United States District Court, D. Alaska
KICC-ALCAN GENERAL, JOINT VENTURE, an Alaskan joint venture, Plaintiff,
v.
CRUM & FORSTER SPECIALTY INSURANCE COMPANY, INC., a Delaware corporation, Defendant.
ORDER RE CROSS MOTIONS FOR SUMMARY JUDGMENT
Sharon
L. Gleason UNITED STATES DISTRICT JUDGE
Before
the Court are Defendant's and Plaintiff's Cross
Motions for Summary Judgment, at Dockets 34 and 37,
respectively. The motions are fully briefed, [1] and the Court
heard oral argument on November 1, 2016.[2]
BACKGROUND
The
parties have largely stipulated to the relevant
facts.[3]
Plaintiff
KICC-Alcan General (KICC) is an Alaskan joint venture that
provides general contracting and construction management
services. In May 2012, KICC entered a contract with the U.S.
Army Corps of Engineers to construct two buildings at Joint
Base Elmendorf-Richardson.[4] KICC entered into two subcontracts with
three businesses collectively operating as the Superior Group
to perform HVAC, electrical, and plumbing work on the
project.[5] Pursuant to the first subcontract, the
Superior Group would perform certain HVAC and plumbing work
in exchange for a lump sum of $3, 991, 545.[6] Under the second
subcontract, the Superior Group would perform certain
electrical work in exchange for a lump sum of $3, 635,
468.[7]
As
often happens, the project encountered a series of delays.
Consequently, it was not substantially complete until April
2014-over three months after the initially projected
completion date.[8] According to the Superior Group, their
work was “repeatedly delayed by the actions of
[KICC].”[9] The Superior Group maintained that, by the
end, all the “delays, acceleration, and related impacts
caused an increase in the cost of performance” for the
Superior Group, resulting in claimed damages to the Superior
Group of nearly $2 million dollars.[10]
To
account for its increased costs, the Superior Group tendered
a “Request for Equitable Adjustment” (REA) to
KICC in August, 2014.[11] In federal contracting, an REA is the
opening salvo in a negotiation for a modification to the
contract-usually in response to a directed or constructive
change by the government.[12] In this case, KICC was acting
as the general contractor for a federal contract, and so the
Superior Group presented the REA to KICC. In order to obtain
the desired equitable adjustment, the Superior Group had to
show a change to its contractual obligations that was caused
by KICC and which harmed the Superior Group.[13] Thus, the REA
asserted that the initial delays had not been “managed
by KICC-Alcan in a fair and transparent manner” and
that the “lack of communication” between KICC and
the Superior Group and “the failure of KICC-Alcan to
mitigate the effects of the various schedule delays”
directly damaged the Superior Group.[14] After some limited
discussion between KICC and the Superior Group, KICC rejected
the REA.[15]
The
Superior Group then sued.[16] Its complaint recounted the
allegations about KICC's mismanagement of the project,
and asserted that KICC “continued to direct the
[Superior Group] to complete the work according to the
original Project schedule.”[17] The Superior Group made
two specific claims.[18] First, the Superior Group alleged
“breach of express contract, ” contending that
the Superior Group “did supply the services and labor
required by Superior's subcontract with KICC-Alcan, which
services and labor were accepted by KICC-Alcan and
incorporated into the Project, but KICC-Alcan has failed to
pay [the Superior Group] in full for the services and labor
provided.”[19] Second, the Superior Group alleged
“quantum meruit, ” contending that the Superior
Group “provided valuable labor and services to
KICC-Alcan” and that KICC “has failed and refused
to pay the [Superior Group] for the labor and services
referenced herein.”[20]
During
the relevant period, KICC had insurance from Defendant Crum &
Forster Specialty Insurance Company (Crum & Forster) which
provided coverage for “‘damages' . . .
because of a ‘wrongful act' to which this insurance
applies.”[21] A “wrongful act” is defined
in the policy as “an act, error or omission in the
rendering or failure to render ‘professional
services' by any insured.”[22] And the contract defines
“professional services” as “those functions
performed for others by you or by others on your behalf that
are related to your practice as a consultant, engineer,
architect, surveyor, laboratory or construction
manager.”[23] Read together, then, the contract
provided coverage for “damages” caused by
“an act, error or omission” in KICC's
rendering or failure to render” its “functions .
