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June 21, 2010
By Laura A. Kamas
Howrey LLP
Slattery Skanska, Inc., Perini Corporation, Koch Skanska, Inc., Skanska (USA), Inc. and Bombardier Transit Corp. formed the Air Rail Transit Consortium and entered into a design-build contract with the Port Authority of New York and New Jersey. They were to design, fabricate, install, test and demonstrate use of the AirTrain, an automatic, driverless light rail system that transports passengers on an aerial guideway between John F. Kennedy International Airport and Howard Beach and Jamaica in New York City, where it connects with the New York subway system and Long Island Railroad.
The Port Authority was required to obtain insurance covering the contractors, including a builder’s risk policy insuring improvements and other work. The Port Authority obtained that policy from American Home Assurance Company (AHA).
Bombardier prepared an AirTrain Test and Commissioning Rule Book that set out operational rules intended to ensure safe operation, testing and commissioning of the system. The Rule Book provided that if any testing involved waiving those constraints, the testing and commissioning supervisor or his delegate must identify the specific operating constraints to be waived and the safety precautions to be taken to ensure the test was conducted safely. The rule book required that the site safety engineer, testing and commissioning supervisor, and site engineering manager – each identified by name -- approve the procedure and safety precautions.
On September 27, 2002, Bombardier conducted acceleration tests of AirTrain trains to calibrate circuit breakers in power substations. The test procedures called for two, four-car trains to accelerate from a dead stop at maximum throttle in automatic train control mode.
However, shortly before the test, a Bombardier systems engineer at its headquarters in Canada advised by e-mail that the test be conducted in the manual mode. The e-mail was sent to the three persons identified in the Rule Book as necessary to approve procedure and safety precautions.
The appeals held it was undisputed that:
|  | The trains were operated in the manual, not automatic, mode by a driver under direction from the operations center.
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| | The trains’ speed governors, which prevented the trains from exceeding 15 mph in manual mode, were disconnected.
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| | Only two-car trains instead of typical four-car trains were used.
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| | To compensate for the weight difference resulting from use of two-car trains, tons of large concrete slabs were loaded into the first cars of the trains unsecured on sheets of plywood.
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| | Because the system was designed to be a driverless and was not fully operational, neither of the operators had experience at speeds greater than 15 mph or at operating on the main line.
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The appeals court also found it was undisputed that no waiver of safety constraints forms had been prepared or approved to conduct testing in the manual mode, with speed governors disabled and with two-car trains loaded with concrete slabs.
During the testing, a train accelerated to 58 mph, entered a curve with a speed limit of 25 mph and derailed. The concrete slabs placed in the lead car shifted forward and pinned the operator against the control console, severely injuring him. He died later that day. The train and 150 feet of parapet wall were damaged. Safety investigations determined that the operator had missed the assigned stopping point.
The contractors submitted a notice of property loss to AHA for $16 million in damage. The claim was based on §10 of the builder’s risk policy, which insured against all risks of direct physical loss to insured property. AHA reserved its rights and later, pointing to the deviations from testing procedure, denied coverage based on §11(B)(4) of the policy.
Section 11(B)(4) of the policy stated in relevant part:
| This policy is extended to cover loss resulting from or caused by Insured Property undergoing performance testing, commissioning and/or start up runs.
For purposes of coverage and premium computation, the performance testing, commissioning and/or start up runs period shall mean and be limited to that period beginning either with the first introduction into the Insured Property of feedstock or other materials for processing or handling or the commencement of supply to a system and continuously thereafter….
The Insured warrants that supervisory or safety systems shall not be deliberately circumvented during such periods, but the Company shall not withhold coverage where it can be reasonably shown[n] that the management or supervisory staff was not aware of such situations.
