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Insurance company on the hook for faulty construction


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lmallory

By Laura Mallory

A city filed a lawsuit against an engineering firm and a construction firm (the Firms) alleging a breach of contract and professional negligence, which arose out of faulty repair and construction of two lagoons.

Background
The city hired the Firms to design and supervise repairs to an existing lagoon and for the construction of a new lagoon at the city’s wastewater treatment plant. During the testing periods of both lagoons, a hole developed in the liner of the repaired lagoon, which resulted in the wastewater to completely drain. Just a few days later, a hole developed in the liner of the newly constructed lagoon as well. The city requested the Firms to repair both lagoons for the initially agreed upon contracted price. A dispute arose between the city and the Firms regarding responsibility to repair the damage to both lagoons. It became clear that the Firms would not fix both lagoons for the contracted price. As a result, the insurance company that issued a performance bond for the lagoons project was added to the lawsuit filed by the city. The city alleged the insurance company breached the terms of the bond by failing to ensure the projects was completed, and the insurance company was liable for the amount the city must pay to repair the damages to both lagoons.

The insurance company attempted to get dismissed from the lawsuit by arguing the city’s claims were barred by the two-year limitations period to initiate an action under the bond. The agreement at issue states any legal proceeding must be instituted within two years after contractor default. The lower court held that the two-year limitations period to initiate an action began to run once the city declared the contractor in default. The insurance company disagreed with the lower court and were permitted to appeal the issue to the Court of Appeals in Tennessee.

The two issues on appeal were whether the two-year limitations period began to run from the alleged events leading to the occurrence of contractor default or whether the two-year limitations period began to run after the Firms ceased working. The insurance company argued that “contractor default” is an occurrence or event in which the Firms failed to perform or otherwise comply with the contract. The appellate court looked at the definition of the term “contractor default” in the agreement which defined the term as the failure of a construction firm, which has neither been remedied nor waived, to perform or otherwise to comply with the terms of the contract. The appellate court determined that because the definition allowed for the failure on the part of the Firms to be remedied or the non-performance waived, it is only after the failure to remedy or waiver that the “contractor default” occurs. Therefore, the two-year limitation period did not begin to run from the date the event leading to the occurrence of contractor default.

The court found the second issue concerning whether the two-year limitations period should begin to run after the Firms ceased working is one of the facts and was inappropriate for the present appeal, as the parties dispute when the work on the project actually ceased. As a result, the claim against the insurance company was timely filed.



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