. . that are related to [its] practice as a . . .
construction manager.”[24]
Faced
with the Superior Group's lawsuit, KICC tendered the
complaint to Crum & Forster, seeking defense and
indemnity.[25] There was apparently some confusion as
to whether Crum & Forster initially accepted defense of the
matter, [26] but on June 9, 2015 Crum & Forster
unequivocally denied coverage for and defense of the
lawsuit.[27] KICC therefore proceeded with its own
defense, and ultimately settled with the Superior Group
before trial.[28]
In the
present suit, KICC asserts three causes of action: first,
that Crum & Forster breached its duty to defend; second, that
Crum & Forster breached its duty to indemnify; and third,
Crum & Forster's refusal to defend or indemnify breached
its duty of good faith.[29] The parties have stipulated to the
facts relevant to liability, and agree that the issue of
liability is appropriate for summary judgment.[30]
DISCUSSION
I.
Jurisdiction
The
Court has jurisdiction pursuant to 28 U.S.C. § 1332
because there is complete diversity of citizenship and the
amount in controversy exceeds $75, 000.
II.
Standard for Summary Judgment
Federal
Rule of Civil Procedure 56(a) directs a court to “grant
summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” The burden of showing the
absence of a genuine dispute of material fact lies with the
moving party.[31] If the moving party meets this burden,
the non-moving party must present specific factual evidence
demonstrating the existence of a genuine issue of
fact.[32] The non-moving party may not rely on
mere allegations or denials.[33] Rather, that party must
demonstrate that enough evidence supports the alleged factual
dispute to require a finder of fact to make a determination
at trial between the parties' differing versions of the
truth.[34]
When
considering a motion for summary judgment, a court views the
facts in the light most favorable to the non-moving party and
draws “all justifiable inferences” in the
non-moving party's favor.[35] When faced with cross-motions
for summary judgment, the court “review[s] each
separately, giving the non-movant for each motion the benefit
of all reasonable inferences.”[36] To reach the level of a
genuine dispute, the evidence must be such “that a
reasonable jury could return a verdict for the non-moving
party.”[37] If the evidence provided by the
non-moving party is “merely colorable” or
“not significantly probative, ” summary judgment
is appropriate.[38]
III.
Duty to Defend and Indemnify
The
parties have stipulated to the facts material to KICC's
first and second causes of action; resolution of these issues
presents a pure question of law. There are three distinct
questions in this case: First, did Crum & Forster breach its
duty to defend? Second, if it did, does this breach alone
render Crum & Forster liable for the amount of settlement?
And third, without regard to whether Crum & Forster breached
its duty to defend, must it indemnify KICC for the Superior
Group claims?
Because
an affirmative answer to the third question eliminates any
need to separately consider either the first or second
question, the Court will begin there.[39] The answer to
this question turns on the scope of the insurance policy and
on the nature of KICC's liability to the Superior Group.
A.
The Policy
The
parties agree that KICC's claims and the insurance policy
itself are governed by Alaska law in this diversity action.
“The obligations of insurers are generally determined
by the terms of their policies, ”[40] but those
terms are construed “in such a way as to honor a lay
insured's reasonable expectations.”[41] Of course, a
lay insured's reasonable expectations are in turn shaped
by the language of the contract, as “construed in
accordance with ordinary and customary
usage.”[42] An ambiguity in the language-that is,
when there are two or more reasonable interpretations of the
policy-is resolved in favor of the insured.[43]
The
parties don't dispute the terms of the insurance policy
or how they fit together. The policy provided coverage for
“damages or cleanup costs because of an act, error or
omission in the rendering or failure to render those
functions performed for others by you or by others on your
behalf that are related to your practice as a consultant,
engineer, architect, surveyor, laboratory or construction
manager to which this insurance applies.”[44]
What
the parties do dispute is, first, whether the Superior
Group's claimed damages were caused by KICC's
“act, error or omission, ” and second, whether
that act or omission was “in the rendering or failure
to render” professional services. The Court therefore
examines the nature of the Superior Group's claims.
B.
