Gateway Residences at Exch., LLC v. Ill. Union Ins. Co., 2019 U.S. App. LEXIS 6044 (4th Cir. Feb. 28, 2019)
Gateway Residences at Exchange, LLC (“Gateway”) hired Mechanical Design Group (“MDG”) to provide various engineering and construction services, including installing two life safety power generators in the garage of an apartment complex. MDG did not install the generators properly and, when the generators were started, they caught on fire, wrecking the generators and delaying the opening of the apartment complex. Gateway demanded that MDG cure the negligent design and installation of the generators. In September of 2014, MDG went out of business. Before starting work on the Gateway project, MDG bought liability insurance from the Illinois Union Insurance Company (“IUIC”) that only covered claims made against the insured and reported to the insurer during the policy period, which was February 1, 2014 through February 1, 2015. MDG never informed IUIC about Gateway’s potential claim before its insurance policy expired. IUIC first
learned of the generator incident on September 6, 2016, when Gateway notified MDG’s insurers that it intended to sue. Ten days later, Gateway sued MDG and, because MDG never appeared, the court entered a default judgment against MDG for $910,148 in damages and $22,580 in costs and attorneys’ fees. In October 2016, MDG learned that IUIC denied had denied it coverage for the Gateway claim because the claim was reported outside the policy period. Having obtained a judgment against MDG, Gateway sued IUIC to collect on the judgment.
The Court affirmed the district court’s summary judgment to IUIC and concluded that Virginia Code § 38.2-2226 does not apply because IUIC asserted that Gateway’s claim was not covered by the policy (i.e. because the claim was reported outside the policy period), not that IUIC denied coverage because of MDG’s breach. Virginia Code § 38.2-2226 provides that an insurer that wants to defend against a third-party claimant based on its insured’s breach of the underlying policy must notify the claimant of that intention within 45 days of discovering the insurer’s breach. Otherwise, the insurer waives its defense based on such breach. The statute, however, does not apply when the insurer denies coverage because the claim falls outside the scope of the policy coverage because a denial based on scope of coverage is not a “defense.” A “defense” presupposes the insurer’s existing obligation to provide coverage. A claims-made-and-reported policy, like the one IUIC sold to MDG, usually requires the claim both be made against the insured and reported to the insurer during the policy period. If no claim is reported, no coverage is triggered, even if the events underlying the claim took place during the policy period.