Shareholder Tom Orlando successfully appealed in the Appellate Court of Illinois, Fifth District, a judgment entered against his insurer client in a dispute under a builders’ risk insurance policy where the earlier decision of the Circuit Court of Madison County, Illinois, found that the insurer, the insured general contractor and the lead subcontractor entered into a three-party construction contract which superseded the insurance policy and required the insurer to pay more than the amount which was awarded in the parties’ insurance appraisal.
Case Background
The general contractor purchased a builders’ risk insurance policy from Foran Glennon’s insurer client in March 2015 to cover a construction project for a senior living development in Georgia, and in December 2015 the project was damaged by a storm, prompting the contractor to file an insurance claim. The insurer determined the damage was a covered loss, and the general contractor hired a subcontractor to reconstruct the damaged portions of the project.
During the claim, the parties discussed how to value the replacement cost and, through an April 2016 email exchange between the insurance company, the general contractor and the subcontractor, agreed to labor rates for the reconstruction work and for the insurer to pay on a time and materials (T&M) basis. The insurer also indicated that a third-party auditor would be onsite during the restoration process to monitor costs as the job progressed.
The general contractor ultimately submitted invoices totaling $5.2 million to the insurance company for reimbursement as part of the insurance claim, which included the work of the subcontractor.
In the meantime, the insurer’s auditor and monitoring consultant identified several issues with the invoices submitted, finding that certain charges were excessive or not justified based on the actual work performed. Based on these findings, the insurer disputed the full amount of the invoices, paid $3.7 million and invoked the policy’s appraisal clause to resolve the dispute, to which the general contractor did not object. The appraisal set the valuation of the reconstruction at $3.9 million, and the insurer made an additional payment to bring the total paid up to the appraised amount.
The subcontractor filed suit against the general contractor and the insurance company in March 2018. The suit against the insurance company alleged tortious interference with the contractual rights of the subcontractor under its contract with the general contractor.
- The general contractor counterclaimed against the insurer, alleging that the aforementioned email exchange formed a new three-party T&M construction contract. This new contract was allegedly outside of and replaced the original insurance policy, with the insurer as the project owner and entitling the general contractor and the subcontractor to the $5.2 million invoice amounts.
- The subcontractor adopted this position and amended its complaint against the insurer.
- The insurance company countered, arguing that no new contract was created, the insurance policy’s terms remained in effect and the appraisal process under the insurance policy governed and barred any additional claims.
The circuit court granted summary judgment in favor of the general contractor and the subcontractor and against the insurance company, holding that they were entitled to receive the remaining amount of $1,468,373.52 on the invoices.
Appellate Court Ruling
Foran Glennon appealed the circuit court’s decision on behalf of the insurer client in September 2023, arguing that the agreement on T&M rates was in furtherance of the valuation provisions of the insurance policy and did not create a new T&M contract which superseded the policy and that, regardless, the parties’ resolution of their dispute through appraisal was binding.
The Appellate Court of Illinois, Fifth District found:
- the insurance policy controlled and was not superseded by any new construction contract,
- the T&M agreement only modified the valuation method under the policy, but did not replace it with a new contract,
- the appraisal process was valid and binding and
- as it had already been invoked and completed, the agreed upon appraisal award of $3.9 million for the reconstruction costs was binding and precluded any action under the policy.
The court held that the lower court erred in granting summary judgment in favor of the general contractor and the subcontractor, reversed the circuit court’s order, and granted summary judgment in favor of the insurer. The matter was then remanded to the circuit court for any remaining claims between the general contractor and the subcontractor, resulting in a successful outcome for Foran Glennon’s client.
This appellate decision underscores the primacy of the insurance policy’s terms and the enforceability of its appraisal clause in resolving valuation disputes.
Focusing his practice on insurance and appellate law in both insurance and non-insurance disputes, Tom has experience representing both appellants and appellees in several state and federal courts nationwide. He is well-seasoned in a range of insurance coverage disputes, including property and liability coverage and litigation matters involving commercial and personal insurance.