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The contractors filed suit for coverage against AHA, and AHA moved for summary judgment, arguing that coverage was denied under §11(B)(4) because the contractors had deliberately circumvented “supervisory or safety systems,” thereby breaching the warranty the contractors had given in §11(B)(4). The contractors also moved for summary judgment, relying on §§10 and 11 of the policy. Section 11(A) defines insured property as:
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This policy insures all material, supplies, machinery, equipment, fixtures,… and other property of a similar nature owned by the Insured, all of which is to be used in or incidental to the fabrication, erection, or completion of the Project while situated at the Project Location defined in the policy, whether the property of the [i]nsured or property of others for which the insured may be legally liable, subject to the exclusions, limitations, terms and conditions of this Policy….
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The trial court denied AHA’s motion and ruled in favor of the contractors, holding that §§10 and 11(A) of the policy unambiguously covered the accident. The trial court held that §11(B)(4) was irrelevant, concluding that the language about feedstock and material processing had been lifted from a policy for a manufacturing plant and applied in this policy to damage to third party property. It concluded that because the test could be run in only the manual mode and with the speed governor disconnected, that provided no basis for excluding coverage.
AHA appealed, and the Appellate Division reversed. Slattery Skanska, Inc. v. American Home Assurance Co., 67 A.D.3d 1, 885 N.Y.S.2d 264 (1st Dept. 2009).
AHA argued that the trial court misconstrued the nature of first-party property insurance by holding that §11(A) covered damage to Bombardier’s own property while holding that §11(B)(4) covered damage to third-party property. AHA also asserted that it was entitled to reject coverage because Bombardier breached the warranty in §11(B)(4) by disabling the speed governor and by failing to follow procedures set out in Bombardier’s own Rule Book for using test procedures at variance with normal operating procedures.
Bombardier asserted that the insurance policy covered any physical damage to the project from all risks before completion and that Section 11(B)(4) was inapplicable and ambiguous. Bombardier also argued that the automatic mode of operation and speed governor were not supervisory or safety systems; that compliance with the waiver procedures in its Rule Book was not required by the insurance policy; and that it had implemented alternative safety measures.
The appeals court held that the policy was a first party casualty insurance policy and not a liability policy. It found the trial court’s decision to be “fundamentally flawed” in this regard and held that §11(B)(4) controlled the claim.
The appeals court held that the definition of insured property under §§10 and 11(A) did not apply to completed structures, such as the property damaged by the accident. The court explained that once construction was completed and turned over to Bombardier for testing, coverage was available only through §11(B)(4)’s coverage extensions for testing. Any other interpretation, it held, would render §11(B)(4) meaningless. The appeals court found that consistent with this interpretation, the contractors admitted paying an additional premium for its coverage.
The appellate court held that §11(B)(4) constituted a warranty by the contractors that they would not deliberately circumvent any supervisory or safety systems during testing. Its terms were clear and unambiguous.
The central issue then, the appeals court wrote, was whether, as a matter of law, Bombardier breached the warranty in §11(B)(4). The appeals court held that Bombardier did just that by deliberately deactivating the automated control system, operating in the manual mode and disengaging the speed governor, “eviscerating the ‘safety system’ in its entirety.” Even if manual operation with the governor disconnected was necessary for the test, the appeals court held, Bombardier breached the insurance policy’s warranty by failing to comply with waiver of constraints procedures set out in its own Rule Book. The court held that those procedures themselves were a safety system because they ensured safety precautions would be taken and that supervisors would be involved in modifying normal procedures.
The appeals court rejected Bombardier’s argument that the three employees authorized by the Rule Book had taken alternative safety precautions. It noted that the policy did not provide that only “some” safety systems shall not be deliberately circumscribed. Rather, it held, the policy was a “calculated risk” conditioned on full compliance. AHA issued the policy with the “bargained for expectation” that Bombardier would abide by safety procedures. Bombardier’s failure to comply with safety procedures “clearly elevated the risk AHA was willing to underwrite,” the appeals court held.
The appeals court reversed the trial court’s decision, granted AHA’s motion for summary judgment dismissing the complaint and denied the contractor’s motion seeking coverage.
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For more information about the issues covered in this report, please contact Laura A. Kamas in our Washington, D.C. office at 202-383-7367 or at kamasl@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2010 Howrey LLP
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