Lawsuit Arising Out of Three Design Errors is a Single “Claim,” and Prior Knowledge and Prior Notice Provisions Bar Coverage

In a win for Wiley Rein’s client, the United States District Court for the Southern District of Florida, applying Florida law, held that, as a matter of law, a lawsuit against an engineer arising out of three alleged errors in connection with a construction project constituted a single “claim” under the engineer’s claims-made-and-reported architects and engineers policies. Nova Southeastern Univ., Inc. v. Continental Cas. Co., No. 18-CIV-61842-RAR (S.D. Fla. Dec. 27, 2019).  Furthermore, the court held that the policies’ prior knowledge and prior notice provisions separately and independently barred coverage for the lawsuit.

The underlying action arose out of the insured engineer’s structural design of ice tanks for a construction project at a university.  The engineer and the university first became aware of structural issues with the tanks in January 2009.  The engineer reported the issue to its insurer at the time and prepared a remedial plan for the tanks.  Although the tanks were substantially completed in September 2009, the university continued to experience problems with them and ultimately filed suit against the engineer in 2012, alleging that it was negligent in the initial and remedial design of the tanks.  Specifically, the university alleged three errors in the design of the tanks, including the initial issue reported to the engineer’s insurer in 2009 and two subsequently discovered issues.

The engineer and the university reached a settlement of the underlying action in 2015.  The insurer to whom the engineer had reported the initial design issue in 2009 provided a defense and paid its limits toward the settlement.  The engineer also reported the underlying action to its insurer when the suit was filed in 2012, but that insurer denied coverage, and the engineer did not dispute coverage under the later policies.  As part of the settlement in the underlying action, the engineer purported to assign its rights under the subsequent policies to the university, which then initiated this action, seeking coverage for the outstanding portion of the judgment from the engineer’s subsequent insurer.

On cross-motions for summary judgment, the court ruled in the insurer’s favor.  First, the court held that the underlying action constituted a single “claim” under the policies.  In so holding, the court rejected the university’s argument that each of the three errors alleged in the underlying action constitute a separate “claim,” the latter of which should be covered under the subsequent policies because it was discovered and reported during the later policy periods.  Instead, the court concluded that the underlying action itself is the relevant “claim.”  Moreover, even if each discrete error allegedly committed by the engineer was considered a separate claim, such claims are logically connected and therefore constitute “related claims,” which the policies provide shall be treated as a single “claim.”

Having concluded that the underlying action constituted a single “claim,” the court then held that the policies’ prior knowledge and prior notice provisions separately and independently barred coverage for the underlying action.  First, the court rejected the university’s argument that the prior knowledge provision did not bar coverage for the third, later-discovered error, concluding that the university’s argument “confuses the definition of ‘wrongful act’ with the definition of ‘claim’” under the policies.  Even if the engineer did not have any reason to expect a claim arising out of the third, later-discovered error before the subsequent policies were issued, the court held that it did know, or reasonably should have known, that the negligent design of the ice tanks might become the basis of a claim before the first policy issued by the subsequent insurer incepted.  Therefore, the prior knowledge provision bars coverage for the underlying action.

Similarly, the court held that the policies’ prior notice exclusion applied because the engineer reported issues that were ultimately the subject of a claim to its prior insurer in 2009, and the underlying action was “at a minimum, a claim arising out of wrongful acts that are logically connected to a wrongful act that was reported to a prior insurer.”

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