Construction Law Insights

Gateway Residences at Exch., LLC v. Ill. Union Ins. Co., 2018 U.S. Dist. LEXIS 58256, 2018 WL 1629107 (E.D. Va. Apr. 3, 2018)

On September 16, 2016, Gateway Residences at Exchange, LLC (“Gateway”) sued Mechanical Design Group, Ltd (“MDG”) alleging negligent design by MDG during the design and construction of a building in 2014. MDG did not appear in the lawsuit and Gateway obtained a default judgment for over $900,000.00 plus approximately $22,000.00 in attorney’s fees and costs. Thereafter, Gateway sought to recover on the judgment from Illinois Union Insurance Company (“IUIC”), MDG’s insurer, claiming that IUIC is required to indemnify MDG. From February 1, 2014 through February 1, 2015, IUIC covered MDG under an insurance policy (the “Policy”). The Policy is a “claims made and reported” policy, which required, as a condition of coverage, that a claim be made and reported to the insurer within the policy period. IUIC alleged that there is no coverage under the Policy because IUIC did not receive a claim during the existence of the Policy, which, at the request of First Insurance Funding (“FIF”), was cancelled on September 5, 2014. FIF was the premium finance company for the Policy and FIF had power of attorney over the Policy. On September 2, 2016, IUIC was first notified of Gateway’s claim.

Gateway argued that IUIC waived its “claims made and reported” defense because IUIC failed to notify Gateway of MDG’s alleged breach of the Policy within 45 days of IUIC’s discovery of a breach, thereby bringing IUIC under the coverage of Va. Code § 38.2-2226. When an insurer discovers a breach of the conditions of an insurance contract by the insured, Va. Code § 38.2-2226 requires the insurer to notify a claimant within 45 days of such discovery, otherwise the insurer waives the defense. However, Va. Code § 38.2-2226 was inapplicable in this case because IUIC was not asserting that MDG violated any Policy provision. Rather, IUIC asserted that, based on its plain language, the Policy did not provide coverage for Gateway’s claim. Therefore, any failure by MDG to report Gateway’s claim to IUIC was not a breach of the Policy, but was a non-occurrence of a condition precedent to coverage under the Policy.

Next, Gateway argued that the Policy was never cancelled or was inappropriately cancelled and, therefore, the Policy remained in force at the time Gateway notified IUIC of its claim. The Court held that even if the Policy was improperly cancelled, it was undisputed that the Policy would have naturally terminated on February 1, 2015 and that IUIC was not given notice of Gateway’s claim until September 2, 2016. Therefore, even if the cancellation was not effective, the Policy terminated before Gateway made its claim to IUIC.

Gateway argued that MDG’s coverage under the Policy continued through an extended reporting period, and that Gateway reported its claim to IUIC during the lifetime of this extended reporting period (“ERP”). In addressing this contention, the Court stated: “As the record stands, there is no evidence by which the Court can conclude that MDG acquired the ERP option, or that its [P]olicy extended the full 34 month period.” The Court denied Gateway’s motion for summary judgement, granted IUIC’s motion for summary judgment, and dismissed the case.

PLDR Law Mark Burgin 1 PLDR Law Scott Kowalski 1 Wolf Tom v2 Stout Kenneth 2016

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