Insurance carrier denied coverage under an insured’s professional liability policy because the carrier believed the design professional failed to timely file the claim when it first knew of it, based on a demand letter sent by the project owner to a number of different entities alleging problems with an HVAC system and water intrusion from the floor and roof. The Architect explained that it didn’t report the demand letter to the carrier because it asserted problems with the project caused by others and which were outside the Architect’s scope of services. When the Owner ultimately filed a complaint naming all entities, including the Architect, the Architect tendered the complaint of the carrier for coverage. The carrier filed a declaratory judgment action asking the court to declare that it owed no duty to defend or indemnify the architect due to untimely notice of the claim. The court denied the requested judgment because it stated it was not clear whether the demand letters that went to numerous entities contended that the Architect, and not others, performed the defective work.
The carrier argued that the Architect failed to timely report the Owner’s demand letters and therefore did not trigger coverage under the policies. It says that based on those demand letters, a Claim was first made against the architect during the 2016-17 policy period, but only reported the Claim during the 2017-18 policy period after the Owner filed suit. Based on that assertion, the carrier asserted that the initial Claim was made in one policy period but reported in another and, the Architect, therefore, would not quality for coverage under either policy.
In opposition the carrier’s argument, the architect argues that it qualifies for coverage under the 2017-18 policy, as the underlying suit was the first Claim it received and it promptly notified the carrier of that Claim. The court denied the carriers motion of judgment “because a dispute of material facts exists whether the Church’s demand letters amounted to a Claim alleging a Wrongful Act o the part of the [Architect].” The court concluded, “there is only a tenuous link between the issues raised in the [demand] letters – complications with the HVAC system and water leaks – and – Architect’s professional liability.”
In support of its position that the first it knew of a Claim against it was when the Complaint was filed, the Architect submitted an affidavit by one of its principals attesting that the Architect “had no role in the design or construction of the civil sitework for the Project including any landscaping or exterior drainage systems … and at no point during the February 2017 meeting, or at any time afterwards until I was served with the underlying lawsuit, did any person allege any negligent act or any error or omission by [Architect] with respect to the professional services provided by [Architect] on the Project.” In support of its affidavit the Architect attached its “Scope of Services Agreement.”
The court concluded, “it is thus unclear whether the scope of the allegedly defective work outlined in the demand letters claimed any problems with the work [Architect] completed as part of its Professional Services. This coupled with the fact the letters were addressed to multiple recipients allegedly responsible for the identified defects, highlights a material dispute whether the demand letters amounted to Claims against [Architect] by alleging [Architect] specifically completed defective work, rather than one or more of the other individuals listed therein.” For these reasons, the court denied the insurance carriers motion for summary judgment. Architrave, Inc. and Mount Moriah Missionary Baptist Church, Slip Copy , 2021 WL 1863259 (South Carolina 2021)
Risk Management Comment:
When an Insured receives a letter like the one involved here, it may submit that letter to its professional liability carrier as a notice of a “circumstance” that might later turn into a claim. If a later claim is, in fact, made against the Insured, it should be covered because it was reported early as a “circumstance” to the carrier. In addition, some (perhaps many) professional liability carriers provide their Insured design professionals with “pre-claims assistance” or “loss control/prevention” services at no additional cost. When an Insured receives a letter similar to the one sent to the Architect in this case, even if it does not appear to be an actual “claim” against the Insured, the design firm can submit the letter to its insurance carrier and request that it be noted as a “circumstance” of a potential claim, or it may request that it be handled as pre-claim assistance by the carrier. Assistance can then be provided for the Architect and if a “Claim” is later filed, this may help to avoid coverage disputes like the one discussed in this court decision.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 23, No. 7 (November 2021).
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