- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
United States ex rel. Allan Myers Va v. Westfield Ins. Co, 2021 U.S. Dist. LEXIS 240864, 2021 WL 5882040 (E.D. Va. Dec. 13, 2021)
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Southway Builders v. United States Sur. Co., 2022 Va. Unpub. LEXIS 12, 2022 WL 2978256 (Va. Jul. 28, 2022)
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Phila. Indem. Ins. Co. v. TCM Constr., LLC, 2021 U.S. Dist. LEXIS 190381, 2021 WL 4527246 (W.D. Va. Oct. 4, 2021)
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
United States, for the Use & Ben. of McKenney’s, Inc. v. Leebcor Servs., LLC, 2022 U.S. Dist. LEXIS 149036, 2022 WL 3337795 (E.D. Va. Feb. 18, 2022);
United States ex rel. McKenney’s, Inc. v. Leebcor Servs., LLC, 2022 U.S. Dist. LEXIS 148633, 2022 WL 3337793 (E.D. Va. Apr. 1, 2022);
United States ex rel. McKenney’s, Inc. v. Leebcor Servs., LLC, 2022 U.S. Dist. LEXIS 148614, 2022 WL 3592170 (E.D. Va. Aug. 18, 2022)
In 2016, the United States Army Corps of Engineers (“USACE”) and Leebcor Service, LLC (“Leebcor”) entered into a design-build contract (the “Prime Contract”) for Leebcor to renovate Army barracks at Fort Benning, Georgia (the “Project”). Per the Miller Act, Leebcor obtained a Payment Bond for the Project from The Cincinnati Insurance Company (“Cincinnati”) in the amount of $36,800,206.00. In June 2017, Leebcor and McKenney’s, Inc. (“McKenney”) executed a $10,197,408.75 firm-fixed-price subcontract (the “Subcontract”), but the Subcontract had an effective date of January 10, 2017. Under the Subcontract, McKenney was to perform the Project’s plumbing and heating, ventilation, and air conditioning (“HVAC”). Per the Subcontract, McKenney obtained a Performance Bond from Hartford Accident and Indemnity Co. (“Hartford”). On May 26, 2020, USACE unilaterally modified the Prime Contract for a 152-day USACE caused delay to the start of construction on the Project (the “Initial Delay”). USACE later modified the Prime Contract to address delays caused by existing structural steel deficiencies.
McKenney’s sued Leebcor and its surety, Cincinnati for amounts due under the subcontract and Leebcor sued McKenney’s and its surety, Hartford, for damages caused by McKenney’s failure to properly perform its subcontract. Both alleged entitlement to damages under the Subcontract for the other’s delays and poor work. McKenney sought $253,787.00 from Leebcor for three unpaid invoices (the “Invoices”). Leebcor received full payment from USACE for the Invoices, but withheld payment to McKenney based on alleged contractual noncompliance. McKenney never stopped performing its Subcontract duties despite Leebcor’s nonpayment.
The Court awarded McKenney $253,786.50 for breach of contract due to Leebcor’s failure to pay the Invoices. The Court found that Leebcor’s concerns with McKenney’s timeliness and work quality were well-founded, but nothing in the Subcontract or applicable regulations gave Leebcor the right to withhold the amounts billed in the Invoices. Leebcor’s payment obligation was contingent upon its acceptance of McKenney’s work and Leebcor could offset its payment obligation by amounts equal to what McKenney owed Leebcor under the Subcontract. Once Leebcor accepted McKenney’s work, however, Leebcor’s obligation to pay accrued absent a right to offset and Leebcor was not allowed to offset its payment obligations where there was contractual and/or regulatory restrictions on offsets or against payment on amounts owed Leebcor that were subject to a reasonable dispute. Leebcor accepted McKenney’s work on April 27, 2019 when USACE acknowledged the Project was complete and, thus, the Invoices became “payments owed” under the Subcontract and Leebcor was not permitted to offset these amounts with amounts it alleged were owed for McKenney’s breaches of the Subcontract, which were the subject of a reasonable dispute.
The Court dismissed McKenney’s $367,005.00 Initial Delay claim as being prudentially unripe. A claim is not ripe for adjudication if it rests upon contingent future events that may not occur as anticipated, or at all. On May 26, 2020, USACE responded by awarding Leebcor only $635,149.50 of its requested $1,943,623.46 (i.e. 32.68%). Leebcor may appeal USACE’s award within 6 years of the accrual of its claim by seeking a contracting officer’s final decision. Leebcor may then appeal that decision to the Armed Services Board of Contract Appeals and, finally, to the Federal Circuit. Thus, the Court concluded that the lack of fitness of the issue for judicial decision outweighed any hardship on the parties of withholding court consideration.
