RISK MANAGEMENT
Background of the dispute
The Robbins Company is a designer, manufacturer and supplier
of tunnel-boring machines. JCM Northlink, LLC contracted with
Robbins to lease one of the machines for a construction project
in Seattle, Wash. The contract contained a clause stating that the
machine was to be free from all latent defects in materials or workmanship.
Two years into the agreement, an internal bearing shattered
and the machine stopped working, causing the construction
project to be delayed. As a result, JCM terminated its contract with
Robbins and filed for arbitration based on Robbins’ alleged breach
of contract. In its claim, JCM demanded costs associated with the
delays in excess of $40 million. The arbitration demand was silent
as to any non-contractual damages.
Robbins was insured through a CGL policy issued by Maxum
Indem. Co. Fifteen months after the arbitration had been filed,
Robbins notified Maxum of the arbitration and sought insurance
coverage under the CGL policy. Maxum denied coverage and filed
for a declaratory judgment in federal district court, asserting that
it had no duty to defend Robbins in the arbitration that exclusively
involved an alleged breach of contract.
Analysis
The federal court agreed with Maxum and found no duty to defend
Robbins because JCM’s arbitration claim was based on a breach of
contract claim. Robbins appealed the lower court’s decision to the
Sixth Circuit Court of Appeals. While it disagreed with the lower
court’s reasoning, the Sixth Circuit (the federal appellate court that
covers Ohio, Kentucky, Tennessee and Michigan) agreed with the
trial court in holding that Maxum had no duty to defend Robbins
in the arbitration.
The court relied upon the language found in CGL policy that the
“breach of contract” exclusion indisputably covered JCM’s claim.
Because the arbitration claim fell within the exclusion, Maxum had
no duty to defend. For the first time on appeal, Robbins attempted
to introduce new evidence of claimed damage separate and apart
from the contractual claims. The court noted that Robbins was in
possession of the information prior to the lower court issuing its
decision and failed to timely introduce it. As a result, the trial court
did not have the benefit of the additional information. The appellate
court would not consider the new evidence for the first time
on appeal and Robbins’ appeal was denied.
Conclusion
Maxum Indem. Co. v. Robbins Co. serves as an important reminder
to industry participants to discuss the extent and limits of their
insurance products with their insurance brokers, including the
necessary requirements to make a timely claim. Most general
liability policies do not include coverage for breach of contract
claims. The purpose of insurance is to mitigate and control risk.
As a result, it is vital that companies be aware of the specifics of
their policies, the price of obtaining additional coverage and any
limitations of such coverage. Additionally, PDCA contractors must
be careful not to agree to indemnify another party for breaches of
contract that are not covered by insurance. Instead, a contractual
indemnity clause must be limited to insured items such as claims
for personal injury and property damage. t
For more information on this topic, please contact Eric B. Kjellander
at ekjellander@beneschlaw.com or 614-223-9329 or Rick Kalson at
rkalson@beneschlaw.com or 412-417-4209.
The purpose
of insurance is
to mitigate and
control risk. As a
result, it is vital that
companies be aware
of the specifics of
their policies, the
price of obtaining
additional coverage
and any limitations
of such coverage.
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