No License, No Contract, No Claim

Jeffrey MacHarg | Fox Rothschild LLP

Can an unlicensed general contractor enforce a construction contract in North Carolina? “No,” and as Judge Conrad explains, “[t]his is an unyielding rule.”

JCG & Associates, LLC vs. Disaster America USA, LLC, 2021 NCBC Order 76 (N.C. Super. Ct. Dec. 9, 2021) involved a dispute between several Brunswick county homeowners and an unlicensed general contractor, Disaster America USA, over home restoration work in the wake of Hurricane Florence.

The initial contracts were between the homeowners and Disaster America USA, who was not a licensed general contractor in NC.  Those contracts were later assigned to affiliate, Disaster America NC, which did have a general contractor’s license.

After delays and disagreements, the homeowners terminated the contracts and sued Disaster America USA for negligence, fraud, unfair/deceptive trade practices, and constructive fraud.  They also sought a declaration that the contracts were illegal and unenforceable because Disaster America USA was never licensed as a general contractor. Assignee, Disaster America NC, counterclaimed against the homeowners for breach of contract and quantum meruit.

In this order, Judge Conrad decided the homeowners’ motion for partial summary judgment. In North Carolina, a party who contracts to perform construction services valued over $30,000 must have a general contractor’s license.  N.C. Gen. Stat. § 87-1. The homeowners argued that their contracts with Disaster America USA were illegal and unenforceable because Disaster America USA was never licensed, and this illegality could not be cured by assigning the contract to a properly licensed entity.  As a result, the homeowners sought summary judgment on assignee Disaster America NC’s contract-based claims for breach and quantum meruit.

Disaster America advanced a series of arguments to try to get around Section 87-1’s licensure requirements.  Judge Conrad rejected all of them.

Disaster America USA first claimed it had permission to use the license of licensed general contractor, JCG & Associates, LLC, pointing out that each of the contracts cleverly listed “DISASTER AMERICA USA, LLC/JCG & ASSOCIATES, LLC” as the general contractor. Putting aside the fact that JCG & Associates (a co-plaintiff) denied even knowing who Disaster America USA was, Judge Conrad rejected this argument, explaining that the contracting party “must be licensed,” and the contracts were with Disaster America USA, not JCG & Associates.

Disaster America then argued that it didn’t need a license under Section 87-1 because these were not construction contracts.  Judge Conrad called this argument “meritless.”  Id. ¶ 19.  The contracts were titled “Construction Agreements” and described things like roof removal, roofing, siding, trim, and other services that were clearly construction work.  Judge Conrad concluded that “[w]ithout question,” Section 87-1 applied and required a general contractor’s license for this type of work.  Id.

Finally, Disaster America USA argued that any illegality was cured when Disaster America USA assigned these contracts to a licensed entity, Disaster America NC.  Citing several cases, Judge Conrad held that the illegal and defective contracts “cannot be validated by the contractor’s subsequent procurement of a license.”  Id. ¶ 16.  Likewise, assignment to a licensed contractor “does not cure the illegal contract.”  Id.

In the end, Judge Conrad relied on the “unyielding” rule that a contract entered into by an unlicensed contractor is illegal and unenforceable by the contractor, and he entered judgment in the homeowners’ favor on Disaster America NC’s breach and quantum meruit claims.

Key Takeaway: When it comes to performing work as a general contractor, North Carolina’s licensure requirements are “unyielding.”  If you don’t have a proper license, you don’t have an enforceable contract, and you have no claim.  No license, no contract, no claim.

California Court Rules Jury Must Resolve Dispute Between Homeowner and Subcontractor Insurer Over When Claim Occurred

Blake Robinson | Davis Wright Tremaine

The California Court of Appeal recently reversed a trial court’s dismissal of a lawsuit, concluding that because there was a dispute over when a homeowner’s claim “occurred” for purposes of an insurance policy, that dispute must be resolved by a jury.

Case Background

Guastello v. AIG Specialty Insurance Co.1 involved a dispute over whether a claim was covered by an insurance policy. The events in question began in 2003 and 2004, when a subcontractor built retaining walls in a housing development. Several years later, the plaintiff purchased a home in the development. Fast forward to 2010, when one of the retaining walls close to the plaintiff’s lot failed and caused significant damage to the plaintiff’s backyard perimeter wall, among other things.

The plaintiff obtained a default judgment of over $700,000 against the subcontractor. The plaintiff then filed a lawsuit against the subcontractor’s insurer, seeking payment on the judgment. The insurer filed a motion for summary judgment, seeking dismissal on the ground that the subcontractor only had a policy with the insurer in 2003 and 2004, but the property damage occurred in 2010.

In response to the motion, the plaintiff filed a declaration in which a geotechnical engineer stated that the retaining wall failed due to the subcontractor’s negligent construction. Significantly, the engineer stated that the damage to the retaining wall and surrounding area began within months of the construction’s completion, including through “continuous and progressive destabilization” of the area. The insurer, on the other hand, submitted evidence that no damage occurred until the retaining wall failed in 2010.

