|
 | |
| |
County Failed to Obtain Builder’s Risk Insurance as Promised, Held Liable for Damage to Contractor’s Work
|
|
|
|
|
|
December 7, 2009
Howrey LLP
King County, Washington, contracted with Frank Coluccio Construction Co., Inc. to build a utility tunnel under a waterway. Coluccio subcontracted with Donald B. Murphy Contractors, Inc. to build an access shaft at the eastern end of the tunnel.
Murphy designed and built the access shaft as a circular series of interlocking columns or piles. Each was built by drilling a hole in the ground and pumping concrete into the hole through a tremie pipe. Once all 34 piles were constructed, the shaft was to be excavated and dewatered. When the last pile was being constructed, the tremie pipe became stuck 70 feet below the surface. The subcontractor was unable to extract the tremie pipe, even using a large crane. It left the tremie pipe in the column, went on with placement of concrete in the column and cut off the tremie pipe at the surface. However, less than 80 percent as much concrete was placed in this pile as in comparable piles.
When the shaft had been excavated and was being dewatered, a blow in occurred, filling the shaft with water, soil and debris. A diver determined that the pile in which the tremie pipe became stuck and two adjacent piles were damaged. After three failed repair attempts, the subcontractor had to freeze the ground around the shaft with liquid nitrogen so repairs could be made and construction of the access shaft completed. The blow in delayed completion of the project by two months.
The construction contract for the project required King County to purchase an all risk builder’s risk insurance policy to protect the interests of the county, the contractor and subcontractors of all tiers against physical loss and property damage to the project. The county failed to purchase the required policy. The county did have a general property damage insurance policy. The construction contract also provided that King County would adjust any claims under the builder’s risk policy and made it a trustee for the insureds with regard to any payments made on such claims.
After the county denied the contractor’s claims for the cost of repairs, which included a pass-through claim from the subcontractor, the contractor sued on a number of grounds, including breach of contract and breach of the implied duty of good faith and fair dealing. In a bench trial, the trial judge ruled in the contractor’s favor, holding that: 1) King County was obligated under the contract to buy builder’s risk insurance that covered the interests of the general contractor and subcontractor; 2) the county failed to do so; and 3) the required insurance would have covered the losses sustained. The trial court awarded damages of more than $1.5 million and nearly $325,000 in attorney fees pursuant to a statutory offer to compromise.
The county appealed, but the Court of Appeals affirmed the trial court’s judgment. Frank Coluccio Construction Co., Inc. v. King County, 136 Wash.App. 751, 150 P.3d 1147 (2007).
In its appeal, the county argued that it had complied with the insurance requirement by carrying the general property damage policy and that the general policy covered the project. The trial court found that the general policy did not cover the project for two reasons: 1) When the county bought it years before the project, the county specifically requested that it not cover tunnel work in order to hold down premium costs; and 2) the project was not a scheduled property under the policy. The trial court found “not to be credible” the explanation by the county’s deputy risk manager as to why the project was not scheduled under the general policy. The appeals court found that the trial court’s rulings were supported by substantial evidence and were legally correct.
The trial court next found that the county “colluded” with the insurer that had issued the general property damage policy to assure that the contractor’s claims would be excluded from coverage, including engaging in secret meetings with the insurer. The appeals court agreed, holding that King County was “dishonest in fact.” The appeals court found that the county had failed to promote the contractor’s claims under the policy and failed to adjust the claims in good faith as required by the contract.
Next, the appeals court held that when a party to a contract is required to obtain insurance and fails to do so, the breaching party assumes all risk. The damages recoverable for the breach are the full amount that would have been covered by the policy. The court held that the general contractor had the burden of proving its losses would have been covered by the required builder’s risk policy. Once the contractor met its burden, the county would have the burden of proving that an applicable exclusion would have removed the losses from coverage.
To prove coverage, the contractor had to establish that the loss was the result of a “fortuitous event.” The county argued that the loss was not fortuitous. The appeals court wrote that the burden of proving fortuity is not particularly onerous to meet and that the standard is subjective. Ordinarily, if the loss could not be reasonably foreseen by the parties at the time the policy was issued, it is fortuitous. The appeals court noted that the county’s own expert testified that the subcontractor had employed appropriate construction means and methods up to the time the tremie pipe became stuck and that any explanation of why the pipe became struck would be pure speculation. Accordingly, the appeals court affirmed the trial court’s finding of fortuity.
The county argued that the claim would be barred by the faulty workmanship exclusion in a builder’s risk policy. The appeals court noted that the county had the burden of proving the existence of an exclusion in a policy that it had not purchased. Accordingly, the appeals court held that the county could prevail only if it proved that every insurance policy it could have purchased to satisfy the contract would have excluded the losses at issue. The appeals court wrote that this rule was balanced – denying a contractor a windfall that it would not have obtained if insurance had been purchased while barring the owner from after-the-fact policy shopping to prove its case. Thus, the court wrote, the county had to prove that all builder’s risk policies contain faulty workmanship exclusions and that the contractor and subcontractor had engaged in faulty workmanship.
The county proved neither, the appeals court held. The trial court concluded that there was no evidence of faulty workmanship, and the appeals court agreed. It also noted that at trial, the county’s insurance expert witness admitted the scope of exclusions in builder’s risk policies varied widely. The appeals court pointed to cases in which builder’s risk coverage was found even when the insurer claimed that faulty workmanship precluded such coverage.
If you would like to receive legal reports and updates by e-mail, click here and fill out the mailing list form. If you would like to subscribe to our RSS feeds or learn more about RSS, click here.
For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
|
|
|