The Court denied McKenney’s $544.493.00 claim for damages caused by Leebcor and its other subcontractors after construction began because McKenney’s own conduct delayed its completion and McKenney failed to distinguish periods of alleged Leebcor-caused delay from delay caused by McKenney’s own conduct. McKenney had to demonstrate that (1) Leebcor’s breach of the Subcontract was the direct and proximate cause of McKenney’s delays, (2) the damages are natural and directly traceable to Leebcor, and (3) the damages are not attributable to some other intervening cause. Based on the record, McKenney failed to satisfy its burden.
The Court denied Leebcor’s claim for 95 days of critical path delay damages and claim for $34,990.00 to remediate McKenney’s deficiencies because Leebcor did not carry its burden to show that any period of delay during the start-up, test and balance (“TAB”), performance and verification testing (“PVT”), and commissioning processes was caused solely by McKenney’s failures.
The Court denied McKenney’s claims for unapproved change orders proposals (“COP”) because McKenney failed to prove that the covered activities fell outside its Subcontract scope of work.
The Court held that McKenney timely filed its action and that Cincinnati was jointly and severally liable under the Miller Act Payment Bond for the amounts owed by Leebcor to McKenney. Miller Act actions must be brought no later than 1 year after the day on which the last of the labor was performed or material was supplied by the person bringing the action. Labor in the Miller Act includes physical toil, but not work by a professional, such as an architect or engineer. The Court concluded that McKenney’s May 29, 2019 training on the operation and use of controls systems it installed qualified as labor under the Miller Act because McKenney’s employees were on site and working on a non-remedial task required to complete the Project, rather than administrative task.
The Court dismissed Leebcor’s claim against Hartford under McKenney’s Performance Bond. The Court already ruled that Leebcor was not entitled to any funds from McKenney, so Leebcor could not pursue a claim for payment from Hartford for any sum. Further, the Court held that Leebcor’s failure to give reasonable notice of McKenney’s default breached the terms of the Performance Bond. Under the Performance Bond, either (1) Hartford could remedy the deficiency without notice to Leebcor or (2) after Leebcor gave Hartford reasonable notice of McKenney’s default, Leebcor could make alternative arrangements for McKenney’s performance and receive payment for the additional costs incurred. Reasonable notice is generally described as notice conveying the requisite information and permitting time for response. Notice to a performance bond surety is reasonable when it provides the insurer time to respond and exercise its options under the bond. Leebcor did not provide Hartford with notice until 2 years after the Project was complete and almost 1 year after McKenney filed its Complaint.
The Court denied McKenney’s claim for attorney’s fees because the Subcontract required each party to bear its own costs and expenses, including attorney’s fees, incurred in connection with an action arising out of the Subcontract and the Court found that there was no bad faith.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
United States ex rel. McKenney’s, Inc. v. Leebcor Servs., LLC, 2022 U.S. Dist. LEXIS 6576, 2022 WL 122367 (E.D. Va. Jan. 12, 2022)
The United States Army Corps of Engineers (“USACE”) and Leebcor Services, LLC (“Leebcor”) entered into an agreement (the “Prime Contract”) for Leebcor to renovate barracks at Fort Benning, Georgia (the “Project”). Leebcor obtained a payment bond from The Cincinnati Insurance Company (“Cincinnati” and with Leebcor, the “Defendants”). On June 22, 2017, Leebcor and McKenney’s, Inc. (“McKenney”) entered into a subcontract (the “Subcontract”) for McKenney to complete the Project’s plumbing, HVAC, and direct digital controls (“DDC”) systems. McKenney filed its Complaint on May 8, 2020.
Leebcor paid McKenney $9,943,622 under the Subcontract. McKenney claimed it was owed an additional $220,347.50 under the Subcontract. The Court denied McKenney’s Motion for Summary Judgment because reasonable jurors could conclude that McKenney breached the Subcontract and that the sums withheld were not owed by Leebcor under the Subcontract.
