7th Cir.: Mitigation Expenses Due to Construction Delay Potentially Covered

The Seventh Circuit, applying Indiana law, held that Travelers Property Casualty Company of America (“Travelers”) is liable to the extent the Indianapolis Airport Authority (“Airport Authority”) can prove that it incurred expenses to reduce costs for which Travelers otherwise would have been liable due to a construction incident which delayed the project .  The mitigation expenses are recoverable under the Travelers’ policy provision for coverage for expenses to reduce the amount of loss (the “ERAL Provision”).

The Airport Authority constructed the $1 billion Midfield Terminal, a passenger terminal that opened for business on November 11, 2008.  During construction of the terminal, two shoring towers malfunctioned, and as a result, a portion of the terminal’s roof structure dropped by a foot and work on the terminal stopped temporarily.   As a result of the incident, the Airport Authority incurred millions of dollars in inspection and repair costs.  The incident ultimately delayed the opening of the Midfield Terminal by 44 days – much less time than originally feared.  Travelers insured the Airport Authority with a customized Commercial Inland Marine Policy.   After the incident, the Airport Authority provided Travelers with a sworn proof of loss statement which identified total losses of approximately $12.8 million, less $3.6 million in payments that Travelers had already paid.  Travelers partially denied the claim, and as result, the Airport Authority was left with $9 million of non-covered losses.

The Airport Authority sued Travelers for breach of contract and sought a declaration regarding the parties’ rights and obligations under the policy.  The parties filed cross-motions for summary judgment.   Three categories of coverage under the policy are at issue: (1) builders’ risk (the “General Coverage Provision”); (2) “soft costs”, particularly bond interest in excess of the budgeted amount; and (3) the ERAL Provision.  The ERAL Provision is an additional coverage feature that pays for certain expenses incurred by the Airport Authority to reduce delay and mitigate “soft costs”. The district court denied the Airport Authority’s motion and in large part granted Travelers’ motion.  After ruling in favor of Travelers on a number of evidentiary motions, the Airport Authority’s case was effectively over.  On the Airport Authority’s motion, the district court entered final judgment in Travelers’ favor.  The Airport Authority appealed.

The Seventh Circuit upheld the district court’s interpretation of the General Coverage Provision.  It found that the General Coverage Provision unambiguously provided coverage only for physical damage caused by the shoring tower incident and the expenses directly related to restoration of the damaged property.  The General Coverage Provision did not cover economic or consequential costs.  The Seventh Circuit also upheld the district court’s ruling that there was no coverage for the Airport Authority’s “soft costs” under the policy.  The “soft cost” at issue was bond interest that continued to accrue at $122,387.73 a day during the 44 day delay in the project –  a total of more than $5,000,000. In denying coverage for “soft costs,” the court noted that such coverage was subject to a 90 day deductible and, because the opening day of the Midfield Terminal was only delayed 44 days, the deductible had not been met.

However, the Seventh Circuit reversed the district court’s order regarding coverage under the ERAL Provision.  The Airport Authority contended that it incurred substantial costs in reducing the period of delay.  The Seventh Circuit found that Travelers and the district court misunderstood the interaction between the “soft cost” coverage provisions and the ERAL Provision: “The ERAL Provision did not say that coverage turned on whether Travelers actually paid out a soft cost claim.  Rather, ERAL coverage was to be triggered to whatever extent the Airport Authority accelerated or otherwise adjusted the project (at added expense) so as to mitigate Travelers’ soft cost liability . . . Travelers’ attempt to condition payment of ERAL expenses on payment of soft costs would create perverse incentives.”  The Seventh Circuit ruled that “[i]f the Airport Authority can demonstrate with competent evidence that it incurred expenses to reduce soft costs for which Travelers otherwise would have been liable, it may recover those expenses under the ERAL Provision.”   Thus, the court remanded the issue.  The Seventh Circuit also vacated the district court’s evidentiary orders for “fresh consideration in light of [the appellate opinion].”  Indianapolis Airport Authority v. Travelers Property Casualty Co. of America, No. 16-2675 (7th Cir. Feb. 17, 2017).