August 1, 2012 Volume 16 Issue 2  

 

 

Offering court-qualified scientists, engineers andresearchers with expertise in product testing, scientificevaluation and forensic analysis for over 40 years.

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In Critical Path

From the Chair

Save the Date!!!

The Damages Dilemma

Hunt Construction Group, Inc. v. Garrett

Architects and Engineers Professional Liability:Redesigning the Standard of Care

Practice Pointer: Drafting Subcontracts to Ensure PromptPayment Protection

A Primer on Construction Project “Wrap-Up” InsurancePolicies: Bundling of Coverages

No License, No Problem. Maryland’s Highest CourtProvides New Means of Redress for UnlicensedSubcontractors

Sliding Glass Doors: Defending against Claims ofExcessive Pull Forces

Construction Defect Claims: An Update [Part I]

Increase Your DRI Membership Value

Committee ChairDavid V. Wilson, IIHays McConn(713) 654-1111dwilson@haysmcconn.com

Committee Vice ChairKathy R. Davis

Leadership Notes

From the Chairby David V. Wilson

I am extremely pleased to draft this "From the Chair" columnfor the third newsletter of my tenure as chairof the committee.  I hope you join me inforwarding this issue to friends in theconstruction and insurance industry (whichthe electronic format makes easy).  You willaccomplish two things.  First, you will remindyour personal network that you are connected

to this dynamic group that studies cutting edge issues in thedefense of construction litigation. In addition, you will begiving added exposure to the authors of the various articlesand their hard work.  This newsletter, and the additionalopportunity to be published in For The Defense, is asubstantial committee benefit. 

Another powerful benefit of committee membership is ourConstruction Law Seminar, which will take place at theArizona Biltmore Hotel in Phoenix, from September 19-21. Please mark your calendars now.   In addition to a great line-up of in-house speakers, we also have NFL Referee andPhoenix attorney Ed Hochuli, who will speak on ethics inmediation.   As noted before, please keep DRI's newInsurance Claims Executive program in mind when invitingthose from the insurance industry to the seminar.  Theprogram allows those of us who work with the insuranceindustry to invite our colleagues at insurance companies toattend DRI seminars without paying a registration fee. Another key reason to attend the seminar, besides the greatnetworking and C.L.E., is the opportunity to attend thecommittee's largest business meeting, which will take placeat the Biltmore at 5:00 p.m. on September 20.  I hope to seeeveryone in Phoenix at both the seminar and the businessmeeting.

David Wilson II

Hays, McConn Rice & Pickering, P.C.

David Wilson is a shareholder in the Houston firm of Hays,McConn Rice & Pickering, P.C. who concentrates hispractice on civil litigation and construction law.  His e-mailaddress is dwilson@haysmcconn.com.

 

Featured Articles

Save the Date!!!

DRI's Construction Law Seminar is set for September 20-21,2012, at the Arizona Biltmore in Phoenix, Arizona.  Theprogram is designed to enhance the practice of allconstruction industry professionals—from experienceddefense attorneys to risk managers, construction executivesand those who are new to construction litigation.

This year's seminar will focus on the experienced litigatorseeking to develop advanced skills for getting a case toresolution. Topics include effective voir dire, jury persuasion,mediation and negotiation.  In-depth presentations also willbe made on evolving strategies for risk transfer and anupdate on the latest case law affecting insurance coveragefor construction defects. DRI is proud to present a number ofnationally known speakers on all of these timely topics.

Carr Allison(205) 949-2953kdavis@carrallison.com

 Newsletter EditorSteele Holman Zieman, Speegle,Jackson & Hoffman LLC (251) 694-1700 

sholman@ziemanspeegle.com Click to view entire Leadership

Seminars 

Construction LawSeminar

September 20-21, 2012Phoenix, Arizona

  

 

DRI Publications

The Collateral SourceRule: A Compendiumof State Law

 

 Print to PDF

 

The following are LinkedIn and Facebook links concerningthe event along with some additional details.

http://linkd.in/LwquR0 andhttps://www.facebook.com/events/184815754974367

A limited number of discounted hotel rooms havebeen made available at the Arizona Biltmore, 2400E. Missouri Avenue, Phoenix, Arizona 85016.  Forreservations, visit www.dri.org and go to theConstruction Law Seminar page or contact thehotel directly at 602.955.6600.  Please mentionDRI's Construction Law Seminar to takeadvantage of the group rate of $224 Single/Double. The hotel block is limited and rooms and rates areavailable on a first-come, first-serve basis.  You mustmake reservations by August 21, 2012, to be eligiblefor the group rate.  Request for reservations madeafter August 21 are subject to room and rateavailability.This seminar has been approved for MCLE credit bythe State Bar of California in the amount of 12 hours,including 1 hour of ethics credit.  Accreditation hasbeen requested from every state with mandatorycontinuing legal education (CLE) requirements.If you wish to have your name appear on theregistration list distributed at the conference andreceive the course materials in advance, DRI mustreceive your registration by August 31, 2012 (pleaseallow 10 days for processing).  Registrationsreceived after August 31, 2012, will be processedon-site.The registration fee is fully refundable forcancellations received on or before August 31,2012.

So join us and stay on the cutting edge of construction lawissues, network, make new friends, and reconnect with oldones.

 

The Damages Dilemmaby Stacy Moon

Many attorneys who represent contractors involved in theconstruction industry run into the samedilemma.  A contractor may have beendelayed in completion of a project, whether byits own fault or as a result of anothercontractor, the owner, or the architect.  As aresult, the contractor now must decidewhether to bring suit against the owner or

subcontractor for failure to pay.  Alternatively, the contractormay be facing a lawsuit brought by the owner orsubcontractor for delay; poor workmanship; or failure toperform.

Thus begins the damages dilemma.  What type of damagescan be recovered?  Knowing the potential damages at thebeginning of litigation allows for a more effective evaluationof the costs and benefits of moving forward with litigation orattempting some pre-litigation mediation (assuming suchmediation is not already mandated by the contract). 

Determining what damages are available in any contractdispute, but particularly in the construction industry,generally requires a three-step analysis:  (1) reviewing thecontract; (2) researching state statutes; and (3) researchingstate case law.

Step One:  The Contract

Don't be floored.  The contract, generally, is the first place tostart when determining what damages can be collected forbreach of any contract, much less a construction contract. And, it is frequently the last place people look – particularlysince "the contract" may not be just one document.  As justone example, AIA Document A103-2007, for a cost-plus

contract, not a bid project, provides the following damagesprovision:

If no specific provision is made in Article 5 foradjustment of the Contractor's Fee in the case ofchanges in the Work, or if the extent of changes issuch, in the aggregate, that application of theadjustment provision of Article 5 will causesubstantial inequity to the Owner or Contractor, theContractor's Fee shall be equitably adjusted on thesame basis that was used to establish the Fee forthe original Work.

AIA Doc. A103-2007 § 6.4 (emphasis added).  However,A103-2007 also provides that the cost of the work, for whichthe contractor should be paid, includes the followingdamages:

Costs of repairing or correcting damaged ornonconforming Work executed by the Contractor,Subcontractors or suppliers, provided that suchdamaged or nonconforming Work was not causedby negligence or failure to fulfill a specificresponsibility of the Contractor, and only to theextent that the cost of repair or correction is notrecovered by the Contractor from insurance,sureties, Subcontractors, suppliers, or others.

Id. at §7.7.3.  The form for A103-2007 is approximately 13pages.  Many contractors (and even some owners) maythink those 13 pages are "the contract."  However, A103-2007 incorporates General Conditions, form AIA Document

A201TM-2007, a 38-page document, into the contract.  Ifyour client did not read the General Conditions beforesigning the contract, it will not be aware that it has waived allconsequential damages.  Specifically:

The Contractor and Owner waive Claims againsteach other for consequential damages arising out ofor relating to this Contract.  This mutual waiverincludes

1.   damages incurred by the Owner for rentalexpenses, for losses of use, income, profit,financing, business and reputation, and forloss of management or employee productivityor of the services of such persons; and

2.   damages incurred by the Contractor forprincipal office expenses including thecompensation of personnel stationed there,for losses of financing, business andreputation, and for loss of profit exceptanticipated profit arising directly from theWork.

This mutual waiver is applicable, without limitation, toall consequential damages due to either party'stermination . . . Nothing contained in this Section . . .shall be deemed to preclude an award of liquidateddamages, when applicable, in accordance with therequirements of the Contract Documents.

AIA Doc. A201-2007 § 15.1.6.

If a contractor read only the 13-page document, and not the38-page General Conditions, it did not know that it hadwaived all consequential damages.  (On a side note, it hasalso probably failed to comply with the Claims processincluded in the General Conditions – but that is an article foranother newsletter.)  Knowing that consequential damageshave, or have not, been waived will materially affect theestimate of damages that might be recoverable in a breachof contract or negligence action, particularly as neither the13-page nor the 38-page document allows for attorneys'fees.

