Another Reason for General Contractors to Think About Professional Liability Insurance

Many contractors now carry professional liability insurance in addition to their commercial general liability insurance because of the prevalence of alternative procurement delivery methods, such as general contractor/construction manager and design-build contracts.  In the wake of the recent Washington Supreme Court decision in W.G Clark Constr. Co. v. Pac. Nw. Reg’l Council of Carpenters, ___ P.3d ___ (Docket No. 88080-8) (2014), a decision by the United States District Court of Western Washington may give general contractors who do not already carry professional liability insurance another reason to think about procuring such insurance.  Read more about the W.G. Clark Constr. Co. decision here.

At the same time the W.G. Clark case was being decided by the Washington Supreme Court, the United States District Court of Western Washington in Bayley Construction v. Great American E&S Insurance Company, ___ F.Supp.2d ___ (2013) decided that a claim similar to the one made by the trust funds in W.G. Clark triggers an insurer’s duty to defend the GC under its professional liability insurance policy.

In Bayley, the insurer issued an insurance policy to the GC that included coverage for professional liability (“Policy”).  In relevant part, the Policy stated:

The Company will pay on behalf of the INSURED for LOSS and related LEGAL EXPENSE because of an actual or alleged act, error or omission in PROFESSIONAL SERVICES, which the INSURED becomes legally obligated to pay as a result of a CLAIM first made against the INSURED during the POLICY PERIOD….

PROFESSIONAL SERVICES [means]:  Construction Management, Pre-Construction Consulting Services and Design Services.

CLAIM means:  … a demand, notice or assertion of a legal right alleging liability or responsibility on the part of the INSURED, arising out of … an actual or alleged act, error or omission in PROFESSIONAL SERVICES, and shall include but not be limited to lawsuits, orders, petitions or governmental regulatory actions, filed against the INSURED.

LOSS means:  a monetary judgment, award or settlement of [damages].

The GC was awarded a bid for a renovation project at a college learning center in Orange County, California by the county district (“District”).  The GC engaged an HVAC subcontractor for the Project.  As the Project was being completed, an investigation by the District’s labor compliance administrator revealed the HVAC subcontractor was illegally paying its workers on the Project less than California’s prevailing wage.  The GC was not complicit in the HVAC’s illegal operations.

The District served the GC with a Notice of Withholding Contract Payments (“Notice”).  The GC tendered the claim to the HVAC subcontractor, which subsequently dissolved and declared bankruptcy.  Thus, the GC decided to tender the claim to its insurer under the Policy, but the insurer denied the tender.

The GC filed suit against its insurer in the U.S. District Court of Western Washington (the GC’s headquarters are located in Seattle, Washington).  The GC then filed for a motion for summary judgment and argued, in relevant part, that the insurer breached its duty to defend.[1] 

In Washington, an insurer has a duty to defend “when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy’s coverage.”  Truck Ins. Exch. v. VanPort Homes, 147 Wn.2d 751, 58 P.3d 276 (2002).  Whereas the duty to indemnify “hinges on the insured’s actual liability to the claimant and actual coverage under the policy,” the duty to defend “arises based on the insured’s potential for liability and whether allegations in the complaint could conceivably impose liability on the insured.”  Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454 (2007).

The insurer opposed the summary judgment motion on two grounds:  (1) the Notice was not a “claim” or “loss” under the Policy, and (2) “professional services” require an exercise of professional skill and judgment or specialized knowledge or skill, and paying workers the appropriate prevailing wage does not require special skill or judgment.

The court disagreed with the District. First, the court held that from the face of the Notice, the insurer was aware that the GC was serving as the prime contractor on a construction project, that the subcontractor the GC hired had failed to pay its workers California’s prevailing wage, and that the GC was facing liability under California law for that failure.  Thus, the facts alleged in the Notice conceivably indicate a “loss” due to an “act, error, or omission” by the GC in conducting “construction management” of the Project that could be covered by the Policy. Second, the court held that nothing within the four corners of the Policy necessitates or supports the insurer’s definition of “professional services.”  Washington law requires inclusionary clauses in insurance contracts be liberally construed in favor of covering all acts fairly embraced by the specified terms.  Thus, it is not clear that the term “professional services” limits the “construction management” conduct covered by the Policy.  Washington law also requires that facts be liberally construed in favor of triggering an insurer’s duty to defend.  A liberal and reasonable construction of these facts would be that ensuring subcontractors’ compliance with prevailing wage laws on a project of this scope required professional skill and judgment.  Accordingly, the insurer had a duty to defend the GC.

Comment: This decision is significant, especially in light of the recent W.G. Clark decision.  Many insurance companies attempt to settle claims in order to avoid increasing defense costs.  So, for those general contractors who do not already carry professional liability insurance, procurement of such insurance may be an alternative to protect your retention and bond against labor and trust fund liens.  Ultimately, this case was settled by the insurance carrier, which reinforces the significance of an insurer duty to defend.

[1] GC also argued that the insurer’s failure to investigate and denial of coverage constituted bad faith; as a result of the alleged bad faith, GC argued that the insurer was estopped from denying the GC coverage and violated Washington Insurance Fair Conduct Act (“IFCA”).  The court, however, did not find that there was any bad faith because there was not enough evidence to find the insurer was unreasonable in denying coverage.

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