Ultimately, the trial court sided with the insurer, and the plaintiff subsequently filed an appeal.

Occurrence vs. Claims-Made

The appeals court noted that the subcontractor had an occurrence policy, which “provides coverage for damages that occur during the policy period, even if the claim is made after the policy has expired,” as opposed to a “claims-made” policy—which “provides coverage only if the claim is made during the policy period.” Accordingly, the key question was whether the damage that the plaintiff suffered occurred during the 2003-2004 policy period.

In answering that question, the appeals court relied on the “settled rule” that “when continuous or progressively deteriorating damage or injury first manifests itself, the insurer remains obligated to indemnify the insured for the entirety of the ensuing damage or injury.”

Ultimately, the court concluded that—based on the expert declaration—there was evidence from which a jury could find that the damage began occurring shortly after the retaining wall’s completion in 2003. Therefore, the Court of Appeal held that the trial court erred in dismissing the plaintiff’s claim on summary judgment, and the case was sent back to the trial court so a jury could resolve the disputed issue of when the damage began to occur.

Lessons in Insurance

As this case illustrates, both owners and contractors should be aware of the types of insurance policies that they and those with whom they contract have. Whether it is a claims-made or occurrence policy can sometimes make the difference between whether a claim is covered or not.


1   61 Cal.App.5th 97, 275 Cal.Rptr.3d 370 (2021)

Some Insurers Dismissed, Others Are Not in Claims for Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    The insured Developer survived a motion to dismiss by one of several carriers who were asked to defend against claims for faulty workmanship. East 111 Assoc. LLC v. RLI Ins. Co., 2019 N.Y. Misc. LEXIS 5331 (Oct. 4, 2019).

    Developers sponsored a residential condominium project and sold all units. The owners subsequently sought damages for $881,450 for alleged design and construction defects, and asserting causes of action for, among other things, breach of contract, specific performance and negligence. The underlying action settled for $350,000. Developers sought coverage from its insurers. 

    The Developers sued the carriers for a declaratory judgment that they were entitled to a defense. Developers had a CGL policy issued by Mt. Hawley. Developers were also additional insureds in policies issued to subcontractors by James River, Admiral and Selective. The insurers moved to dismiss. 

    The insurers’ breach of contract exclusion precluded coverage for “property damage . . . arising directly or indirectly out of . . . (a) Breach of express or implied contract; (b) Breach of express or implied warranty . . .” Developers argued that the owners’ cause of action for negligence did not fall within this exclusion. However, the negligence cause of action alleged – as did the breach of contract – that Developers constructed the building with design and construction defects and not in accordance with the offering plan. Since all of the alleged “property damage arose directly or indirectly” from Developers’ alleged breach of express or implied contract by their failure to deliver a building free of defects, the underlying action fell within the breach of contract exclusions. Therefore, motions to dismiss by James River, Admiral, and Mt. Hawley were granted.

    The Developers were additional insureds under the Selective policy issued to Walsh, a subcontractor. The underlying complaint carried the possibility that Walsh’s allegedly fault workmanship damaged other parts of the building – which was not, as a whole, Walsh’s work – an “occurrence” giving rise to “property damage” could exist under the Selective policy. Accordingly, the alleged water damage triggered Selective’s duty to defend Developers. 

Montana Supreme Court: Insurer Not Bound by Insured’s Settlement

K. Alexandra Byrd | SDV Insights | October 24, 2019

In Draggin’ Y Cattle Co., Inc. v. Junkermier, et al.1 the Montana Supreme Court held that where an insurer defends its insured and the insured subsequently settles the claims without an insurer’s participation, a court may approve the settlement as between the underlying plaintiff and underlying defendant, but the settlement will not be presumed reasonable as to the insurer. Therefore, an insurer who defends its insured cannot be bound by a stipulated settlement that the insurer did not expressly consent to.

The case involved Draggin’ Y Cattle Company (the “Cattle Company”), a ranching and cattle business that utilized the services of an accounting firm, Junkermier, Clark, Campanella, Stevens, P.C. (“Junkermier”), to structure the sale of real property to take advantage of favorable tax treatment. It was discovered that Junkermier’s employee misinformed the Cattle Company’s owners of the tax consequences of the sale. The Cattle Company’s owners subsequently filed suit against Junkermier and its employee and alleged nearly $12,000,000 in damages due to the error. Junkermier’s insurer, New York Marine, provided a defense for Junkermier and its employee.

The Cattle Company’s owners offered to settle the claims against Junkermier and its employee for $2,000,000, the policy limit of the New York Marine policy. New York Marine refused to give its consent or tender the policy’s limit. Subsequently, Junkermier, its employee, and the Cattle Company entered into their own settlement agreement for $10,000,000. The settlement was contingent upon a reasonableness hearing to approve the stipulated agreement.

New York Marine moved to intervene and challenged the stipulated settlement. The trial court, relying on Tidyman’s Mgmt. Svs. Inc. v. Davis, 330 P.3d 1139 (Mont. 2014), held that New York Marine had effectively abandoned its insured when it had refused to settle the claim in good faith and therefore it was “as if it had breached the duty to defend.” The trial court concluded that the settlement was reasonable and entered judgment against Junkermier.