Other documents that comprise the construction contractfrequently include the plans and specifications.  Plans, inparticular, may hide additional limitations on recoverabledamages or provisions regarding liquidated damages in the

very small print on those plans.  Therefore, even if what thecontractor believes is a contract does not contain liquidateddamages, or if a liquidated damages provision is strickenfrom one part of the contract, liquidated damages may stillbe applicable if they are included in the General Conditionsor even the plans.

Step Two: State Statutes

State law is also a source for potential damages (andpotential pitfalls).

Many states have prompt payment acts.  Under thosestatutes, the state mandates the length of time by which acontractor or subcontractor must be paid; a specific interestrate for a late payment (if one is not specified by contract);and, frequently, attorneys' fees, even if the contract does nototherwise provide for attorneys' fees.  See, e.g., Ala. Code §8-29-3 (1975); Or. Rev. Stat. Ann. § 279C.580; (West 2012);815 Ill. Comp. Stat. 603/15 (2007); Tex. (Property) CodeAnn. § 28.005 (West 2000) (permitting a court to awardcosts and attorneys' fees); Diamond Concrete and Slabs,L.L.C. v. Andalusia-Opp Airport Authority, No. 2100114,2011 WL 3528469 (Ala. Civ. App. Aug. 12, 2011).

States also have specific mechanic's or materialman's lienstatutes.  Frequently, those statutes must be strictly followedto enforce the lien.  See, e.g., Davis v. Gobble-Fite LumberCo., Inc., 592 So. 2d  202 (Ala. 1991); Action Labor ofFlorida, Inc. v. Liberty Mut. Ins. Co., Inc., 897 So. 2d 1240(Fla. Dist. Ct. App. 2004) (interpreting previous version ofstatute).  In other states, the provisions are more liberallyconstrued, to serve their primary purpose of protectinglaborers and materialmen.  See, e.g., Fagerlie v. MarkhamContracting Co., 258 P. 3d 185 (Ariz. Ct. App. 2011). Nevertheless, from a defense standpoint, they do allowsome form of argument, particularly if the lien was filed in anuntimely fashion, or if suit was not filed within the six monthspermitted by the statute.  See, e.g., Ala. Code 35-11-215(1975).  From the plaintiff's standpoint, though, they maypermit additional categories of recovery.

Finally, a contractor seeking payment of its contract priceshould determine whether it can argue that the amount owedto it is a "sum certain."  If so, some states might apply thestatutory pre-judgment interest rate if no interest rate wasincluded in the contract.  While it is not the optimal way toobtain some recovery, it will at least help offset some of thelitigation costs.

Step Three:  Case Law

Reviewing case law specific to the jurisdiction in which aclaim is brought or defended early in the litigation will helpyou tailor your case.  The treatment of liquidated damages isa good example.  Many contracts include liquidateddamages, and in those contracts, the parties contractuallyagree that the amount is reasonable, and that liquidateddamages are appropriate because calculating actualdamages would be difficult.  Each jurisdiction's case law willstate whether liquidated damages clauses are favored ordisfavored in that particular jurisdiction (compare Utica Mut.Ins. Co. v. DiDonato, 453 A.2d 559 (N.J. Super. Ct. App.Div. 1982) to Wasserman's, Inc. v. Township of Middletown,645 A.2d 100 (N.J. 1994)).  The case law will state whichparty bears the burden of proving the applicability ofliquidated damages, or the burden of proving they constitutepenalties.  See, e.g., New Pueblo Contractors v. Arizona,696 P. 2d 185 (Ariz. 1985); X.L.O. Concrete Corp. v. John T.Brady and Co., 482 N.Y.S.2d 476 (N.Y. App. Div. 1984);Rohlin Constr. Co., Inc. v. City of Hinton, 476 N.W.2d 78(Iowa 1991).

By knowing in advance whether an argument canlegitimately be made that liquidated damages should notapply, even if included in the contract, the contractor'sexposure to such damages may be limited.  Alternatively, thecontractor can be advised that the liquidated damages are,or are not, quite the "slam dunk" that the owner thinks theyare. 

CONCLUSION

It is easy to forget that damages for breach of a constructioncontracts, like practically any other contract, may be basedon a variety of sources.  Whether bringing suit on behalf of acontractor, or defending a suit brought against a contractor,identifying all of the portions of a contract, as well as relevantstatutes and case law, will enable any attorney to betterevaluate a case at the outset, to determine either a client'spossible exposure or recovery, and to determine the bestcourse of action moving forward.

Stacy L. Moon is a shareholder in Fees & Burgess, P.C., inHuntsville Alabama.  She practices in the areas of insurancedefense, construction contracts and law; commerciallitigation; and civil litigation.  Her e-mail address isSMoon@feesburgess.com.

 

Hunt Construction Group, Inc. v. Garrettby Mark Gerth and Mike Wroblewski

In its recent opinion in the case of Hunt Construction Group,Inc. v. Garrett, #49S02-1106-CT-365 (Ind. 2012), the IndianaSupreme Court provided someneeded clarity concerning liabilityof construction managers forinjuries suffered by employees ofcontractors on a construction

site.  A construction manager exercises overall managementof a construction project.  The construction managerundertakes a variety of responsibilities pursuant to a contractwith the project owner, some of which relater to jobsitesafety.  Unlike a general contractor, a construction managernormally does not enter into contracts with other contractorson the project, each of which generally contracts directly withthe owner.                                 

The case arose out of injuries suffered by the Plaintiff,Shannon Garrett, during the construction of Lucas OilStadium.  At the time she was injured, Garrett was employedby Baker Concrete Construction, Inc. which had entered intoa contract with the Indiana Stadium and Convention BuildingAuthority ("Stadium Authority") to perform concrete work onthe stadium.  She was injured when one of her co-workersdropped a piece of wood while removing forming materialfrom the concrete.  The wood struck Garrett and injured herhead and left hand. 

The Plaintiff subsequently filed suit against the Defendant,Hunt Construction Group, Inc., which had entered into acontract with the Stadium Authority as the constructionmanager for the building of the Lucas Oil Stadium.  Hunt hadno contractual relationship with Baker Concrete or any of theother contractors involved in the construction of the stadium.

In its contract with the Stadium Authority, Hunt undertookcertain duties with reference to safety on the project,including the establishment of a safety program andmonitoring the safety practices of contractors on the project. However, the contract documents also clearly stated thatHunt was not assuming the safety obligations andresponsibilities of other contractors on the project that thosecontractors owed to their own employees, pursuant to theirown contracts with the Stadium Authority and pursuant totheir statutory duties under IOSHA.  Moreover, the contractbetween Hunt and the Stadium Authority contained thefollowing provisions:

2.4.2.  Contract Administration  . . . servicesprovided by the Construction Manager during theConstruction Phase are rendered solely for thebenefit of the Owner and not for the benefit of theContractors, the Architect, or other partiesperforming Work or services with respect to theProject.

* * *

12.7  No Third Party Benefit. . . .  the parties do

not bestow, nor do they intend to bestow, anyrights, privileges or interest in favor of anypersons or entities who are not signatories to theAgreement and nothing contained in thisAgreement shall be construed to create acontractual relationship with (express, implied,third party beneficiary or otherwise) or a cause ofaction in favor of any persons or entities who arenot signatories to this Agreement.

Notwithstanding the quoted contract provisions, the plaintifffiled a motion for partial summary judgment in the trial courtrequesting the Court to declare that Hunt was vicariouslyliable, as a matter of law, for any safety violations on the partof Baker Concrete or its employees that proximately causedthe plaintiff's injuries.  Hunt responded to the motion forpartial summaryjudgment and filed its own motion forsummary judgment, arguing that: one, Hunt could not beheld vicariously liable for any negligence of Baker Concrete;and two, Hunt was not liable to the plaintiff because it hadnot assumed a duty to the plaintiff by way of contract or byconduct.

The trial court granted the plaintiff's motion for partialsummary judgment and denied the Hunt's cross-motion forsummary judgment.  Hunt then appealed.  In December2010, the Court of Appeals issued its  opinion in which itreversed the partial summary judgment for the plaintiff andheld that Hunt could not be held vicariously liable for anynegligence of the plaintiff's employer, Baker Concrete. However, the Court of Appeals affirmed the trial court'sdenial of Hunt's Motion for Summary Judgment, holding thatHunt had assumed a duty of care to the plaintiff by contract. The plaintiff filed a petition for rehearing that was denied. Hunt filed a petition to transfer with the Indiana SupremeCourt. 

The Supreme Court granted transfer and heard oralargument, after which it issued its opinion. The Courtsummarily affirmed the unanimous decision of the Court ofAppeals reversing the trial court's judgment on the issue ofvicarious liability.  In its opinion on that issue, the Court ofAppeals had held that the plaintiff had failed to establish anycontractual or other relationship between Hunt and BakerConcrete that would justify imposing liability upon Hunt,without fault, for the alleged negligence of Baker Concrete. The Supreme Court obviously agreed with that conclusion. 

