AGC Urges Court to Require Insurance Carrier to Show Prejudice

On April 1, AGC of America (AGC) and the Maryland Chapter jointly filed a friend-of-the-court brief in the U.S. Court of Appeals for the Fourth Circuit in support of a contractor’s claim for insurance coverage of a settlement that the contractor had reached with a project owner.  The insurance policy that lies at the heart of the case is the standard form of the commercial general liability (CGL) policy sold to AGC members across the United States.  The question the case presents is whether that policy entitles an insurance carrier to deny coverage of such a settlement if the carrier did not receive timely notice of the settlement or consent to its terms, even in the absence of any evidence that the carrier suffered any prejudice. A significant majority of the states forbid an insurance carrier to deny coverage of a CGL policy claim for failure to receive timely notice of an “occurrence” or a “suit” unless the carrier can show that its position was actually prejudiced by its failure to receive timely notice.  In most of these states, the rule is a part of the “common law” that the courts have developed on their own.  The case currently pending in the Fourth Circuit arose under Maryland law and that state has a statute to the same effect. At least several of the same states have also held that this “notice-prejudice rule” also applies to the “voluntary payments clause” found in the CGL policy.  In full, that clause provides: “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”  Like the provisions requiring timely notice of an “occurrence” or “suit,” this provision is clearly intended to prevent an insurance carrier from being prejudiced by any action that an insured company might take on its own initiative.  At the same time, as the Washington Supreme Court states, “[t]o release an insurer from its obligations without a showing of actual prejudice would be to authorize a possible windfall for the insurers.”  Public Utility District No. 1 of Klickitat County v. International Ins. Co., 881 P.2d 1020 1029 (Wash. 1994). The pending case grew out of a structural failure that delayed the completion of a large hotel project outside Washington, D.C.  The contractor and the owner negotiated a settlement of their resulting claims against each other, and the contractor then filed a claim under the project’s builders risk policy for the costs that the settlement required the contractor to absorb.  The builder’s risk carrier paid some of those costs but not many, so the contractor then filed a claim for the remainder of those costs under a CGL policy provided for the project by the owner.  The CGL carrier refused, however, to pay anything on the grounds that the carrier had not received timely notice of the settlement with the owner, or consented to it. In a somewhat confusing ruling from the bench, the district court granted summary judgment for the carrier and denied the contractor’s claim for reimbursement.  The court explained that “one of the main purposes” of the voluntary payments clause is to protect insurance carriers from “overly generous or unnecessary settlements by the insured at the expense of the insurer.”  To that end, the court held that a carrier may invoke the voluntary payments clause even in the absence of any evidence that a settlement was improper. In its brief in support of the contractor’s appeal, AGC urges the court to require carriers “to account for the realities of the construction industry to which they market their insurance products.”  The brief agrees that “an insurer should not be obligated to pay claims that are outside the coverage of the policy,” but explains that contractors often have to decide “whether to promptly mitigate damages to a project . . . , by undertaking repairs, or engaging in settlement negotiations,” for many if not most of today’s projects are constructed under “an extremely tight schedule.”  The brief concludes that “[r]equiring an insurer to show actual prejudice merely assures that the complexities of a construction claim are give due consideration.” The name of the case is Perini/Tompkins Joint Venture v. Ace America Insurance Co., Case No. 12-2263.  The carrier has not yet filed its brief on the appeal and the Fourth Circuit has yet to set the date for the oral argument.  AGC of America is expecting a decision very late in the current year, or early next year, and will keep members posted.