You Only Get What You Pay For

No Need for, Nor Right to, Indemnity – No Damages

Insurance is a risk transfer device. Construction contracts also act as risk transfer devices since they include indemnity agreements and requirements for additional insured endorsements in favor of the owner and general contractor.

In Kaiserkane, Inc. v. North American Roofing Services, Inc., Civil Case No. 1:15-cv-00189-MR-DLH, United States District Court for the Western District of North Carolina Asheville Division (March 20, 2019) the USDC was asked to deal with the claim of a third party.

BACKGROUND

The Plaintiff KaiserKane, Inc. (“KaiserKane”) is a general contractor that provides construction management and design/build construction services for a diverse range of projects. In 2007 or 2008, KaiserKane was selected by the federal Bureau of Prisons (BOP) to serve as the general contractor for a project to replace the roofs on three buildings at the Federal Correctional Institution Fort Dix (FCI Fort Dix), located in Burlington County, New Jersey.

After being selected by the BOP as the general contractor for the FCI Fort Dix project, KaiserKane entered into a subcontract agreement with the Defendant North American Roofing Services, Inc. (“NARS”). In addition to the roof replacement work, the FCI Fort Dix project also involved the removal of asbestos materials. The asbestos removal and abatement work was performed by Briggs Contracting Services, Inc. (“Briggs”) pursuant to a separate agreement between NARS and Briggs. The work at the FCI Fort Dix project lasted approximately thirteen months and was completed in October 2009.

In 2010, Hitham Abuhouran (“Abuhouran”) sued KaiserKane, NARS, Briggs, and other defendants in New Jersey state court. KaiserKane, NARS, Briggs, and the other named defendants answered the state court complaint of Abuhouran, denied Abuhouran’s allegations against them, and asserted cross-claims against one another.

In short, KaiserKane requested damages, a declaration regarding the parties’ rights under the indemnification portions of their contract, an affirmative injunction requiring NARS to comply with its purported contractual obligations to defend and indemnify KaiserKane, and costs.

DISCUSSION

Indemnification

Section 5.2 of the parties’ Subcontract provides, in that NARS agreed to indemnity KaiserKane under the situations set forth in the contract. The claims asserted in the Abuhouran litigation fall squarely within the purview of Article 5, Section 5.2 of the Subcontract, and thus KaiserKane has the right of indemnity with regard to the Abuhouran litigation for any claim asserted or expenses incurred therein that was based on KaiserKane being derivatively liable for any injury “caused . . . by any negligent act or omission” on the part of NARS or Briggs.

The Abuhouran litigation is now concluded. The action was dismissed with prejudice, and without any determination of liability, direct or otherwise, against any party. Therefore, there was not – nor can there ever be – any finding that KaiserKane is derivatively liable for any negligent act or omission on the part of NARS or Briggs. While the parties’ Subcontract provides for the right of indemnity, such indemnity does not extend to the losses KaiserKane claims in this case.

KaiserKane nevertheless argued that it is entitled to indemnification for its attorney fees and costs incurred in defending against that litigation.

Primary and secondary liability between defendants exists only when

  • they are jointly and severally liable to the plaintiff; and either
  • one has been passively negligent but is exposed to liability through the active negligence of the other or
  • one alone has done the act which produced the injury but the other is derivatively liable for the negligence of the former.

Thus, in order for common law indemnity to apply, there must be an underlying injury sounding in tort and the party seeking indemnity must have imputed or derivative liability for the tortious conduct from which indemnity is sought.

Here, KaiserKane is not exposed to any liability at all. In light of the dismissal of the Abuhouran action with prejudice there is no loss for which KaiserKane would be entitled to indemnity. Accordingly, NARS is entitled to a judgment as a matter of law with respect to KaiserKane’s claim for indemnity, and this claim is therefore dismissed.

Breach of Contract

KaiserKane claimed that NARS breached the Subcontract by failing to name KaiserKane as an additional insured on NARS’s comprehensive general liability (“CGL”) policy.

Section 5.1 of the Subcontract required NARS, at its own expense, to obtain various types of insurance, including CGL insurance, before commencing work on the Fort Dix Project.  It also required that NARS list KaiserKane, Inc. as Additional Insured, and provide a Certificate of Insurance coverage for any other (than the listed CGL) insurance as required by the Contract Documents.

The plain language of this provision requires NARS to name KaiserKane as an additional insured (and provide a certificate of insurance) only “for any other insurance” obtained by NARS. Therefore, this provision did not obligate NARS to name KaiserKane as an additional named insured on its CGL policy, as CGL coverage was already explicitly required by Section 5.1 of the Subcontract. Under the terms of the contract, KaiserKane had the option of trusting NARS’s carrier as to the adequacy of its defense and solvency to pay any judgment, or to hire its own attorneys – at its own expense.

The Court concludes that NARS is entitled to a judgment as a matter of law on this claim. Accordingly, KaiserKane’s breach of contract claim is dismissed.

ZALMA OPINION

This convoluted and complex case arose only because the people in charge of writing the risk transfer contracts and insurance requirements failed to write the terms in the language they secretly intended. Courts will read a contract only as it is written not as the parties desired unless there is a showing the contract terms were obtained by deceit, misrepresentation or concealment of material facts. Since the parties were all professionals in the contracting business the contract was read as it was written and KaiserKane needs a new risk manager and attorney before entering into another construction contract.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest 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  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 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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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.
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