Fourth Circuit Denies Coverage when Developer Failed to Timely Notify Insurer

The Fourth Circuit recently ruled against the Insured in a construction defect action as to coverage when the Insured failed to timely notify its insurance companies of a potential claim. The court ruled the Insured was not covered under its two insurance policies (St. Paul Mercury Insurance Co. and National Surety Corp.) because it delayed giving notice to the insurance companies, depriving them of the opportunity to pursue claims against the subcontractors involved in the project.

THF Clarksburg Development Two LLC (“THF”) entered into two agreements in 2002 with Lowe’s Home Centers, Inc. (“Lowe’s”) for over $4,000,000 to develop a large track of land in Clarksburg, West Virginia, including the preparation of a building pad area where a Lowe’s store could be built. THF subcontracted with CTL Engineering (“CTL”) to build the pad and provide geotechnical engineering certification that would support the construction of the Lowe’s store. CLT delivered the certified building pad to THF on April 9, 2002 and THF delivered it to Lowe’s on April 15, 2002.
Lowe’s built the store, but during the one-year inspection Lowe’s discovered a settlement problem that would likely cause worsening foundation failure and continued wall movement. Lowe’s notified THF of the issue on April 20, 2003. THF then notified CLT of the problem and hired them again to determine the cause of the settlement. CLT investigated and determined the problem was unrelated to the construction of the building pad and was likely caused by an external force. THF sent the findings to Lowe’s on March 20, 2005.

After eight months without a response from Lowe’s, THF sent another letter saying it presumed Lowe’s lack of response meant Lowe’s was in agreement with the findings in the report. After almost two years had passed, Lowe’s sent a letter to THF stating the delay in response was due to its own engineers investigating the issues. Lowe’s engineers ultimately determined the soil failures were a latent defect to which THF’s extended warranty applied and subsequently put THF on notice of the claims. On April 26, 2012, over nine years since becoming aware of the issue, Lowe’s filed suit.
In June 2012, THF notified its insurers St. Paul Mercury Insurance Co. and National Surety Corp. about the lawsuit and two years later, in 2014, the Insurers moved for a declaratory judgment seeking a determination by the court regarding of the existence of coverage. The Northern District of West Virginia determined THF was not entitled to coverage due to its delay in notifying the insurers of the potential claims.

The court determined the delay in notice prejudiced the insurers as a matter of law because West Virginia’s 10-year statute of repose would bar the insurers from asserting claims against the subcontractors. The court upheld the district court’s ruling in favor of St. Paul Mercury Insurance Co. and National Surety Corp. and against THF.

This case is a hard lesson of which developers, builders, design professionals, and contractors should take note. Whenever there is the existence of even a potential claim, the insurance carrier must be notified as soon as possible to avoid prejudice to the carrier. Even if the claims appear to be unrelated to a construction entity’s scope of work, allowing the Insurer to have the relevant information to determine liability could have a huge impact on the Insured as in the instant case. Finally, this case reinforces the ever-present need by attorneys and insurance carriers to determine relevant dates during construction and delivery to avoid issues related to statute of limitation and statute of repose in construction defect cases.

This case is St. Paul Mercury Ins. Co. v. THF Clarksburg Dev. Two, LLC, No. 15-1453, 2016 WL 715007 (4th Cir. Feb. 23, 2016). Please contact us if you would like a copy of the case or have any questions.

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