Get insurer’s approval before you settle.
Before settling any construction defect claims, contractors are cautioned to first get their General Liability insurer’s approval. Without the insurer’s approval, contractors risk claim denial, which means the insurer won’t reimburse any settlement amount the contractor paid to the plaintiff.
That’s exactly what happened in Perini/Tompkins Joint Venture v. ACE American Insurance. Co. In 2005, Perin was hired by the Gaylord National, LLC to manage a multi-million dollar hotel and convention complex construction project in Maryland. The insurance Gaylord purchased from ACE included both General Liability and Excess Liability. Perin was named an additional insured in each policy. A builder’s risk policy was also purchased for the project.
Fallout from the construction defect claim
Part of of a glass atrium collapsed in mid construction, resulting in damage and delayed completion of the project. Following completion, the management company sued the developer. However, arguing failure to manage the work properly and deliver the project on time at the agreed price and quality level, the developer countersued.
The parties settled their disputes in 2008, though the managing company never requested or obtained consent from ACE before settlement with the developer. The managing firm contacted ACE seeking reimbursement for the atrium-related damages not covered by the Builder’s Risk policy. However, they neglected to mention in their letter the developer’s counterclaim or the subsequent settlement. ACE’s response to the claim denial of coverage was based on the management company making voluntary payments without consent from ACE.
The managing company then sued ACE for breach of contract, bad faith, and a declaratory judgment. ACE motioned for a summary judgment by arguing failure to obtain consent from ACE breached two clauses contained within the CGL policy:
“No insured will…voluntarily make a payment, assume any obligation, or incur any expense… without our consent.”
“A person or organization may sue us to recover on an agreed settlement. … An agreed settlement means a settlement and release of liability signed by us, the insured and the claimant or the claimant’s legal representative.”
Such clauses are typically standard in Excess Liability and CGL policies. However, in yet another countersuit it was argued that under Maryland law ACE couldn’t deny liability coverage without establishing that a lack of notice had, in fact, resulted in prejudice to ACE, who was obligated by common law to prove prejudice.
The end result
The District Court granted ACE the summary judgment, a decision that was affirmed on appeal.
The bottom line is that contractors have to acquire the consent of their insurer prior to settling construction defect claims. Without consent, insurers may deny coverage without being required to prove prejudice.