The Court then reversed the trial court's denial of Hunt'smotion for summary judgment on the issue of duty.  First, theCourt held that Hunt's contracts did not impose upon Hunt alegal duty of care for job-site safety to contractor and sub-contractor employees.   (Opinion at pg. 10) The Courtrejected the plaintiff's argument that Hunt had assumed bycontract a duty to insure the safety of everyone on theproject in light of the contract language limiting Hunt's dutiesand liability.  The Court opined that "Hunt did not undertakein its contracts a duty to act as the insurer of safety foreveryone on the project.  Rather, Hunt's responsibilities wereowed only to the Stadium Authority not to workers likeGarrett." (Opinion at pg. 8). 

The Court observed that its resolution would promote safetyat construction sites.  It noted that, under Indiana law, anowner of property has no duty to provide the employees ofindependent contractors with a safe work place. Thus, theStadium Authority's contract with Hunt delegating somespecific responsibilities related to job safe safety to Hunt wasan effort to promote safety on the construction site beyondthat required by law.

The Court observed that had it adopted the rule urged byGarrett, the only way for Hunt to avoid liability would be todisavow any responsibility for safety in its contractdocuments.  Instead, Hunt and the Stadium Authorityadopted a method to promote safety without exposing Huntto the role of an insurer of safety for workers of othercontractors on the job site. (Opinion at pgs. 9-10). 

Next, the Court turned to the question of whether Huntassumed by its actions or conduct a legal duty of care forjob-site employee safety.  The Court observed that, althoughGarrett argued that Hunt had engaged in a number of

activities relating to safety, none of the actions alleged werebeyond those actions contemplated by the contract betweenthe Stadium Authority and Hunt.  The Court concluded thatbecause the contract itself did not impose upon Hunt anylegal duty of care for job-site employee safety, and becauseHunt did not undertake any actions beyond those requiredby that contract, it did not assume by its conduct or actionsany legal duty of care for job-site employee safety. 

Thus, under the Supreme Court's opinion in Hunt, aconstruction manager cannot be held vicariously liable forthe alleged negligence of a contractor on the site with whichthe construction manager has no contractual relationship.  Inaddition, a construction manager may limit its duties withreference to safety on the job site, both as to the scope ofthose duties and the parties to whom those duties areowed.  Finally, in instances in which the constructionmanager has limited its duties by contract, any actionsundertaken by the construction manager pursuant to thecontract do not give rise to an assumption of duty by conductor action. 

While the Court's decision rests on sound tort and contractprinciples, the opinion does not establish a general rule ofnon-liability of construction managers for work site injuries inall instances.  A construction manager can still assume bycontract a duty for job site safety.  In addition, to the extentthe construction manager undertakes duties beyond thosestated in its contract with the owner, it may be found toassume a duty by conduct.  It is also important to note therules adopted by the Court with reference to constructionmanagers do not necessarily apply to general contractorswith reference to a general contractor's duties andobligations as to jobsite safety for employees of its sub-contractors. 

Nevertheless, the decision does stand for the propositionthat by the careful use of appropriate contract language, anowner and construction manager can enter into arelationship that encourages the construction manager tomonitor safety on the job site without becoming an insurer ofthe safety of the employees of all contractors on the site.  Inthat instance, the primary duty for safety of employees onthe site remains where it has been placed by IOSHA, uponeach employee's own employer.

Mark Gerth and Mike Wroblewski are partners in theIndiana-based law firm of Kightlinger & Gray, LLP. Mr.Gerth's practice focuses on appellate, insurance coverageand bad faith, and workers' compensation matters. Mr.Wroblewski focuses his practice on personal injury defenselitigation and handling civil rights and governmental agencycases.  Their e-mail addresses are mgerth@k-glaw.comand mwroblewski@k-glaw.com.

 

Architects and Engineers ProfessionalLiability: Redesigning the Standard ofCareby Paul Cottrell and Patrick McGrory

Introduction

The construction industry has always struggled to strike aproper balance between the need to hold designprofessionals accountable for their work and the need tomove projects forward in an efficient manner, unburdened bytime consuming and expensive conflicts.  But as the industrystruggles to reduce impacts to projects caused by smalldefects in plans and specifications, factors such asglobalization, rapid changes in technology and increasinggovernment regulation continue to place heavy burdens

upon design professionals seeking to deliver error-freeplans. 

Modern law recognizes that design professionals do notimply or warrant perfect results.  A design professionalperforms a service that requires judgment and skill, and theend product can be affected by factors totally outside of hisor her control.  Because an owner is purchasing a servicefrom a design professional and not a product; and becausethe design professional must deal with a great deal ofuncertainty during the design process, no set of plans is everexpected to be absolutely perfect.

Despite this standard, many courts still hold architects liablefor errors and omissions in contract documents that are ofinconsequential cost when compared to the total cost of theproject.  These types of holdings raise an importantquestion:  how can courts hold design professionals to astandard of care based on the reasonableness of theiractions, yet manage to avoid entertaining small nuisanceclaims that tax the limited resources of both courts and theconstruction industry?  One solution involves creating aminimum threshold for design professional liability basedupon the total cost of a project.  This article explores thepossibility of altering the standard of care for designprofessionals to include such a threshold by brieflydiscussing the evolution of the modern standard of care fordesign professionals; reviewing the modern state ofprofessional malpractice law; and considering how a courtapplying malpractice common law could find that such a safeharbor is consistent with the expectations of modernsociety. 

Evolution Of The Standard Of Care For DesignProfessionals

Prior to the Industrial Revolution, American buildings wereboth designed and constructed by builders known ascraftsmen.  The common law of this period requiredcraftsmen to build structures in a workmanlike manner- - astandard that defined the quality of the product that wasproduced by the craftsman.  A case from the year 1820 inNew Jersey called Rose v. Parker, 5 N.J.L. 780, 1820 WL1224 (N.J.), 2 Southard 780, provides a typical example ofhow this rule worked.  In Rose, a craftsman was held liablefor failing to construct a well in a sound and workmanlikemanner.  Chief Justice Kirkpatrick's opinion illustrated twoimportant aspects of the law at the time.  First, the law foundthat a craftsman owed an owner an implied duty to performthe work in a workmanlike manner whenever a craftsmancontracted with an owner to perform building work, even if noexpress promise to perform the work in that manner existedwithin the agreement between the parties.  Second, the lawdid not use a negligence-based standard.  Rather, it applieda strict liability rule that looked more like a modern productsliability standard.

By the end of the nineteenth century, both the buildingtrades and the law had experienced significant changes. Design work and construction work had become twodifferent functions and were performed by separate groupsof people.  The design professionals became known asarchitects and builders were called contractors.  Contractorscontinued to be judged by the results of their work, becausethey were expected to strictly follow the plans andspecifications supplied by the owner.

The law, however, began to treat architects differently. Courts considered architects to be professionals who wereagents hired by owners to offer expert advice on the art ofconstruction.  Architects became agents of the owner in thesame way that doctors or lawyers had traditionally beenconsidered agents of their clients - they were professionalswho possessed specialized skills and knowledge and whowere able to exercise independent judgment in craftingsolutions to problems.  Integrated Practice:  Process orProduct, Charles Thomson, FAIA, FCMAA. 

A contractual relationship between an architect and anowner during this period implied that the architect wouldexercise the same skill and care that a reasonable memberof his or her professional community would employ.  Such arelationship, however, did not promise perfect results. 

Architects were not expected to produce perfect plans, norwere they expected to warrant the finished product.

Accordingly, an owner could not claim that an architectcommitted professional malpractice by simply showing thatthe building that the architect designed was defective. Architects could not be punished for merely committing anhonest mistake or miscalculation without a further showingthat the architect breached a basic duty of reasonableprofessional care and/or good faith.  Coombs v. Beede, 89Me. 187, 36 A. 104 (Me, 1896), 56 Am.St.Rep. 406.

The modern law of professional malpractice is based on themodel developed at the end of the 19th Century.  TheRestatement of Torts (Second) summarizes the majorityview: 

Unless [a design professional] represents that he or she hasa greater or lesser skill or knowledge, one who undertakes torender services in the practice of a profession or trade [suchas architecture or engineering] is required to exercise theskill and knowledge normally possessed by members of thatprofession or trade in good standing in similar communities.

This language from the Restatement sets forth a malpracticestandard that carefully refuses to draw a bright line betweennegligent and non-negligent behavior for designprofessionals.  This is so because each building projectpresents unique design challenges that require the skillfulapplication of professional judgment.

Can No Lapse in Judgment Be Forgiven Merely BecauseOf Its Size?

Consequently, courts have avoided adopting a bright-linestandard because such a standard may oppress the verycreativity that owners require from design professionals tosolve problems.  For this reason, the modern standard givescourts both the ability to hold design professionals liable forsmall, yet egregious mistakes and the ability to forgive largermistakes where the design professional acted reasonably.

