Wednesday, 17 February 2016

Insurer’s attempt to stand in the shoes of government contractor fails

February 17, 2016. 

The Tucker Act cannot be read to waive sovereign immunity for a general liability insurer that brings suit as an equitable subrogee of a prime contractor, a panel of the U.S. Court of Appeals for the Federal Circuit instructed. In so ruling, the panel affirmed the Federal Claims Court’s dismissal for lack of subject-matter jurisdiction an attempt by the commercial general liability insurer for the general contractor on a Post Office asbestos-removal project to recoup the amounts that the insurance company had paid to settle an underlying tort suit against its insured by a postal employee who alleged that he had contracted mesothelioma after having been exposed to asbestos during the project (Fidelity and Guaranty Underwriters Insurance Co. v. U.S., November 6, 2015, Schall, A.).


The U.S. Postal Service contracted with a construction firm for the abatement of asbestos and for fireproofing at a municipality’s main post office building. As a general contractor, the firm subcontracted the asbestos-removal portion of the project to another company, which purchased commercial general liability insurance for the asbestos-removal work under the terms of the subcontract.

During the course of the work and after delays caused by the Postal Service, the asbestos-removal subcontractor attempted to renew its CGL policy but the insurance company refused the renewal. Because the cost of liability insurance had significantly increased during the interim, the general contractor sought additional compensation from the Postal Service to cover the increased cost of completing the project. Instead of providing additional monetary compensation, the Postal Service proposed that the project’s contract be amended to indemnify the general contractor for any liability incurred as a result of any asbestos-related injury. The general contractor accepted the proposal, and ultimately obtained its own liability insurance covering periods during which the project was being completed.

Several years later, a Postal Service employee sued both the general contractor and the subcontractor alleging that he had contracted mesothelioma as a result of the asbestos-removal work performed under the contract. The general contractor demanded that the Postal Service provide a defense and indemnification for the lawsuit pursuant to the amended contract. The Postal Service refused, after which the general contractor and its CGL insurer eventually reached a settlement with the aggrieved employee totaling over $1 million for the employee’s claims and just over $529,000 in legal expenses.

The insurer sought reimbursement of the amounts paid from the Postal Service, but a federal contracting officer denied the claim. The insurance company then filed suit against the government claiming jurisdiction under the Tucker Act and alleging breach of contract. The government filed a motion to dismiss, arguing that the general contractor’s insurer was not in privity with the United States because the insurer was not a party to a contract with the federal government. In addition, the insurance company failed to demonstrate that its suit fell within one of the several limited exceptions to the privity requirement, the trial court found, dismissing the action for lack of subject-matter jurisdiction. The insurer appealed the trial court’s decision.

Statutory language

The Tucker Act provides in relevant part that the Court of Federal Claims has jurisdiction to “render judgment upon any claim against the United States founded … upon any express or implied contract with the United States.”

The parties’ contentions. The insurance company argued on appeal that under the Tucker Act, sovereign immunity is waived as to any claim founded upon any contract with the United States and that, as such, the Court of Federal Claims had jurisdiction to hear the suit. Relevant case precedent established that the insurer should be considered an equitable subrogee of the general contractor for purposes of the court’s jurisdiction; therefore, the trial court erred in dismissing the insurer’s complaint.

The government countered that the Court of Federal Claims correctly held that the insurance company did not meet the statutory requirements for being able to sue the United States in the insurer’s own name as an equitable subrogee of the general contractor. The insurer had no relationship at all with the Postal Service, and the insurer’s payment of settlement monies and legal fees satisfied only an obligation to its insured and not to the United States, the government contended, distinguishing the case on appeal from case precedent involving sureties.

Sovereign immunity waiver

The pivotal issue underpinning the jurisdictional question was whether the Tucker Act’s waiver of sovereign immunity extends to a general liability insurer seeking to sue as the equitable subrogee of a prime contractor. As a general rule, for purposes of Tucker Act jurisdiction, the government consents to be sued only by those with whom it has privity of contract. The common thread of the exceptions to the privity rule as a prerequisite to invoking jurisdiction under the Tucker Act is that the party standing outside of privity by contractual obligation must stand in the shoes of a party within privity.

In arguing that sovereign immunity was waived, the insurance company analogized a prior U.S. Supreme Court decision holding that the Federal Tort Claims Act (FTCA) authorizes insurers that pay the claims of those injured by the negligence of government employees to sue the United States as equitable subrogees to a prior decision by the U.S. Court of Appeals for the Federal Circuit that the language of both the FTCA and the Tucker Act contain an unequivocal expression waiving sovereign immunity as to claims and not to particular claimants.

Contrary to the insurer’s assertion that the prior case’s statement that sovereign immunity is waived “as to claims and not particular claimants” opened the door to claims from all equitable subrogees regardless of the status or nature of the claimant bringing the suit for breach of contract, the case did not stand for that broad proposition. Rather, the earlier decision’s statement simply reflected the fact that, in their respective waivers of sovereign immunity, both the FTCA and the Tucker Act speak in terms of claims against the United States. Thus, the earlier case simply reaffirmed the previously well-established principle that a surety can sue the United States and recover not only any retainage but also any amounts paid by the United States to the contractor after the surety had notified the government of default.

Nothing in the prior case undermined the well-settled principle that the exceptions to the general jurisdictional rule requiring privity of contract are based upon the party that is outside of privity by contractual obligation standing in the shoes of a party within privity. In the case at bar, by having settled the underlying tort claim of the allegedly injured Postal Service employee, if anything, the insurance company became the equitable subrogee of the general contractor solely with respect to that tort claim—the settlement of which the insured never would have had to pay if the insurer had not stepped in.

Therefore, the insurance company never became an equitable subrogee of the general contractor with respect to any of that firm’s contract claims against the Postal Service because the insurer never stepped into the firm’s shoes in the firm’s capacity as general contractor on the post office project. As the firm’s general liability insurer, the insurance company had no responsibility for contract performance and had no obligations owed to the government. Consequently, the insurer failed to establish jurisdiction under the Tucker Act. For those reasons, the statute could not be read as waiving sovereign immunity for a general liability insurer that brings suit as an equitable subrogee of a prime contractor. Accordingly, the trial court’s dismissal of the insurer’s complaint for lack of subject-matter jurisdiction was affirmed.

The case is No. 2015-5036



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