Kentucky Supreme Court Holds “Pay-if-Paid” Provision in Subcontract Is Valid and Enforceable, Shifting Risk to Subcontractor

Michelle Beth Rosenberg | Pepper Hamilton LLP | January 25, 2018

Superior Steel, Inv. v. Ascent at Roebling’s Bridge, LLC, 2017 Ky. LEXIS 511 (December 14, 2017)

Corporex Development and Construction Management, LLC (“Corporex”), a design builder, contracted with Dugan & Meyers Construction Company (“D&M”), a construction manager and general contractor on the Ascent at Roebling’s Bridge (the “Project”), a 21-floor luxury condominium in Covington, Kentucky.

As a cost saving measure, D&M asked Superior Steel, Inc. (“Superior”) to fabricate the steel and to have Ben Hur Construction Company (“Ben Hur”) complete the erection and installation work. Superior and D&M entered into a fixed price contract for $1,814,000. In turn, Superior subcontracted with Ben Hur to erect the steel and metal decking for $444,000. As structured, the payments would flow from Corporex to D&M to Superior. Superior would then pay Ben Hur.

During the course of the Project, D&M instructed both Superior and Ben Hur to perform extra work. Ben Hur and Superior submitted work orders to D&M who in turn submitted work orders to Corporex. Ultimately, Corporex refused to pay for Superior and Ben Hur’s additional work and refused to pay Superior’s retainage.

Superior and Ben Hur filed a complaint against Corporex and D&M for breach of contract, among other claims, in order to recover monies owed. The trial court held that a contract existed between Superior and D&M and that an implied contract existed between Ben Hur and D&M, as a matter of law. The trial court entered judgment in favor of Superior for $124,017.26 for extra work performed and $195,143.40 for unpaid retainage. Additionally, the trial court entered judgment in favor of Ben Hur for $284,295.53 for extra work performed.

The Court of Appeals vacated the trial court judgment, reasoning that the jury should have been explicitly instructed as to the “pay-if-paid” provisions in the Superior/D&M contract. Such provisions essentially mandated that Superior was entitled to payment from D&M only if D&M received payment from Corporex. The Kentucky Supreme Court agreed with the Court of Appeals on this issue.

At the center of Superior and Ben Hur’s breach of contract claims, was the “pay-if-paid” provisions which condition D&M’s payment of Superior on D&M having first been paid by Corporex. “Pay-if-paid” conditions shift the risk of nonpayment from the contractor to the subcontractor. The Superior/D&M contract contains two sections with pay-if-paid language. First, Article 7.11 “Claims Payment,” states:

[n]o additional compensation shall be paid by the Contractor to the Subcontractor for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved, or unless by written agreement from the Contractor to the Subcontractor prior to the execution of the Work performed under said claim, which agreement and work order must be signed by an officer of the Contractor.

Second, Article 8.2.4, “Time of Payment” states:

[r]eceipt of payment by the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The subcontractor hereby acknowledges that it relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work.

The Supreme Court held that these provisions unambiguously created a condition precedent that D&M must receive payment prior to its obligation to pay Superior. Therefore, the provisions unequivocally allocated the risk of nonpayment by Corporex to Superior and relieved D&M of its obligation to pay Superior unless and until it received payment from Corporex. As it was undisputed that Corporex never paid D&M, D&M was not obligated to pay Superior under the contract terms. The Supreme Court held the “pay-if-paid” provisions were consistent with public policy because Kentucky has long respected freedom of contract and allowed the parties to allocate foreseeable risk among themselves. Furthermore, the Supreme Court refused to invalidate such a policy without clear direction from the Legislature.

Thus, because the Supreme Court held that the “pay-if-paid” provisions were valid and enforceable, those provisions precluded judgment in favor of Superior against D&M. Nevertheless, the Supreme Court also held that Superior and Ben Hur, which had obtained a judgment for unjust enrichment against Corporex for the extra work claims, could sustain that judgment.

Calculating Actual Cash Value, Part 7: Kentucky

Shane Smith | Property Insurance Coverage Law Blog | May 12, 2015

You may have been following some of my prior blogs on Calculating Actual Cash Value. So far, I have covered: Florida, California, Louisiana, Texas, New Jersey and New York, and Michigan.

