On January 23, 2019, Lee Kennedy Co, Inc. (“Lee Kennedy”) dismissed with prejudice its remaining count for unfair claim practices against Arch Insurance (“Arch”) arising out its claim for coverage under an Arch general liability policy. Lee’s Kennedy’s dismissal came after an earlier ruling in January where a federal judge found Arch had not breached its insurance contract with Lee Kennedy by refusing to pay some $700 thousand plus in costs and losses Lee Kennedy had sought from Arch under its contractor-controlled insurance program policy.
Lee Kennedy’s contractor-controlled insurance program policy with Arch
In September 2011, Arch issued a contractor-controlled insurance program policy to Lee Kennedy for certain construction projects.
A contractor–controlled insurance program, commonly called a “wrap up” may provide general liability as well as workers compensation or excess liability coverage for one or more construction projects. The wrap-up policy can provide insurance coverage for the contractor, its subcontractors and the project owner in one policy rather than having each party providing their own insurance.
Arch’s wrap-up policy provided coverage for Lee Kennedy and its enrolled subcontractors for legal liability for bodily injury and property damage subject to liability limits of $2 million per occurrence and a $4 million aggregate with a $250 thousand deductible applicable to defense costs as well indemnity coverage.
The wrap-up policy Arch issued to Lee Kennedy contained common terms and provisions found in a standard commercial general liability policy. However, the policy afforded Lee Kennedy and its enrolled subcontractors with specified coverages for projects undertaken over a multi-year period, in this case, three years. The policy also allowed Lee Kennedy to Cen a “rolling” basis by endorsement during the wrap-up policy’s three-year term.
These terms were in contrast, to a commercial general liability policy which would only provide its named and additional insureds with specific types of coverage for injuries caused or losses sustained during a one-year policy period.
A subcontractor’s defective work leads to claim and lawsuit over the wrap-up policy’s coverage
In early 2013, Lee Kennedy entered into a written contract with the Winsor School in Boston, Massachusetts to serve as the general contractor on a project for construction of a new school building, the Lubin O’Donnell Center for Performing Arts, Athletics and Wellness. The new Center included a gymnasium.
Lee Kennedy subcontracted with Kenvo Floor Co., Inc. (“Kenvo”), a Rhode Island company, to install the Center’s wooden floors following written specifications prepared by the school’s architects.
Lee Kennedy rolled the Center project onto its policy with Arch by endorsement and Kenvo enrolled as a subcontractor in Lee Kennedy’s contractor-controlled insurance program
Kenvo’s work included the construction and installation of a so-called “floating gymnasium flooring system” on the second floor of the Center, by the use of so-called “kip” pads, a gymnasium subfloor and a finish floor system. Kenvo agreed to perform its work for $443,689.00, subject to its right to obtain additional payments for work performed under agreed change orders.
Shortly after the completion of work on the Center, the Winsor School raised concerns about the gymnasium flooring system with Lee Kennedy.
The flooring was displaying a “noticeable ‘softness’ that affects both basketball dribbling (bounce) and physical play on the floor surface” and the “transfer of excitable energy (either a bouncing ball [or] jumping athlete) that can be felt in the floor at locations beyond where energy is applied to the floor system.”
The school’s architects identified the gymnasium flooring system deficiencies in reports issued in May and August 2015, finding:
- Kenvo did not use the specified type of “tongue & groove” plywood in the flooring system’s initial underlayment layer;
- Kenvo only fastened the underlayment to the perimeter of the flooring system in disregard of specifications concerning the need to fasten the plywood underlayment to steel channels intended to support and stiffen the “floating” gymnasium flooring system;
- Kenvo did not screw fasten the top layer of the cement board underlayment per the shop drawings prepared by the project’s acoustics engineer);
- the plywood floor underlayment exhibited inordinate bow and unevenness; and (e) Kenvo attempted to mitigate the unevenness by installing unauthorized thru-bolts into the structural slab which compromised the intended “floating” design features of the floor system;
- some volleyball insert covers had off-center installations that allowed the finish flooring to contact the steel volleyball post inserts transmitting unwanted vibrations to the underlying structural slab.
The architects recommended the full replacement of the current as-built sports floor and isolated resilient floor down to the underlying metal channel stiffeners.
Lee Kennedy repairs defective flooring based on architects’ findings
Under the construction contract between the Winsor School and Lee Kennedy, the school’s architects’ decision on construction defects, if undisputed, triggered the right of the school to repair the defect and chargeback Lee Kennedy.
Based on the architect’s findings and recommendations, Lee Kennedy withheld $190,349.39 in payments allegedly owed to Kenvo for work performed. A suit by Kenvo against Lee Kennedy for the withheld payments resulted, after Lee Kennedy counterclaimed, in an $85,000 payment by Kenvo.
