Construction Law Insights

Heartland Constr., Inc. v. Travelers Cas. & Sur. Co. of Am., 2022 U.S. Dist. LEXIS 22795, 2022 WL 391308 (E.D. Va. Feb. 8, 2022)
Heartland Constr., Inc. v. Travelers Cas. & Sur. Co. of Am., 2022 U.S. Dist. LEXIS 159292, 2022 WL 4016884 (E.D. Va. Aug. 30, 2022)

The U.S. Veterans Administration awarded Potter Enterprises, Inc. (“PJP”) a contract to construct a new building at the VA Medical Center (the “Project”). PJP and Heartland Construction, Inc. (“HCI”) entered into a firm fixed price subcontract (the “Subcontract”) under which HCI would manage the Project and provide second and third tier subcontractors. Under the Subcontract, PJP was to pay HCI $5,554,711.00 for HCI’s services to be billed on a percentage of completion basis, based on a schedule of values (“SOV”). On November 4, 2017, Matt Hemmis (the son of PJP’s President and employed as the President of HCI) altered the Subcontract, purportedly changing it to a cost-type Construction Management Agreement (“CMA”) without the consent, authority, or approval of HCI. Matt Hemmis removed the Subcontract from HCI’s servers and destroyed it, replacing it with the cost type subcontract. HCI terminated Matt Hemmis’ employment.

In November of 2018, a dispute arose between HCI and PJP when PJP attempted to take over HCI’s subcontracts and remove HCI from the Project. The disputes resulted in a mediation on January 21, 2019, during which HCI’s CEO, PJP, Dennis Hemmis, and Matt Hemmis executed a settlement agreement. However, the cost-plus CMA was not signed or delivered to HCI until after the settlement agreement was signed. On February 14, 2019, HCI filed an arbitration demand against PJP alleging that PJP breached the settlement agreement. On March 13, 2019, HCI issued a letter to PJP’s payment bond surety, demanding $750,648.98 on the basis of the fixed-price CMA between HCI and PJP and alleging that any cost-plus CMA was procured by fraud.

Travelers Casualty and Surety Company of America (“Travelers”) issued a Wrap+ Insurance Policy to HCI (the “Policy”). HCI sought coverage under the Policy’s Crime Coverages section. Travelers argued the Crime Policy section contained an exclusion that excluded coverage for losses caused by an employee to certain insuring agreements. HCI sued and Travelers moved to dismiss. Later, HCI and Traveler both filed Motions for Summary Judgment.

The Court granted Traveler’s Partial Motion to Dismiss and dismissed those parts of HCI’s Complaint seeking judgment based upon breach of contract and seeking declaratory relief under the insuring agreements. Virginia has adopted the Eight Corners Rule under which courts look at the four corners of the complaint and the four corners of the insurance policy to determine if there is a potential for coverage. Ambiguous terms in a policy are construed against the insurer. Under the Eight Corners Rule, the Court found the Policy’s exclusion to be clear and unambiguous, in that it could only be reasonably be understood in one way – to exclude coverage for loss resulting from fraudulent, dishonest, or criminal acts of employees unless coverage is available under one or more of the five enumerated Insuring Agreements. Hemmis was an employee of HCI.

The Court granted Traveler’s Motion for Summary Judgment and determined that the fixed-price CMA was not a “Security” under the Policy, as it only established a legal relationship between the parties that allowed HCI the opportunity to earn money through performance as specified in the contract. The Policy defined “Securities” as a “written negotiable and non-negotiable instrument or contracts representing Money or property” and then provided specific examples. Applying the doctrine of noscitur a sociis (when general and specific words are grouped, the general words are limited by the specific and will be construed to embrace only objects similar in nature to those things identified in the specific words), the Court held that the fixed-price CMA was not a “contract representing money or property” because it did not have an intrinsic value that, in and of itself, could be exchanged for money.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

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