Federal Circuit Holds That Prime Contractor's Insurer Cannot Seek Equitable Subrogation Against Government

Although a performing surety can bring an action directly against the government under the doctrine of equitable subrogation, the Federal Circuit has not previously determined whether the doctrine extended to a contractor’s general liability insurer. If, due to the government’s breach of a contract, a contractor’s insurer is forced to defend the contractor and pay claims, should that insurer be entitled to recoup those costs by asserting a direct action in the U.S. Court of Federal Claims against the government? Unfortunately for commercial general liability carriers for construction contractors, this November, in Federal & Guaranty Insurance Underwriters, Inc. v. United States, 805 F.3d 1082 (Fed. Cir. 2015), the Federal Circuit answered that question in the negative and unequivocally refused to extend equitable subrogation beyond Miller Act sureties.

The events forming the basis for the Fidelity decision began over 30 years ago when, in 1984, the Postal Service contracted with Gibbs Construction, LLC (“Gibbs”) to renovate the main post office in New Orleans, Louisiana. The Postal Service further agreed to wholly indemnify Gibbs against any liability for asbestos abatement related to the renovation work.  In 2010, a former Postal Service police officer sued Gibbs and its asbestos abatement subcontractor, alleging that during the asbestos abatement he contracted mesothelioma.  The Postal Service refused Gibbs subsequent demand to indemnify Gibbs and defend the suit, and, thereafter Gibbs and its insurer, USF&G, settled the tort lawsuit.

Following settlement, Gibbs filed a claim with the Postal Service for the settlement costs and legal expenses incurred by USF&G. After denial of the claim, USF&G filed suit in the U.S. Court of Federal Claims under the Tucker Act. The government moved to dismiss the lawsuit for lack of jurisdiction, arguing that USF&G had no contract with the government, and that USF&G was not equitably subrogated to Gibbs. The trial court agreed, finding that, while a Miller Act surety can seek equitable subrogation against the government because it steps into the shoes of the contractor to fulfill its performance obligations, a general liability insurer does not.

On appeal, the Federal Circuit began its analysis by reviewing prior decisions of the U.S. Supreme Court and Federal Circuit which held that the Tucker Act permitted claims by Miller Act sureties as equitable subrogees against the government. The Federal Circuit focused on the fact that, by settling the tort claim of the Postal Service employee, USF&G did not step into the shoes of Gibbs as a performing contractor, and had no obligation to the government. Therefore, unlike a performing surety that essentially takes over the government contract, a general liability insurer does not take over any facet of the construction contract and therefore cannot enforce the same against the government. Nor, likewise, could the government enforce the construction contract against USF&G. For these reasons, the Federal Circuit affirmed the lower court’s dismissal of USF&G’s suit.