When Joint Venture Is Insured Joint Venturer is Insured

To Prove Bad Faith Plaintiff Must Prove Malice, Oppression, Wilfulness or Reckless Indifference

Insurers, like every business, will often err, be lazy, or just fail to treat their insured properly. When that happens the insured will invariably sue or cross-claim for the tort of bad faith. The insured learns, when they seek damages from the insurer, that it is not enough to prove stupidity, delay, or incompetence, to obtain a bad faith judgement.

In Westchester Surplus Lines Insurance Company v. Clancy & Theys Construction Company, Westchester Surplus Lines Insurance Company v. Clancy & Theys Construction Company, United States Court of Appeals, Fourth Circuit, 2017 WL 1239588, No. 15-2299, No. 15-2373  (April 4, 2017) a complex insurance coverage case became simple when the court decided that coverage existed but there was no bad faith.

FACTS

Capstone Development Corporation hired a joint venture consisting of Brasfield & Gorrie, LLC, and Clancy & Theys Construction Company to construct a mid-rise student housing building in Raleigh, North Carolina. After construction was well under way, a portion of the building began to lean, damaging other portions of the building. After a plan for repair was agreed to, the Brasfield/Clancy Joint Venture initiated a mediation process with potentially responsible subcontractors to agree to an allocation of the $14.4 million repair costs. Following the process, the subcontractors and their insurance companies agreed to pay $10.5 million, leaving the remainder to be absorbed by the Brasfield/Clancy Joint Venture.

When Clancy, as a partner in the Brasfield/Clancy Joint Venture, sought reimbursement for its share of the repair cost from its insurance company, Westchester Surplus Lines Insurance Company, which had issued Clancy a general liability and professional liability insurance policy, Westchester Insurance sued seeking declaratory judgment that its policy provided no coverage. Clancy filed a counterclaim alleging breach and tortious breach of the insurance contract. The district court, finding that the policy afforded coverage, entered judgment in favor of Clancy on its breach of contract claim in the amount of $1.75 million and dismissed Clancy’s claim for tortious breach of contract.

To insure its liability as a partner or venturer in the joint venture, Clancy purchased a “Joint Venture Endorsement” to its Westchester Insurance policy to cover its liability as a partner in the Brasfield/Clancy Joint Venture. The underlying policy — a commercial general liability and professional liability policy — excluded coverage for joint venture liability.  The Joint Venture Endorsement was designed to eliminate that exclusion and provide Clancy with coverage for joint venture liability.

The repair ended up costing $14.4 million to implement. Clancy notified Westchester Insurance in September 2011 of the potential claim. But Clancy was unable subsequently to contact the employee of Westchester Insurance who had been assigned to the claim; unbeknownst to Clancy, that employee had left the employ of Westchester Insurance. After about a month, Clancy was able to establish contact with another Westchester Insurance employee, who had been assigned to the claim. After providing that employee with all of the communications between Clancy and Capstone Development, Clancy heard nothing further from Westchester Insurance for another two months. As Clancy pressed Westchester Insurance for a coverage determination, Westchester Insurance requested an accounting of costs and a copy of the Brasfield/Clancy Joint Venture agreement, all of which Clancy also provided. When, in September 2012, Clancy complained about the delay in Westchester Insurance’s making a decision and threatened suit, Westchester Insurance commenced this declaratory judgment action.

In its complaint, Westchester Insurance sought a declaratory judgment that its policy did not cover Clancy’s losses because Clancy’s liability did not arise from the performance of its work. More particularly, it asserted that responsibility for the losses belonged to the Brasfield/Clancy Joint Venture, not to Clancy as a venturer in the Joint Venture.

On Westchester Insurance’s motion, the district court granted summary judgment to Westchester Insurance on Clancy’s claim for tortious breach of contract because Clancy failed to show “malice, oppression, or a reckless indifference to consequence,” as required to prove a claim for tortious breach of contract under North Carolina law. Following a bench trial on the remaining issues, the court found that Westchester Insurance owed Clancy coverage for its $1.77 million loss, less a deductible of $500,000 as provided in the policy, plus interest, entering judgment in favor of Clancy in the total amount of $1,746,963.83.

ANALYSIS

In contending that its policy provided no coverage for Clancy’s joint venture liability, Westchester Insurance argues that “Clancy and the Joint Venture were separate and independent entities under North Carolina law and for the purposes of the Policy.

The Fourth Circuit noted, as had the trial court, that Westchester Insurance confused Clancy’s obligations to its partner under the Brasfield/Clancy Joint Venture agreement and its obligations as a joint venturer to Capstone Development for the defective foundation. Westchester Insurance also overlooks the fact that its Joint Venture Endorsement provided coverage for Clancy’s liability as a joint venturer to Capstone Development, which liability is indeed the same as the Joint Venture’s liability.

Not only did Clancy have liability as a joint venturer, it was this very liability that it insured when it purchased the Joint Venture Endorsement.

The liability of a joint venture is indistinguishable from the liability of the venturers. The injured person may sue all the members of the partnership or any one of them at his election. Thus, Westchester Insurance’s premise that the Brasfield/Clancy Joint Venture’s liability to Capstone Development was distinct from the liability of each member of the joint venture was fallacious.

The Fourth Circuit also concluded on Clancy’s cross-appeal, that the district court did not err in granting Westchester Insurance summary judgment on Clancy’s claim for tortious breach of contract. Under North Carolina law, to prove such a claim, a plaintiff must show malice, oppression, wilfulness [or] reckless indifference to consequences. The district court concluded that, while the record showed delay, it did not provide support for the elements of a tortious breach claim.

The Fourth Circuit agreed that Clancy had not directed it to any portion of the record to support its claim. Clancy relies simply on Westchester Insurance’s delay in investigating the coverage issue, which, without more, is insufficient to satisfy North Carolina’s requirements for showing a tortious breach.

ZALMA OPINION

The tort of bad faith was created to deal with insurance industry abuses. It has be fairly successful. However, as this case makes clear, the worm has turned and the abuses are now impressed on the insurance industry. Westchester had a legitimate, albeit wrong, coverage dispute with its insured. It sought declaratory relief to determine if it owed coverage. The trial court and Fourth Circuit found coverage but Westchester was forced to defend a claim seeking bad faith tort damages. It is time to get away from the tort of bad faith and allow contract disputes to be resolved quickly.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Share

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.