Second Circuit Affirms No Duty to Defend Claims Against Construction Firm Outside the Scope of Professional Liability Coverage

The United States Court of Appeals for the Second Circuit, applying New York law, has held that neither of two claims against an insured construction company fell within the scope of coverage under the company’s claims-made and reported professional liability policies, where one claim was not both first made and reported during the same policy period and the other claim did not arise out of alleged negligence. Hunt Constr. Grp., Inc. v. Berkley Assurance Co., 2022 WL 17825813 (2d Cir. Dec. 21, 2022). The court also held that the construction company’s claim for bad faith failed as a matter of law.

In this coverage action, a construction company alleged breach of contract and bad faith based on its professional liability insurer’s denial of coverage for claims arising out of two separate projects. With respect to the first project, the company received a “Notice of Claims” letter in February 2017 but did not report the letter to its insurer at the time.  In December 2018, the construction company reported to its insurer a lawsuit and arbitration demand alleging that the insured had mismanaged the project. The insurer denied coverage under both the policy in place at the time the February 2017 letter was received and the policy in place when the lawsuit and arbitration demand were reported on the grounds that the claim was first made when the February 2017 letter was received but not timely reported during that policy period. The insurer also denied coverage for an unrelated lawsuit for failure to pay a subcontractor on a second project, on the grounds that it did not arise out of the negligent rendering of Professional Services and therefore did not fall within the scope of coverage. The district court granted summary judgment in favor of the insurer, and the construction company appealed. 

The Second Circuit affirmed on appeal, holding that there was no coverage for the claims related to the first project because they all arose out of alleged mismanagement of the project and were deemed a single claim first made when the February 2017 letter was issued, and the claim was not first reported under the policy in place at that time but instead was reported during a later policy period. The appellate court agreed with the district court’s holding that the insurer could not have waived the policy’s timely reporting requirement because it goes to the existence or nonexistence of coverage. The court also affirmed the ruling that there was no coverage for the subcontractor’s failure-to-pay lawsuit for the second project because it arose out of intentional, not negligent, conduct. Finally, the court held that the bad faith claims, which were largely duplicative of the breach of contract claims, failed as a matter of law.