The Court denied the Defendants’ Motion for Summary Judgment on McKenney’s claim for damages relating to the initial delay of work on the Project (the “Initial Delay”). Under the Subcontract, McKenney was only bound by the USACE’s decisions that satisfy 3 requirements: (1) the decision must relate to both the Prime Contract and Subcontract; (2) McKenney must have been allowed to provide any required or supporting documentation on the basis of the USACE’s decision; and (3) the decision must be binding upon Leebcor under the Prime Contract. As to the third requirement, a reasonable juror could find that the USACE’s decision concerning the Initial Delay damages was not binding upon Leebcor because Leebcor retained the ability to appeal the decision and seek additional compensation from the government for the Initial Delay.
The Court denied the Defendants’ Motion for Summary Judgment on McKenney’s claim for compensation for additional cleaning and wrapping of ductwork during delivery and installation. The Subcontract included a section on Construction Indoor Air Quality (“IAQ”) that listed 3 requirements, none of which required plastic sheeting. Per the expresio unius cannon, a reasonable juror could conclude that the IAQ’s plastic sheeting requirement did not apply because it was not one of the listed requirements.
The Court denied Cincinnati Motion for Summary Judgment based on the Miller Act’s 1-year statute of limitations. Cincinnati failed to properly object to the magistrate’s recommendation and the Court found no error in the magistrate’s conclusion that the record contained sufficient evidence for a reasonable juror to conclude that McKenney provided base Subcontract work after May 8, 2019.
The Court denied Cincinnati Motion for Summary Judgment related to McKenney’s claimed damages because Cincinnati did not specify which cost for the Initial Delay, other delays, out-of-scope work, and outstanding invoices exceeded the amount unpaid and were, therefore, beyond the Miller Act’s scope. Summary judgment is appropriate to bar certain categories of damages, but Cincinnati did not identify which of McKenney’s damages fell outside the Miller Act. Under the Miller Act, a subcontractor may recover the entire subcontract price for work actually performed, but may not recover for work that it was to perform but did not actually complete due to the prime contractor’s breach. Subcontractors may also recover damages related to project delays, but only for additional or increased costs actually expended in furnishing the labor or material in the prosecution of the work provided for in the contract and attributable to the delay (i.e. out-of-pocket costs of delay). Under the Miller Act, ‘labor’ requires ‘physical toil,’ but work involving superintending, supervision, or inspection of the job site is covered. ‘Material’ includes things incorporated into the project itself as well as expendable and other things reasonably expected to be consumed, or substantially consumed, in the performance of the work. A thing reasonably expected to be removed by the contractor and used in subsequent jobs does not qualify as material.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Sys. Application & Tech., Inc. v. United States, 26 F. 4th 163 (4th Cir. Feb. 14, 2022)
In 2015, Systems Application and Technologies, Inc.’s (“SA-TECH”) employees sued it in California state court for violating California’s labor laws. SA-TECH is a U.S. Navy services contractor that provides the Navy with training and weapons testing primarily at Naval bases in California and on Naval vessels in the Pacific. SA-Tech’s employees often perform work on the Naval ships at sea and spend more than 24 hours at a time on the Naval ships, but SA-TECH does not pay its employees for overtime spent on the ships when the employees are not working. SA-TECH’s employees sued it claiming that it violated California wage laws by failing to pay them for the entire time they were required to stay on the ships, which was often 24 hours or more.
In 2017, SA-TECH sought guidance from the Navy regarding whether California’s labor laws applied to its employees under its contract with the Navy. SA-TECH received no response from the Navy and filed a claim under the Contract Disputes Act (“CDA”), but the contracting officer denied the claim. Subsequently, SA-TECH filed a complaint in a U.S. District Court in Maryland seeking declaratory judgment and injunctive relief. The District Court dismissed SA-TECH’s complaint for lack of subject matter jurisdiction because SA-TECH failed to fulfill the CDA’s exhaustion requirements. Specifically, SA-TECH’s claim for agency was not asserted as a matter of right as required under the CDA and SA-TECH’s monetary claims failed to include a “sum certain,” which is required under the CDA. SA-TECH appealed.