Professional malpractice is usually classified as a tort, but itis meant to cure the harm caused by the breach of acontractual relationship.  Stated differently, a designercannot commit professional malpractice absent a contractualrelationship between him/herself and another party (such asan owner). While the tort is meant to protect the owner andthe public against physical harm caused by unsafe designs,it is also meant to preserve the benefit of the bargainbetween the designer and the recipient of the designer'sservices.  As stated previously, the standard for professionalmalpractice allows designers the room to exerciseprofessional judgment while ensuring that owners feelsatisfied that they are getting what they paid for. But theseunderlying policies are not entirely satisfied by the currentstandard.  Designers can be held liable for mistakes thatcause neither reasonable harm to the owner nor a safety riskto the public.  To illustrate this problem, consider thefollowing example.

Suppose a designer makes a $4,000.00 mistake on a $500million project. Further suppose that the mistake could neverhave threatened anyone's safety and did not add anysignificant cost to the project.  If the mistake occurredbecause the designer negligently failed to exercisereasonable judgment, the designer could be held liable.  Inthe absence of fraud or bad faith, however, should he be?

How does a $4,000.00 mistake affect a half-billion-dollarproject?  The cost of a meeting to negotiate a settlementmay exceed the cost of the actual mistake, even if neitherparty consults a lawyer.  In a case like this, the malpracticestandard does not seem like an adequate mechanism toresolve the problem.  The practical effect of the rule is poorand the rationale of the legal theory is not satisfied by theremedy. 

How Small Is Small Enough?

The previous example clearly shows that no owner can

reasonably expect to be compensated for every lapse injudgment committed by a designer.  But what would happenif the designer made 10 relatively small mistakes on thesame project?  What about 100?  1,000?  At some point, thesum of these inconsequential errors would have an adverseimpact on the reasonable expectations of the owner.  But atwhat point?

In the private sector, the Construction Industry Institute (CII)conducted a study in the late 1980s that focused onindustrial projects of medium complexity.  The study showedthat an average project could be reasonably expected toexperience between a 2-and-3 percent overrun in theconstruction budget because of errors and omissions by thedesigner.  Construction Contingency; Standard of Care vs.Cost of Design Errors and Omissions, L.G. Lewis Jr., P.E.,Engineering Times, Feb. 1999.  Furthermore, many projectowners set aside contingency amounts in their constructionbudgets of around two to five percent to account for errorsand omissions by design professionals.  For the Client:  AContractual 'Safe Harbor' for Change Order Costs, RichardB. Garber, P.E. (2006).

Finally, standard form AIA contracts do not contain clausessetting a threshold for an errors and omissions claim againsta design professional.  However, many owners andarchitects are negotiating threshold clauses and adding themto their agreements.  For example, the AGC ContractDocuments Handbook, J. William Ernstrom, Kevin F.Peartree, 2003 Aspen Publishing, recommends adding thefollowing clause to a form contract:

3.1.8    The Architect/Engineer shall be responsibleto the Owner for the costs of any errors oromissions of the Architect/Engineer or ofConsultants retained by the Architect/Engineer tothe extent that such costs exceed __________percent (_______ %) in the aggregate of theArchitect/Engineer_s compensation. 

The handbook expressly states that this clause is designedin part to reduce the expense and delay of establishing thedesign professional's error or omission for small mistakes. Therefore, designers and owners in the private sector havebegun to expect a certain threshold amount of errors andomissions by a designer during a project (2 to 5 percent) andhave also begun to use contract clauses that plan for them. 

In the public sector, many state departments oftransportation (DOTs) do not pursue errors and omissionsclaims against consultant designers working on publicprojects unless the claim reaches a certain monetarythreshold.  For example, the Arizona DOT will not pursue anerrors and omissions claim until the value of the cumulativeerrors by the designer reaches 5 percent of the constructionbid price or $20,000.00, whichever is less.  TheMassachusetts DOT will not pursue an individual errors andomissions claim worth less than $5,000.00 unless thecumulative value of the designer's mistakes on the projectexceeds $50,000.00.  Finally, the Pennsylvania DOT will notpursue an E&O claim unless the designer's errors exceed 3percent of the construction bid price.  While some DOTs donot have a threshold minimum value for an E&O claim (e.g.Delaware DOT), the Federal Highway Administration(FHWA) recommends that state DOTs should not holdconsultant designers responsible for additional constructioncosts resulting from errors and omissions unless grossnegligence or carelessness are involved.

Could a Court Adopt a Threshold Standard?

A court could adopt a threshold requirement for an errorsand omissions claim without offending the legal theorybehind modern malpractice law for the following reasons: First, courts have held that no set of contract documents isexpected to be error free.  Holding a design professionalliable for any lapse in professional judgment offends thisprinciple. Therefore, a line needs to be drawn somewhere. 

Second, malpractice law seeks to protect the public fromharm and to allow the owner the benefit of his or her bargainwith the designer.  As discussed above, owners and

designers in the private sector have begun to alter theircontracts in order to avoid spending money on resolvingsmall claims; and design professionals working for stategovernments generally enjoy a great deal of protection fromerrors and omissions claims.

The industry as a whole seems to accept the premise that areasonable owner should expect an overrun in aconstruction budget of somewhere between two and fivepercent because of errors and omissions from designprofessionals. Therefore, as long as the designer's mistakeis not fraudulent, dangerous, or in bad faith, and did notcause a personal injury, a court could easily rule that areasonable owner should expect an overrun of 3 percent ona construction project due to errors and omissions.  Finally, acourt-imposed threshold does not create an unreasonableburden on the industry, because parties to a contract arealways free to negotiate their own threshold or eliminate itcompletely. 

Conclusion

In conclusion, a court could easily adopt a thresholdstandard of liability for errors and omissions claims againstdesign professionals without offending public policy or thepremise behind malpractice law.  Setting the bar at 3 percentwould eliminate needless conflicts and free up preciousresources to apply to other more serious problems.

Paul Cottrell is a principal and founding member of Tighe &Cottrell, P.A. in Wilmington, Delaware.  His practice primarilyfocuses on professional liability defense and constructionlaw. Patrick McGrory is an associate at Tighe & Cottrell,P.A., and focuses his practice on professional liabilitydefense, including: architects, engineers, accountants andattorney malpractice defense.  Their e-mail addresses arep.cottrell@tighecottrell.com andp.mcgrory@tighecottrell.com.

 

Practice Pointer: Drafting Subcontractsto Ensure Prompt Payment Protectionby Laura Fraher

The Prompt Payment Act ("PPA") was enacted in 1982 andrequires government agencies to paypenalties on overdue bills to governmentcontractors.   The act was designed to"provide incentives for the FederalGovernment to pay its bills on time."  H.R.Rep. No. 461, 97th Cong., 2d Sess. 1,reprinted in 1982 U.S.C.C.A.N. 111.   The

PPA thus imposes an affirmative obligation on theGovernment and affords general contractors enforceableprompt-payment rights against the Government in the eventof a failure to make timely payment.

In 1988, the PPA was amended to include provisionsapplicable to subcontractors.  Specifically, the PPA requiresprime contractors who contract with the Government to (i)include seven-day prompt-pay clauses in all of itssubcontracts and (ii) include an interest penalty clause in allof its subcontracts, which obligates the general to pay to thesubcontractor an interest penalty on amounts due in thecase of each payment not made in accordance with theseven-day prompt-pay clause.  See 31 U.S.C. § 3905(b). 

Congress doubtlessly intended to afford some protection tosubcontractors in extending the provisions of the PPA toreach subcontracts.  Indeed, the legislative history relating tothe 1988 amendments to the PPA expressly state thecommittee's view that the provisions of the PPA as amendedwould "result in more equitable treatment ofsubcontractors."   See H.R. Rep. No. 1 ---784, 1998U.S.C.C.A.N. 3036, 3057.

However, it is equally clear that the protection ofsubcontractors was never Congress's principal goal in

enacting these amendments.   Rather, the primary goal ofthe amended PPA was "to create incentive for increasedcompetition for Government work, and, thereby, lower coststo the Government" and to "result in the Government'sconstruction projects being performed in a more timelymanner. ..."  Id.

It is perhaps, therefore, not surprising that the PPA does notinclude any enforcement provision that would create aprivate right of action in favor of a subcontractor to enforcethe requirements of the PPA as against a generalcontractor.   As the United States District Court for theDistrict of Maine explained in Transamerica PremierInsurance Co. v. Ober, 894 F. Supp. 471 (D. Me. 1995),"[f]irst and most fundamentally, neither the precise languageof the Prompt Payment Act nor the clauses in the primarycontract impose a statutory obligation on [a generalcontractor] to make prompt payment to its subcontractors." Id. at 480 (emphasis in original). 

Moreover, federal courts across the country have uniformlyrejected the notion that the PPA creates an implied right ofaction in favor of subcontractors.  Rather, every court considering this issue has held that the PPA does not createany affirmative statutory obligation on prime contractors topay subcontractors or a corresponding statutory right topayment.  