On appeal to the Montana Supreme Court, New York Marine argued that a stipulated judgment, entered into without the insurer’s consent or participation, is only reasonable when the insurer has refused to provide a defense, effectively abandoning the insured. New York Marine noted that it provided its insureds with a defense throughout the relevant proceedings.

The Montana Supreme Court agreed with New York Marine and held that if parties decide to settle without the insurer’s participation, a court may approve the stipulated judgment as between the underlying plaintiff and the underlying defendant, but it will not be presumed reasonable as to the insurer. The judgment against Junkermier and the proceedings were reversed and remanded to the lower court for further proceedings.

This case underscores the importance of involving coverage counsel in settlement negotiations when a defending insurer refuses to agree to a reasonable settlement. Montana policyholders should also consider whether a declaratory judgment action is necessary if their insurer has reserved its rights as to any indemnity owed.

Policyholders and Contractors Unite Against Wrongful Insurance Company Claims Practices

Chip Merlin | Property Insurance Coverage Law Blog | December 5, 2019

While working on and researching for answers to questions posed by Professor Feinman regarding the growing insurance coverage gaps crisis, I came across a very pointed article published about how modern insurance company claims practices are destroying the construction restoration industry.

In Cleaning & Restoration (Quarter 1, 2019) an article, “Our Greatest Need—The Case For, And Path To, Industry Advocacy For The Restoration Industry,” by the Restoration Industry Association (RIA) Board member Mark Springer, stated the following:

In a previous C&R article…. I described a situation where an insurance carrier refused any payment on a water mitigation claim due to a technicality in document upload. It is not my intent to relitigate that argument but rather to expand on some of the issues that restoration contractors face. In that article, I stated a thesis that poses a somewhat grim outlook for the restoration industry. However, with each passing month, I continue to see challenges emerge that reinforce this position. The thesis is this:

‘If restoration companies are unwilling to unite, advocate for sustainable claims practices and take a proactive approach with insurance carrier claims policies, then the restoration industry as we know it will cease to exist within a decade.’

I agree. The significance is that leadership from the largest and most longstanding restoration construction association is promoting this “call to arms” in its own battle with the property insurance claims handlers. It is not only policyholders suffering from catastrophic physical damage to their businesses and homes, the insurance claims industry has focused its claims techniques on those contractors repairing and rebuilding those structures.

Springer made his point further:

‘Claims policies’ go much deeper than the specific policies that a carrier dictates to issue payment. The issues we face are many, and they all impact the entire claims process that a property restoration company must navigate in the course of their day-to-day operations. What follows are some examples of the challenges and threats we face. Realistically, each of these areas, or sectors of concern, are not only necessary but essential in the claims environment. However, there are some key questions that each restorer, and the industry at large, should be examining if we are going be able to operate our businesses sustainably. These questions are not rhetorical; they are not intended to be presented sarcastically or with bias. This isn’t a time for conspiracy theories, but we would be exceptionally naive if we were to think that the largest fiduciaries in the world, who incidentally are the repositories of the largest quantities of data in the world, were looking out for any interest other than their own and that of their shareholders.

Springer provided several examples of methods the insurance claims Industry is leveraging lower claims payments through wrongful claims practices, which are often involving partners of the insurance companies.

  1. Pricing and Scoping platforms found in Xactware, which is operated by Verisk—a company owned primarily by insurance companies until it went public.
  2. Non-adjuster insurance company construction consultants who often delay and raise roadblocks to payment without legitimate reason. The RIA named JS Held as an insurance industry partner consultant that RIA leaders need to have “talks” with.
  3. Third-Party Administrators Growing Influence and Expanded Role in claims adjustment.
  4. Government regulations and rules not under insurance carrier claims rules. Indeed, Springer notes that the result is that less affluent contractors breaking the law will get paid by insurers for the illegal construction, which is performed, but not caught by, government regulators.

Certainly, the insurance company will claim that many contractors overprice materials and labor. They will also point to those that over-scope the damage and method of repair so that Xactware performs a very valuable function in the claims process. They will also point out that expert consultants can help prevent contractors from “gaming” the claims payment system and prevent unreasonable overpayments payments. These are two legitimate concerns. Still, two wrongs never make a right.

I am not certain how insurers get away from the refusal to pay government safety laws for construction workers. Of course, insurance claims managers just saying “no” and then conspiring with financial support for those that break the law is one way to do it, as Springer noted. I am certain that the audit committees checking on governmental compliance for the publicly traded insurers would not like to read these accusations by Springer.

I would suggest that contractors and those concerned about what they can do to help stop the growing trends of wrongful claims practices of the insurance claims industry read the various articles archived by the RIA and support many of their efforts. The RIA has over 1,200 member firms and has been in existence for over 70 years advocating for restoration contractors.

Policyholder interests for high standards of ethical construction practices and fair and ethical claims practices are aligned with the RIA—so should the insurance industry.