The Fourth Circuit affirmed the District Court. When the CDA applies, it provides the exclusive mechanism for dispute resolution. An aggrieved contractor who wishes to pursue relief under the CDA must first present a valid, written claim to the agency’s contracting office, who will issue a written decision. If the officer denies the claim, the contractor may either appeal to the governing agency board or bring an action in the Court of Federal Claims. For claims arising under maritime contracts, however, the contractor may appeal the contracting officer’s decision instead to a federal district court. Before bringing an action in district court, the contractor must exhaust its lower-level administrative remedies. To exhaust its administrative remedies, an aggrieved contractor must present to the contracting officer a valid claim that relates to the contract. A “claim” is a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. For all claims, the contractor must be seeking some relief as a matter of right, which requires that the contractor specifically assert entitlement to the relief sought (i.e. a demand for something due or believed to be due). Failure to include a “sum certain” in a monetary request renders the submission not a “claim” under the CDA and is fatal to jurisdiction under the CDA. SA TECH either failed to assert that it was contractually entitled “as a matter of right” to the Navy’s opinion on its agency status or failed to include a “sum certain.”
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
East Coast Repair & Fabrication, LLC v. United States, 16 F. 4th 87 (4th Cir. Oct. 1, 2021)
The United States Navy (“Government”) contracted with East Coast Repair & Fabrication, LLC (“East Coast”) to repair three ships: (1) USS Thunderbolt; (2) USS Tempest; and (3) USS Hurricane. In 2013, the Government claimed it was entitled to $474,600 in liquidated damages because East Coast delivered the Tempest late. Because the Government paid East Coast all but $1,000 for its work on the Tempest, the Government withheld a $473,600 setoff from payment to East Coast under the Hurricane contract. East Coast claimed the Government caused the Tempest delays, disputed the assessment of liquidated damages, and sought additional compensation for unanticipated work on the Tempest, which the contracting officer denied. East Coast sued the Government under the Tempest contract and included the $473,600 setoff in its lawsuit. In 2017, East Coast and the Government settled the Tempest lawsuit and the settlement included broad, but not identical, releases of liability by each party. The Tempest lawsuit was dismissed with prejudice. In 2020, East Coast filed this action, claiming the Government’s refusal to pay the $473,600 was a breach of the Hurricane contract. The district court granted the Government’s motion for summary judgment, holding, in part, that the Tempest settlement agreement barred East Coast’s claims. East Coast appealed.
The Court affirmed the district court’s judgment because the parties’ settlement agreement precluded East Coast’s claims. Res judicata bars a party from asserting a claim in a later suit once a court has reached a final judgment on the merits of the same claim in an earlier suit. If a claim is resolved in a settlement agreement, the court looks to the intent of the parties to determine whether the settlement agreement bars later claims. Contract interpretation is used to discern the parties’ intent. Here, East Coast released the Government from liability for any and all claims arising out of or in any way relating to the Tempest contract. The $473,600 related to the Tempest contract because it was withheld as liquidated damages on the Tempest Contract, which is what East Coast alleged in its Tempest lawsuit.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Mullinex v. John Crane, Inc., 2022 U.S. Dist. LEXIS 92512, 2022 WL 1637175 (E.D. Va. May 23, 2022)
Patricia E. Mullinex (“Mullinex”) sued John Crane, Inc. (“JCI”) for asbestos-related products liability claims for the JCI’s gaskets and packing which were used by the Navy and harmed Mullinex. JCI sought to raise the government contractor defense. Leading up to trial, Mullinex filed a Motion to Exclude Irrelevant Evidence and Testimony regarding the Alleged Knowledge or Negligence of the Navy (the “Motion”), and a Magistrate Judge’s order (the “Order”) denied her motion in part and granted it in part. On November 8, 2021, Mullinex filed an objection to that Order arguing that the Order impermissibly rewrote the third prong of the government contractor defense by allowing JCI to present evidence of the Navy’s knowledge about the hazards of asbestos generally, as opposed to being required to establish the Navy’s knowledge of the asbestos hazards presented by JCI’s products.
