Legal Obligation to Pay Means Just That

By Jenifer Minsky, Esq.¹

In the case of Permasteelisa CS Corporation v. Columbia Casualty Company, 2010 U.S. App. Lexis 8754 (3rd Cir. 2010), the United States Court of Appeals for the Third Circuit was called on to decide the meaning of an insurance policy term that covers the insured against amounts it becomes "legally obligated to pay." The Third Circuit granted summary judgment in favor of the insurer, Columbia Insurance Company ("CNA"), holding that an insured does not become "legally obligated to pay" until the entry of a judgment against it. This holding may affect the timing, and indeed the decision of whether to proceed at all, with "voluntary" repairs and remediation on construction projects.

In January 2002, Goldman Sachs hired Turner Construction Company ("Turner") to construct a new office building with a curtain wall that was subcontracted to plaintiff Permasteelisa CS Corporation ("Permasteelisa). Two years after Permasteelisa began work, Turner, at the direction of Goldman Sachs, halted construction due to errors with the curtain wall and demanded that Permasteelisa repair the damages. Upon becoming aware of this issue, CNA specifically directed Permasteelisa to neither admit liability nor agree to fix any damages. Despite this advice, Permasteelisa, with the agreement of both Turner and Goldman Sachs, completed the remediation of the curtain wall at a cost of approximately $5.5 million.

Permasteelisa then made a claim to CNA for the remediation costs, which CNA denied. As a result, Permasteelisa filed suit against CNA seeking a "declaratory judgment that CNA [was] obligated to defend, indemnify, and cover Permasteelisa for the remedial work done to the curtain wall." As a basis for their argument, Permasteelisa relied upon that portion of the CNA insurance policy which maintains that, "[CNA] will pay all amounts…which [Permasteelisa is] legally obligated to pay." The court interpreted the phrase "legal obligation to pay" as requiring "the presentation of proofs in a court of competent jurisdiction and finding by the court or jury of liability." Since Permasteelisa was not subject to a final judicial judgment, the court ruled that that it was not "legally obligated" to repair or to pay for repairs to the curtain wall.

Permasteelisa appealed the decision, arguing that its contractual obligation to remediate the curtain wall constituted a legal obligation. The court found this reasoning flawed because under New Jersey law, an insurance company does not assume the risk of a professional liability policy holder's breach of contract. Although Permasteelisa may have breached its contract with Turner, CNA is not responsible for the costs associated with said breach.

The Permasteelisa case puts participants in the construction process on notice that they, like Permasteelisa, will likely not be reimbursed by their insurance carrier for repairs they undertake voluntarily if their insurance policy contains the provision at issue therein. Significantly, an insurer becomes "legally obligated to pay" only after entry of a final judgment establishing the insured's liability. Contractual obligations may force a company to pay for damages and repairs; however, said costs cannot be recovered through insurance, for no indemnifiable legal obligation exists.

The above article is an overview only, and should not be considered legal advice, which is dependent upon specific facts and circumstances. For more information, please contact Jenifer B. Minsky at 973.364.9900 or jminsky@zdlaw.com.

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SEPTEMBER 2010