Suit Up: Fla. Supreme Court Holds Statutory Defect Notice is a "Suit" Under CGL Policy

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Recently, the 11th Circuit was presented with an appeal concerning a commercial general liability ("CGL") insurer's duty to defend a general contractor.  At issue was whether statutory-required notice from an owner to the general was a "suit" under the policy triggering the defense duty.

The 11th posed this certified question to the Florida Supreme Court:

Is the notice and repair process set forth in chapter 558, Florida Statutes, a “suit” within the meaning of the commercial general liability policy?

The Court, in Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. SC16-1420, 2017 WL 6379535, at *1 (Fla. Dec. 14, 2017), answered yes, Chapter 558 defect notice is a suit for purposes of CGL coverage. As such there insurer had a duty to defend. The holding has potential implications for insurers in other states that subscribe to similar defect notice schemes or rights to repair. See, e.g., Cal. Civ. Code §§ 895 et seq.; Colo. Rev. Stat. § 13-20-801 et seq.; Tex. Prop. Code. Ann. §§ 27.001 et seq. There are upwards of 30 states nationwide.

First of all, what is Fla. Stat. chapter 558?  In Florida, before suit can be commenced by any owner claiming that a construction defect exists, the owner must follow a certain notice and response procedure. Basically the owner must give notice to the contractor or design professional of the alleged defect.  Then those receiving notice provide notice to any lower-tier subcontractors that may have responsibility for the defect in question and all recipients can respond to the owner.  If the owner does not receive adequate responses, it then can file suit.  The legislative findings specifically identified this process as an "alternative dispute resolution mechanism" such that the inspections involved and any findings or settlement offers made as a result of the inspections become inadmissible if there are future proceedings.

Under the CGL policy, the insurer has the "right and duty to defend the insured against any 'suit' seeking those damages [of personal or property damage]." The definition of a "suit" is a "civil proceeding in which damages . . . to which this insurance applies are alleged." It also includes "an arbitration proceeding . . . to which the insured must submit or does submit with our consent" or "any other alternative dispute resolution proceeding . . . to which the insured submits with our consent."

Therefore, the question was whether Fla. Stat. ch. 558 notice is a "suit."  The Court analogized the notice to "other alternative dispute resolution proceeding" (especially given the legislative history) and confirmed it was indeed a suit.  The issue of insurer "consent" was a hurdle that the Court did not need to cross in the decision.  The Court observed that "whether [the insurer] consented to [the general contractor's] participation in the chapter 558 process . . . is outside the scope of the certified question and an issue of fact disputed by the parties."

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  Katharine thanks Anthony Lehman, Esq. of Hudson Parrott Walker in Atlanta, Georgia for his input on this post.

Are Your Punch Lists Signed Off and O&Ms Submitted? NJ Court Rules not Delivering all Closeout Items Could be a Basis for Withholding Final Payment for Over Two Years

General Contractor Wallace Brothers, Inc. (Wallace) entered into a contract with the East Brunswick Board of Education (Board) for the construction of the New Memorial School in the amount of $18,233,000.  During the course of the project, the Board paid Wallace a total of $19,713,664.11 through the change process. Even though the school had been in use by the Board for two years, it was holding a contract balance of $366,130.26 that it refused to issue to Wallace.  The Board claimed that it had issued several punch lists for Wallace to complete but were still outstanding.  Conversely, Wallace claimed that it did not receive a final punch list from the Board until this current action was initiated. The trial court granted summary judgment to Wallace finding that the Board had delayed the issuance of punch lists and then only provided punch lists full of maintenance related items wholly separate from the contract.  The Board appealed.

As there were numerous material facts disputed at trial, the Court began its analysis by reviewing some of the conflicted details.  At trial, the Board presented evidence that its architect issued two signed Certificates of Substantial Completion, one in November 2012 and another in October 2013.  In the certificates, the architect struck language from the forms that denoted a punch list was enclosed.  The architect claimed that the strike-through merely represented that the punch list was not attached. Wallace countered the strike-through language meant that construction was in fact complete. 

The Board further claimed Wallace was issued a punch list in April 2013, before litigation ensued in March 2014. That April 2013 punch list was referred to as the “Final Punch List” by the architect and it contained about 300 yet to be completed items.  Updates to this punch list were released in August 2013, October 2013, and November 2014.  Items that remained on the updates included:

“caulking all exposed steel, removing "stub conduit," touching up paint on a door frame, repairing a damaged wall, installing the vinyl base at a casework counter, removing paint from an entry frame, installing a "backer rod," patching bolts at a side-court basket, sanding and painting "hose bibbs," replacing crumbling grout, and installing concrete floor sealer.”

The trial court was not swayed by the Board’s argument on the April 2013 punch list or its contents stating that its items were “maintenance things that would occur in the ordinary course of using the premises, but basically it sounds like you're holding their money hostage to make them come and do repairs that they would not have been called upon to do.”

Notwithstanding the above, the Board additionally argued that the trial court had disregarded material disputes of fact such as the final payment balance contained almost $56,000 worth of back charges and approximately $170,000 of liens on the project.   Wallace’s contract required it to refund any lien amounts back to the Board.  The Board further stated it was within its rights to withhold the contract balance as the trial court ignored the fact that contractually required close out documents such as “proof of payment of all vendors, proof of insurance, subcontractor waivers, recorded drawings, proof of tests and inspections, and the maintenance package containing manufacturers' warranties” were never submitted by Wallace to the Board.  Finally, the Board pointed to the November 2014 punch list which denoted $163,890 worth of work remained and the architect had yet to issue its final Certification for Payment, which is a condition precedent for final release of all contract sums per Wallace’s contract.