The Court Vacated the Magistrate Judge’s Order in part and held that the Magistrate Judge’s Order misapplied the standard to establish the third prong the government contractor defense to products liability claims. In Boyle, the Supreme Court first recognized the government contractor defense in product liability cases. Under Boyle, in evaluating the government contractor defense in product liability cases, liability for design defects in military equipment cannot be imposed, pursuant to state law, when: (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States. In applying the defense to failure-to-warn cases, three criteria are necessary to establish the immunity defense: (1) the government exercised its discretion and approved certain warnings; (2) the contractor provided the warnings required by the government; and (3) the contractor warned the government about dangers in the equipment’s use that were known to the contractor but not to the government. Therefore, it was JCI’s burden to prove under the third prong of Boyle that the Navy knew that JCI’s gaskets and packaging presented an asbestos risk and the Navy proceeded to use the products without warning labels anyway. The Magistrate Judge’s Order was incorrect because it suggests that JCI could satisfy the third prong of the government contractor defense by merely presenting evidence of the Navy’s general knowledge about the hazards of asbestos without connecting that knowledge to the JCI products at issue.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Ocean 10 Sec. LLC v. Hous. Auth., 2022 U.S. Dist. LEXIS 77645, 2022 WL 1272012 (W.D. Va. Apr. 28, 2022)
In 2019, Ocean 10 Security, LLC (“Ocean 10”) contracted with Lynchburg Redevelopment and Housing Authority (“LRHA”) for the purchase, installation, and operation of twelve security camera systems in LRHA’s housing developments. Ocean 10 installed and began operating the cameras, and LRHA began making monthly payments to Ocean 10. Based on the success of the initial project, LRHA ordered twelve more cameras, which Ocean 10 installed and operated throughout 2020. In early 2021, LRHA stopped making monthly payments to Ocean 10. In April of 2021 (under purported authority of the Virginia Public Procurement Act (“VPPA”)), LRHA’s Board approved a motion voiding Ocean 10’s contract as “not being in the public interest.” Ocean 10 sued LRHA claiming inter alia, breach of contract and quantum meruit. LRHA moved to dismiss, arguing that Ocean 10’s claims were barred by the statute of frauds and the VPPA.
The Court denied the LRHA’s motion to dismiss. The Court rejected the LRHA’s argument that its contract with Ocean 10 was unenforceable under the statute of frauds because it was never signed and, therefore, never reduced to writing. Signature notwithstanding, the document attached to the LRHA’s motion to dismiss, however, contained all the requisite elements of a contract. Also, the partial performance exception to the statute of frauds applied because Ocean 10 installed and managed the cameras LRHA purchased and LRHA made corresponding payments to Ocean 10 for more than a year. The Court also rejected the LRHA’s VPPA argument. The VPPA contemplates a public body making certain findings before voiding a contract on the basis of “public interest.” In its response to LHRA’s motion to dismiss, Ocean 10 alleged that the LRHA’s Board had not made the requisite findings before voiding its contract with Ocean 10. Thus, the Court held that there was a question of material fact as to whether the LRHA’s Board made the requisite findings before voiding Ocean 10’s contract and denied the LRHA’s motion to dismiss.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Pa. Nat’l Mut. Cas. Ins. Co. v. River City Roofing, LLC, 2022 U.S. Dist. LEXIS 73676, 2022 WL 1185888 (E.D. Va. Apr. 21, 2022)
Shockoe Valley View Genesis, LLC (“Genesis”) contracted with Branch Builds, Inc. (“Branch”) for Branch to construct the Shockoe Valley Apartments (“Project”) in Richmond. Branch subcontracted with River City Roofing, LLC (“River City”) for all roofing and all aluminum and composition siding at the Project. River City warranted its materials and work, and agreed to make Branch an additional insured under a general liability (“GL”) insurance policy issued by Pennsylvania National Mutual Casualty Insurance Company (“Penn. National”). The Project was substantially completed in April 2017. In October 2017, Genesis reported that water damage was occurring in the building due to defects in the roof. Branch repaired and/or compensated Genesis for the damage. Branch then sued River City in state court for breach of contract, alleging that River City failed to construct the roof in accordance with the “plans, specifications and industry standards,” and demanded $3,000,000 in damages. Penn. National filed a declaratory judgment action in federal court, seeking an order stating that it had no duty to defend River City in the state court action.