For example, in U.S. ex rel. Virginia Beach MechanicalServices, Inc. v. SAMCO Construction Company, 39 F.Supp. 2d 661 (E.D. Va. 1999), the United States DistrictCourt for the Eastern District of Virginia held that "whilecontractors can pursue the contractual remedies ordinarilyavailable to them if they do not receive payment, they cannotuse the [Prompt Payment] Act as a substantive basis ofrecovery of that payment when they file their claims pursuantto the Miller Act."  In so holding, the Virginia Beach Courtcited subsections of the Prompt Payment Act § 3904(i) and(j)) that clearly prohibit making the United States (the namedplaintiff in Miller Act cases) a party to disputes betweenprime and subcontractors under the Prompt Payment Act asis the case here.  Id. at 676-77.

Numerous other federal courts have held that the PPA doesnot create a viable private right of action for the benefit ofsubcontractors:

United States ex rel. Dick Corporation, No.3:08cv56/MCR/MD, 2009 WL 1139569, at * 1 (N.D.Fla. Ap. 27, 2009) ("All of the authority which thedefendants have cited, or the court has located, holdthere is no private right of action under the [PromptPayment] Act.");In re Thomas, 255 B.R. 648, 654 (Bankr. D.N.J.2009) ("The Prompt Payment Act requires thatconstruction contracts with governmental agenciesshall include a clause requiring the generalcontractor to pay subcontractors for satisfactoryperformance within seven days of the generalcontractor's receipt of payment from the agency. The Prompt Payment Act does not, however, givesubcontractors an additional cause of action for analleged breach by a general contractor of asubcontract.");United States ex rel. King Mountain Gravel, LLC v.RB Constructors, LLC, 556 F. Supp. 2d 1250, 1252-53 (D. Colo. 2008) ("[T]he Prompt Payment Actprovides no express private cause of action. …  A'cautious' review of the statutory text and legislativehistory of the Prompt Payment Act – particularlywhen construed with the Miller Act – indicate thatCongress did not intend a subcontractor to have aprivate cause of action under the Prompt PaymentAct.");C&H Contracting of MS, LLC v. LakeshoreEngineering Services, Inc., No. 1:07cv700, 2007 WL2461017, at *1 (S.D. Miss. Aug. 24, 2007) ("The fewcourts addressing the matter have found that there isno private right of action between contractors underthe Prompt Payment Act.").

Most recently, the United States District Court for the Districtof Columbia held in 2011 that the PPA does not create a

private right of action for subcontractors to sue generalcontractors for interest, penalties and fees.  In the currentlypending case of United States of America, for the use andbenefit of IES Commercial, Inc., v. The Continental Ins. Co.,Inc., Civ. Action No. 11-0985 (ESH), the Court dismissed thesubcontractor's PPA claim, holding that "neither the text ofthe PPA nor the legislative history reveal an intent to createa private right of action.  Instead the statute andimplementing regulations show that the enacting Congressenvisioned the PPA's protections to be enforced in the samemanner as other contractual disputes."

The lesson for subcontractors is clear.  The PPA will notprovide any protection for a subcontractor in the event thegeneral contractor fails to make timely payment of invoices. Although a subcontractor may be able to persuade theGovernment to exert influence over a general contractor inthat situation, no subcontractor should rely upon thatpossibility to ensure he receives timely payment.  Rather, thesubcontractor or its counsel must carefully every subcontractto ensure that all statutorily required language is included inits terms.  Only then will the subcontractor have the ability todirectly enforce those terms through a breach of contractaction against the general contractor.

If the language is not included in the subcontractor'scontract, then under the law as it currently exists, thesubcontractor will not be permitted to rely upon theprotection of the PPA to seek interest, penalties and fees.

Laura Fraher is an associate in the trial and constructiongroup of Shapiro, Lifschitz & Schram, P.C. in Washington,D.C.  Laura has experience in civil litigation at both the trialcourt and appellate level and focuses on complexcommercial and construction litigation.  Her e-mail address isfraher@slslaw.com. 

 

A Primer on Construction Project“Wrap-Up” Insurance Policies:Bundling of Coveragesby W. Thomas McBride

I. The History of Wraps

Defense counsel and insurers familiar withconstruction law are well aware thatdevelopers/builders, construction managers,general contractors and varioussubcontractors are targets of accident andconstruction defect claims. Traditionally, the

owner, general and subs each has their own CGL policies.The prime contract and various subcontract agreements areworded such that the risk of loss (i.e, costs of defending andpaying claims) shifts down from owner and generalcontractor to the subcontractors. This model is the familiar,traditional risk-shifting in construction projects.

An alternative that often has proven to be a superior methodof risk management is the "wrap-up" policy. When it isunderstood that ultimately it is the developer who is payingall costs of the project, including all insurance costs, it makessense that it can be preferable for either the owner ("OCIP"or owner-controlled insurance program) or the generalcontractor ("CCIP" or contractor-controlled insuranceprogram) to procure a single policy that insures the owner,general contractor and all enrolled subs and thathconsolidates the various types of coverage (i.e. commercialgeneral liability, workers' compensation, builder's risk, evencompleted operations coverage).

A "wrap-up" policy is, as implied, a means of getting allcoverages and all interested parties under the same policy.The wrap policy has been around for several decades and isused most commonly in very large commercial or publicprojects.  Events of the late 1990's and early 2000's,however, began a movement toward  broader use of "wrap-up" insurance programs.

II. The Proliferation of Construction Defect Claims

The building boom of the late 1990's and early 2000's, forinstance in luxury and resort condominiums, brought anexplosion of "construction defect" claims. The typical ISO-sponsored CGL policy is not understood to provide coveragefor a builder's poor workmanship that results purely in awarranty-type claim.  Nevertheless, pleadings often allegethat the contractor or subcontractor's defective workdamaged other structures or systems of the building totrigger coverage and a duty to defend.

As one can imagine, this litigation became very costly forinsurers.  Compounding the problem, insurers wereexpected not only to cover the individual subcontractor'sliability, but also that of possibly several additional insureds,chiefly the owner and GC.  The result was that manyinsurers reduced their exposure to the building market. Manyotherwise qualified, very capable subcontractors andsuppliers became unable to secure coverage, negativelyimpacting the building industry throughout the United States.

III. Shortcomings in the Traditional Insurance Approach--Time for a "Wrap-Up"

"Wrap-up" policies offer several advantages over thetraditional risk management insurance program based on acommercial general liability policy. Either the owner orgeneral contractor can obtain a single policy for every entityon the job, often at an overall substantial cost savings.  Thewrap policy can be made project-specific, avoiding the risk ofsubcontractors' individual policies' being depleted becauseof claims arising at other construction jobs. Finally, theowner or general contractor is in a better position topurchase broader forms of coverage than a subcontractorusing the more conventional CGL policy.

The owner or general contractor avoids the burden andconcern of monitoring subs to ensure that additional-insureds endorsements or even the policies themselves arekept in effect.  The burden is even greater because of theneed to keep policies effective not only during the possiblylengthy construction period, but also until the statute ofrepose period passes up to a dozen years after completion. The owner or general contractor with OCIP or CCIP, rather,can control against a possible coverage lapses during thatcritical period.

Policy deductibles or self-insured retentions can be allocatedby formula in the contract documents among the contractorand the subcontractor.  These allocations work as anincentive for everyone to perform at their best. Competitivebids, both with and without a subcontractor insurance policycomponent, can be used to determine whether to choose thewrap or the traditional approach.

Litigation itself can be better managed under a wrapprogram, both in reduction of cross-claims (finger-pointing),indemnity actions, and tenders to additional insurers. Withbroader coverages than ordinarily obtained bysubcontractors, and assuming adequate limits, conflicts ofinterest among the defendant-parties can be greatlyminimized.  The possibility exists that all or most of thedefendants can be represented by a single law firm. Theresults can be a streamlined defense, elimination ofunnecessary finger-pointing (which often only improves theplaintiff's prospects) and greater consistency in claims-handling are the results.  The defense can be betterconducted at a significantly lower cost, especially if allparties can be defended by the same attorney. Ethicalconflicts can be abated, if not altogether eliminated, and it isimportant that the construction documents are drafted to beconsistent with the OCIP or CCIP.

In some states, because of a recent history ofsubcontractors being unable to obtain their own coverage, adeveloper cannot proceed with a condominium projectwithout a wrap policy. Even where subs have been able tofind individual coverage, the owner/GC has to be concernedwith "administering" multiple policies.  They face potentialproblems of conflicting policy provisions, scope of

coverages, gaps in coverage, exclusions, and selection ofcarriers (insolvency risks).  They contend with maintenanceof coverage/multiple policies to cover future claims, namelyfor construction defect liability for the period of the statute ofrepose.

