Senate Bill 474 Changes the Rules for Indemnity Between a General and a Subcontractor

C. Clay Olson:

California Law and Indemnity Shifts

Originally posted on Law Offices of Robert L. Bachman:

The California Legislature and Governor Brown recently approved California Senate Bill 474, which general provides that in all construction contacts for private commercial project entered on or after January 1, 2013 any indemnity obligations (including cost to defend) arising out of the active negligence or willful misconduct  of the indemnified party are void and unenforceable.

The new law affects risk allocations in construction projects and may lead to insurance related litigation. California developers and general contractors typically use what is referred to as a “Type 1″ indemnity proviso in construction contracts. “Type 1″ indemnity allows one party (usually owners, developers, and general contractors) to require the other party (typically subcontractors) to indemnify them for their own active negligence or fault.

Senate Bill 474:

  • Does not apply to design professionals.
  • Includes contracts for renovations and utility, water, sewer, oil and gas lines under construction contracts.
  • Cannot be avoided by the…

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Owners and Contractors Protective Liability Coverage Form

Originally posted on South Carolina Construction Defect Law:

I intend to devote several upcoming posts on Owner Controlled Insurance Policies (“OCIP”) or “WRAP” coverage due to its continued emergence in the construction, insurance, and legal industries.  In an effort not to confuse, this article deals (“OCP”), which is an acronym for Owners and Contractors Protective Liability insurance coverage.  Coverage for Operations of Designated Contractors (CG 00 09 12 07) is,  as suggested by the title, intended to protect certain owners and contractors, but only for operations performed for the named insured by the “designated” contractor.  The Designated Contractor is listed on the Declarations Page to the policy.   

THE NAMED INSURED

In addition to being limited to certain tasks performed by a specific contractor, OCP coverage is further narrowed to protect the interests of a party other than the policyholder.  Consider the following hypothetical to illustrate the “protective” nature of OCP coverage.  Protective policies are designed quite differently…

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Owners and Contractors Protective Liability Coverage Form

I intend to devote several upcoming posts on Owner Controlled Insurance Policies (“OCIP”) or “WRAP” coverage due to its continued emergence in the construction, insurance, and legal industries.  In an effort not to confuse, this article deals (“OCP”), which is an acronym for Owners and Contractors Protective Liability insurance coverage.  Coverage for Operations of Designated Contractors (CG 00 09 12 07) is,  as suggested by the title, intended to protect certain owners and contractors, but only for operations performed for the named insured by the “designated” contractor.  The Designated Contractor is listed on the Declarations Page to the policy.   

THE NAMED INSURED

In addition to being limited to certain tasks performed by a specific contractor, OCP coverage is further narrowed to protect the interests of a party other than the policyholder.  Consider the following hypothetical to illustrate the “protective” nature of OCP coverage.  Protective policies are designed quite differently than most liability insurance policies purchased by contractors.  Consider a construction agreement between Owner and Contractor which requires Contractor to purchase and carry OCP for the benefit of the Owner.  The plain language within the policy will list Owner as the policy’s named insured.  Despite purchasing and paying the premium, Contractor is not a named insured and, thus, not protected by the policy.    

While helpful to Owner, OCP coverage is not as broad as the sweeping coverage provided by traditional CGL policies.  In almost all circumstances, the Owner is protected by the OCP policy in just two factual circumstances.  These relate to incidents of (a) vicarious liability and (b) supervisory liability which might be imputed upon the Owner for the acts or omissions of Contractor.  Plainly stated, the Owner is not protected or indemnified for the active negligence or omissions created via its own making.

VICARIOUS LIABILITY AND THE GENERAL CONTRACTOR’S ACTS

Since coverage is limited to the vicarious liability of the named insured, coverage applies only to liability imposed on the named insured as a result of the designated contractor’s acts and not as result of the named insured’s own acts or failure to act.  Courts have also allowed coverage for acts and omissions resulting from a subcontractor’s work.  Although the OCP does not use the phrase “vicarious liability,” one court stated:

“… the courts must construe the “arising out of [the subcontractor's work]” provision as one providing coverage in cases                                       where the alleged liability is vicarious.”  [Emphasis added.]  See St. Paul Fire & Marine Ins. and Hardin Constr. Grp., Inc. v. Hanover Ins. and Travelers Ins., 187 F. Supp. 2d. 584 (E.D.N.C. 2000)

However, conventional wisdom to the contrary, one who engages an independent contractor is usually not vicariously liable for the acts or omissions of the independent contractor.

DIRECT OR GENERAL SUPERVISION

Courts have provided some guidance as to what it considered to be “general supervision.” In Union Electric v. Pacific Indem., 422 S.W.2d 87 (Mo. App. 1967), an employee (Palmer) of the subcontractor (Davey) was seriously injured when he came into contact with an uninsulated power line when trimming trees around the line pursuant to a contract with Union Electric. Palmer brought a complaint against Union Electric, alleging Union Electric was negligent in failing to warn Palmer of inadequately insulated power lines. Union Electric’s insurer contended that Union Electric’s alleged liability did not result from Union’s supervision of Davey in that Union supervised only the result of the work did not supervise the method, manner, or means of performance of the work.

The court ruled:

The factual situation presented shows the insured’s contract with Davey required the insured [Union Electric] to designate the areas along the distribution and transmission lines of the insured where Davey would cut and trim trees. … we hold that the words “general supervision” as used in the policy in question do not mean supervision of the method, manner, and/or means employed by Davey…We hold that the words mean supervision of the work of Davey only to the extent necessary to see that the work was done in accordance with the contract…and to provide the area of the transmission lines where Davey would cut and trim the trees. Palmer’s claim fell within the coverage of the policy. Insured’s failure to warn Palmer arose out of its supervisory function. [Emphasis added.]