Lee Kennedy replaced the defective flooring and made a claim against its insurer, Arch. Lee Kennedy sought $792,062.65 in costs and losses that it claimed it had sustained to correct the alleged deficiencies in the gymnasium flooring system installed by Kenvo, including:
- $28,322 in costs attributed to a “mock-up” of the replacement system;
- $138,752.67 in Lee Kennedy labor costs;
- $9,143.69 for Lee Kennedy’s fee;
- $51,424.09 in unspecified overhead costs; and
- $566,420.20 in vendor and subcontractor charges.
Arch denied the claim, and Lee Kennedy sued Arch in the Norfolk County Superior Court for breach of contract, unfair claim practices in violation of M.G.L. c. 93A, and a declaratory judgment that coverage for the flooring repair existed.
Case removed to federal court
Because Arch was a Missouri corporation sued in a Massachusetts state court by a Massachusetts corporation, Arch exercised its right to have Lee Kennedy’s lawsuit removed to federal court in Boston.
In federal court, Arch moved for summary judgment and Lee Kennedy cross-moved. Both claimed, there were no material facts in dispute. Based on the undisputed facts and the terms of the policy, Arch claimed there was no coverage. Lee Kennedy claimed just the opposite arguing that based on the undisputed terms of the policy Arch owed indemnity for the legally required repairs of the Center’s gymnasium floor.
Unambiguous contract a matter of law for the judge
In this case, the District Court judge went right to the contract. The judge applied Massachusetts law to the contract dispute between Lee Kennedy and Arch.
Under Massachusetts law, the interpretation of an insurance contract is ordinarily a question of law for the judge to decide if the policy has no material ambiguities. Where an insurance contract is unambiguous, the court interprets the policy’s words in light of their plain meaning, considering the document as a whole.
The insuring agreement of Arch’s policy provided:
Will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply.”
Lee Kennedy’s position was that Kenvo’s defective flooring job constituted “property damage,” covered by the policy. Lee Kennedy reasoned that when the architect rejected the flooring work, Lee Kennedy became “legally obligated to pay”under the terms of its contract with the Winsor School to fix the work Kenvo had defectively performed.
Arch argued that Lee Kennedy’s claimed payments and losses were not “sums that the insured becomes legally obligated to pay as damages because of. .. ‘property damage’ to which this insurance applies,” and that Lee Kennedy, therefore, was not entitled to indemnification coverage.
Lee Kennedy countered that the term “legally obligated to pay” did not require any demand or formal lawsuit.
Court rules a general liability policy covers tort liability and not liability under a contract
In reviewing the policy, the Court found that Lee Kennedy’s argument that the phrase “legally obligated to pay” in the policy’s insuring agreement was irrelevant.
The Court noted the policy had a specific exclusion common to general liability policies that barred coverage for ‘Bodily injury’ or ‘property damage:’
for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.”
The Court ruled that to the extent that Lee Kennedy based its claim on the contract with the Winsor School where it assumed liability for the defective work of Kenvo, Lee Kennedy’s coverage claim “falls directly within this contract liability exclusion.”
The exclusion did have two exceptions for liability for damages: “(1) That the insured would have in the absence of the contract or agreement; or (2) Assumed in a contract or agreement that is an ‘insured contract,’ provided the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement.”
The Court found that neither of these exceptions applied. In the first instance, the judge ruled that Lee Kennedy had not shown that it had become legally obligated to pay the repair costs in the absence of its contract with the Winsor School. As the judge stated: “[Lee Kennedy] fixed the [gymnasium’s] defective flooring without ‘any adjudication of [its] liability in any civil or arbitration proceedings, or even the entry into a settlement agreement with the School.’”
As to the second exception the judge ruled not applied since the insured contracts defined in the policy were: (1) “[a] contract for a lease of premises”; (2) “[a] sidetrack agreement”; (3) “[a]ny easement or license agreement”; (4) “[a]n obligation, as required by ordinance, to indemnify a municipality, except in connection with work for that municipality”; (5) “[a]n elevator maintenance agreement”; or (6) “[t]hat part of any other contract or agreement pertaining to your business. .. under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization.”
Finally, the Court pointed out citing prior case decisions, “This exclusion is consistent with the general rule, [stated the majority of courts], that the phrase ‘legally obligated to pay as damages’ in a commercial general liability insurance policy only applies only to tort liability and not contractual liability.”
In conclusion, the judge ruled for Arch, allowing its motion for summary judgment and denying Lee Kennedy’s motion for summary judgment stating:
In sum, this Court finds no ambiguity in the Policy language and enforces the contract according to its express terms, which provides no coverage for contract liability.”
Following this definitive ruling by the Court, Lee Kennedy dismissed its suit waiving any appeal.