Ultimately, the Court reversed and remanded finding that there were material facts in dispute as to whether Wallace fully completed the contract.

WALLACE BROS., INC. v.EAST BRUNSWICK BOARD OF EDUCATION

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA.  He may be contacted at 781.786.8916 or carter@agcmass.org.

The early bird deadline to sign up for the Midwinter Meeting in Fort Myers, Florida, is tomorrow! This program, which is focused around issues particularly relevant to subcontractors, will be an excellent opportunity to hear the latest issues and trends that subcontractors across the country are dealing with. You can save $60 by signing up before the end of the day tomorrow. The brochure can be viewed at this link. 

The Division 1 practicum featuring Jason Rodgers-da Cruz, Joe Imperiale, Stuart Sobel, Terry Brookie, and Esther Mignanelli  is limited to 60 attendees and is going to be a great program.  The details are as follows:   

Wednesday, January 17, 2018

2:00 P.M - 5:00 P.M.

Young Lawyer Practicum

Construction cases are technical and complex matters that may not be easily understood by the Jury or even the Judge or Arbitrator. As construction trial lawyers, we must distill such technical and complex matters and present them in easily understood and relatable concepts. While we develop the case, we must also navigate the evidentiary and presentation issues that, as trial lawyers, routinely confront us. The practicum focuses on utilizing the fundamental building blocks to build your construction case whether prosecuting or defending one. Separate Registration Fee: $75 per person

Sponsored by: Division 1 - Litigation and Dispute Resolution, Young Lawyers Division, and the Forum Leadership Circle

Please sign up for the practicum and make your travel arrangements now to arrive in time for the practicum.

Montana Supreme Court Holds That a Waiver of Consequential Damages and a Partial Limitation of Liability in a Design Contract Are Not Contrary to Montana Law

    

Zirkelbach Constr., Inc. v. DOWL, LLC, 2017 Mont. Lexis 591 (Mont., Sept. 26, 2017)


In interpreting a state statute which makes contractual limitations on a party’s liability unenforceable in certain instances, the Supreme Court of Montana recently upheld the validity of a contract provision in a professional services agreement between a general contractor and a designer in which the parties waived consequential damages against each other and limited the liability of the designer to $50,000.00.


Zirkelbach Constr., Inc. (“Zirkelbach”) and DOWL, LLC (“DOWL”) entered into a professional services agreement (the “Agreement”), whereby DOWL agreed to provide design work to Zirkelbach, a general contractor, for the construction of a FedEx Ground facility in Billings, Montana.  The original contract price was $122,967, but was adjusted to approximately $665,000 after the parties made several addenda to the Agreement to account for additional services.
The Agreement contained a provision (the “limitation of liability clause”) – which the parties did not renegotiate when they modified the Agreement through addenda – in which the parties agreed to waive against each other “any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, or resulting from, or in any way related to the Project,” and also agreed that DOWL’s total liability to Zirkelbach under the Agreement “shall be limited to $50,000.”


After Zirkelbach brought suit against DOWL asserting claims of negligence and breach of contract in the amount of $1,218,197.93 for problems allegedly caused directly by DOWL’s design plans, DOWL filed a motion for partial summary judgment arguing that DOWL could not be liable to Zirkelbach in any amount exceeding $50,000 due to the limitation of liability clause. The District Court granted DOWL’s motion and Zirkelbach appealed.


On appeal, Zirkelbach argued that the limitation of liability clause was unenforceable as against public policy under Section 28-2-702, MCA, which provides:

All contracts that have for their object, directly or indirectly, to exempt anyone from responsibility for the person’s own fraud, for willful injury to the person or property of another, or for violation of law, whether willful or negligent, are against the policy of the law.

The Supreme Court disagreed.  In holding that the limitation of liability clause was valid under § 28-2-702, the Supreme Court emphasized the importance of the freedom of parties to mutually agree to the terms governing their private conduct, provided those terms do not conflict with public laws, and emphasized that Zirkelbach and DOWL were two experienced, sophisticated business entities with equal bargaining power.  The Court relied on case law in both Montana and California, which has an identical statute, in concluding that “it would be difficult to imagine a situation where a contract between relatively equal business entitles would be able to meet the required characteristics of a transaction that implicated public interest.”


Additionally, the Court noted that the limitation of liability clause only capped damages and did not exempt DOWL from all liability under the Agreement, as the Court had previously held that § 28-2-702, is not violated when business entities contractually limit liability, but do not eliminate liability entirely, or when a limitation of liability applies only to a narrow type of damages, but not all damages.  DOWL remained exposed to liability on the negligence claim asserted by Zirkelbach and for $50,000 under the Agreement.


Finally, the Court rejected Zirkelbach’s argument that the $50,000 limitation of liability indirectly exculpated DOWL from liability because it was a nominal amount compared to DOWL’s total adjusted fee.  The Court pointed out that the limitation was a much larger percentage of DOWL’s fee before the parties modified the Agreement to add additional services by addenda, and stressed that it would not “allow Zirkelbach to avoid a term of the contract simply because it [had] become more burdensome due to its own failure to renegotiate.”  Each time the Agreement was modified, Zirkelbach had an opportunity to renegotiate the cap on liability, but did not.


