Facts: The insured provided architectural design services for a single floor high-end renovation condominium project ($7.5M renovation budget). After the project was completed the insured was owed $65,000 in fees. When architect requested the outstanding fees, the owner (a wealthy, high-profile figure) indicated that he was unhappy with a number of features of the condominium, which he deemed to be errors by the insured. Architect’s contract called for arbitration and the architect filed a demand for arbitration to recover fees and attorneys fees. Owner counterclaimed for approximately $120,000 in alleged design defects and attorney fees. Eventually the alleged damages against the insured increased to over $450,000.
Claims against the insured: The owner alleged that the architect breached its agreement by failing to deliver “superior architectural services” and “executing deeply flawed concepts that it knew or should have known were both fundamentally unworkable and directly contrary to owner’s express instructions.” Specifically, the owner alleged that the breach occurred by (a) failing to “supervise and monitor construction,” and (b) refusing to continue work and file appropriate “sign-offs” with the City for open permits due to non-payment of invoices. The owner’s defect lists was long, but included: improper door latches, the closet not being large enough for her hanging items, power-strip not being mounted correctly, location of light switches being incorrect, sagging bookshelves, cracks in the walls, shallow height of shelving.
Defenses: The majority of the claims involved construction issues, owner desired changes or just were not defects.
Coverage issues: The counterclaim sought recovery of payments made by the owner to the insured (“Damages” does not include “return or offset of fees”). The contract also contained a “prevailing party” provision. No coverage for Liability Assumed under Contract.
“Prevailing Party” Provision Issues: Absent a clear-cut victory by either side, the arbitrator would have wide discretion in deciding how to apply the fee-shifting provision. Generally, whichever side obtains most of what it seeks will be deemed the prevailing party.
Policy Limit: $3,000,000 per claim limit, $30,000 deductible.
Resolution: 10 days of arbitration started, followed by 1 day of mediation. Insured waived their fee claim in its entirety and paid the owner $25,000 to settle. Defenses costs $578,000.