Each month, Brickerconstructionlaw.com summarizes recent decisions of state and federal courts that may affect construction projects and those involved with them in Ohio, Indiana, Kentucky and Michigan. From time to time, we may even include cases from other states, if they seem particularly relevant. We highlight what the courts have said in these cases to keep you informed about decisions that may affect your business and your interests, but the summaries themselves are neither legal advice nor legal opinion. If we overlook a case that you think is significant, e-mail us with your suggestions. We can always use feedback, and we would enjoy hearing from you!

This month we start with a case before the U. S. District Court for the Southern District of Ohio. The issue was whether Ohio law recognized a bad faith claim against a performance bond surety. After discovery was conducted a contractor sought to add a bad faith claim to its breach of contract action. Our second case comes from the Supreme Court of Kentucky. The court looks at whether a Commercial General Liability policy covers damages that occurred where a contractor hired to remove a carport mistakenly removed the carport and half of the house connected to the carport.

Court Recognizes Bad Faith Claim Brought Against Performance Bond Surety Under Ohio Law

Contractors and subcontractors are frequently required to post a performance bond on construction projects in Ohio. Among other things, these bonds are used to pay for the completion of a project if the contractor or subcontractor fail to finish the project.

In most cases the surety does one of several things to complete the project. The surety either can hire a contractor to finish the project, permits the owner to hire a new contractor to complete the project at the surety’s expense, or pays the owner if the owner completes the work. Under any of these options the surety must pay to have the work completed correctly. Where a surety fails to properly fulfill its obligations it may be subject to a breach of contract claim. In addition, if an owner or contractor can prove that the surety acted in bad faith, then the owner or contractor may be able to assert a bad faith claim against a surety. This is significant because where a contract does not provide for attorneys’ fees in the event of a breach of contract, a bad faith claim, in some cases, allows the owner or contractor to recover its attorneys’ fees and potentiallty punitive damages.

In Kokosing Construction Co., Inc. v. RLI Insurance Co., 2008 U. S. Dist. LEXIS 10327, Kokosing sought recovery under a performance bond where its subcontractor, American Native Construction and Supply Company, allegedly failed to perform. American Native was required to perform bridge painting and sealing work on an ODOT project. Kokosing sought recovery from RLI Insurance under the performance bond for the costs to complete the work.

After the case was filed, Kokosing took the deposition of one its witnesses. After that deposition, Kokosing sought to amend its complaint to add a bad faith claim against RLI Insurance. The language in the Kokosing’s motion to amend its complaint stated that “the legal theories upon which RLI sought to elicit evidence are not predicated upon circumstances that furnish a reasonable justification for its refusal to pay.” This was the basis for the bad faith claim.

RLI Insurance, in response to the motion to amend the complaint, argued that, as a general rule in Ohio, Kokosing cannot assert a bad faith claim against a performance bond surety in a breach of contract action. RLI Insurance argued that there is no case law or other authority in Ohio supporting a bad faith claim against a performance bond surety.

Kokosing asserted that there is no Ohio authority barring a bad faith claim against a performance bond surety. In addition, Kokosing argued that bad faith claims against sureties of financial responsibility bonds are permitted in Ohio, and there is no reason to distinguish financial surety bonds from performance bonds.

The court granted Kokosing’s motion and allowed Kokosing to amend its complaint to add the bad faith claim. According to the court, Kokosing’s “bad faith claim, supported by Ohio authority, appears plausible on its face; therefore, the Court cannot say at this stage of the proceedings that [Kokosing] is unable to prove any set of facts entitling it to relief against [RLI Insurance] on this claim.” A bad faith claim, if proven by Kokosing, could result in RLI Insurance’s payment of Kokosing’s attorneys’ fees and possibly punitive damages.

Ambiguous Insurance Policy Language Results in Legal Battle

Commercial General Liability (CGL) insurance policies exist to provide comprehensive coverage to the insured. To manage risk, insurance companies often include language to exclude certain activities from insurance coverage. These exclusions should be carefully drafted with terms defined as accurately and succinctly as possible.

In Bituminous Casualty Corporation v. Kenway Contracting, Inc., (Ky. 2008) No. 2005-SC-000013- DG, the Kentucky Supreme Court determined that language in an insurance policy was ambiguous. This resulted in the court interpreting the contract language in favor of the insured and holding that the insurance company must indemnify the contractor.

In Bituminous, a property owner hired a contractor to tear down a carport that was attached to a residential structure. The property owner planned to convert the residential structure to commercial use. They acquired plans from an engineering firm and met with Kenway Contracting Inc. to discuss the specifications and obtain a proposal. The property owners made it clear that the residential structure was not involved in the contractor’s work. The contractor’s proposal also stated that the residential structure was not involved in the work.

In preparation for the demolition of the carport, the contractor asked one of its workers to meet a supervisor at the job site to assist in the demolition of the carport. When the employee arrived at the job site, the supervisor was not there. Instead of waiting for the supervisor, the employee began demolition. The supervisor arrived to find the employee had demolished not only the carport, but also half of the residential structure.

After realizing the mistake that occurred, the contractor contacted its insurance agent. Eventually, the insurance company sent a letter to the contractor informing it that the CGL insurance policy did not cover the damage caused by the employee. Specifically, the insurance company did not consider the damage an “occurrence” according to the definition of “occurrence” in the insurance policy. In addition, the insurance company believed that multiple exclusions applied.

In its analysis, the Kentucky Supreme Court relied on Kentucky law relating to the interpretation and application of ambiguous terms in insurance contracts. In Kentucky, the courts have interpreted ambiguous insurance contract language against the drafter of the contract and in favor of the insured. As a result, the ambiguous language was interpreted against the insurer and in favor of the contractor. 

The case turned to the issue of whether the damage was within the definition of an “occurrence”. The insurance policy defined, “occurrence” in part as “an accident”; however, the policy did not define “accident”.

The court turned to past case history to define the term “accident.” The court determined that an accident was “something that does not result from a plan, design, or intent on the part of the insured.” The court determined that the contractor did not expect or intend to cause the damage, and the damage was not the result of the insured’s plan or design. Therefore, the damage was determined to be caused by an accident.

Next, the court determined whether policy exclusions prevented coverage of the damage. One of the exclusions limited coverage where damage occurs to “[t]hat particular part of real property on which you . . . are performing operations, if . . . property damage arises out of those operations.” Another exclusion prohibited coverage of damage to “that particular part of any property that must be restored, repaired, or replaced because “your work” was incorrectly performed on it.”

According to the court, the phrase “that particular part of the property” could be defined as the carport. It also could include the carport and the rest of the home. The court determined that there could be multiple interpretations of the phrase. Therefore, the court interpreted the phrase to the benefit of the insured. Since the phrasing of the insurance policy was unclear, the court interpreted the phrase against the drafter so that the policy would indemnify the contractor.

When drafting an insurance policy, or any contract, it is important to ensure that the language used by the parties is unambiguous and clearly represents the intention of both parties.