Accordingly, the Supreme Court affirmed the grant of summary judgment in DOWL’s favor.


The author, Emily D. Anderson, is an associate in the New York City office of the Pepper Hamilton Construction Practice Group.

Federal Court Holds That, Under Louisiana Law, a Contractor Need Not Show a Total Work Stoppage to Recover Extended Home Office Overhead Under Eichleay

     

Team Contrs., L.L.C. v. Waypoint NOLA, L.L.C., No. 16-1131, 2017 U.S. Dist. LEXIS 162172 (E.D. La. Oct. 2, 2017).


Waypoint NOLA (“Waypoint”) was the owner of a hotel construction project in New Orleans (the “Project”).  Waypoint contracted with Team Contractors (“Team”) to serve as the Project general contractor and HC Architecture (“HCA”) to serve as the Project architect.  HCA, in turn, subcontracted with KLG to prepare the mechanical, electrical, and plumbing (“MEP”) plans.
HCA delivered a complete set of specifications, including KLG’s MEP plans, to Team, and Team began work.  It was later discovered that the MEP plans did not comply with code requirements.  Team was forced to remove and reconstruct the MEP work before proceeding with its work as scheduled.


Team filed suit for breach of contract against Waypoint and for negligence against Waypoint, HCA, and KLG.  Team alleged it experienced delay and incurred damages when it was forced to remove and reconstruct the MEP work.  Its damages included extended home office overhead related to the delay.  Team’s expert used the Eichleay formula to calculate these damages.


In Louisiana, courts apply a three-prong test to determine if a claimant is entitled to recover damages under Eichleay:  First, the contractor must demonstrate that there was an unexcused delay. Second, the contractor must show that it incurred additional overhead expenses.  Third, the contractor must establish that it was required to remain “on standby” during the delay.  To show that it was “on standby,” a contractor must show (1) the delay was of an indefinite duration, (2) the contractor was required to return to work at full speed and immediately during the delay, and (3) most, if not all, of the contract work was suspended.


The Defendants filed a motion for summary judgment, arguing that Team could not recover damages under Eichleay, because there was no suspension or stoppage of the work.  In response, Team presented evidence that there was, at minimum, a “functional” stoppage of “all or most of the work performed” pursuant to the contract.


The District Court determined that Louisiana court decisions had not decided whether a “functional” work stoppage would satisfy Eichleay, and if so, what degree of work stoppage would be sufficient.  As such, the District Court was required to predict how the Louisiana Supreme Court would resolve the issue.  The District Court noted that the Louisiana courts which had decided the application of Eichleay had adopted the doctrine from the federal courts without alteration, and accordingly, federal analyses of this issue should weigh heavily in a prediction of what the Supreme Court of Louisiana would hold.


Because the federal courts applying Eichleay had held that a claimant need not show a total stoppage of work to recover extended overhead damages, the District Court held that it is sufficient, for purposes of establishing standby, if a contractor can demonstrate that work has stopped or significantly slowed.  Because Team had presented evidence of such a functional stoppage, the District Court denied the Defendants’ motion for summary judgment.


The author, Jane Fox Lehman, is an associate in the Pittsburgh, Pennsylvania office of the Pepper Hamilton Construction Practice Group. 

Make Sure Delay Claims are Timely and Discrete: MI Court Finds $3,000/Day Liquidated Damages are Enforceable on a Project 644 Days Late

In December of 2007, specialty contractor Abhe & Svboda, Inc. (ASI) entered into a contract with the Michigan Department of Transportation (MDOT) to clean and paint certain sections of the Mackinac Bridge in Michigan’s Upper Peninsula.   The contract required the work be completed by October 30, 2009 with a liquidated damages (LDs) provision of $3,000 per day for each calendar day of delay.  MDOT’s “Standard Specifications” were incorporated into the contract which contained a mechanism to request a time extension due to delays.  The provision required that a contractor submit a claim 14 days "following the end of the delay" or "following the end of the calendar month in which the delay occurred,” depending on if the delay was weather-related or for another reason.  

ASI began work on the painting project but missed the contractually required finish date with MDOT ultimately determining completion of the project on August 5, 2011.  Accordingly, MDOT assessed LDs for 644 days worth of delay.  During the course of construction, ASI contends that it and MDOT engaged in an ongoing dialogue that led it to believe, “MDOT would fairly and equitably address these issues at the end of the project.” ASI filed suit against MDOT claiming that LDs should not have been assessed in whole or in part because of MDOT’s own obstructionist actions and environmental conditions that were beyond ASI’s control.

At trial, ASI argued that 515 days were improperly assessed due to 56 days of delay being the result of MDOT’s failure to approve work task prerequisites in a timely manner, with a further 459 days of work being excusable due to: 1) site conditions being “substantially worse” than could have been anticipated; 2) additional stripe coating work outside of the original contract scope; and 3) the impossibility of working in the winter (even though winter work was allowed in the contract).  ASI also argued in the alternative that LDs should not be applied to the winter shutdown’s 362 days where MDOT could not have experienced any losses, or that LDs should be void as an unenforceable penalty for failing to be a good faith estimate of potential losses incurred.  The trial court ruled for MDOT finding that the LDs were not an unenforceable penalty and that ASI had not submitted a proper request for time extension in compliance with the contract documents, thereby waiving any right to relief.   ASI appealed the lower court’s ruling.