The Court ruled that Penn. National had no duty to defend River City because there was no possibility that Penn. National would be obligated cover a judgment against River City for breaching its subcontract as alleged in Branch’s state court complaint and based on the GL policy. Virginia follows the Potentiality Rule, which requires an insurer to defend a policyholder when there is “any possibility” that a judgment against the policyholder would be covered by the policy. Under the Potentiality Rule, Virginia courts apply the Eight Corners Rule, which looks at the four corners of the complaint and the four corners of the insurance policy to assess whether there is a duty to defend. River City’s GL policy included coverage exceptions, qualifications. and exclusions. The GL policy only covered property damage if it was caused by an “occurrence” that took place in the “coverage territory.” The GL policy defined “occurrence” as an accident and excluded “property damage to [River City’s] work arising out of it or any part of it,” damage to “any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it,’” and damages River City was required to pay “by reason of the assumption of liability in a contract[.]” Branch’s complaint against River City alleged that Branch incurred damages caused by River City’s breach of contract, where River City did not construct the Project’s roof in accordance with the “plans, specifications and industry standards.” Branch also claimed River City was liable under the subcontract’s warranty provision. The Court concluded that Branch’s claims (and prospective damages) against River City were contractual in nature or allegedly arose from River City’s own defective work. Thus, the Court found that there was no possibility that Penn. National would be responsible for any judgment against River City resulting from Branch’s state court lawsuit and that Penn. National had no duty to defend River City.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Heartland Constr., Inc. v. Travelers Cas. & Sur. Co. of Am., 2022 U.S. Dist. LEXIS 22795, 2022 WL 391308 (E.D. Va. Feb. 8, 2022)
Heartland Constr., Inc. v. Travelers Cas. & Sur. Co. of Am., 2022 U.S. Dist. LEXIS 159292, 2022 WL 4016884 (E.D. Va. Aug. 30, 2022)
The U.S. Veterans Administration awarded Potter Enterprises, Inc. (“PJP”) a contract to construct a new building at the VA Medical Center (the “Project”). PJP and Heartland Construction, Inc. (“HCI”) entered into a firm fixed price subcontract (the “Subcontract”) under which HCI would manage the Project and provide second and third tier subcontractors. Under the Subcontract, PJP was to pay HCI $5,554,711.00 for HCI’s services to be billed on a percentage of completion basis, based on a schedule of values (“SOV”). On November 4, 2017, Matt Hemmis (the son of PJP’s President and employed as the President of HCI) altered the Subcontract, purportedly changing it to a cost-type Construction Management Agreement (“CMA”) without the consent, authority, or approval of HCI. Matt Hemmis removed the Subcontract from HCI’s servers and destroyed it, replacing it with the cost type subcontract. HCI terminated Matt Hemmis’ employment.
In November of 2018, a dispute arose between HCI and PJP when PJP attempted to take over HCI’s subcontracts and remove HCI from the Project. The disputes resulted in a mediation on January 21, 2019, during which HCI’s CEO, PJP, Dennis Hemmis, and Matt Hemmis executed a settlement agreement. However, the cost-plus CMA was not signed or delivered to HCI until after the settlement agreement was signed. On February 14, 2019, HCI filed an arbitration demand against PJP alleging that PJP breached the settlement agreement. On March 13, 2019, HCI issued a letter to PJP’s payment bond surety, demanding $750,648.98 on the basis of the fixed-price CMA between HCI and PJP and alleging that any cost-plus CMA was procured by fraud.
Travelers Casualty and Surety Company of America (“Travelers”) issued a Wrap+ Insurance Policy to HCI (the “Policy”). HCI sought coverage under the Policy’s Crime Coverages section. Travelers argued the Crime Policy section contained an exclusion that excluded coverage for losses caused by an employee to certain insuring agreements. HCI sued and Travelers moved to dismiss. Later, HCI and Traveler both filed Motions for Summary Judgment.
The Court granted Traveler’s Partial Motion to Dismiss and dismissed those parts of HCI’s Complaint seeking judgment based upon breach of contract and seeking declaratory relief under the insuring agreements. Virginia has adopted the Eight Corners Rule under which courts look at the four corners of the complaint and the four corners of the insurance policy to determine if there is a potential for coverage. Ambiguous terms in a policy are construed against the insurer. Under the Eight Corners Rule, the Court found the Policy’s exclusion to be clear and unambiguous, in that it could only be reasonably be understood in one way – to exclude coverage for loss resulting from fraudulent, dishonest, or criminal acts of employees unless coverage is available under one or more of the five enumerated Insuring Agreements. Hemmis was an employee of HCI.
The Court granted Traveler’s Motion for Summary Judgment and determined that the fixed-price CMA was not a “Security” under the Policy, as it only established a legal relationship between the parties that allowed HCI the opportunity to earn money through performance as specified in the contract. The Policy defined “Securities” as a “written negotiable and non-negotiable instrument or contracts representing Money or property” and then provided specific examples. Applying the doctrine of noscitur a sociis (when general and specific words are grouped, the general words are limited by the specific and will be construed to embrace only objects similar in nature to those things identified in the specific words), the Court held that the fixed-price CMA was not a “contract representing money or property” because it did not have an intrinsic value that, in and of itself, could be exchanged for money.
