Federal Court in Indiana Permits City to Sue Design Subconsultant Despite Lack Of Privity

Jane Fox Lehman, Associate, Pepper Hamilton LLP

City of Whiting, Indiana v. Whitney, Bailey, Cox, & Magnani, LLC, 2015 U.S. Dist. LEXIS 150229 (N.D. Ind. Nov. 5, 2015)

The City of Whiting, Indiana (the “City”) contracted with American Structurepoint, Inc. (“Engineer”) to design a lakefront park that would protect its shoreline from erosion (the “Project”).  Engineer subcontracted with Whitney, Bailey, Cox, & Magnani, LLC (“Subconsultant”) to serve as the marine engineer for the Project (the “Subcontract”).  Pursuant to the Subcontract, Subconsultant designed a revetment to protect the Project shoreline.  The revetment failed, damaging the City’s property and necessitating remediation.

Engineer assigned to the City any claims Engineer might have had against Subconsultant relating to the Subcontract and the revetment failure.  The City then sued Subconsultant, asserting three counts as Engineer’s assignee, and asserting breach of the Subcontract, negligence, and negligent misrepresentation in its own capacity.  Subconsultant filed a motion to dismiss, arguing that the City’s complaint failed to state a claim.

The district court granted Subconsultant’s motion in part and denied it in part.  The court first observed that Indiana law both permitted assignment of claims and recognized the causes of action the City asserted through the assignment.  While the City had erred by pleading that it sought to recover “its own damages” through these causes of action, the liberal federal pleading rules “do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.”  The court denied Subconsultant’s motion to dismiss the causes of action the City asserted through the assignment.

The court next explained that the City’s claim for breach of the Subcontract, which the City asserted on the theory that it was a third party beneficiary of the Subcontract,  survived Subconsultant’s motion to dismiss if the City had shown clear intent by Engineer and Subconsultant to directly benefit the City.  Intent could be shown by Subcontract language.  The Subcontract specifically named the City as the recipient of Engineer’s services, obligated Subconsultant to assist Engineer with those services using a professional standard of care, and incorporated the terms of Engineer’s contract with the City.  The court denied Subconsultant’s motion to dismiss the City’s claim for breach of the Subcontract.

Turning to the City’s negligence count, the court concurred with Subconsultant’s position that Indiana’s “economic loss rule” precluded the City’s ability to recover in tort for “disappointed contractual or commercial expectations,” which included any damage to the Project.  The City’s complaint alleged that it had suffered extensive damage to its “property at the Project, including the . . . pavilion, gazebo, and fishing pier.”  The court held that, regardless of whether damage to the pavilion, gazebo, and pier constituted damage to the Project, the City’s allegations had not foreclosed its ability to recover for damage to other property because the word “including” signified a non-exhaustive list.  The court denied Subconsultant’s motion to dismiss the City’s negligence count.

Finally, the court observed that Indiana recognized the tort of negligent misrepresentation, and that it may be actionable even when a plaintiff has suffered only economic loss.  However, Indiana’s economic loss rule precluded the owner of a construction project from recovering in tort for pure economic loss caused unintentionally by design professionals with whom the owner is connected through a network of contracts.  The City and Subconsultant were connected through a network of contracts, and nothing about the facts of the parties’ dispute warranted the court creating an exception to the rule.  The court granted Subconsultant’s motion to dismiss the City’s negligent misrepresentation count.

Article originally posted February 14, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Additional Insured Status for General Contractors

Today, we have a post regarding insurance coverage from Division 1 member Stephen Wright of the Atlanta-based law firm of Taylor English Duma LLP.

Stephen Wright of Taylor English Duma LLP

Stephen has a business background, having received his degree from Indiana University in Business Economics. His practice is not entirely construction-based, but his advice to clients on insurance issues relates across the board.

In the post that follows, Stephen outlines the ins and outs of the "your work" exclusion on a typical comprehensive general liability policy. Perhaps unsurprisingly, even with the same policy language, that exclusion is not applied consistently in all states.

New Twists: As General Contractor, Are You Protected as an "Additional Insured"?

By Stephen L. Wright

Let’s say you’re a general contractor on a commercial project and you’ve had your subcontractors give you certificates of insurance that identify your company as an “additional insured” under the subcontractors’ general liability policy.  So you’re covered in the event your subcontractors’ work causes some type of damage, right? Think again.

It all depends upon which state law applies. If you’re in Connecticut, you’re in luck. If the general contractor is in Georgia, not so much. But in either case, the wording of the specific insurance policy can make the difference.

The distinction between the states turns on a typical exclusion found in all comprehensive general liability policies involving construction companies. The “your work” exclusion states in essence that there is no insurance coverage if the damages are to the contractor’s own work. The thought here is that this is really a contract risk and the contractor needs to be careful in the performance of its own work. But how does this exclusion apply when the general contractor is an additional insured on a subcontractor’s policy?

It probably comes as little surprise that there is disagreement as to how these two provisions should interrelate. In Connecticut, the state Supreme Court recently found that the policy was only intended to relate to the subcontractor’s own scope of work such that damage to other parts of the project caused by a subcontractor’s defective work could be the basis of a claim by the general contractor.  

By contrast, in Georgia a recent court decision found that the scope of “your work” is determined from the perspective of the party making the claim so that a general contractor would have the exclusion apply to the entirety of the project. The court found that to find otherwise would make the insurer a guarantor of the subcontractor’s performance. The Connecticut court rejected this conclusion and pointed out that performance bonds guarantee a much broader spectrum of subcontractor failures as opposed to insurance which just focuses on defective work.

