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By J. Kent Holland, Esq.
ConstructionRisk Counsel, PLLC

A project was delayed because the Architect’s plans erred in their steel quantity estimate, and in the specifications for the structural steel girts and exterior façade.  The project owner sent a demand letter to the Architect asserting that the structural steel error caused delay damages.  Later, after the project was completed, the owner sued the Architect for breach of contract and negligence.  In addition to steel issues, one of the complaint allegations concerned an “Ice Control Issue” wherein it was asserted that the excessive accumulations of snow and ice were sliding off the building onto sidewalks because the design of the building façade failed to account for temperature variations.   The insurance carrier for the Architect asserted that the two claims were “related claims” and, therefore, considered a “single claim” for purposes of determining how much insurance would pay.  The U.S. Court of Appeals, 2nd Circuit, held that two claims arose from two unrelated wrongful acts, and that even though they both may have resulted from the generalized negligence of the Architects that does not make them related.  Both claims, therefore, would receive the benefit of the full policy “per claim” limit.  Dormitory Authority of the State of New York v. Continental Casualty Company, 756 F.3d 166 (Second Cir., 2014).

In this case, summary judgment was granted by the trial court that found the two design flaws in the same structure were not “related.”  The litigants had earlier stipulated that if the two flaws were held to be unrelated, the insurer would indemnify loss caused by the second flaw with a second limit of liability.  The insurance carrier then appealed the summary judgment decision.

Professional Liability Policies

The architect’s professional liability policies were claims-made policies. Polices for two different years were implicated in the dispute.  The polices provided that “all related claims shall be considered a single claim first made and reported … within the Policy year in which the earliest of the related claims was first made and reported.”   Related claims were defined as “all claims made against [the Architects] and reported to [Continental] during any policy year arising out of …. a single wrongful act or related wrongful acts.”

What gives rise to this appeal is that it had been agreed in a settlement prior to litigation on the insurance coverage dispute that the insurance carrier would pay the owner $3.1 million under the 2000-02 policy for the Steel Girt Tolerance Issue that had been raised in the initial demand letter, and that it would pay an additional $3 million under the 2003-04 policy if the owner succeeded in obtaining summary judgment that the Ice Control Issue did not arise out of the same or related wrongful acts identified in the 2002 demand letter.   Having lost the summary judgment, and having to pay $6.1 million plus interest, Continental appealed.

Continental’s primary arguments on appeal were that (a) the wording of the 2002 demand letter encompasses both the Steel Girt Tolerance Issue and the Ice Control Issue; and (b) the two issues are “related claims” as that phrase is defined in the insurance policies.  Continental argued that the demand letter alleged professional negligence in terms broad enough to include all design defects in the building.  The court noted that although the letter opens with two categorical allegations of failure to complete the design services in a timely fashion and the failure to properly coordinate services with other members of the design team, the crux of the letter identifies just one specified failure, the Steel Girt Tolerance.

Although the owner had been aware of the issue concerning Ice Control in 2002 when it wrote its demand letter concerning the other issues, it was at that time receiving proposals from the architect to correct the problem with additional canopies and did not yet consider it a claim.  It was only after an expert study was completed in the winter of 2003-04 that it was concluded that major design changes would be needed.

The appellate court, in affirming the summary judgment, stated that the “The 2002 Demand Letter, issued before the 2003-04 study, cannot be fairly read to concern the Ice Control Issue’ and, focused as it is entirely on the Steel Girt Tolerance Issue, it cannot be fairly read as an omnibus claim, concerning all architectural defects [in the building].”   The court went on to explain in succinct and clear terms why the two issues were not related, stating the following:

 “We agree with the district court that the Steel Girt Tolerance Issue and the Ice Control Issue arise from two unrelated wrongful acts. One has to do with the structural integrity of the building; the other, with its aesthetic design. The issues inhere in different systems, each with its own distinct engineering considerations. The two issues involved different design teams; two separate sets of contractors worked on them. The problems ultimately manifested themselves at different times and resulted in different types of damage. The solutions to each issue were wholly different. That both may have resulted from the generalized negligence of the Architects is an insufficient degree of relatedness.”

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. 16, No. 10 (December 2014).

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