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Where a developer of a condominium, and its design architect, were sued by a municipal equal opportunity housing opportunity council as well as by the state attorney general for alleged violations of not meeting federal and state requirements for handicap access, the developer cross-claimed against the architect alleging negligent failure to correctly identify and follow building code provisions governing access for disabled persons.  The designer tendered a request to its professional liability carrier to defend the action, which the carrier refused to do.  The case then settled with the developer agreeing to limit its recovery against the architect to the proceeds of the insurance policy, which it then sued the carrier to recover.   On appeal it was held that the carrier owed both a duty to defend and indemnify under the policy because the key issue involved alleged design error and not “discrimination” by the architect that would have been subject to the “discrimination” exclusion of the policy.  Fostill Lake Builders v. Tudor Insurance and H Design, 338 S.W.3d 336, (Missouri 2011).

In the trial court case by the plaintiffs against the developer and architect, the court found that “H Design was negligent and that [Developer] had been damaged on account of H Design’s negligence.”  Damages in the amount of $365,586 were awarded against the architect to the developer on the developer’s cross claim against the architect.  A convoluted series of motions and actions by the insurance carrier ensued in which the carrier sought to challenge the judgment and avoid a finding of coverage under its professional liability policy.

As first matter of business, the appellate court held that since the carrier refused to defend the architect, it did so at its own risk and lost the ability to control the defense on behalf of the architect as well as the ability to assert affirmative defenses that might have been available to it.  Since the carrier refused to defend the architect on the cross-claim for professional negligence, the court stated it couldn’t subsequently challenge the “reasonableness of the judgment” to avoid making payment under the policy.

In a suit by the carrier to essentially obtain a judgment that its policy provided no coverage, the trial court granted the carrier summary judgment on the basis that the claim was essentially a claim for discrimination, which was expressly excluded from coverage pursuant to the following exclusion of the policy:

 “This policy does not provide coverage and the Company will not pay claim expenses or damages for … D. any claim based upon or arising out of discrimination by the Insured on the basis of race, creed, national origin, handicap, age or sex.”

 In rejecting that conclusion, however, the appellate court stated:

 “We reject Tudor’s characterization of [Developer’s] claim as one of discrimination. As set forth more fully below, we find that [Developer’s] claim against H Design was properly brought as one for professional negligence. [Developer’s] hired H Design to conduct a professional service—to design a safe and marketable condominium project that complied with all applicable building codes, including those pertaining to accessibility for physically disabled persons. [Developer’s] cross-claim against H Design does not allege direct discrimination, and [Developer] had no standing to allege discrimination against H Design.”

 Even if the claim could have been properly characterized as “essentially a claim for discrimination,” the court found this would not unambiguously exclude coverage for this particular claim since there was no evidence that the architect intended to discriminate or that there had been a “purpose” of the architect to discriminate, which the court held must be read into the meaning of the discrimination exclusion of the policy.  The court cited the American Heritage Dictionary for a definition of the term “discrimination” since the policy did not specifically define the term.  The dictionary defines discrimination as “the act of discriminating” which is in turn defined as “marked by or showing bias; discriminatory.”  As explained by the court, “This definition indicates a purpose to discriminate and not a mere negligent act that has the effect of making things more difficult for a certain class of persons.”  Although the term “discrimination” was not defined in the policy, the court said it would “construe the term as would an ordinary lay person purchasing a policy” and that such an ordinary person would expect it to mean the exclusion would only apply “to situations where the architectural design firm purposefully discriminates on one of the bases enumerated in the policy exclusion.”  For these reasons, the court found the exclusion in the policy to be ambiguous and therefore it must be construed against the insurance company.

In the final pages of its decision, the court explained the difference between the duty of an insurance company to defend its insured in contrast to the duty to indemnity the insured for damages awarded, and in this case found the carrier owed a duty to defend the architect.  From previous case law, the court quoted, “An insurance company has a duty to defend an insured when the insured is exposed to potential liability to pay based on the facts known at the outset of the case, no matter how unlikely it is that the insured will be found liable.”   The court quoted further from that case precedent as follows:

 An insurance company has a duty to defend an insured when the insured is exposed to potential liability to pay based on the facts known at the outset of the case, no matter how unlikely it is that the insured will be found liable and whether or not the insured is ultimately found liable. To extricate itself from a duty to defend the insured, the insurance company must prove that there is no possibility of coverage. Coverage is principally determined by comparing the language of the insurance policy with the allegations in the pleadings. However, even though the pleadings do not show coverage, where known or reasonably ascertainable facts become available that show coverage[,] the duty to defend devolves upon the insurer.

 The duty to defend is broader than the duty to indemnify, therefore, even if the carrier were ultimately correct that the discrimination exclusion was sufficient to prevent its having to indemnify for claims against the architect, “it does not necessarily follow that [the Carrier] had no duty to defend H Design in the first instance.”    Because the court found that the policy exclusion did not clearly and unambiguously exempt the architect form coverage for allegations made against it in the underlying law suits, the court held the carrier had a duty to defend the architect in those suits.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 13, No.8 (Aug 2011).

Copyright 2011, ConstructionRIsk.com, LLC