Subcontractor’s Insurer Does Not Need to Indemnify its Insured for Subsequent Actions

Essex Insurance Co. v. Y&J Construction, Inc., No. 1:15-CV-1597, 2016 WL 8254921, at *1 (E.D. Va. Dec. 30, 2016)

The disputes in this case arose from an insurance coverage dispute from property damage caused by a fire that occurred during a construction project at Building 207 at Fort Belvoir, Virginia (“Project”).   The damage was caused by the roofing work of the subcontractor, defendant Y&J Construction, Inc. (“Y&J”) when it used roofing torches to complete the Project. The general contractor’s insurer, defendant Pennsylvania Mutual Insurance Company (“Penn”) paid for the damage and then filed a subrogation action against Y&J to recover the amount paid. Pa. Nat’l Mut. Cas. Ins. Co. v. Y&J Constr., Inc., No. 15-cv-1283 (E.D. Va. Oct. 2, 2015). In the complaint, Penn made the following claims: (1) Y&J acted negligently by causing fire at the Project; (2) Y&J breached its subcontracting agreement with the general contractor, Autumn Contracting, Inc.; and (3) Y&J must indemnify Penn.

Due to the pending litigation, Y&J’s insurer, Essex Insurance Company (“Essex”) filed this declaratory judgment action pursuant to 28 U.S.C. § 2201(a) claiming that (1) it has no obligation to defend Y&J in the subrogation action from Penn; (2) it has no obligation to indemnify Y&J for any judgment, settlement, or recovery in the pending subrogation action; and (3) it has no obligation to Penn such as indemnifying Penn for payment on behalf of its insured for the fire caused at the Project by Y&J. After engaging in discovery, pretrial motions, and a bench trial, both parties presented evidence to the court as support for their respective arguments. The Court reviewed the Findings of Fact and Conclusions of Law pursuant to Fed.R. Civ. P. 52.

The issue before the Court was whether Essex, under its policy with Y&J had a duty to pay Y&J or Penn if there is a judgment against Y&J in the subrogation action or; a duty to defend Y&J in the subrogation action. As to the first count of Penn’s complaint, the Court determined that Essex has no duty to defend or indemnify Y&J because according to the policy, property damage that arises out of operations involving torch or heat application are not covered. As to the second and third counts of Penn’s complaint, the Court determined that Essex has no duty to defend or pay because the policy includes a broad exclusion for claims arising out of a breach of contract. Because counts two and three are both premised on the breaches of the subcontract agreement between Y&J and Autumn Contracting Inc., Essex is not obligated to become involved.

The Court also discussed whether Penn was entitled to reformation of the policy’s roofing endorsement. Even though Penn had standing to seek reformation as a third party beneficiary of the contract with the right to sue on the policy’s terms, the Court found that Penn could not prove fraud, duress, or inequitable conduct in this case. Furthermore, Penn claimed mutual mistake of fact on the grounds of reformation in its Answer, but failed because Essex was aware of the roofing endorsement and there was no mutual mistake. Additionally, Y&J was put on notice of the roofing endorsement in the policy before it purchased the policy. As such, Penn could not establish by clear and convincing evidence that it should receive the remedy of reformation.  

Ultimately, the Court found that Essex was entitled to a declaratory judgment that it has no obligation to defend Y&J in the subrogation action, no obligation to indemnify Y&J for any judgment, settlement, or recovery in the subrogation action, and no obligation to Penn with respect to indemnifying it for any subrogation rights Penn possesses as a result for the payment of the Project fire caused by Y&J.