No Coverage for Voluntary Remediation Because Insured Not “Legally Obligated to Pay” for Work

In a win for a Wiley Rein client, the United States District Court for the District of New Jersey, applying New Jersey law, held that no coverage was available under an errors and omissions policy for remediation work performed by an insured because the insured was not “legally obligated to pay” for the remediation.  Wyndham Constr., LLC v. Columbia Cas. Co., 2016 WL 5329585 (D.N.J. Sept. 21, 2016).  In addition, the court held that the remediation costs were not covered “damages” because they were incurred without the insurer’s consent.  Wiley Rein represented the insurer.

An insured construction company was contracted to perform work on a road widening project for a state highway authority.  The state highway authority alleged that the insured’s construction of a wall system was out-of-tolerance and demanded that the insured cure the defect.  Over a three-week period, the insured incurred over $250,000 to cure the purported defect.  It then sought coverage from its E&O insurer for the remediation costs.  The insurer denied coverage for the remediation costs, and the insured filed suit.

The court held that no coverage was available for the remediation costs because the insured was not “legally obligated to pay” those amounts, as required to trigger the policy’s insuring agreement.  Relying on a prior case from the United States Court of Appeals for the Third Circuit, Permasteelisa v. Columbia Cas. Co., 377 F. App’x 260 (3rd Cir. 2010), the court reasoned that the insured was not “legally obligated to pay” because it did not perform the remediation work due to a finding of liability by a court.  Even if the insured was contractually obligated to perform the remediation work, the court held that a contractual obligation was insufficient under the Third Circuit’s holding.

The court also held that coverage for the remediation costs was foreclosed by the policy’s definition of “damages,” which required that “[a]ll settlements must be made with [the insurer’s] consent.”  Because the insured did not seek the insurer’s consent before performing the remediation work, the costs associated with the remediation were not “damages.”

Finally, the court rejected the insured’s argument that the insurer was estopped from denying coverage because it never asserted these grounds in its coverage denial letter.  The court held that estoppel did not apply because the insurer never conveyed that coverage was available and reserved its rights to rely on additional grounds to deny coverage.


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