Bottom line: be aware of what the law of the state in which the project is located provides and make sure that the specific policy language of the “your work” exclusion says what you need it to say. There is no one standard way of phrasing this exclusion and each insurer can have its own individual approach.

Stephen L. Wright is a Partner with Taylor English Duma LLP in Atlanta. 

LEED Appeals

In this second post about LEED, we briefly review the achievement categories for construction projects.  Then we take a look at LEED appeals and challenging whether credits within the categories were fulfilled.

As discussed in the post #1, LEED is a rating system for sustainable and efficient building, which achievement level—denoted by platinum, gold, silver, and certified—may be a requirement in the project specifications or a condition for funding.  The level is determined by points (up to 110 are available) earned in several categories.  The categories are often interrelated.  For example, the location selected can affect energy options including harnessing renewable power.  The universal categories (there are also regional categories) and brief examples of strategies for generating points follow:

•  location/transportation – (16 points) – develop areas near pre-existing roads/infrastructure and already developed surfaces to limit urban sprawl and avoid occupying green space, develop at a high priority sites like a brownfield, locate near public transportation, incentivize carpooling; provide electric car recharging services;
• sustainable sites – (10 points) - use native plants in landscaping, limit size of the building footprint by building upward to protect open space and habitats, minimize lighting or use screened or timed units, install pervious surfaces, collect and use rainwater for landscaping or even process water; use reflective or light-colored roofs or roof gardens and reduce paved surfaces to avoid heat absorption;
• water efficiency – (11 points) - limit water use by installing efficient plumbing valves and restrictors, use dual flush or low flow toilets, use rainwater as process water, monitor water use to manage consumption, use drought-tolerant plants in landscaping, install high-performance irrigation systems;
• energy/atmosphere – (33 points) - incorporate natural air sources through appropriate venting or harness wind energy, use solar energy and sunlight for some or all building power sources, insulate walls and the roof to conserve energy, give due consideration of size demands of the use and build appropriately, select high-performance appliances, lighting, and HVAC, design appropriately sized HVAC loops for heating and cooling;
• materials/resources – (13 points) - reuse building materials, rely on efficient framing spacing to use less material, use local materials to reduce travel emissions, use renewable, recycled, long-lasting, prefabricated materials, adopt streamlined recycling and waste programs;
• indoor environmental quality – (16 points) - design systems to filter air as it enters the building; test for radon, avoid building materials that emit volatile organic compounds; design ingress/egress to limit particulates collection from outside, use pest control that does not rely on chemicals; 
• innovation – (6 points) – credit is given for a cutting edge methodology even if it exceeds or does not fit into a specific category.

LEED certification process begins when a project team registers its application online.  (For guidelines on the entire application process, see the LEED Certification Guide). The team provides all necessary information about the project and documentation to establish the various credits.  The U.S. Green Building Council’s Green Building Certification Institute (“GBCI”) reviews the application, allows for supplemental clarifications during the “Preliminary Review,” and then provides a “Final Review” that states whether and to what level the project will receive LEED certification. 

At that point, the owner or project team has 25 days to appeal the credit decisions contained in the Preliminary Review.  Called the “Appeal Review,” the project team may amend their application with respect to single credit or seek out additional credits not previously submitted for review.  Generally the original reviewer will respond to the appeal.  This appeal process may be raised for a single credit or multiple credits and may be repeated without limit. However, each credit addressed is considered its own appeal and requires payment of its own appeal fee.  Interestingly, the appeal fee is greater depending on the complexity of the credit.  While this “Appeal Review” process is unlimited to the project team (a change from the 2012 version of LEED guidelines wherein an Appeal Board had the final say on credits), it may suffer from its new Laissez-faire approach.  For example, a formal review from an uninterested and qualified panel (or reviewer) is highly important when a credit decision is questioned.  As presently set up, the same reviewer who rejected the credit maybe the same person to review the appeal.

A variation of the “Appeal Review,” the project team also has the option of pursuing Credit Interpretation Rulings (CIR), which are project specific, or LEED Interpretations, which set precedents for all projects.  The CIR process invites the project team to seek out technical guidance related to a particular credit or facet of the LEED rating system. LEED Interpretations tend to ask similar questions as CIRs, but may be more complex or, in the LEED estimation, is worthwhile to use as precedent.  The difference between a CIR /LEED Interpretation and the Appeal Review described above appears to be the timeframe and breadth of appeal.  Appeal Review is necessarily during the application process, whereas the other two may be accomplished before application.  Appeal Review appears focused on sufficiency of backup for a credit as opposed to the technical guidance or the LEED regulations as a whole.

On the flipside of the project team’s appeals and interpretations is the “Certification Challenge.”  This policy is intended to ferret out “incidents of intentional or inadvertent misrepresentation which result in the inappropriate award of LEED certification.”  See the LEED Certification Guide.  Essentially it is an audit process that may initiated by the GBCI president for “any reason or no reason at all” within 18 months of LEED certification.  The GBCI may also proceed with a Certification Challenge if a third party with “specific personal knowledge” comes forward with a complaint.  In either case, there is an investigation by GBCI and an opportunity for the project team to be heard.  Upon an adverse determination, the project team may appeal to the GBCI Board of Directors.  In the event of an adverse decision before that board, the decision is final, and the LEED certification may be revoked.

Final Post: We will examine considerations in construction contracting in this green-building era aimed at avoiding disputes on a sustainable project.  For example, the AIA has adopted its own guide and contract language.  See AIA D503.

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.