What happens when a construction-related claim is reported untimely or falls outside coverage of a construction management professional liability policy?  From the policyholder’s perspective, nothing good.

The Policies

The coverage dispute, recently decided by the United States Court of Appeals for the Second Circuit (New York), involves a general contractor and two Texas projects.  Hunt Construction Group, the contractor, bound two construction management professional liability insurance policies from Berkley Assurance Company.  The policies included the same material terms, but were for two different terms—June 2016 to July 2017 and June 2018 to June 2019.  The insurance policies were claims-made and reported, required the following:

1.    the Professional Claim arise out of an actual or alleged negligent act, error or omission in the rendering of or failure to render Professional Services by Hunt on or after the Retroactive Date and before the end of the Policy Period; and

2.    the Professional Claim be first made against Hunt during the Policy Period or Optional Extended Reporting Period and reported in writing by Hunt to Berkley during one of those periods.

Professional Claim was defined in the policies as a written demand, demand for arbitration or mediation or suit made against Hunt seeking damages or correction of Professional Services and alleging a negligent act, error or omission in the rendering of or failure to render Professional Services. Professional Services were defined as including  “Construction Management, Program Management, Project Management, . . . [and] Property Development.” The insurance policies explicitly excluded coverages for contractual obligations to make payments to others, including subcontractors.

Also, where there are multiple claims “arising out of one or more acts, errors, omissions, incidents, events . . . or a series thereof, that are related (either causally or logically), [such claims] will be considered a single Claim” under the Policies. Multiple claims treated as a single claim are considered under the Policies to be made on the date the earliest of multiple claims were made, and are covered only by the policy in effect on that date. Of significance here is that the Policies required Hunt report a claim to Berkley in writing “as soon as reasonably possible, which must be during the Policy Period.” Finally, the Policies dictate that New York law governs any dispute.

The Texas Projects

In 2014, Hunt was hired as general contractor for the Fairmount Austin Convention Center. Disputes arose regarding Hunt’s management of the Fairmount project, and the owner ultimately filed suit in November 2018. Thereafter, Hunt notified Berkley of this claim and attached a letter from dated February 16, 2017 from the owner listing the same concerns with Hunt’s management of the Project that ultimately made its way into the lawsuit. Berkley initially agreed to defend Hunt under reservation of rights, reserving its right to deny coverage pending additional investigation. Berkley then decided it would not defend Hunt because it believed the February 2017 letter was a Professional Claim that should have been noticed that should have been reported during the June 2016 to July 2017 Policy (not the second, later policy period).

In 2015, Hunt was hired as general contractor for the Houston Methodist Project. A subcontractor to Hunt sent a demand to Hunt for $25 million arising from Hunt’s alleged mismanagement of the Methodist project. Hunt notified Berkley, and Berkley rejected coverage asserting that it was not a Professional Claim as defined by the policy. The subcontractor filed suit for $37 million in state court and Berkley, again, rejected coverage.

Hunt Construction Group, Inc. v. Berkley Assurance Co.

Hunt filed suit in New York against Berkley alleging Berkley breached the insurance contracts and the implied covenant of good faith and fair dealing by failing to defend Hunt in the Fairmount and Methodist projects.  In trial court, Berkley successfully moved for summary judgment on Hunt’s claims, which Hunt appealed.

As to the Fairmount project, the Second Court of Appeals held that the February 16, 2017 letter and lawsuit constituted a single claim under the policy because the allegations arose out of Hunt’s alleged mismanagement of the project. Therefore, Hunt should have been reported the claim during the June 2016 to July 2017 policy period.

As to the Methodist project, the Court held that the subcontractor’s claim did not arise out of the negligent performance of professional services (a claim under the policy), but rather Hunt’s own decision not to pay its subcontractor.  In the Court’s own words, “negligence may have caused Hunt to incur extra costs, but it did not cause Hunt to refuse to pay them.”

Understanding the obligations to timely report claims under professional liability insurance policies and the scope of the insurance coverage are important elements in managing construction risk. Our attorneys in Dallas and Austin are available to answer any questions you may have and to help you and your company understand and manage risk. Contact us at info@gstexlaw.com with any questions you may have.

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