Legal Updates

Spirco Environ. v. American Int'l Specialty Lines.

The facts in connection with this rare and significant opinion involve three related cases.

In Case 1, a property owner asserted a breach of contract claim against the contractor-principal (Spirco), along with a performance bond claim against the surety. Spirco and the surety obtained complete defense verdicts in Case 1.

In Case 2, the surety sought reimbursement from Spirco for the $800,000 it incurred to defend the property owner's $4MM claim in Case 1. Spirco tendered defense of Case 2 to its carrier (American), and American defended Case 2 under a reservation of rights. When the surety ultimately received a judgment against Spirco in Case 2, American denied indemnity coverage.

In Case 3, Spirco sought a declaration that American was required to cover the surety's fee award entered in Case 2.

The Court's opinion in Case 3 revolved around three significant issues:

First, the Court determined that the property owner's original claim against Spirco in Case 1 arose out of negligence allegations that Spirco caused property damage, notwithstanding the claimant's statement of a contract claim. The Court found that the substance of the property damage claim fell within the liability policy. The Court also ruled that Spirco's liability to the surety for fees was not "too attenuated" from the property damage allegations.

Second, the Court ruled that there is no language in the policy that excluded claims for economic loss or harm.

Third, the Court disregarded American's vigorous arguments that the "liability of others assumed under contract or agreement" exclusion applied to Spirco's claim for coverage. The court provided two separate bases for this holding.

The Court found that the liability of the surety in Case 1 was limited to the extent of Spirco's liability and, therefore, the surety incurred its defense costs in that case, at least in part, for the protection of Spirco.

Moreover, the Court ruled that, even if the exclusion applied, the policy included an applicable exception to the exclusion: that the exclusion did not apply to any liability that the insured would have anyway, in the absence of an indemnity agreement. The Court expressly held that the surety would have been entitled to indemnity from Spirco even in the absence of an express indemnity agreement and that, because such liability existed absent the agreement, the exclusion did not apply.