The Michigan Court of Appeals began its review with ASI’s assertion that the LDs were an unenforceable penalty which would make any assessment impermissible. In its argument, ASI pointed to a progress schedule it attached to the contract that explicitly identifies a “winter shutdown” of work activities. ASI contended that any calculation of LDs which included dates when work was not schedule to be performed was not an honest attempt to ascertain actual damages incurred.   The Court rejected ASI’s argument by pointing to the fact that MDOT’s damages were not based upon if work was completed on a specific day during the course of the project, but rather the impact of the total delay on MDOT’s organization. The Court stated:

“The implied logic behind plaintiff’s argument would suggest that if it had simply taken a day off work in the middle of an ordinary week, defendants would have suffered some kind of harm irrespective of the timeliness of the entire project. In fact, the opposite is true: the liquidated damages clause reflects the parties’ agreement that defendants would suffer harm if the project was incomplete after a certain date, irrespective of how or why it was incomplete.”

The Court ruled that the LD’s provision was not a penalty and was based upon MDOT’s administrative overhead for the project and concluded LDs were “clearly based on the total delay.”

The Court next reviewed ASI’s claim that MDOT’s inability to approve its scaffold plan in a timely manner caused a domino effect of other delays that resulted in the project’s late delivery.  The Court examined the term “delay” within the contract and Standard Specification and whether it refers to a discrete impediment to the work, or to the entire duration of the lateness of the project.  The Court concluded that “delay” “refers to individual, specific, discrete impediments to ongoing work.”  The Court pointed to the fact that the Standard Specification contemplates multiple delays occurring during the course of project.  The Court further muses that the only reasonable reading of the Specification would be after every individual and discreet occurrence of delay, the contractor would have 14 days after work resumes to submit a delay claim or a time extension request.  The Court found that ASI did not submit a credible request for an extension of time in accordance with the Standard Specification’s time frame and as a result waived its right to any extension of time or relief to LDs.

The Court affirmed the lower court's rulings in full.

ABHE & SVBODA INC v. STATE OF MICHIGAN, DEPARTMENT OF TRANSPORTATION, and MACKINAC BRIDGE AUTHORITY

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA.  He may be contacted at 781.786.8916 or carter@agcmass.org.

Enjoy the post from I'Ashea Myles-Dihigo:

Money for Women and Minority Owned Contracting Businesses… An Introduction to Winning Government Contracts - Part 1: Certifying as a Small Business

 

            I can’t help but think of the song by The O’Jays, “For the Love of Money” when writing this piece, so let that soundtrack play in your mind’s ear as you read this.

 

I get together with a group of my friends about every 6-8 weeks for “Wine and Woodworking,” the brain-child of my talented friend, Natalie.  As a construction lawyer, I felt the need to be able to at least attempt to build something with my hands.  I get to interact with a cross-section of women. We laugh, drink wine, use table saws and various other tools and build amazing furniture pieces.  At one of these events, a friend of mine approached me about starting her own construction company. I was all about helping her out.  The information I found in walking her through the process is useful for any general contractor or sub-contractor that is looking to start or grow her or his business.    

 

            The current administration spoke very boisterously on the campaign trail about its plans to “revitalize” the country’s infrastructure.  There is also a large push in many areas of the country for housing and new construction as affordable housing shrinks across the nation.  This series will be used to introduce minority and women owned contractors, and those aspiring contractors to the United States Small Business Administration (SBA).  It will provide a broad overview of the programs it offers to small businesses and specifically the certifications and set-asides for women and minority owned businesses which are in place to position those companies to win some of those government contracts.

 

            In 2016, the U.S. Bureau of Labor Statistics reported that women in construction related fields represented about 9% of the workforce.  Latinos and/or Hispanic Americans 28.9%, African Americans made up 5.8% and Asian Americans 1.9%. These statistics are shocking, especially when new construction is booming in almost every quadrant of the country.  As the statistics show, construction is an often missed and lucrative field for minority and women owned businesses.  According to the SBA, the U.S. government awards about $500 billion in contracts annually, and at least 23% of those contracts are awarded to small businesses.  There are additional federal mandates that some of those dollars and contracts must flow to businesses that are owned by women and minorities.   

 

Size Matters: Certifying as a Small Business

            The SBA has identified various programs to encourage women and minorities to enter into federal government contracting.  For the record, the business registration process for minorities, women and service-disabled and/or veterans does not differ at all from the standard process that all businesses must follow.  You will need to register your business with the state, choose a name for your business, obtain a federal tax identification number, and secure any pertinent certifications and/or permits for your business to legally operate under the rules and laws of your state.

 

            You must also ensure that your business is a small business as defined by the SBA.  For most industries, small business is defined by either the average number of employees over the past 12 months or average annual receipts over the past three years. U.S. Small Business Administration (October 2, 2017), available at http://www.sba.gov.  This is the definition used for the construction industry. This information will be used in the System for Award Management (SAM) when you register as a government contractor in addition to your self-certification as a small business. Id. Additionally, the SBA defines a small business as one that:

 

 

• Is organized for profit;
• Has a place of business in the U.S.;
• Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor;
• Is independently owned and operated;
• Is not dominant in its field on a national basis.  Id.