During construction, a single insurer and the sponsor(OCIP/CCIP) on large projects can collaborate to implementbest safety practices and also exert control over constructioncosts and risk management. The owner or generalcontractor and its insurer can implement a comprehensiverisk management program that includes the OCIP/CCIP,whereas in the traditional insurance model, the owner orgeneral contractor relinquishes an important level of controlto subcontractors.

IV. Conclusion

Increasingly, many owners are turning to wrap-up insuranceas a way to get better control over risk management.Although not always a perfect solution, and while someconflicts are not always avoidable, greater peace of mindcan be accomplished under OCIP/CCIP.

This article is not intended to cover all problems connectedto weighing the advantages and disadvantages of wrap-upinsurance versus traditional risk-shifting insurancestrategies. The owner/its GC must seek out insurers andpossibly qualified wrap-insurance consultants to implementthe unified insurance/risk management program. Legalcounsel experienced in coordinating construction documentswith the wrap-up policy should be retained at theprocurement phase. Excess and umbrella coverages mustbe reviewed and harmonized with the underlying wrappolicy. Legislation and regulations concerning wrap-upinsurance should be consulted on a state-to-state basis.

Tom McBride is a partner at Delany & O'Brien inPhiladelphia, Pennsylvania.  He practices in the areas of large exposure claims covering industrial accidents,construction site accidents/defect claims, product liability,professional negligence, personal injury litigation andcommercial disputes.  His e-mail address iswtm@dolaw.com.

 

No License, No Problem. Maryland’sHighest Court Provides New Means ofRedress for Unlicensed Subcontractorsby George S. Mahaffey Jr., and Malcolm S. Brisker

The Maryland Court of Appeals has held that the MarylandHome Improvement Act nolonger insulates generalcontractors from claims by theirunlicensed subcontractors, thusending an era for generalcontractors who use unlicensedsubcontractors.  Stalker

Brothers, Inc. v. Alcoa Concrete Masonry, Inc., 422 Md. 410,30 A.3d 885 (2011).

Maryland contractors who perform home improvements arerequired to be licensed with the Maryland HomeImprovement Commission ("MHIC").  In addition to facingcivil and criminal fines and penalties, contractors who do notpossess MHIC licenses risk losing the ability to enforce theircontracts, meaning that they may lose their right toeffectively demand payment for services performed.

Moreover, for 90 years, Maryland's Home Improvement Acthas provided a bulwark to general contractors and owners,insulating them from claims made by unlicensedsubcontractors.  No more.

In Stalker Brothers, Inc. v. Alcoa Concrete Masonry, Inc.,422 Md. 410, 30 A.3d 885 (2011), the Maryland Court of

Appeals, while continuing to preclude unlicensedsubcontractors from making claims against owners, held, forthe first time, that unlicensed subcontractors could make aclaim against the general contractor.  The decision waspremised largely on the conclusion that the Maryland HomeImprovement Act ("MHA") was intended to protect the publicunder contractor-owner contracts and not contracts betweencontractors who engage in arms-length transactions with oneanother. 

For nearly a century, Maryland's courts consistentlyprecluded unlicensed subcontractors from making claimsagainst owners and general contractors.  The courts haveanalyzed the issue in a handful of cases, but the followingthree cases are most often cited.  In Goldsmith v. Mfrs.Liability I. Co., 132 Md. 283, 103 A. 627, 628 (1918), thecourt held, as a general rule, that

 "[A] contract entered into by an unlicensed person,engaged in a trade, business, or professionrequired to be licensed, and made in the course ofsuch trade, business, or profession, cannot beenforced by such person, if it appears that thelicense required by the statute is, in whole or inpart, for the protection of the public, and to preventpersons from engaging in such trade, business, orprofession.  If, however, the purpose of the statuteis to raise revenue only, his right to enforce suchcontract is not defeated by the want of a license."

In Sondgrass v. Immler, 232 Md. 416, 194 A.2d 103 (1963),the Court of Appeals dealt with an unlicensed architect and,citing Goldsmith, held that the architect could not pursue aclaim against the property owner who employed him.  InHarry Berenter, Inc. v. Berman, 258 Md. 290, 265 A.2d 759(1970), the Court of Appeals considered whether anunlicensed contractors could assert a mechanic's lienagainst the owner of a parcel of property.  In considering theapplicability of the MHA, the court differentiated betweenstatutes that are regulatory in nature, requiring licenses forbusiness in the interest of protecting the public, versusstatutes that are designed simply to raise revenue. 

If a contract is entered into by an unlicensed personengaged in actions covered by statutes that are regulatory innature, the contract would be defeated by want of a license. Because the MHA was regulatory in nature, an unlicensedcontractor under the MHA could not pursue a claim againstthe owner of a parcel of property because said contract wasvoid. 

In Donmar Maryland Corp. v. Hawkesworth, 46 Md. App.575, 420 A.2d 295 (1980), the Maryland Court of SpecialAppeals analyzed whether an unlicensed contractor couldrecover for repairs made on a mobile home.  Analyzing thesame legal principles as in Berenter, the court concludedthat Maryland law held unenforceable a contract made by anunlicensed person subject to the MHA.  Id. at 576, 420 A.2dat 295.

In Stalker Brothers, Alcoa Concrete Masonry, Inc.("plaintiff"), was an unlicensed subcontractor providing workfor Stalker Brothers, Inc. ("defendant") on contract.  The twocompanies did business together from 2004 to 2007. Payments were regular at first, but the defendant started tomiss payments in 2005.  After an attempt to reconcile theamount due between themselves, the defendant began tomiss payments again, eventually refusing to pay the plaintiffaltogether.

The plaintiff contended that it had been intentionally misledby the defendant and that the defendant had signedreleases of liens stating that all subcontractors had beenpaid for the work when in fact the defendant knew they hadnot paid the plaintiff thereby gaining access to funds notrightfully theirs.  Id. at 413-14, 30 A.3d at 886-87.

By way of a defense, the defendant claimed that the plaintiffhad performed this residential home improvement work whilean unlicensed subcontractor in Maryland and as suchcontracts made by such an unlicensed subcontractor wereillegal and unenforceable under the MHA.  Id. at 416, 30

A.3d at 888. 

The Court of Appeals agreed with plaintiff's argument thatMaryland's revenue/regulatory cases did not involve thecontractor/subcontractor relationship and that overall, theMHA was not intended to be a shield for contractors to eludepaying their debts.  Id. at 419-20, 30 A.3d at 890.

Consequently, the fact that the MHA was a regulatorymeasure did not bar the plaintiff from recovering on itssubcontract with the general contractor.  Moreover, thisclaim involved persons in the same business field whocontracted with each other with knowledge of theirrespective qualifications.  In fact, under the dourt'sinterpretation, the public was benefited to the extent that ageneral contractor loses incentive to enter into a contractwith an unlicensed subcontractor.  This decision makes clearthat a general contractor cannot use the MHA as a shield toescape its obligations under a contract with an unlicensedsubcontractor.

Lessons of the Case

Stalker Brothers offers lessons for both contractors andsubcontractors, including

the following:

Subcontractors that perform home improvements arerequired to be licensed and should be MHIC-licensed. If a subcontractor that performs home improvementsis not licensed at the time of contracting, relief isavailable.  Unlicensed contractors shouldimmediately begin the application process so thatthey can obtain a license in the event that it becomesnecessary to file suit to recover payments.General contractors should obtain evidence that theirsubcontractors are licensed with the MHIC.

In Stalker Brothers, the appellate court emphasized thatgeneral contractors are part of the

enforcement process, placing the burden on generalcontractors to withhold payment until a subcontractor islicensed.  This will effectively ferret out unlicensedsubcontractors and motivate other subcontractors to getlicensed, furthering the policy of homeowner protection.

Finally, it is important to note that in Stalker Brothers, therewere no allegations of defective work by the subcontractor,and the general contractor had induced the subcontractor tocontinue working based on assurances of future payment.Accordingly, be aware that different facts may yield adifferent outcome in another case.

From a practical prospective, general contractors inMaryland now have more reason to make sure theirsubcontractors are MHIC-licensed.  Even more important isto ensure all legal rights are afforded to the general andsubcontractors on residential properties.   Now that evenunlicensed subcontractors can file suit against generalcontractors, it is critical that the general contractor has theability to rely upon the owner for payment for a project thatmay not be enforceable if the general or subcontractor is notlicensed.

 

Malcolm Brisker is a partner at Goodell DeVries inBaltimore.  His practice encompasses all areas of civildefense litigation including products liability, constructionand insurance defense, mass torts and medical malpractice.George Mahaffey is Of Counsel to Goodell DeVries, and hiscurrent practice concentrates on commercial litigation,securities litigation, wrongful death litigation, professionalliability defense, and general insurance defense. Their e-mailaddresses are msb@gdldlaw.com and gsm@gdldlaw.com.

 

Sliding Glass Doors: Defending againstClaims of Excessive Pull Forcesby Michael Forte

Sliding glass doors are a common target in constructiondefect cases, and one common complaint isthat the sliding doors are too heavy tooperate.  This article discusses severalpotential defenses against such claims. 

