Don’t pick up the tab before picking up the phone: Settling a claim without the insurer’s knowledge.
Sometimes we all need to be reminded of something we already know – if you think that someone else is going to pick up the tab for something, it’s probably best to check with that person before shelling out any of your money. The Fourth Circuit, in Perini/Tompkins Joint Venture v. Ace American Insurance Company, 738 F.3d 95 (4th Cir. 2013)(applying Maryland law and Tennessee law), recently issued a stern reminder of this principle.
Perini/Tompkins Joint Venture (PTJV) was the construction manager for the construction of a $900 million hotel and convention center in Oxon Hill, Maryland known as the Gaylord National. For those of you who are involved with DRI, this is the hotel where the DRI Products Liability Conference was held in 2013. The hotel has a large atrium with a glass ceiling. During construction, one of the ceiling trusses became overloaded and collapsed, causing damage to other portions of the construction and causing project delays.
After completion, PTJV filed suit against Gaylord National, LLC, the owner of the hotel, for an unpaid sum of $79,656,098 under the construction contract. Gaylord responded with a suit of its own for approximately $65,000,000 in overpayments due to the construction delay attributable to the truss collapse and various other scheduling issues. As usually happens, especially in a business situation where the parties might want to work together again, PTJV and Gaylord were able to settle their differences. Gaylord paid PTJV $42,301,875, and PTJV agreed to credit back $26,157,912. At that point, the litigation was over.
But not really. PTJV had neglected to tell its insurer, ACE American, of the proposed settlement, or even the lawsuit against it, prior to entering into the settlement. ACE had been aware of the truss collapse when it occurred and, in fact, had sent someone to the construction site to inspect the damage. However, even in a post-settlement letter to ACE indicating that Gaylord had asserted a claim and that PTJV would be seeking reimbursement from ACE to the extent it could not recover under a building’s risk policy with another carrier, PTJV failed to tell ACE that the claim had evolved into a lawsuit which PTJV had already settled. Once ACE learned this, ACE, predictably, denied coverage (as had the builder’s risk policy issuer).
PTJV, however, would not take no for an answer. PTJV filed a breach of contract and declaratory judgment action against ACE in the United States District Court for the District of Maryland, seeking reimbursement of the funds it had credited to Gaylord to settle Gaylord’s claims. ACE filed a summary judgment motion on the basis that PTJV had failed to notify them of the settlement before entering into it. The district court agreed with ACE and dismissed the case.
PTJV still would not take no for an answer, and appealed to the Fourth Circuit. On appeal, the Fourth Circuit noted the following provisions of the insurance contract:
“No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent”
“No person or organization has a right under this Coverage Part unless all of its terms have been fully complied with. A person or organization may sue us to recover on an agreed settlement….An agreed settlement means a settlement and release of liability signed by [ACE], the insurance and the claimant or the claimant’s legal representative…”
These terms, which are included in most insurance contracts, prevent an insured from settling a claim and then seeking reimbursement from the insurer without affording the insurer the opportunity to investigate and dispute the claim. PTJV, however, argued that under Maryland Code § 19-110, ACE had to demonstrate actual prejudice resulting from PTJV’s failure to timely notify ACE of a claim and settlement, which would be a fact issue for a jury and thus not appropriate for summary judgment. ACE, on the other hand, argued that the issue was not whether PTJV had provided timely notice of the claim and settlement, but whether PTJV had complied with the conditions of the policy requiring ACE to consent to settlement. The Fourth Circuit agreed with ACE and affirmed the district court’s dismissal on summary judgment, denying PJTV recovery of the money it credited in the settlement. The Court noted that even if prejudice had been required, ACE was prejudiced as a matter of law.
Sometimes lessons are expensive. Unfortunately for PJTV, this lesson cost $26 million. You can learn from this lesson. In the construction context, minor claims often arise which can be resolved quickly with a small payment, additional services, or a simple understanding as to future projects. However, if the claim is such that you plan to seek a defense or indemnity from your insurer be sure to read your insurance policy, consult your attorney, and remember the importance of putting your insurers on notice as soon as possible.