 

All federal agencies must use the SBA defined size standards for contracts identified as small businesses. Once you have gone through the process to determine if you’re in fact a small business, you may register and certify your business as such.  The small business standards are the ceiling on how large your business can be and still remain classified as a small business under the SBA guidelines.

 

NAICS for General Contractors

            Once you’ve determined your business size, you have to determine the classification under which your service would fall.  The North American Industry Classification System (NAICS) is a system used to classify businesses to collect, analyze and publish statistical data related to the U.S. economy. United States Census Bureau (October 2, 2017), available at https://www.census.gov.  The NAICS industry codes define establishments based on the activities in which they are primarily engaged in and services and/or goods a business produces. 

 

            The 2017 NAICS code for new single-family construction is 236115. Id. This code is used for general contractor establishments that are responsible for the entire construction of new single-family housing that is separated from neighboring houses by a ground-to-roof wall and has no housing units constructed above or below the unit.  This code would cover firms working in single-family design for firms handling the construction management for single family homes.

The 2017 NAICS code for commercial and industrial construction is 236220. Id. This code is for contractors focused on the construction of commercial and institutional buildings and related structures, such as parking garages, airports, office buildings and schools.  This code would also cover design firms and commercial and institutional construction management firms.  There are also specialty codes within the construction subsection for contractors that specialize in trades like flooring (238330), electrical (238210), structural and foundation (238190) and roofing (238170).  Id. The NAICS defines the size of the business by monies earned in annually in millions of dollars. Id. For instance, if you are a framing contractor (23810), your size standards are calculated in either the number of employees or average annual receipts; therefore, if your business, inclusive of subsidiaries and affiliates, makes less than $15 million in receipts annually, then you are considered a small business. Many small start-up to mid-sized construction companies would qualify under this definition of small business.  So, some of the governmental contracts for construction work on roads, infrastructure, natural disaster relief and many other areas could go to businesses of this size.

 

            Next time, I will talk about the government set-asides that are specifically designed to be awarded to businesses that self-certify to be women and minority owned and how to qualify for those contracts.

 

For more information on the SBA visit www.sba.gov.

I'Ashea Myles-Dihigo            

In a matter of first impression, California Court declares subcontractor's CGL coverage includes subcontractor's work & delay to general contractor

https://www.steelconstruction.info/Modular_construction

In Glob. Modular, Inc. v. Kadena Pac., Inc., 222 Cal. Rptr. 3d 819 (Cal. Ct. App. 2017) the underlying dispute concerned construction of 53 roof-less modular units for a rehabilitation center.  The Plaintiff-subcontractor constructed the units and another contractor planned to install the roofs. The subcontractor sued for non-payment and the general contractor counterclaimed that the units were defective. After a partial settlement, the remaining issue was whether the subcontractor's commercial general liability (CGL) insurer must cover the general contractor's claim for water damage to the tarp-covered, but roof-less units caused by heavy rains or if exclusions barred recovery.

The California Appeals Court concluded that the CGL insurance policy was not limited to risk of damage to third party property. The Court explained that the policy language referred to ‘property damage‘ without any reference to who owned the property.  Also there was no impediment to coverage due to the exclusion for "faulty workmanship." There was no indication that the exclusion applied broadly to any damage to the subcontractor's work before project completion.

More specifically, and as a matter of first impression, the Court held that the CGL policy's exclusion for damage to property on which the subcontractor is “performing operations” applied only to damage caused during the subcontractor's physical construction activities. Therefore, this exclusion did not bar coverage for the repair or replacement costs incurred to the units from rain and flooding damage to the units after they were delivered to the site.  Although the units were unfinished, because the subcontractor was not working on the units once delivered to the site, the subcontractor was not performing "active physical construction activities." Accordingly the exclusion did not apply.

As for the exclusion of "[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it,” the Court held that "your work" referred only to the specific part of subcontractor's work, not broadly to the general area of the construction site where the subcontractor was working. The Court explained that this exclusion "applies only to the particular component of the insured's work that was incorrectly performed and not to the [subcontractor's] entire project. Here . . .the only arguably defective components or parts of [subcontractor's] work are the plastic tarps, as they failed to keep the water out." Importantly, "there was no allegation the items for which [general contractor] sought repair and replacement costs—the drywall, insulation, framing, and ducting [inside the units]—were defective.  [Rather,] those items were acceptable until it rained and they suffered water damage."  Accordingly the exclusion did not apply.

In addition, the Court determined that delay damages for the 131 days the general contractor spent remediating the water damage did constitute “property damage” within meaning of insuring clause of CGL policy.  The Court explained that the remediation was extra time that general contractor spent. And had the units not been damaged, the general contractor would not have needed to spend that time and instead could have been working to finish the project.  The delay therefore constituted a consequential loss and was deemed part of the damages insurer must pay “because of” the property damage.

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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.

