Contractor Hits a Wall as Insurer Denies Rectification Coverage Claim

A Maryland general contractor has spent almost $10.5 million to fix an improperly installed concrete wall system in a school it was hired to build and wants its insurer to reimburse it under a rectification expense coverage in its professional liability policy.

But the insurer, AXA XL subsidiary Indian Harbor Insurance, has refused, citing exclusions for previously-known conditions and notices made to a prior insurer. The insurer alleges that the coverage is not triggered because the contractor, John C. Grimberg Co., knew about the specific wall system defect in September 2020 and notified its previous liability insurer, Pioneer Underwriters.

Grimberg rejects that interpretation, maintaining that prior notifications to Pioneer were about other work by subcontractors and that it did not know of the concrete wall defect until a year later in September 2021 when it notified Indian Harbor.

The Indian Harbor professional liability policy was effective October 1, 2020 to October 1, 2021, with a retroactive date of July 1, 2009. The policy provided $3 million per rectification expense.

According to IRMI, rectification coverage, also called “mitigation of damages” coverage, provides first-party insurance for the “costs a contractor incurs in correcting a design defect that is discovered after the construction is put in place but before it actually results in a professional liability claim.” The coverage is intended to provide a contractor with the funds to fix the error and keep construction moving forward.

Grimberg is suing Indian Harbor for costs and damages of at least $10.5 million, which it says is what the demolition will cost it, before any additional costs it might incur from the escalation of the follow-on mechanical, electrical, and finish trades once the complete superstructure is in place. Grimberg also wants interest on late payments, litigation cost and punitive damages.

Grimberg was hired by the U.S. Navy to build the school on the Marine Corps military base in Quantico, Virginia. Grimberg hired Nudura Corp., a firm that claimed to specialize in the design, manufacturing and installation of insulated concrete form wall systems. However, Nudura’s installers erred in the installation, creating a structural deficiency that would have been a safety hazard.

Although there was a potential remedy short of demolition, the Navy ordered Grimberg to completely demolish and reconstruct the substandard walls.

In September 2021, Grimberg sought coverage under the rectification expense provision but was denied coverage in February 2022 by Indian Harbor even after, according to Grimberg, the insurer had in November 2021 waived its right to consent to the expense. Grimberg said it subsequently started to demolish all the concrete walls in mid-November 2021. The complete demolition and reconstruction of the wall structures is scheduled to continue through 2022.

On October 18, 2022, over a year after Grimberg’s initial notice, Indian Harbor again “improperly” rejected Grimberg’s claim for rectification coverage based upon Grimberg’s alleged prior notice to another insurer, according to the complaint.

The complaint was filed in the U.S. District Court for Maryland on October 20, 2022. Indian Harbor has not yet answered.

Topics Carriers Contractors