The Contract Disputes Act (“CDA”) is probably not the first law that comes to mind when a government contractor is named as a defendant in a personal injury or wrongful death suit. But a recent decision from the U.S. Court of Federal Claims illustrates why the CDA ─ and its six-year statute of limitations ─ should be top of mind for any contractor that is sued in tort and wants the government to take over its defense or to reimburse its uninsured legal fees or settlement/judgment costs. The Court’s decision, which is the latest opinion in a long-running dispute, is an important reminder for contractors that are indemnified by the government for liabilities to third persons, including under clauses such as FAR 52.228-7, Insurance ─ Liability to Third Persons (MAR. 1996) and FAR 52.250-1, Indemnification under Public Law 85-804 (APR. 1984).
Kansas City Power & Light Co. (“KCP&L”) entered into a contract with the General Services Administration (“GSA”) in 2005 to provide electricity service for a federal complex, under which GSA agreed to defend and indemnify KCP&L with respect to claims for “loss, damage or injury” to third persons. In August 2006, a GSA employee died while KCP&L was performing under the contract. The decedent’s widow filed a wrongful death action in state court against KCP&L in March 2007. KCP&L retained a law firm to defend it in that action and later filed a third-party petition against two GSA employees. The United States then substituted itself in the action (in lieu of the federal employees) and removed the case to federal district court.
Shortly after removal, KCP&L’s counsel demanded that the United States agree to defend and indemnify KCP&L based upon the indemnification provision in KCP&L’s contract with GSA. In March 2008, government counsel informed KCP&L that the United States was unlikely to defend or indemnify KCP&L in the action. The case was remanded to state court in April 2009 after the United States was dismissed from the case. In May 2010, KCP&L entered into an approved settlement of the wrongful death action. Four years later, in June 2014, KCP&L submitted a CDA claim to the GSA contracting officer seeking reimbursement for expenses KCP&L incurred in defending and settling the action. The contracting officer denied the claim, and KCP&L filed suit in the U.S. Court of Federal Claims.
The Court’s Decision
Before the Court, KCP&L argued that the GSA breached its contractual duties to defend and indemnify KCP&L in connection with the wrongful death action. KCP&L sought to recover more than $4 million ─ consisting of approximately $1.75 million in legal fees and $2.25 million in settlement expenses. The United States moved for summary judgment, arguing principally that KCP&L’s “duty-to-defend” and “duty-to-indemnify” claims were barred by the CDA statute of limitations because the claims accrued more than six years before they were presented in a CDA claim to the contracting officer. In resolving the government’s motion, the Court focused on the date each of KCP&L’s claims accrued ─ i.e., when KCP&L “knew or should have known” all the facts fixing GSA’s purported liability such that KCP&L could have presented a CDA claim to the contracting officer. Ultimately, the Court held that KCP&L’s duty-to-defend claim was time-barred, but its duty-to-indemnify claim was not.
Regarding the duty-to-defend claim, the Court found that four distinct events needed to occur to fix GSA’s liability: (1) KCP&L and GSA’s execution of a contract, (2) GSA’s obligation to provide KCP&L with a defense, (3) GSA’s refusal to provide KCP&L with a defense, and (4) KCP&L’s sustainment of damages as a result of GSA’s refusal. The Court then determined that undisputed facts established the dates for each of these events. First, the contract was executed in August 2005. Second, GSA’s obligation to defend KCP&L in the wrongful death action ripened on the day the suit was filed in March 2007. Third, KCP&L knew the United States would not defend KCP&L when government counsel informed KCP&L’s lawyers of that decision in March 2008. Fourth, KCP&L incurred damages as soon as it received the United States’ decision because government counsel informed KCP&L that it should continue paying its own litigation costs and would not receive reimbursement for previously incurred attorney’s fees. Thus, because KCP&L knew all the facts fixing GSA’s purported liability by March 2008—more than six years before KCP&L submitted its claim to the contracting officer in June 2014—the duty-to-defend claim was time-barred and KCP&L could not recover the $1.75 million in legal fees it incurred to defend the wrongful death suit.
Regarding KCP&L’s duty-to-indemnify claim, the Court focused solely on when GSA purportedly became obligated to indemnify KCP&L for the $2.25 million it incurred to settle the wrongful death action. Citing federal common law, the Court found “a judgment or settlement in [an] underlying case is a condition precedent to a right to indemnification” and held that KCP&L’s CDA claim for indemnification was timely because it was submitted to the contracting officer within six years of May 2010 ─ the date the settlement was approved by the state court. In doing so, the Court declined to follow prior decisions from the Court of Federal Claims and Armed Services Board of Contract Appeals which have suggested that an indemnified contractor may have to submit a protective CDA claim for settlement or judgment costs before an underlying lawsuit is resolved.
The Court of Federal Claims’ decision in Kansas City Power & Light Co. v. United States, No. 15-348C, is instructive for a few reasons. First, contractors that are sued in tort ─ and have a contractual right to have the government defend or indemnify them in such an action ─ should invoke those rights promptly after learning of the suit. This is an especially important reminder for contractors with protections under clauses such as FAR 52.228-7 or FAR 52.250-1, which impose notice and cooperation requirements on the contractor. Second, when defending an underlying tort suit, indemnified contractors must be mindful of events that can trigger the running of the CDA statute of limitations. For duty-to-defend claims that seek reimbursement of legal fees, the CDA clock may start to run as soon as the government refuses to participate in the lawsuit. For duty-to-indemnify claims seeking to recover settlement or judgment costs, some tribunals may find the CDA statute of limitations does not start until the contractor settles the action or receives an adverse final judgment. But other tribunals may find the contractor should have submitted a protective claim for future liabilities ─ even before the underlying lawsuit is over. In either case, when an indemnified contractor is sued in tort, one of the first orders of business should be to carefully assess whether and when to pursue potential CDA claims for litigation defense and liability costs.