Federal Court Rules Presence of “Orange Saw Horses” During a Site Visit was Sufficient Notice to Contractor that Worksite was Structurally Deficient

The Naval Facilities Engineering Command (NAVFAC) issued a solicitation (Solicitation) for bids for a project at the Naval Stations in Newport, Rhode Island (Newport Naval Station) on May 18, 2009 and later conducted site visits with prospective bidders in June of 2009.  The solicitation contained bid documents for the demolition of an existing bulkhead (Bulkhead, Wharf)  between two piers, removal of underwater obstructions, and then the construction of a new bulkhead and parking area to support ship berthing.  Missing from the bid documents were two reports (Report, Reports) NAVFAC was in possession of, one from 2005, the other from 2008 which both identified the Bulkhead had deteriorated to the point that it was structurally deficient and not able to support vehicles.  The Report identified that the Bulkhead concrete deck showed signs of deterioration along with the presence of a sinkhole at the adjacent shoreline.  The Report further identified that the marine H-piles and concrete encasement has significantly deteriorated and required replacement because “catastrophic collapse was possible”.  

RDA Construction Corp (RDA) of Canton, Massachusetts attended the site visits but did not submit any RFI’s to NAVFAC on the condition of the Bulkhead and Wharf, despite its testimony that is paid special attention to the condition of the H-piles at the site visit.  RDA was ultimately awarded the project due to an extremely low price as compared to other bidders and NAVFAC’s estimate.  After asking RDA to confirm its pricing, NAVFAC executed a contract with RDA on October 13, 2009.  On November 18, 2009, NAVFAC furnished the Reports to RDA in response to RDA’s submitted demolition plan in which it planned to utilize the Wharf as platform to set excavators and cranes on and then demolish working outside in from either direction.  Eventually after much back and forth on this and other schedule issues, RDA submitted a certified claim to NAVFAC in the amount of $1.9 million to reflect the additional costs to change its demolition means and methods from its bid.

After a contentious project and other certified claims filed by RDA against NAVFAC, RDA’s contract was ultimately terminated for default on February 21, 2013 and on April 15, 2015 NAVFAC determined that RDA was responsible for $2.2 million in liquidated damages.  On May 7, 2015, RDA filed a complaint that alleged, among other counts, NAVFAC breached its duty to disclose material information regarding the extreme deterioration of the Wharf that was known by NAVFAC but not disclosed to RDA.  RDA further alleged:

1)   The Report concluded the existing Wharf could not support the weight of equipment, thus affecting work activities and added cost.

2)    NAVFAC was aware of the Wharf’s deterioration which could only be observed from an underwater inspection.

3)  The solicitation did not reference the poor condition of the Wharf, H-piles, and  Bulkhead.

4)  NAVFAC only advised RDA on the existence of the Report until the contract was executed.

RDA argued that as a result of NAVFAC’s failure to disclose the above, it violated the implied duty to disclose the existence of the Reports and was in material breach of the contract at the time of its signing in October 2009.  Accordingly RDA argues the termination for default should be converted into a termination for convenience.

NAVFAC responded that it had no duty to disclose the Reports and the Solicitation did include notice to inquire about the current condition of the wharf through the inclusion of the comment that the Wharf, “was likely not in good condition.” Furthermore, structural deficiencies were identified in the bid documents and should have been readily identifiable during the pre-bid site visits.  Finally, NAVFAC contended that RDA’s means and methods were inconsistent with the bid document’s direction that the Wharf was to be completely demolished before work could commence on the Bulkhead.

The Court began its analysis by presenting the standard for a violation of the implied duty to disclose “superior knowledge” by the government. An implied duty to disclose is violated when:

1)    A contractor undertakes to perform [the contract] without vital knowledge of a fact that affects performance costs or duration;

2)    The government was aware the contractor had no knowledge of and had no reason to obtain such information;

3)    Any contract specification supplied misled the contractor or did not put it on notice to inquire; and

4)    The government failed to provide the relevant information.

Hercules Inc. v. United States, 24 F.3d 188, 196 (Fed. Cir. 1994)

The Court then found that NAVFAC had indeed violated both the first and fourth elements of the test by not furnishing the Report to RDA until a month after the contract had been executed. The record showed and NAVFAC personnel confirmed that NAVFAC did not disclose to RDA the Wharf was subject to severe load restrictions until November 2009.  Therefore, the first element was met when the Court concluded that RDA undertook to perform the project in October 2009 without “vital knowledge” of the load restrictions which effected performance costs and duration. The Court found the fourth element was also satisfied because NAVFAC admitted it did not provide that knowledge until after the contract was executed.

The Court next examined the second element of the violation test and presented RDA’s argument that a bidder could only learn of structural deficiencies of the Wharf through the bid documents or through a site visit.  RDA contended the bid documents were silent on the extent of the Wharf’s deterioration and the only means to truly view it during the site visit would be through an underwater investigation.  The Court rejected RDA’s arguments by pointing to the fact that during the site investigation, there were “indicia of the Wharf’s limited loading capacity” through “orange saw horses and concrete barriers lining the perimeter of the wharf indicating that vehicles could not drive there.”  The Court further pointed to the presence of large sinkholes adjacent to the Bulkheads “suggesting the land around the Wharf was not stable.”  Therefore, despite the fact that NAVFAC was aware RDA had no knowledge of the Report, the physical condition of the Wharf during the inspection should have given RDA “reason to obtain [additional] information” about the structural capacity of the Wharf through an independent engineer’s report or underwater investigation.  Accordingly, the Court found that the second prong was not satisfied and RDA’s claim failed the test.

