Part of Contractor's Settlement Payment Covered by Insurer under the Duty to Defend

The California Court of Appeals in Navigators Specialty Insurance Co. v. Moorefield Construction, Inc. concluded that a general contractor's general liability (CGL) insurer must pay the general contractor for at least part of its settlement obligation notwithstanding there was no coverage.

The general contractor entered into a contract with the owner to construct a Best Buy store.  Years after the project was completed, the owner of the building sued the general contractor (and others) for breach of contract and negligence based on "claims the flooring had failed." The insurer accepted tender of defense from the general contractor with a  reservation of rights.

During the litigation it was revealed that the "flooring tiles had been installed on top of a concrete slab that emitted moisture vapor in excess of specifications." Worse, evidence came out that the general contractor knew about the excessive moisture vapors, but had directed its subcontractor to install the flooring anyway. The cost to repair the floor was $377,404.  The general contractor settled for $1,310,000. The insurer contributed the policy limits of $1 million and then filed suit that it had no duty under the policies to defend or indemnify the general contractor.

After a non-jury trial, the court agreed with the insurer and ordered the general contractor to reimburse the insurer for the entire $1 million that the insurer paid. The general contractor appealed and the Court of Appeals reversed in part.

The Court was faced with two questions - was the floor failure an "occurrence" giving rise to coverage? And did the supplementary payments provision of the policies require the insurer to still pay a part of the settlement?


For the first question, the Court answered "no" because "occurrence" under the policies was defined as an "accident." There could be no accident from the general contractor's deliberate act. As such: the insurer had no duty to indemnify the general contractor for damages and "was entitled to recoup that portion of the $1 million paid toward settlement that was attributable to damages."

As for the second question, however, the Court held that the standard CGL provision--"with respect to any claim . . . or any `suit' against an insured we defend," the insurer will pay "all costs taxed against the insured"--did require the insurer to pay for settlement "costs" and that those costs includes attorneys' fees when there, as here, was a "prevailing party attorney fees under a contract."  The Court concluded that the insurer's "duty [to defend] was not extinguished by the determination that [the insurer] had no duty to indemnify" for the damages the insured caused. The case was remanded "for a new trial limited to the issue of the amount of the $1 million paid by [the insured] that is attributable to damages, not attorney fees and costs of suit under the supplementary payments provision."
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Florida Court’s Decision Should be a Caution to General Contractors to Precisely Follow a Performance Bond’s Procedural Requirements

In Arch Insurance Company v. John Moriarty & Associates of Florida, Inc., 2016 U.S. Dist. LEXIS 172173, the U.S. District Court for the Southern District of Florida granted Summary Judgment to a surety after finding that a general contractor did not satisfy the procedural requirements of a performance bond before it submitted a bond claim.  The Defendant was a general contractor who subcontracted the bond’s principal to furnish labor and materials on a project.  The subcontract required the provision of a performance bond which the subcontractor acquired through the Plaintiff.  At some point during the course of the project, the Defendant notified the Plaintiff that it was considering to declare the subcontractor in default. Later at the completion of the contract, the Defendant demanded a $995,239.83 payment from the Plaintiff on the bond due to the performance of the subcontractor.

The terms of the performance bond addressed specific procedures that must have been followed in the event of the subcontractor’s termination for default.  The bond required that: 1) Notice be provided to the subcontractor and Plaintiff that Defendant is, “considering declaring a Contractor Default”; 2) "Declares a Contractor Default, terminates the Construction Contract and notifies [Plaintiff]"; and 3) "Agree[s] to pay the Balance of the Contract Price…to [Plaintiff] or to a contractor selected to perform the Construction Contract." Once those three condition precedents had been met, the bond required that the Plaintiff be given the opportunity to mitigate its damages through arranging for the completion of the defaulted work.  Finally, seven days’ notice must be provided before Defendant can make a demand on the bond. 

The Court found the first requirement was met by Defendant when it alerted the Plaintiff that it was considering declaring a default.  The Court then went on to find that none of the other bond’s default or termination requirements were met.  The Defendant never declared the subcontractor to be in default, never terminated the subcontractor, nor paid the contract balance to the Plaintiff to complete the work.  In fact, the Defendant admits in its response that it, "did not declare [subcontractor] in default, did not terminate the Subcontract, and continued to administer the Subcontract substantially as it had before the Pre Default meeting, with a few additions." The Court stated that, “There can thus be no dispute that [Defendant] never allowed [Plaintiff] to mitigate its damages by arranging for the completion of the subcontract itself. By depriving [Plaintiff] of its completion options, [Defendant] materially breached the bond.”

In its ruling, the Court found that the Defendant failed to comply with the terms of the bond and as a result the Plaintiff was not liable for the nearly $1 million demand.  

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com