The Superior Group Claims
As
alleged in its complaint, the Superior Group entered into two
lump-sum contracts with KICC.[45] The complaint alleged that the
Superior Group's work under the contracts “was
repeatedly delayed by the actions of KICC-Alcan” and
that KICC's actions “caused the [Superior Group] to
incur increased . . . . costs.”[46] The complaint
then set forth what the Superior Group viewed as instances of
KICC's mismanagement of the project. According to the
Superior Group, (1) initial delays from soil contamination
“were not adequately addressed by KICC-Alcan in the
Project schedule, caus[ing] a ripple
effect”[47]; (2) the project “was further
hindered by a lack of timely responses by . . . KICC-Alcan to
requests for information or in processing Contract
modifications as well as delays related to the structural
steel design for the Project . . . which in turn directly
impacted the [Superior Group's] work”[48]; and (3) KICC
directed various subcontractors to add additional manpower,
“which resulted in further crowding and difficulties in
executing the Contract work.”[49] Combined, these
“delays, acceleration, and related impacts caused an
increase in the cost of performance for [the Superior
Group]” in an amount totaling almost $2
million.[50]
The
Superior Group did not allege that KICC failed to pay the
lump-sum amount originally agreed to in the
contracts.[51] Instead, the Superior Group alleged that
it had made “repeated demands for payment from
KICC-Alcan for the increased costs incurred in
performing” its work.”[52] The Superior Group then
claimed that it “did supply the services and labor
required by Superior's subcontract with KICC-Alcan, which
services and labor were accepted by KICC-Alcan and
incorporated into the Project, but KICC-Alcan has failed to
pay [the Superior Group] in full for the services and labor
provided.”[53] This failure, the Superior Group
alleged, amounted to a “breach of the parties'
contract.”[54]
C.
Were the Superior Group claims covered under the policy?
KICC
settled the Superior Group claims before trial. If all of the
settled claims were in fact covered claims under the policy,
then Crum & Forster is obliged to indemnify KICC for the
liability arising from those claims-here, the amount of the
settlement (if that settlement was both reasonable and
nonfraudulent). Crum & Forster contends that KICC's
liability to the Superior Group is not covered under the
policy because it is liability for breach of contract claims.
KICC counters that the suit did not raise typical breach of
contract claims because the Superior Group was seeking
“additional compensation” to offset its
“increased cost of performance allegedly caused by
KICC-Alcan's mismanagement.”[55]
Coverage
under the policy extended to damages caused by “an act,
error or omission” in KICC's “rendering or
failure to render” its “functions . . . that are
related to [its] practice as a . . . construction
manager.”[56] On its face, this requires a simple
causation inquiry: was KICC's liability to the Superior
Group caused by KICC's performance of its duties as a
construction manager? KICC resolved all the claims the
Superior Group asserted in its complaint in a
settlement.[57] This case does not involved a
“mixed” settlement, where some of the claims
resolved in settlement would give rise to coverage, while
others would not. In such a case, an insurer might be
permitted to litigate the portion of the settlement
attributable to covered claims.[58] In this case, if all the
claims were covered then so is the settlement liability.
Thus, the answer turns on the claims asserted in the
underlying complaint.
The
Superior Group's complaint alleged that it had
experienced “an increase in the cost of
performance” as a result of various “delays,
acceleration, and related impacts.”[59]These delays
and acceleration were allegedly caused by KICC's failure
to “adequately address[]” the initial delays in
construction, [60] KICC's “lack of timely
responses” to the Superior Group's requests for
information, [61] and the “crowding” on the
work site caused by KICC's direction to the Superior
Group and other subcontractors to add more
manpower.[62]
Each of
these allegations contends that KICC's management of the
project caused the Superior Group to incur increased costs.
The Superior Group claimed that KICC was obligated to pay for
those increased costs. The underlying complaint plainly
alleged damages (in the amount of the Superior Group's
increased costs) that were “because of”
KICC's actions as a construction manager.
But the
Superior Group's complaint sought damages only for
contract- and quasi-contract claims. And professional
liability coverage, Crum & Forster asserts, “is not a
guarantor of a policyholder's contractual
debts.”[63] Thus, Crum & Forster maintains that an
insured could not “reasonably understand the Policy to
mean that KICC-Alcan can demand accelerated work from its
subcontractors to compensate for construction delays, and
then pass the cost of paying those subcontractors for the
additional work onto its professional liability
carrier.”[64] KICC counters that the Superior
Group's claims did not arise from a “simple
contract dispute” or seek recovery for amounts clearly
owed under the contract, but were instead claims for
“additional compensation.”[65] In KICC's
view, the Superior Group would be entitled to that additional
compensation if, and only if, it could show that KICC
“failed to grant a time extension to which the Superior
Group was entitled.”[66] And to show that entitlement,
the Superior Group would have to show that KICC's
mismanagement caused delays necessitating an extension.
