Court holds two separate design defects on same project were not related for purposes of coverage

The Second Circuit Court of Appeals issued a significant decision in a case interpreting a design professional errors and omission policy. In Dormitory Authority v Continental Casualty, a building owner sued for damages for two design defects in the structure of the building. The owner sought a declaration that the design flaws were two separate defects because, if so, two separate policies would have to respond to the claims. 

The facts were that after the project was completed, it was determined that the architect incorrectly estimated the steel requirement for the structural steel and exterior façade. The owner sent a demand letter to the architect in 2002. Separately, it was also discovered that snow and ice were sliding off of the building on the sidewalk below. A study determined that the design of the façade failed to account for temperature variations appropriate for a building in New York. Notice of and a claim for this defect was made against the architect in 2004.

The carrier asserted that the two claims were “related claims.” The policy defined “related claims” as “all claims made against [the architect] and reported to [the insurer] during any policy year arising out of . . . a single wrongful act or related wrongful acts.” It further provided that “[a]ll related claims shall be considered a single claim first made and reported . . . within the policy year in which the earliest of the related claims was first made and reported.” The owner argued the two separate claims implicated two different policies because they were reported at different times.

The district court found in favor of the owner, holding that there were two claims. On appeal, the Second Circuit rejected the insurer’s argument that the defects were “related claims”, holding that one defect relates to the structural integrity of the building, while the other relates to the building’s aesthetic design. It also found important that the problems manifested themselves at different times, that the defects resulted in different types of damage, and the solutions to each issue were completely different. The Court said: “[t]hat both [defects] may have resulted from the generalized negligence of the Architects is an insufficient degree of relatedness” for the claims to be considered only one claim.