georgia considered whether Mt. Hawley Insurance Company (Mt. Hawley) was entitled to reimbursement of defense costs after it was determined that it had no duty to defend its insured against a lawsuit for negligent management and security. Mt. Hawley’s reservation of rights explicitly reserved the right to seek reimbursement of defense costs in the event it was determined that there was no coverage available under its commercial general liability policy; however, the policy did not contain a reimbursement provision.

The East Perimeter court acknowledged that the recoupment of defense costs in the absence of an express reimbursement provisions was an unsettled issue in Georgia, as “Georgia courts have not decided the issue and federal courts are split.” In Illinois Union Insurance Company v. NRI Construction, Inc., 846 F. Supp. 2d 1366 (N.D. Ga. 2012), the court permitted reimbursement, finding it was justified under an unjust enrichment or implied in fact contract theory. However, in American Family Insurance Company v. Almassud, 522 F. Supp. 1263 (N.D. Ga. 2016), the court required an express reimbursement provision in the contract, finding that “if a right to recoupment is a benefit that the insurer deems sufficiently important, it can easily secure that right by including it in the policy agreement.”

The East Perimeter court ultimately concluded that Almassud was more persuasive, on the basis that permitting a right to recoupment absent a policy provision would permit insurers to unilaterally impose post hoc conditions on their contractual obligations.  

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Fifth Circuit Finds Duty to Defend Construction Defect Case

Tred R. Eyerly | Insurance Law Hawaii

    Reversing the judgment of the district court, the Fifth Circuit found the insurer owed a defense in a construction defect case. Siplast, Inc. v. Emplrs Mut. Cas. Co., 2022 U.S. App. LEXIS 795 (5th Cir. Jan. 11, 2022).

    The Archdiocese of New York sued various parties for a roofing project at a high school in the Bronx. Siplast, the roofing manufacturer, was included as a defendant. The underlying lawsuit arose from the Archdiocese purchase of a roof membrane system from Siplast. Siplast guaranteed that the roof membrane system would remain “in a watertight condition for a period of 20 years . . . or Siplast will repair the Roof Membrane System at its own expense.”

    After installation of the roof, school officials noticed water damage in the ceiling tiles throughout the school after a rain storm. Siplast attempted to repair the damage, but was unsuccessful. Siplast later informed the Archdiocese that the guarantee would not be honored regarding any permanent improvements of the roof. The Archdiocese filed suit against Siplast and the installing contractor. The cause of action against Siplast was for breach of the guarantee.

    Siplast tendered its defense to its insurer, Employers Mutual Casualty Company. Coverage was denied and Siplast filed suit. Both parties moved for summary judgment. The district court granted Employers Mutual’s motion and denied the motion filed by Siplast. The court found that there was property damage and an occurrence, but the Your Product/Your Work exclusion applied.

    The Fifth Circuit considered whether the underlying complaint contained allegations of damage to property other than Siplast’s roof membrane as part of the cause of action against Siplast. Liberally construed, the Fifth Circuit found that it did. Therefore, there was a duty to defend. The underlying complaint’s request for damages in excess of $5,000,000 was read to go beyond the repair costs for the roof membrane and to include a prayer for damages covered by the insurance policies, triggering the duty to defend.

    The district court correctly determined there was an occurrence. Under Fifth Circuit precedent, claims for damage caused by an insured’s defective performance could constitute an “occurrence” when “property damage” resulted from the “unexpected, unforeseen or undersigned happening or consequence” of the insured’s negligent behavior. 

    Further, while the legal theories underpinning the underlying plaintiffs’ cause of action might sound in contract, the facts alleged concerned property damage to the school and the roof due to Siplast’s negligence, constituting an occurrence under the policy. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.