Crum &
Forster argues in its reply that “[t]he fact that the
Superior Group incurred additional costs in order to comply
with the construction schedule set by KICC-Alcan does not
transform the Underlying Lawsuit from a breach of contract
action into a negligence case.”[67] Perhaps so,
but the fact that the underlying lawsuit was styled a breach
of contract action does not automatically eliminate all
coverage under this professional liability policy. Indeed,
despite Crum & Forster's broad claim that there cannot be
any coverage for breach of contract claims, the policy does
not contain a general exclusion for contractual liability or
for all claims that arise from contract.[68]
Crum &
Forster's primary support for its position is not the
policy language, but the Ninth Circuit's
decision-applying Alaska law-in Bell
Lavalin.[69] There, the Ninth Circuit held that a
professional liability policy did not provide coverage
“for a simple contract dispute in which [a
subcontractor] performed work for which it was not
paid.”[70]
In
Bell Lavalin, the coverage turned on facts as
determined by a jury. Bell Lavalin, the insured, was a
general contractor and construction manager that won a
contract to design and build oil tanks. Bell Lavalin then
subcontracted with Conam Alaska for construction services and
materials. When the project fell behind schedule, the parties
disputed how long an extension was warranted. With work 87%
complete, and Bell Lavalin unwilling to grant an additional
extension, Conam Alaska walked off the job. Conam Alaska then
sued Bell Lavalin for breach of contract and other
claims.[71]
Although
the work was 87% complete when Conam Alaska ceased
performance, at that point Bell Lavalin had paid Conam Alaska
only 48% of the contract price. Conam Alaska sought payment
for the value of the unpaid work that it had performed, and
the jury awarded damages in that amount, plus
interest.[72] Thus, Conam Alaska obtained a judgment
that “represents the unpaid value of the performance
rendered by Conam to the date it stopped
working.”[73] On appeal, the Alaska Supreme Court
affirmed the trial court's refusal to submit the issue of
professional negligence to the jury, concluding that there
was insufficient evidence of causation between the alleged
professional negligence and damages.[74]
Bell
Lavalin sued its insurer for indemnity. The relevant policy
provision covered “damages” that “arise[]
out of” the insured's performance as a project
manager and are “caused by an error, omission or
negligent act.”[75] Construing that provision, the Ninth
Circuit concluded that coverage existed “if three
requirements are met: (1) the judgment must be for
‘damages'; (2) the liability must arise out of Bell
Lavalin's ‘performance of professional service for
others in the insured's capacity . . . as a project
manager'; and (3) the liability must be ‘caused by
an error, omission or negligent
act.'”[76] Bell Lavalin asserted that because its
“wrongful refusal to grant a time extension” was
the “breach” that resulted in the damages,
coverage should exist. The Ninth Circuit rejected this
argument because “Bell Lavalin's failure to grant a
time extension is irrelevant to the issue of whether Bell
Lavalin owes Conam the value of the unpaid
work.”[77] Any “error, omission or negligent
act” in refusing the extension was not the
“cause” of the damages, and so there was no
coverage. As the Ninth Circuit recognized, “even if
Bell Lavalin had won . . . regarding the time
extension issue, it would still owe Conam the value of the
87% of the work performed.”[78] Thus, Bell Lavalin could
not prove the third element.
In a
footnote, the Ninth Circuit also noted that “the second
requirement”-that the liability “arise out
of” Bell Lavalin's professional
services-“fails for the same reason” as the
causation element. Specifically, the Ninth Circuit concluded
that Bell Lavalin's liability “did not arise out of
Bell Lavalin's ‘performance of professional service
for others, '” but instead “arose out of Bell
Lavalin's receipt of professional services from
Conan.”[79]
In Crum
& Forster's view, Bell Lavalin determines the
outcome of this case. It maintains that just as Bell Lavalin
did not “cause” the damages to Conam Alaska, so
too KICC did not “cause” the damages to the
Superior Group. According to Crum & Forster, this is so
because “[t]he insured's obligation to pay sums
owed under a contract is imposed by the contract; it
is not created by any wrongful act of the
insured.”[80] And, according to Crum & Forster, the
damages in this case arose out of KICC's receipt of
services, not the provision of services, just like the
damages in Bell Lavalin.[81]
Certainly
this case bears some resemblance to Bell Lavalin.