This week, I will address Kentucky.

To recap, actual cash value (ACV) is typically calculated in one of three ways:

  1. The cost to repair or replace the damaged property, minus depreciation;
  2. The damaged property’s “Fair Market Value”; or
  3. The “Broad Evidence Rule” – considering all relevant evidence of the value of the damaged property such as age of the property, the profit likely to accrue on the property, and the property’s tax value.

In determining the actual cash value of buildings for insurance purposes, Kentucky courts use the Broad Evidence Rule.1

In Snellen v. State Farm Fire & Casualty Company, the policyholder’s home was damaged by fire. Her policy provided that the insurer would pay the cash value of the damage, up to the policy limit, until actual repair or replacement was completed, at which time the insurer would pay the cost of repair or replacement, without deduction for depreciation. The court held that the policy was not ambiguous and that the insurer would only pay the “cash value of the damage, up to the policy limit, until actual repair or replacement is completed.”2 In other words, actual repair of the premises is a condition precedent to receive those amounts deducted or depreciated from replacement costs. Here, the policyholder had not repaired or replaced or even evidenced an intention to do so.

Overhead and profit cannot be depreciated, however the Snellen court held that overhead and profit may be wholly deducted separate from depreciation in order to calculate actual cash value.3 To calculate actual cash value, the insurer started with the replacement value and subsequently subtracted clean-up costs, contractor’s profit, contractor’s overhead, permits, and depreciation.4

Please feel free to leave a comment below with the state you would like me to address in the next blog in this series.

1 Snellen v. State Farm Fire & Cas. Co., 675 F. Supp. 1064, 1068 (W.D. Ky. 1987).

2 Id. at 1066.

3 Id. at 1068.

4 Id.

via Calculating Actual Cash Value, Part 7: Kentucky : Property Insurance Coverage Law Blog.

What Constitutes Insurance “Bad Faith” in Kentucky?

Kenneth Kan |  Property Insurance Coverage Law Blog | April 3, 2015

This week, in the spirit of the March Madness NCAA Tournament (and the team I have in my bracket to win it all), I decided to research what constitutes insurance bad faith under Kentucky law.

Kentucky law provides the following elements which the policyholder must prove in order to prevail against an insurance company for bad faith whether under common law or statute:

(1) the insurer must be obligated to pay the claim under the terms of the policy;

(2) the insurer must lack a reasonable basis in law or fact for denying the claim; and

(3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed.1

Like most states, Kentucky has a statute which delineates unfair claims settlement practices. In Kentucky, the Unfair Claims Settlement Practices Act (UCSPA),2 an insurance company must comply with the following mandates and refrain from:

(1) Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

(3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;

(4) Refusing to pay claims without conducting a reasonable investigation based upon all available information;

(5) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

(6) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear;

(7) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds;

(8) Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application;

(9) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of the insured;

(10) Making claims payments to insureds or beneficiaries not accompanied by statement setting forth the coverage under which the payments are being made;

(11) Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration;

(12) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information;

(13) Failing to promptly settle claims, where liability has become reasonably clear, under one (1) portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage;

(14) Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement;

(15) Failing to comply with the decision of an independent review entity to provide coverage for a covered person as a result of an external review in accordance with KRS 304.17A-621, 304.17A-623, and 304.17A-625;

(16) Knowingly and willfully failing to comply with the provisions of KRS 304.17A-714 when collecting claim overpayments from providers; or

(17) Knowingly and willfully failing to comply with the provisions of KRS 304.17A-708 on resolution of payment errors and retroactive denial of claims.

If an insurer fails to settle or pay a claim in good faith the insured can recover prejudgment interest (12% per annum) and reasonable attorney’s fees incurred. This of course would be in addition to the policy benefits which would be owed to the insured if the breach of the insurance contract is proven.

1 Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993).

2 KRS 304.12-230

via What Constitutes Insurance “Bad Faith” in Kentucky? : Property Insurance Coverage Law Blog.