Monday, June 15, 2015

Insurer wall of denial falls.

Commercial construction projects are dangerous, especially in cities. General contractors routinely require that subcontractors purchase insurance policies covering the general contractor and owner as "additional insureds." And so, if a subcontractor does damage that triggers a lawsuit naming the general or owner, it is the subcontractor's insurance that should hire defense counsel, and later indemnify the claim.

In a perfect world.

In Capital City Real Estate, LLC v. Certain Underwriters at Lloyds of London, reported June 10, 2015, the United States Court of Appeals for the Fourth Circuit reversed Maryland federal judge Marvin Garbis' trial court decision to excuse the insurance company from the duty to defend the general contractor.

Capital City acted as its own general contractor in the renovation of a brick building in D. C., sharing a common wall with its neighbor.  Capital City subcontracted with another company for masonry work on and around the common wall. As a result of the subcontractor's work the common brick wall collapsed.

Welcome to the not-so-perfect world.

57 Bryant Steet in 2013

Capital City had required the masonry contractor to purchase the usual insurance policy, with the usual "additional insured" endorsement. However, when Capital City was sued by the neighboring landowner the insurance company denied the claim and refused to pay for a lawyer to defend Capital City. The insurance company denied the claim because, it argued, the neighbor's lawsuit alleged that only Capital City was negligent. The insurance company believed that the "additional insured" endorsement only reached conduct of the mason subcontractor for which Capital City was "vicariously liable."

Yes, it made me smile, too. (you are smiling, right?)

Vicarious liability is a limit on general liability.  It would mean that the subcontractor could have triggered certain damage on the project for which the general contractor would have no responsibility. Imagine for a moment that your employee accidentally trips a customer in your store, and the customer breaks a leg. You, as the employer, are vicariously responsible for the employee's actions.  Now imagine the same employee goes home and trips someone in  his own house, and that person breaks a leg. As the employer, you are not vicariously responsible for that person's broken leg. On the construction project, the insurance company argued that the general contractor was only covered for a narrow range of things performed by the subcontractor.

And the trial court accepted the argument and granted the insurance company summary judgment (a motion granted before a trial, based on the evidence then known and the applicable law). But the U.S. Court of Appeals rejected the argument.

Insurance contracts are not construed against an insurance company unless they are ambiguous. And where the endorsement in this case did not contain the extreme limitation of language relied upon by the insurer, the appellate court ruled that most any action on the job site by the subcontractor resulting in a lawsuit would trigger coverage for the general contractor. And that means that the insurance company must pay for the general contractor's trial lawyer.

That is why you purchase insurance, and that is why it is useful to have your project documents reviewed by counsel before an accident. You can always count on the insurer to construe the contract language as narrowly as possible in order to limit or deny your coverage.