Federal Court in Alaska Holds Insurer Liable Under E&O Policy to Indemnify and Defend Construction Manager for Claims by Subcontractor That Construction Manager Failed to Properly Perform Construction Management Services

by Pepper Hamilton LLP
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KICC –Alcan Gen. v. Crum & Forster Specialty Ins. Co., 2017 U.S. Dist. LEXIS 37560 (March 16, 2017)

A Contractor/Construction Manager, KICC-Alcan General (“KICC”), entered into a subcontract with an MEP subcontractor, Superior Group (“Superior”), concerning the construction of two buildings at an airforce base in Alaska. Superior sued KICC for approximately $2 million in costs it incurred in excess of the contract value, allegedly caused by KICC’s failure to properly manage the project.  KICC tendered Superior’s claims to its Errors and Omissions insurance carrier, Crum & Forster Specialty Insurance Company (“C&F”).  C&F denied both defense and indemnity of Superior’s claims.  KICC settled its claims with Superior prior to trial.  KICC then sued C&F for its breach of the duty to defend and indemnify against Superior’s claims, as well as a breach of its duty of good faith.

The terms of KICC’s E&O policy provided coverage for “damages… because of… an act error or omission in the rendering or failure to render professional services by any insured.”  The contract defined “professional services” as “those functions performed for others by you or by others on your behalf that are related to your practice as a consultant, engineer, architect, surveyor, laboratory or construction manager.”

Superior alleged that KICC: mismanaged a soil contamination issue at the beginning of the project; failed to provide timely responses to requests for information and contract modifications; and directed other subcontractors to work in the same areas at the same time as Superior, resulting in delays and added costs to Superior on the project. Superior submitted a request for equitable adjustment (“REA”) for these costs and delays, but KICC denied the REA.  In its lawsuit, Superior asserted claims for breach of contract and quantum meruit.

C&F’s main argument was that its policy covered only negligent acts on the part of KICC in its construction administration services, and that Superior’s claims were for contractual or quasi-contractual damages. C&F cited to Bell Lavalin v. Simcoe and Erie Gen. Ins. Co., 61 F.3d 742 (9th Cir. 1995), which held that “a professional liability policy did not provide coverage for a simple contract dispute in which [a subcontractor] performed work for which it was not paid.” Id. at 746.   In Bell Lavalin the general contractor refused to provide a contract extension to its subcontractor during a delay.  The subcontractor walked off the project after having been paid for approximately half of the services it had provided. Id. at 744.  The subcontractor sued the general contractor for its unpaid contract amounts, and prevailed at trial.  The general contractor then sued its insurer for indemnity.  The general contractor’s E&O insurance policy provided coverage for damages that “arise out of the insured’s performance as a project manager and are caused by an error, omission or negligent act.” Id. at 746.  The court held that the damages incurred by the subcontractor were not as a result of any act or omission of the general contractor’s project management, but rather were a result of a failure to pay the subcontractor for completed work. Id.  The claims were purely contractual and not covered under the E&O policy, thus the insurance company prevailed.

The Court in this matter found that several key facts were different from those in Bell Lavalin.  Superior was not seeking payment of the base contract value, but was seeking additional compensation beyond the contract price.  Superior was required to prove that KICC wrongfully denied the contract extension or otherwise caused it to incur additional costs above the contract price to prevail.  The Court found that Superior’s claims were clearly based on KICC’s professional services, as the complaint referenced KICC’s mismanagement of the project as the cause of the damages.  The Court also found that pleading in contract does not automatically preclude coverage under this policy, which did not expressly exclude claims of contractual liability or those that arise from contract.  As a result, the Court held that Superior’s claims were covered by the C&F policy, and thus C&F had a duty to indemnify KICC for the settlement amount, as long as the settlement was reasonable and non-fraudulent.  The Court also held that C&F breached its duty to defend.

Finally, the Court held that to prevail in its bad faith cause of action KICC would have to show that C&F’s actions “were objectively unreasonable under the circumstances.” The Court found that in light of the holding in Bell Lavalin, no reasonable jury could find that C&F’s actions were objectively unreasonable.

To view the full text of the court’s decision, courtesy of Lexis®click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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