Defense No. 1:  The architect mandatedheavy sliding glass doors. 

The first place to check is the architect's specifications,which often will mandate a particular water resistancepressure.  The water resistance pressure will determine thedesign pressure, which in turn determines the weight of thedoors.

The standard at issue here is promulgated by the AmericanArchitectural Manufacturers Association.  AAMA 101-97states that the water resistance pressure must be at least 15percent of the design pressure.  Therefore, if the specs callfor a water resistance pressure of 15 percent, AAMA 101-97requires the design pressure to be 100 psf.  The result is avery heavy door.

Defense No. 2:  Industry standards mandate heavy slidingglass doors.  

AAMA standards often are more than just aspirational. Some states, such as Florida, specifically incorporate certainAAMA standards into their building codes.  For example, the2001 version of the Florida Building Code requires slidingglass doors to be certified by AAMA.  To receive certification,the doors must meet pull standards.  These standardsrequire that, depending on door type, the doors must be ableto open at a maximum force of 30 to 40 pounds, and mustbe able to keep moving at a maximum force of 20 to 25pounds.  These forces may not sound like much, but inreality they are quite substantial.  Consider, for example, thata typical cinderblock can weigh in the range of 30 pounds. 

Defense No. 3:  Improper maintenance increases the forcesrequired to operate sliding glass doors.  

If sliding glass doors have passed AAMA certification, whatcould account for requiring excessive pull forces afterinstallation?  The most common answer is impropermaintenance.  Door tracks easily collect dirt, and sand andsea salt present additional concerns in coastal areas.   

Most sliding glass door manufacturers promulgatemaintenance standards to facilitate the smooth operation oftheir doors.  Generally, these standards require periodiccleaning of all metal, vinyl and glass surfaces with mildsoapy water using a sponge or soft cloth.  In addition, AAMAhas promulgated a detailed brochure titled "Caring for YourWindows, Doors, and Skylights."

The brochure sets forth maintenance recommendations fordoor tracks, including (1) cleaning tracks using a dry paintbrush or vacuum brush attachment; (2) cleaning the framesand tracks with a mild, nonabrasive soap or detergent,followed by rinsing and drying; and (3) lubricating tracks androllers.  A homeowner's failure to follow theserecommendations is certain to cause additional friction withinthe door track, resulting in unnecessary difficulty in openingand closing the doors.  The brochure is available online athttp://www.aamanet.org.

 

Michael Forte is a partner in the Tampa, Florida office ofRumberger, Kirk & Caldwell, P.A.  He defends contractorsand subcontractors in construction defect lawsuits.  His e-mail address is mforte@rumberger.com.

 

Construction Defect Claims: An Update[Part I]by Thomas F. Segalla, Matthew S. Lerner, and Han K.Kim

Construction defect coverage and liability litigation continuesto bejurisdictionallyspecific anddictated by therelevant terms,conditions,limitations,

exclusions and endorsements contained in the policy ofinsurance at issue.  An assessment of the cases reported inthis update indicates that the practitioner and claimsprofessional must understand the chronology of critical factsand how the policy provisions have been interpreted by thecourts in a particular jurisdiction.

We should not assume that all courts interpret or apply thefacts, policy provisions and law in the same fashion.  Absentsuch an understanding, the participants in constructiondefect litigation can be blindsided and prevented fromshifting the risk to the appropriate entity.  Below we havereported those cases that we believe will have a significantimpact on the analysis of the issues faced in currentcoverage and liability construction defect litigation.  We hopethat they will provide a road map for the development ofconstruction contracts and the drafting of insurance policyprovisions.

Coverage Cases

California

Insurance Brokers Do Not Have a Duty to NotifyInsureds of Insurers' Insolvency

Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins.Services West, Inc., 203 Cal. App. 4th 1278 (Cal. App. 4thDist. February 28, 2012)

In Pacific, the court dealt with an issue of first impression inCalifornia: Whether an insurance broker, after procuring apolicy of insurance, an OCIP in particular, for a developer ona construction project, owes a duty to notify a subcontractor,who was later added as an insured, of the insurancecompany's subsequent insolvency. The court answered inthe negative. The court first noted that the duty insurancebrokers owed to their clients was limited, only requiring them"to use reasonable care, diligence, and judgment inprocuring the insurance." The court held that such a dutycould not be expanded to require the broker to monitorindefinitely the financial condition of the insurance company.Rather, the duty lay with the insurers under the InsuranceCode § 677.2. The court further supported its holding byciting its case law that found no such duty in case of policycancellation. The court refused to impose on insurancebrokers a new duty to monitor and notify the financialconditions of insurance company as such a role belongs tothe legislature.

Practice Note: The court notes that there are atleast 10 states that impose a statutory duty to notifyan insured of a subsequent insolvency as soon asthe broker receives notice of the insolvency. SeeSinder et al., Agent/Broker Liability for InsurerInsolvency (4th ed. 2006) pp. 3, 10 [as of Feb. 27,2012].

California

Fictitious Business Name ("dba") May Cause Ambiguityin an Insurance Policy 

Zurich American Insurance Co. v. Claremont Liability

Insurance Co., case number 3:10-cv-02232 (S.D. Cal.January 30,  2012)

San Diego Mirror & Window (SDM&W) entered into asubcontract with Davidson Builders, under which SDM&Wagreed to provide and install windows and doors. SDM&Wwas the fictitious business name of J&B Manufacturing,which was incorporated in 1992. The underlying actionincluded a cross-claim for indemnity by Davidson Buildersagainst J&B Manufacturing dba SDM&W. Claremont,defendant in the instant action, issued a CGL policy toSDM&W; dba: Certified Installation. At the time of the policyissuance, however, Certified Installation had not yet beenincorporated. Nor did Certified Installation obtain acontractor's license until the expiration of the Claremontpolicy. Claremont's underwriting files identified "SDM&W;dba: Certified Installation" as "New Business" and as the"Complete Business Name."

J&B Manufacturing's insurer Zurich, which defendedSDM&W in the underlying action, argued that Claremont hada duty to defend and indemnify both J&B Manufacturing dbaSDM&W and Certified Installation. The court held that theuse of the "dba" designation indicated Claremont's intent notto insure all the activities of SDM&W but rather just theactivities undertaken under the fictitious name "CertifiedInstallation." The court, on the other hand, acknowledgedthat such interpretation was incompatible with some of theexclusions in the policy. As the policy was susceptible to tworeasonable constructions, the court, in turn, consideredextrinsic evidence such as Claremont's underwriting file andthe files of other companies which insured both J&BManufacturing and Certified Installation. As such documentson numerous accounts identified Certified Installation as anew entity that was distinguishable from J&B Manufacturing,a long-standing business entity, the court held that there wasno coverage for J&B Manufacturing under the Claremontpolicy and thus no duty to defend.      

Practice Note: This case basically arose out of theway the covered entity was named in its insurancepolicy. The court, for example, did not acceptplaintiff's argument that ";" translated into "and."The court also considered "dba" designation aslimiting the scope of the business entity. Thesesubtle differences must be considered whencrafting policy language as they can result inambiguity.   

California

Court Found Ongoing Operations Language in theAdditional Insured Endorsement Ambiguous

McMillin Constr. Servs., L.P. v. Arch Specialty Ins. Co., 2012U.S. Dist. LEXIS 8339 (S.D. Cal. January 25, 2012)

The dispute arose out of an endorsement in asubcontractor's insurance policy that provided coverage forMcMillin as an additional insured, "but only with respect toliability arising out of [the subcontractor's] ongoingoperations performed for that insured." McMillin alleged thatthe defendant insurers had a duty to defend and indemnifyMcMillin in an underlying construction defect action since the"arising out of" language provided broad coverage fordamages regardless of timing and the "ongoing operations"language was ambiguous. Insurers focused on the "ongoingoperations" language asserting that they had no duty todefend under the policy because the operations were nolonger ongoing. The court found that there was an ambiguityin the Additional Insured Endorsement at issue in this caseand held that defendant insurers were not entitled tosummary judgment based on the Endorsement.

Practice Note: The court found the reasoning ofthe Ninth Circuit in a case involving an additionalinsured endorsement similar to the instant casepersuasive. The Ninth Circuit found the language inthe endorsement ambiguous since the languagecould be construed as imposing a temporallimitation on coverage, but it was equallyreasonable to construe as addressing only the type

of activity from which the liability must arise in orderto be covered. Tri-Star Theme Builders, Inc. v.OneBeacon Ins. Co., 426 Fed. Appx. 507, 2011 WL1361468 (9th Cir. 2011).

