Source: http://www.lexology.com, July 15, 2014
By: Matthew D. Stockwell, Pillsbury Winthrop Shaw Pittman LLP
On June 23, 2014, the Second Circuit Court of Appeals issued a decision in the case Dormitory Authority of the State of New York v. Continental Casualty Company (2014 WL 2808073), a declaratory judgment action filed by a building owner against the architect’s insurance carrier over the faulty design of a dormitory. The issue in this case was whether two design defects in the structure of the building were “related.” The owner sought a declaration that the design flaws were two separate defects because, if so, two separate policies would have responded to the claims, but if not, there would not have been sufficient limits to remediate both defects. Although this decision has not received much attention yet, the importance lies in the Second Circuit’s agreement that the defects were separate, notwithstanding policy language that attempted to group related wrongful acts.
After the project was completed, it was determined that the architect incorrectly estimated the steel requirement for the structural steel girts and exterior façade (“Steel Girt Defect”). The owner sent a demand letter to the architect in 2002. Separately, it was also discovered that snow and ice were sliding off of the building on the sidewalk below. A study determined that the design of the façade failed to account for temperature variations appropriate for a building in New York (“Façade Defect”). A claim was first asserted against the architect in 2004.
The architect’s professional liability policies are claims-made policies that defined “related claims” as “all claims made against [the architect] and reported to [the insurer] during any policy year arising out of . . . a single wrongful act or related wrongful acts.” The policies further provided that “[a]ll related claims shall be considered a single claim first made and reported . . . within the policy year in which the earliest of the related claims was first made and reported.” The two separate claims implicated two different policies because they were reported at different times. The district court granted summary judgment in favor of the owner, finding that the Façade Defect was not related to the Steel Girt Defect. On appeal, the insurer argued that the demand letter for the Steel Girt Defect was broad enough to include all design defects in the building. The Second Circuit disagreed and found that the demand letter focused entirely upon the Steel Girt Defect and “could not be fairly read as an omnibus claim concerning all architectural defects . . .”
The insurer also argued that the defects were “related claims” under the policy because they arose out of a single wrongful act or related wrongful acts. The Second Circuit rejected this claim as well, holding that one defect relates to the structural integrity of the building, while the other relates to the building’s aesthetic design. Furthermore, each system had its own distinct engineering considerations and involved different design teams and contractors. The problems also manifested themselves at different times, resulted in different types of damage, and the solutions to each issue were completely different. Importantly, the Court stated, “[t]hat both may have resulted from the generalized negligence of the Architects is an insufficient degree of relatedness.”