Steadfast Insurance Company v. Portsmouth JV

Background

Portsmouth JV (PJV), a design-build contractor, was responsible for a highway project in Ohio. After slope failures and related geotechnical problems damaged roadways and bridges, PJV concluded that design errors were responsible and undertook repairs. PJV’s total repair costs were $19,410,657.60.

PJV had purchased an insurance policy from Steadfast Insurance Company. The policy’s Rectification Indemnity Coverage, in Endorsement 11, covered costs of correcting a design defect when the insured was responsible for both design and construction. The coverage was subject to a $5 million limit and a $500,000 retention.

Steadfast paid PJV $5 million under that coverage through a July 2019 settlement agreement. The agreement released Steadfast from claims relating to the rectification coverage, including bad-faith claims, but stated that it did not modify or impair Steadfast’s contractual subrogation rights.

Separately, PJV pursued arbitration against its lead designer, MSC, for the same design defects. The arbitration panel awarded PJV $7,501,878. After the arbitration, Steadfast sought reimbursement of the $5 million it had paid PJV. The parties placed the disputed $5 million in escrow while litigating whether Steadfast or PJV was entitled to it.

The parties’ arguments

PJV argued that Endorsement 12 governed the distribution of the arbitration recovery. That provision concerns subrogation—the insurer’s substitution for an insured to pursue the insured’s rights against a responsible third party—and provides an order for distributing money recovered through subrogation.

Steadfast argued that Endorsement 11 governed instead. That provision states that if the insured later receives money from the design professional’s insurance for the same design defect, the money must be used to reimburse Steadfast for its payments under the rectification coverage.

PJV also asserted counterclaims that Steadfast breached the insurance contract and acted in bad faith by seeking reimbursement under Endorsement 11 rather than following Endorsement 12’s distribution process.

Court’s analysis

Judge Abrams held that Endorsement 12 did not apply because the arbitration award was not a recovery obtained through subrogation. Steadfast had not brought a subrogation action against MSC and was not a party to the arbitration. The court concluded that Endorsement 12’s reference to Steadfast’s right to participate did not allow PJV’s arbitration, standing alone, to become a subrogation action.

The court held that Endorsement 11 applied because PJV had filed a protective indemnity claim against MSC for the same design defect that had been covered by Steadfast’s $5 million payment. Under the clear language of Endorsement 11, the proceeds PJV received from the design professional’s insurance had to reimburse Steadfast for its payment under the rectification coverage. The court therefore ruled that Steadfast was entitled to the $5 million.

The court also ruled that Steadfast did not breach the contract by requesting reimbursement. In the court’s view, Steadfast was enforcing the contractual reimbursement method that applied when PJV pursued recovery for a design defect previously covered by Steadfast.

As to bad faith, the court found that the settlement agreement expressly released PJV’s bad-faith claims based on Steadfast’s conduct before the agreement. The only later conduct at issue was Steadfast’s February 21, 2020 letter seeking reimbursement. The court concluded that Steadfast’s interpretation of Endorsement 11 was reasonable and that its conduct did not amount to the serious or extreme misconduct required for a bad-faith claim.

Disposition

The court granted Steadfast’s motion for summary judgment and denied PJV’s motion for summary judgment. The Clerk was directed to terminate the pending motions and close the case.