Does the Subcontractor Owe an Independent Obligation to Pay?
Prime contractors and subcontractors sign contracts obligating them to defend, indemnify and insure the upstream contracting parties, owners in the case of prime contractors and the prime contractor in the case of subcontractors.
Sometimes where an owner blames a contractor for damages, multiple subcontractors are involved. In that case, the prime contractor appoints one defense counsel to defend the prime contractor in the dispute and the costs of defense of the prime contractor might be shared among the various subcontractors’ insurers.
If, for some reason, a subcontractor’s insurer is not paying or is slow in paying the prime contractor’s attorneys’ fees, is the prime contractor compelled to argue with the insurer and await payment or is the subcontractor itself liable to pay the fees and itself argue with the insurer for reimbursement? That was the question in The Weitz Company, LLC v. MacKenzie House, LLC, 2010 U.S. Dist. LEXIS 45440 (W.D. Mo. May 6, 2010).
In MacKenzie House, the Weitz Company, LLC was the general contractor and MacKenzie House, LLC the owner for construction of residential towers. Horizon Plumbing was one of multiple subcontractors.
The subcontract required the subcontractor to: “defend, indemnify and hold harmless the Owner, Contractor, Architect . . . from and against claims, damages, losses and expenses, including but not limited to attorney’s fees and loss of use … , to the extent arising out of or resulting from the performance by [subcontractor] of its Work under the Subcontract Documents or any breach of any provisions of the Subcontrct [sic] Documents by [subcontractor].”
The subcontract also contained a separate attorneys’ fees provision mandating, that if “if either party was required to institute legal proceedings against the other party for recovery of any amounts due and owing under the Agreement… the prevailing party in any such action shall be entitled to recover … all costs, including reasonable attorney’s fees…”
The subcontract further required that the subcontractor provide insurance to general contractor.
The parties disputed responsibilities for delay. The general contractor sued the owner for sums claimed due under the prime contract. The owner counterclaimed asserting liquidated damages for delay and other costs related to completion. The contractor then sued several subcontractors including the plumbing subcontractor for portions of the alleged delays. Owner also sued the plumbing subcontractor directly.
The primary issue regarding the plumbing subcontractor’s delay responsibility concerned an alleged failure to connect two balcony drain connections in one tower of the project. Water accumulated allegedly causing moisture damage repair costs o $334,000 and 84 days of delays.
In a settlement, the owner dismissed the plumbing subcontractor and general contractor regarding the water damage and related delays. General contractor’s attorneys’ fees were $611,731.50 but, at the time of settlement, the plumbing subcontractor’s insurer had paid only $3,803.50.
General contractor sought recovery of its attorneys’ fees spent to defend owner’s claims related to the water damage and associated delays from plumbing subcontractor directly.
The plumbing subcontractor did not deny it had a contractual obligation to defend the general contractor for owner’s claims involving subcontractor’s work. But plumbing subcontractor argued it had; plumbing subcontractor had provided insurance.
Not good enough, said the MacKenzie House court:
“[General contractor] did not bargain for [subcontractor] to obtain insurance to which [general contractor] could submit invoices - - it bargained for [subcontractor] to pay legal costs. [General contractor] is not obligated to submit invoices to [subcontractor’s insurer] as a substitute for the performance it bargained for.”
MacKenzie House, 2010 U.S. Dist. LEXIS 45440, * 8.
In the first instance, plumbing subcontractor was obligated to pay general contractor. It then was up to the subcontractor to wrangle with the insurer to pay the invoices. (The court surmised the insurer’s objection might have been to the amount of the fees.)
The case went on to explain that plumbing subcontractor’s obligation would be $30,391.50 for fees on tasks specifically related to plumbing subcontractor’s work and 15% of “common fees” and “block billed fees.”
In reaching its decision, the MacKenzie House court reasoned that the general contractor was powerless “to enforce any agreement between itself and [insurer].” The decision did not discuss whether general contractor was an “additional insured.” If a general contractor is an “additional insured”, the reasoning employed in MacKenzie House might not apply.