Colorado

§ 13-20-808 Does Not Apply Retroactively; "Occurrence"May Include Unanticipated Damage to NondefectiveProperty Resulting from Poor Workmanship

Greystone Constr. v. Nat'l Fire & Marine Ins. Co., 661 F.3d1272 (10th Cir. Colo. November 1, 2011)

Greystone, a general contractor, built residential homes thatwere sold to individual buyers. Greystone hiredsubcontractors to perform all work on the houses. Thehouses, however, were built on soils containing expansiveclays. The expansive clays later caused the houses'foundation to shift, which resulted in extensive damage tothe homes' living areas. This damage was neither intendednor anticipated. Greystone had obtained a standard CGLpolicy from National. While the instant proceeding was takingplace, the Colorado General Assembly enacted Colo. Rev.Stat. § 13-20-808, which expanded the

scope of "accident" previously established  by case law. SeeUnited Fire above. The court here was presented with twoprimary issues: (1) Whether Colo. Rev. Stat. § 13-20-808applies retroactively to this case and (2) whether propertydamage arising from poor workmanship is an occurrence.The court answered the first issue in the negative noting itspresumption of prospective application absent legislativeintent to the contrary. As to the second issue, the court heldthat the CGL policy may cover damage to nondefectiveproperty arising from poor workmanship. In support, thecourt noted "a strong trend in case law" interpreting the term"occurrence" to "encompass unanticipated damage tonondefective property resulting from poor workmanship." 

Practice Note: The court notes that "most federalcircuit and state supreme court cases" are in linewith its definition of "occurrence." (citing cases fromGA, IN, MS, SC, FL, TX, KS, UT, WI, and AK aswell as 7th Cir. and 4th Cir.) The court also notes"other courts" that conclude that damage to acontractor's work arising from defectiveconstruction can never constitute a coveredoccurrence. (citing cases from KY, AR, PA, NE,WV, OR, IA, and OH)  

Colorado

CGL's "Insured Contracts" Provision Only Applicable tothe Name Insured

United Fire & Cas. Co. v. Boulder Plaza Residential, LLC,633 F.3d 951 (10th Cir. Colo. Jan. 27, 2011)

A real estate developer and a construction company enteredinto a contract by which the construction company agreed toserve as the general contractor for the interior constructionwork of a condominium. The contract contained the generalcontractor's agreement to indemnify the developer. Thegeneral contractor then entered into a subcontract with aflooring company by which the flooring company agreed toindemnify the general contractor. The subcontractor flooringcompany, in turn, obtained a CGL policy from United Fire &Casualty ("UFC"). The CGL policy provided coverage for"insured contracts," which were defined as:

That part of any other contract or agreementpertaining to your business … under which youassume the tort liability of another party to pay for"bodily injury" or "property damage" to a thirdperson or organization.

The developer argued that the general contractor'sassumption of contractual liability to the developer fell withinthe scope of the "insured contracts" covered by the CGLpolicy issued by UFC.  It also argued that UFC accordingly

had a duty to indemnify the general contractor for any liabilityto the developer. The court disagreed, reasoning that UFC'sCGL policy made a distinction between the named insuredsubcontractor and the additional insured general contractor,by using the terms such as "you and "your" to exclusivelyindicate the name insured.  As the "insured contracts"provision only applied to the named insured's contractsunder such language, UFC did not have a duty to indemnifythe general contractor for its contractual obligation.

Practice Note: Despite its inapplicability to theinstant case, the court noted the enactment ofColo. Rev. Stat. § 13-20-808, which expanded thescope of "accident" previously established byColorado's case law. § 13-20-808 provides that "ininterpreting a liability insurance policy issued to aconstruction professional, a court shall presumethat the work of a construction professional thatresults in property damage, including damage tothe work itself or other work, is an accident."

Hawaii

Intentional Nondisclosure and Fraud Do Not Constitutean Accident or Occurrence

State Farm Fire & Cas. Co. v. Vogelgesang, 2011 U.S. Dist.LEXIS 72618 (D. Haw. July 6, 2011)

Homeowners sued their contractor, alleging that thecontractor had defectively constructed and failed to completetheir homes. The underlying complaint alleged that variousaspects of the residence were not completed properly, thatthe contractor deceived the homeowners about the status ofthe contractor's workers, and that the contractor failed toprovide certain disclosures. State Farm agreed to defend theinsured contractor under a reservation of rights and pursuedthe instant declaratory judgment action seeking adetermination as to whether State Farm had a duty todefend or indemnify the insured under a CGL and umbrellapolicies. The court held that intentional nondisclosure andfraud alleged in the complaint did not constitute an accidentand thus were not an occurrence or loss under Hawaiiinsurance law. The court found that the remaining claimsasserted in the underlying litigation arose from thecontractor's alleged breach of construction contract and heldthat breach of contract claims were not accidents and, thus,did not trigger State Farm's duty to defend under thepolicies. The court also found that the homeowners'negligence claim that the contractor failed to finish theresidence in a timely and workmanlike manner was not trulyan independent cause of action, but instead a restatement ofthe breach of contract claim.

Practice Note: The court also considered theimpact of H.B. No. 924, the recently enactedlegislation affecting insurance coverage under CGLpolicies for construction defects. It provides that, forliability insurance policies that cover occurrencesduring the policy period and insure a constructionprofessional for liability arising from construction-related work, the meaning of the term "occurrence"shall be construed in accordance with the law as itexisted at the time that the insurance policy wasissued.

Illinois

Damage to the Structure Itself, Regardless of Whetherthe Insured Worked on that Particular Part of theStructure, Is Not an Accident

Nautilus Ins. Co. v. 1735 W. Diversey, LLC, 2011 U.S. Dist.LEXIS 82246 (N.D. Ill. July 21, 2011)

1735 W. Diversey, LLC (Diversey), the insured, converted avacant building into condominiums by installing newmechanical, electrical and plumbing in the interior, installingnew roof coverings and windows on the exterior andtuckpointing the exterior surfaces of the building, amongother things. Diversey obtained commercial lines policiesfrom Nautilus, which covered bodily injuries and property

damage caused by an "occurrence." The policies alsocontained a "Products-Completed Operation Hazard"exclusion. Soon after the units were sold to individualbuyers, one of the new owners started complaining aboutwater leakage. The board of directors of the condominium,which was organized to manage the common areas of theunits, hired an inspection company to investigate the cause--nearly five years after the work on the condominiums wascompleted. The inspection company concluded that aprimary cause of water infiltration was the deterioratedexterior brick masonry walls. Diversey argued that its faultyworkmanship was covered by the policies as itsworkmanship damaged parts of the building that they did notwork upon and was not damage to the project itself. Thecourt held that, under Illinois law, damage to the structureitself, regardless of whether the insured worked on thatparticular part of the structure, could not be an accident,and, thus, was not an occurrence. As to the underlyingcomplaint regarding damages to personal property, the courtheld that the "Products-Completed Operations Hazard"exclusion applied as they occurred both after the work wascompleted and after the insured had transferred ownershipto the individual unit owners.            

Practice Note: The court notes that treating faultyworkmanship as an "accident" is equivalent totransforming an insurance policy into performancebond, illustrating its unwillingness to adopt suchexpansive definition.

Mississippi

Coverage Barred by Business Risk Exclusions

Lafayette Ins. Co. v. Peerboom, 813 F. Supp. 2d 823 (S.D.Miss. June 2, 2011)

Certain homeowners claimed they sustained damage whena contractor failed to use proper equipment to raise theirhome 24 inches, which allowed the house to fall. LafayetteInsurance sought a declaratory judgment its policy providedno coverage for the damage.  Lafayette moved for summaryjudgment asserting that the incident was not an occurrence,and the business risk exclusions would bar coverage even ifit were an occurrence. The court found that even though thehomeowners did not identify what caused the house to fall,the complaint left open the possibility that the propertydamage at issue was proximately caused by an accident andthus was the result of an occurrence. Accordingly, the courtruled that summary judgment could not be granted on thisbasis. The court noted that some cases found the businessrisk exclusions inapplicable if the insured was working onlyon the foundation and the entire structure was damaged.The court found that, in this case, it was manifest that theinsured was hired to perform work on the entire house.Therefore, the risk that the house would fall and sustaindamage was not merely a fortuitous event, but a businessrisk which fell squarely within the policy exclusions.

Practice Note: Under Mississippi law, thedetermination of whether a liability insurance carrierhas a duty to defend depends on the policylanguage and the allegations of the complaint.Under the so-called "eight-corners" test, theallegations in the complaint are analyzed againstthe language in the policy to determine coverageand the duty to defend.

(NEXT INSTALLMENT:  CRITICAL PATH FALL 2012)

Thomas F. Segalla is a founding partner of the law firm ofGoldberg Segalla LLP.  He is a construction defect coverageattorney and a co-author of the insurance treatise Couch onInsurance 3d.   Matthew S. Lerner is a partner at GoldbergSegalla LLP and chair of the firm's appellate advocacygroup.  Han K. Kim is a graduate of SUNY Buffalo LawSchool and summer associate at Goldberg Segalla LLP. Segalla's and Lerner's e-mail addresses aretsegalla@goldbergsegalla.com andmlerner@goldbergsegalla.com.

 

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