The policy provision at issue here provides coverage for
“damages . . . because of”[82] KICC's
“act, error or omission in the rendering or failure to
render”[83] its services as a “construction
manager.”[84]Thus, similar to the policy in Bell
Lavalin, the Crum & Forster policy provides coverage
only if (1) there is liability for damages; (2) the liability
arises out of KICC's performance of professional
services; and (3) the liability is caused by KICC's act,
error, or omission. Both policies provided coverage for
damages caused by the insured's acts, errors, or
omissions. Unlike the provision in Bell Lavalin, the
Crum & Forster provision does not explicitly require an
“act” supporting coverage to be
“negligent.” But setting that distinction aside,
the policies were quite similar.
But the
underlying lawsuits were not similar. The Superior Group was
seeking, as KICC describes it, “additional
compensation” beyond the lump-sum amount previously
agreed to. Unlike the subcontractor in Bell Lavalin,
the Superior Group could prevail only if it showed that KICC
had wrongly failed to grant an extension or otherwise caused
it to incur additional costs. If KICC had done nothing wrong,
then the Superior Group would be entitled only to the
lump-sum amount on the face of the contract-an amount it had
already received and which it was not seeking. In Bell
Lavalin, the subcontractor had a claim against the
general contractor without regard to any action or
omission on the part of the general contractor. Here, by
contrast, the subcontractor had a claim-if at all- only
because of the general contractor's actions or
omissions. KICC's liability arose from the settlement of
that claim; thus the liability was “caused” by
KICC's act or omissions, satisfying the third element.
And
these damages did “arise out of” KICC's
professional services. The specific policy language in this
regard is somewhat different than in Bell Lavalin.
There, the policy required that the liability “arise[]
out of the performance of professional services for
others.”[85] Here, the policy does not use the words
“arise out of, ” but instead provides that the
“act, error or omission” that causes the damages
must be “in the rendering” of professional
services or in the “failure to render”
professional services.[86] This distinction may make no
substantive difference in the scope of coverage. Rather, each
policy provides that there must be a casual connection
between the asserted wrongful act and the insured's
professional services. In Bell Lavalin, the Ninth
Circuit held that no coverage existed because as a matter of
law the general contractor's failure to grant a time
extension was not the cause of the damages. Necessarily,
then, the damages did not arise from Bell Lavalin's
professional services.
Here,
as discussed above, the Superior Group's damages were
caused by an act or omission of KICC. The “second
element” requires only that those acts or omissions be
“in the rendering” of KICC's professional
services. The Superior Group's entire complaint is
directed toward KICC's alleged mismanagement of the
project-either by failing to properly account for the initial
delays, failing to communicate essential information to the
Superior Group, or causing crowding on the worksite by
demanding too many subcontractors add additional labor. Each
of these is an act or omission “in the rendering”
of KICC's functions as a construction manager.
The
Court acknowledges that the amount of KICC's liability to
the Superior Group would be determined, at least in part, by
the value of the additional services provided by the Superior
Group.[87] But this fact alone does not mean that
the damages were not related to KICC's provision of
professional services. The Superior Group's claims were
premised on the theory that KICC's mismanagement required
the Superior Group to provide those extra services and incur
those additional costs. The claims and resultant settlement
therefore arose not only from the Superior Group's
provision of services but also from KICC's acts, errors,
and omissions in its provision of construction management
services.
Finally,
the Court considers Crum & Forster's policy
arguments.[88] First, Crum & Forster contends that
“[a]llowing liability coverage for amounts due under a
contract for an insured's pre-existing obligations would
‘create a moral hazard problem . . .
.'”[89] But the Court does not hold that this
professional liability policy extends coverage to any breach
of contract claim, or requires indemnification for
contractual obligations that exist solely by virtue of the
contract. Rather, consistent with the policy language, the
Court holds that this particular professional liability
policy provides coverage for damages that are caused by the
KICC's acts, errors, or omissions in the provision of
professional services. Like all insurance, this policy does
create some moral hazard. But that hazard can be mitigated by
changing the policy language, and the Court will not distort
the plain language of this contract to achieve a policy
result.
For
these reasons, the Court concludes as a matter of law that
the Superior Group's claims against KICC, and the
resultant settlement of those claims, were covered by the
Crum & Forster policy, and that Crum & Forster thus had a
duty to indemnify KICC.
D.
...