Despite the Court’s finding that the second element of the “superior knowledge test” was not met, thus rejecting the violation of the duty to disclose, the Court continued its analysis reviewing the third element. RDA argued that the bid documents affirmatively misrepresented that the Wharf could be used to support the weight of cranes and excavators required for demolition because the bidders were instructed to “locate demolition equipment” throughout the structure so as to not overload the framing.  The Court stated that even though RDA defined “demolition equipment” to mean cranes and excavators, the bid documents do not define that term.  Instead, the bid documents did contain the American Society of Safety Engineer's 2006 Safety and Health Program Requirements for Demolition Operations which stated demolition equipment that “each structure can withstand should be determined by the contractor.”  The Court stated this definition contained within the bid documents required due diligence by RDA to perform an engineering analysis before it placed equipment on the wharf and RDA was on notice to inquire about the structural integrity of the Wharf.

Accordingly,  the Court ruled that NAVFAC did not have a duty to disclose the Reports prior to entering into a contract with RDA and dismissed the count. 

RDA Construction Corp. v. The United States  

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA.  He may be contacted at 781.786.8916 or carter@agcmass.org.

Thanks to Benjamin J. Morris from the San Diego office of Foley & Lardner LLP for his contribution to the Dispute Resolver: 

California Court of Appeal Affirms Finding that Additional Insured Endorsements in Subcontractors’ Policies did not Clearly Exclude Completed Operations Coverage for an Additional Insured (Developer/Contractor) and the Insurer Acted in Bad Faith in Denying Coverage and Defense

Pulte Home Corp. v. American Safety Indemnity Co., No. D070478, 2017 WL 3725045 (Cal. Ct. App. Aug. 30, 2017)

The California Court of Appeal recently issued a broad coverage decision in favor of a developer/contractor and affirmed punitive damages against the insurance carrier for its bad faith denial of a defense. The case arose from Pulte’s development of two residential projects in Southern California beginning in 2003. The homes were sold in 2005-2006. Pulte was named as an additional insured on certain subcontractors polices issued by American Safety in 2003-2006.

After residents of the developments filed construction defect suits against Pulte in 2011 and 2013, Pulte tendered the claims to American Safety, which denied Pulte’s request for a defense based on a position (among others) that the AI endorsements excluded the subcontractors’ completed operations. Pulte then filed suit against American Safety. The trial court found that the language of the AI endorsements on the relevant policies was ambiguous on the potential for coverage of the alleged claims; therefore, American Safety was required to provide a defense to Pulte. Pulte was awarded $455,238.45 for defense fees, costs, and prejudgment interest for the defense of the two underlying construction defect suits. The trial court also awarded $500,000 in punitive damages against American Safety finding that its decision to deny coverage was unreasonable and in bad faith. On appeal, the Pulte court affirmed the trial court’s award of contract damages and Pulte’s entitlement to punitive damages.[1]

The relevant subcontractors’ insurance policies all identified the aggregate limit for “products-completed operations” as $1 million; however, the policies contained multiple manuscript AI endorsements—that American Safety and Pulte agreed were substantially similar. The key AI endorsement cited in Pulte granted AI coverage, “but only with respect to liability arising out of ‘your work’ which is ongoing and which is performed by the Named Insured for the Additional Insured on or after the effective date of this Endorsement.”[2]

Relying on Pardee Construction Co. v. Insurance Co. of the West, 77 Cal. App. 4th 1340 (2000), the Pulte court stated that “the initial issue for policy interpretation is whether the additional insured endorsements explicitly exclude coverage for the subcontractors’ completed operations.” After reviewing the relevant policy language and endorsements and the parties’ arguments, the Pulte court held that the AI endorsement did not clearly exclude “completed operations” coverage for the AI because liability for harm caused by the subcontractors “completed operations” could arise from the work performed after the policy was effective.  Moreover, the specific language of the AI endorsement did not clearly limit the coverage to liabilities which arose while the subcontractors were performing construction work. American Safety had “failed to expressly limit covered completed operations as to time or particular project in their policy and endorsement language.” 

Writing for the panel, Justice Huffman stated that “[b]oth sets of insureds could reasonably have expected that if the subcontractors had bought completed operations coverage for the work, it also applied to vicarious liability of the developer, if property damage problems appeared.” He further noted that“[t]hese AIEs do not clearly restrict coverage to only ongoing operations, simply by linking the ongoing operations phrase to the ‘liability arising out of the work’ clause.” Based on the facts surrounding the preparation of the manuscript AI endorsements and applicable legal precedent, doubts about whether a duty to defend existed should have been resolved in favor of Pulte.

After addressing whether American Safety had a duty to defend, the Pulte court went on to review the trial court’s finding that the insurer had acted unreasonably and in bad faith when it denied Pulte coverage for the alleged defects. The court affirmed the trial court’s decision finding there was substantial evidence that American Safety: (1) knew the policies were purchased to satisfy contractual requirements to provide completed operations coverage; (2) had a “pattern and practice of using every conceivable argument to deny coverage, whether the arguments are weak or strong, valid of invalid”; (3) routinely issued form letters denying AI coverage without reasonable case-by-case investigation; (4) denied coverage despite awareness of prior federal court decisions against its coverage interpretation; and (5) had continued these practices over a course of years. Justice Huffman concluded that “[s]uch conduct showed the company was primarily protecting its own interests in refusing to defend its additional insureds in construction defect cases.” Based on the above conduct, the Pulte court approved of Pulte’s entitlement to a punitive damages award, which would be recalculated on remand using an approximate one-to-one ratio after the trial court recalculated Pulte’s Brandt fees and costs.

