Wrongful Conduct Found Not Covered by Insurance Policy
The City of Shawnee, Kansas, hired a contractor to perform work on a project. Utility lines ran throughout the job site. The bid solicitation documents indicated that the utility lines would be relocated not to interfere with the contractor's work. The city failed, however, to relocate the utility lines as asserted during the bid solicitation, and the contractor encountered delay damages as a result.
The contractor then sued the city for misrepresentations and resulting delay damages. The city then sued its insurer, Argonaut Insurance Company (Argonaut). See City of Shawnee v. Argonaut Ins. Co., 546 F. Supp. 2d 1163 (D.Kan. 2008). The policy included a part named "Public Officials' Liability Coverage Part" and provided coverage for "any act, error or omission by an insured." Id. at 1170. However, the policy excluded coverage for liability arising out of a breach of contract or faulty preparation of bid specifications.
The United States District Court for the District of Kansas heard the matter on a summary judgment motion. The court first found that it could not rule as a matter of law that the breach of contract exclusion applied. The bid documents and all other agreements between the parties did not specify that one or another party was responsible for relocating the utility lines. Therefore, the city's argument that the action for negligent misrepresentation arose out of tort rather than contract had some merit and summary judgment in favor of the insurance company was not proper.
As to the faulty preparation exclusion, the court noted that the language of the policy was ambiguous because it did not define "bid specifications." Any ambiguity in an insurance contract is resolved against the insurer. The court, therefore, found that Argonaut failed to show the exclusion applied and had to provide coverage for the claim against the city.
Nevertheless, the city fell out of luck. Evidence was presented that the city had knowledge of the contractor's claims and intent to sue before the January 1, 2006 effective date of the policy. The terms of the policy provided no coverage for claims arising before the effective date. Accordingly, the insurer was not liable.
This case is a contract lesson to both insurance companies and to bidders. While the bid documents asserted all utility lines would be relocated, this court did not consider such statements contractual warranties that would trigger a breach of contract exclusion. The court may expect more precise and clear language to impose a contractual obligation. As to the insurers, ambiguity in contracts could ultimately lead to unplanned losses. Defining all terms clearly and ensuring consistency of the entire agreement is critical.
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Posted by Ryan McCabe at 5/6/2009 8:23 AM 
Categories: Insurance,Liability and Risk Management,Contractors,Contract Law
Categories: Insurance,Liability and Risk Management,Contractors,Contract Law
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