Spirtas Co. v. Ins. Co. of the State of Penn., No. 07-1547.
Contracts
A contractor entered into a $2.8 million agreement with a property owner to remove asbestos from the property. The remediation contract contained an arbitration clause. The property owner required the contractor to obtain a $2.8 million surety bond for the work. The contractor contacted Insurance Company of the State of Pennsylvania (“ICSP”) for the bond. ICSP required the contractor to indemnify it for any expenses and fees related to “executing” the bond, which the contractor did. The indemnity agreement incorporated the remediation contract by reference.
Work
Once the contractor had finished all of the work required under the remediation contractor, it demanded final payment under the contract of $150,000. The property owner refused, claiming that the contractor had not properly performed the remediation and had spread asbestos to other, previously uncontaminated areas of the property. The property owner also submitted a claim against the bond to ICSP for additional work needed at the property to clean up the contamination caused by the contractor.
Arbitration
The contractor initiated arbitration to receive the remaining $150,000 payment. The property owner counterclaimed for $4 million for expenses related to the clean up and loss of rental income. The property owner also brought ICSP into the arbitration (after threatening a court order to participate), claiming it owed the property owner $4 million dollars in compensatory damages, as well as $4 million for punitive damages based on bad faith in failing to pay the property owner’s earlier bond claim.
Because the property owner’s claims were well outside the surety bond amount, ICSP retained its own counsel and experts to defend against the property owner’s claims. The contractor and ICSP were eventually successful in the arbitration.
Lawsuit
Afterwards, ICSP submitted a claim under the indemnity agreement to the contractor for its attorney’s fees and expert witness fees in the arbitration of $800,000. The contractor refused to pay and initiated a declaratory judgment action. The trial court held that the contractor had to pay these fees under the indemnity agreement.
Appeal
On appeal, the contractor argued that ICSP did not have to execute on the bond and that its participation in the arbitration had been voluntary. The Eighth Circuit Court of Appeals disagreed, noting that the contract language requiring reimbursement for “executing” on the bond was unambiguous and required but-for causation only. The Court explained that ICSP executed the bond because the property owner (1) made a claim against the bond, (2) asserted claims for compensatory and punitive damages against ICSP, and (3) threatened to seek a court order compelling arbitration. Because of these actions, the court reasoned, ICSP became involved in the arbitration and incurred fees and expenses. Accordingly, the court ruled that ICSP was entitled to reimbursement.
