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by Jeffrey Cox / ENR
T.B.
Penick says in a lawsuit that it expected sub default insurance to pay fast.
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Memorial Day weekend, 2013, was a triumph for New York
City as it reopened its ravaged beaches seven months after Superstorm Sandy. To
do so, New York City had three months earlier hired Triton Structural Concrete,
a part of contractor T.B. Penick & Sons, to build and install most of 35
lifeguard and bathroom station modules at city beaches for $105 million. The
project is one of ENR's Best of the Best projects,
but behind the scenes Penick says its main subcontractor, modular builder
Deluxe Building Systems, failed to perform. Penick terminated Deluxe in August
and placed and finished the last of the modules with its own staff and other
subcontractors.
Penick believed it had insurance covering the costs of
the default. When Omaha-based Arch Specialty Insurance Co., which had provided
Penick a subcontractor default policy, requested much documentation and still
refused to pay, the contractor filed a lawsuit in state court in San Diego,
Penick's base city. Over the contractor's objections, Arch forced Penick to
arbitrate in New York this year.
Penick accuses Arch and its co-insurer, Catlin Specialty
Insurance Co., of failing to back the promise in the policy. The contractor's
attorney, Robert J. Marks, said in a statement that the insurance policy
clearly states that "payment should have been made within 30 days of
submitting and documenting a claim, and a partial payment should have been made
for cash-flow purposes in the event the claim was still being investigated. Yet
18 months later, and despite delivering 10 boxes of supporting documents,
Penick and Triton haven't received a cent."
The conflict is unusual because few of the 2,000 or so
claims under subcontractor default insurance since such policies were initially
written 19 years ago have been disputed publicly. While a surety's response to
a bond claim by a general contractor with a failing sub is often portrayed as a
slow-motion minuet, subcontractor default insurance is in theory a
faster-responding product that provides cash to the prime contractor to keep a
project moving along. Whether the Penick case represents a fundamental
shortcoming or is only a reflection of the details of a single disputed claim,
has to be evaluated in light of subcontractor default insurance's growing
market share, said to cover $48.6 billion of work in 2012. Many big prime
contractors use it.
Penick President Tim Penick declined to comment on his
company's $32-million lawsuit, as did Arch, Catlin and Berwick, Pa.-based
Deluxe. Two other companies, Penick's longtime insurance broker, San
Diego-based Barney & Barney, and St. Paul-based Construction Risk
Underwriters (CRU), also are defendants. Through its parent company, Marsh,
Barney & Barney declined to comment, and CRU could not be reached.
The issues in the conflict seem to belong to a broader
discussion of insurance policies, meetings of the mind and time pressure. One
subject that may figure prominently in the arbitration proceeding will be the
tight time frame in which Penick won the beach module subcontract, signed up
for the subcontractor default insurance, paid a $187,000 premium for a policy
with an each-loss limit of $20 million and began dealing with Deluxe over how
the contract was going. The arbitrators will be forced to scrutinize those
dates to see how they jibe with the language in this and most other policies
that allows the insurer to reject a sub default claim if the prime contractor
has misrepresented the sub's condition or ability, or has assumed control of
its work.
House on Fire
The insurance maxim is that you can't buy fire coverage
for a house that is on fire. That is what Arch's attorney, Joel Beach, argued
in a court declaration not long after Penick filed its lawsuit. He stated that
the city's Dept. of Parks and Recreation awarded Penick the project on March 1,
2013, and that Penick contracted with Deluxe a day later for the $14-million
job. Also that day, Penick offered to buy the materials, $7 million of the contract
value, which it ended up doing. The insurance policy started March 21 and the
project was enrolled March 28, Beach stated, and Penick paid the premium
shortly after. That same day, Penick sent its first deficiency notice telling
Deluxe that it was understaffed, Beach claimed. In essence, he said, Penick may
not be entitled to insurance coverage because it wasn't surprised by Deluxe's
default.
Cecilia O. Miller, Penick's counsel for the claim,
replied to Beach that he would have to show that Penick "knowingly"
misrepresented what was going on. Penick's lawsuit noted that the company had
been damaged in 2012 when another modular subcontractor failed to perform.
Meeting with Barney & Barney and CRU in early March 2013, talk turned to
those concerns, how Penick employees "were resident at Deluxe's facility
as a control on the work" and the difficulties of performance bond claims,
said Penick's lawsuit.
Like other sub default claims in arbitration, the details
and final outcome may never become fully public.
Source: ENR.com
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