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The author, Benjamin J. Morris, is a senior counsel in the San Diego office of Foley & Lardner LLP. His practice focuses on representing owners, developers, engineers, lenders, contractors, subcontractors, and consultants throughout all phases of construction projects and construction litigation.

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[1] The amount of punitive damages was remanded for adjustment following the trial court’s recalculation of Brandt fees, which were remanded only as to amount, not entitlement.

[2] Two other noted versions of the AI endorsements stated that the AI was insured: (1) “but only with respect to liability arising out of ‘your work’ and only as respects ongoing operations performed by the Named Insured for the Additional Insured on or after” the endorsement’s effective date; and (2) “but only with respect to liability arising out of ‘your work’ which is performed at the project designated above. This Endorsement applies only to ongoing operations performed by the Named Insured on or after” the endorsement’s effective date.

Fall Meeting - D1 Lunch Program - Innovative Approaches to ADR

As the projects grow more complex, the stakes for project participants similarly grow complex. To solve the problems that inevitably arise, project participants have crafted various methods of resolving disputes in an effort to “right size” dispute resolution.

Loring A. Cook III of Murtha Cullina, J. Thomas Nocar of Porter Wright Morris & Arthur, and Ronald L. Williams of Fox Rothschild, with co-sponsorship by the ABA Construction Litigation Committee, offered some insight into several of these innovative approaches including med-arb, arb-med and hot-tubbing experts at the Division 1 lunch program during the ABA Forum on Construction Law's Fall Meeting in Boston, MA.  The panel then turned the conversation over to the attendees and invited their thoughts on several topics such as: how to best prepare your client's expert for hot-tubbing and when and why your clients should mediate.

We ran out of time to weigh in on "how do you prepare differently when your client's case will be heard by a non-lawyer arbitrator or mediator?"  Feel free to offer your comments below!

1st Circuit Pending Appeal - Construction Contract Defenses & Miller Act

https://www.va.gov/directory/facility

In Endicott Constructors Corp. v. E. Amanti & Sons, Inc., No. 1:14-CV-12807-LTS, 2017 WL 3028877 (D. Mass. July 14, 2017), the plaintiff-subcontractor Endicott Constructors Corp. (“Plaintiff”) filed a lawsuit claiming breach of contract and quantum meruit against the defendant-general contractor E. Amanti & Sons, Inc. (“Defendant Contractor”) on a construction renovation project at a Veterans Affairs building in Bedford, Massachusetts. Plaintiff also brought a claim against Safeco Insurance of America (“Defendant Surety”) pursuant to the Miller Act, 40 U.S.C. § 3133.  The two Defendants moved for summary judgment against Plaintiff's claims. The District of Massachusetts granted the motions. Plaintiff is now appealing the decision to the First Circuit.

Though factually detailed, the decision serves as a review of numerous key concepts in construction law including the requirement of strict performance to recover on a contract breach, requirement of substantial performance to recover under quantum meruit, cardinal change, necessity of expert testimony, contractual notice provisions, and tolling applicable to the Miller Act statute of limitations.

• The Court held that Plaintiff could not, as a matter of law, show "complete and strict performance of all its terms" because Plaintiff walked off the project with 1/3 of the subcontract to complete, and therefore could not recover on the contract itself.  

• Moreover, in addition to walking off the job, Plaintiff acknowledged, inter alia, that it performed defective work and did not pay federally-required wages.  Accordingly, the Court concluded that the Plaintiff, as a matter of law, "did not substantially perform its contract obligations" which extinguished its claim for "quantum meruit" as well.

• To avoid this harsh result on its contract-based claims, Plaintiff argued that a "cardinal change" had occurred excusing its performance.  The Court hesitated to confirm that Massachusetts has adopted this doctrine, but in any event, held that the elements of a cardinal change were not present. The Court observed that there must be "alteration in the work [effected by the government] so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for."  Here, because Plaintiff only pointed to the government adding supervisory personnel to its payroll and a large number of change orders, the Court was not persuaded that Plaintiff's scope was "drastically altered." Indeed that court emphasized that, In re Boston Shipyard Corp., 886 F.2d 451, 456 (1st Cir. 1989) the court had held that even 86 change orders was not sufficient to show a cardinal change to construction contract.

• With respect to Plaintiff's extended time claim, the Court, in dicta, questioned whether an expert is required to prove such a delay claim, but also noted that Plaintiff's failure to do so may be at its peril as it had not presented a "coherent analysis" to allow a factfinder to could find in its favor.

• Adding to Plaintiff's challenges, it failed to present evidence that it had given notice of its claims within 7 days as required by the contract. The Court, without delving into whether the defendant was prejudiced by the delay, succinctly held that failure to comply with the contractual provision "will generally preclude all relief."

• With respect to the Miller Act action that Plaintiff filed on the bond provided by Defendant Surety, the Court was not persuaded that presence of Plaintiff's trailers on the construction site would extend limitations period.  The Miller Act requires that any action on the bond must be brought within one year of the "last of the labor was performed or material was supplied" by the contractor or supplier bringing the action.

If the First Circuit has an opportunity to weigh in, the law in these areas, as recounted above, may be further honed by its decision. If so, we will update this blog.

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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.