COST OF PREMIUM AND COVERAGE

The premium for the OCP policy is based on the contract price between the named insured and the designated contractor (usually with a rate per $1,000 of the contract price). Thus, a separate OCP can be several thousand dollars of premium (or more) depending on the size of the project, the limits required, etc.

The OCP policy excludes coverage for bodily injury or property damage if such injury or damage takes place after the earlier of when the operation has been completed or put to its intended use by anyone other than another contractor or subcontractor working for the Designated Contractor on that project.

DETERMINING COVERAGE FOR LOSS UNDER MULTIPLE POLICIES

An OCP policy can reduce disputes between insurance companies concerning which policy should be the first policy to respond to a claim (i.e. which policy will be considered primary). For example, when an owner is a named insured under its own CGL policy and an additional insured under the contractor’s CGL policy, the two insurance companies have to determine which of their respective policies is primary. This often leads to disputes because each carrier argues that the other’s policy should be considered primary. An OCP policy minimizes these disputes because an OCP carrier agrees that its insurance policy provides primary coverage to the owner and that it will not seek contribution from the owner’s own insurance policy or from the CGL policy of the contractor that purchased the OCP policy.

CONTRACTUAL PITFALLS

A contractor must be careful when negotiating his or her construction contract with the owners. Contractors must understand the unintended consequences that arise when the owner requires the contractor to purchase the OCP policy and to indemnify the owner for personal injury and property damage arising from the contractor’s negligence in performing its work. In practice, if an accident occurs during construction—an employee of a subcontractor is injured, for example—the employee will sue both the contractor and the owner. The owner will respond by seeking coverage under the OCP policy. The contractor, in turn, tenders to its own CGL carrier, expecting that the OCP carrier will defend the owner and that the contractor’s GL carrier will defend the contractor.

What occurs is the attorney appointed by the OCP carrier to defend the owner asserts a claim against the contractor for contractual indemnification and demands that the contractor (Contractor’s CGL carrier) defend and indemnify the owner pursuant to the indemnification provision in the construction contract. Under these circumstances, not only does the contractor have to pay for an entirely separate OCP policy for the owner, but once coverage under the OCP policy is triggered, the OCP carrier circles back and tenders the claim on the contractor’s CGL policy through the construction contract’s indemnification provision. Simply put, the contractor pays for the OCP policy and then faces increased CGL premiums because of the costs associated with responding to the contractual indemnification obligation.

Contractors (and owners) must understand the interplay between an OCP policy and a contractual indemnification provision. To the extent that an owner is demanding that a contractor purchase an OCP policy, the contractor should attempt to negotiate the elimination of any contractual indemnification provision that requires the contractor to defend and indemnify the owner for claims for personal injury and property damage that are covered by the OCP policy.

 

 

Texas Supreme Court Cleans Up Fifth Circuit’s Mess

C. Clay Olson:

Texas decision limits contractual obligation exclusion. See attached article discussing important construction defect coverage decision.

Originally posted on Green Building/Construction Law:

Construction In a decision released about seven weeks ago (sorry, I’ve had things to do!), the Texas Supreme Court held that a general contractor’s contractual obligation to perform its work in a good and workmanlike manner would not trigger the contractual liability exclusion in its policy. Ewing Const. Co. v. Amerisure Ins. Co. , ___ S.W.3d ___, No. 12-0661, 2014 WL 185035, *1 (Tex., Jan. 17, 2014). Apologies in advance, as this post will only be of interest to the lawyers (even that may be optimistic)…

Background: Ewing Construction Company entered into a contract with a school district. The school district eventually filed a construction defect action in Texas state court. Amerisure, Ewing’s insurer, denied Ewing’s request for a defense and indemnification, relying on the policy’s contractual liability exclusion, which stated there would be no coverage for “‘property damage’ for which [Ewing] is obligated to pay damages by reason of the…

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Is the U.S. Green Building Council Becoming a Not-So-Jolly Green Giant?

C. Clay Olson:

LEED construction and where it is headed

Originally posted on N.C. Construction Law, Policy & News:

Friday Forum As folks who travel in sustainability circles know well, the Leadership in Energy and Environmental Design green rating system, better known as LEED® certification, is far and away the industry leader when it comes to validating green construction projects.  Developed by the Washington, D.C. non-profit the U.S. Green Building Council (“USGBC”), LEED had been used to certify the green bona fides of more than 55,000 projects around the world as of October 2013; by way of comparison, a rival system, Green Globes, had been used for just 850 .

My Twitter feed has featured a series of “good news” chirps for USGBC lately.  For example, about a month ago, the agency touted its release of the 2013 Top Ten States for LEED (North Carolina cracked the top ten at #7):

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Extreme Climatic Events Provide Important Insights For Resilient Design

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C. Clay Olson:

Great post. High wind events are usually followed by construction defect and coverage suits so this is always pertinent.

Originally posted on The Building Enclosure:

Extreme Weather 2 Extreme climatic conditions are those falling in the upper or lower tenth percentile of the local period of record. North American hygrothermal datasets rely on such extremes in simulating climatic effects on building performance. Prior to 2012, WUFI employed customized 30-year hourly data provided by the U.S. Department of Energy for the 1961-1990 period of record. This dataset was supplemented with hourly rainfall data, providing hygrothermal years selected from the 10th percentile of the warmest and coolest years. The DOE-WUFI climate files represent composite Hygrothermal Reference Years, not contiguous weather years.

In 2011, ASHRAE 1325-RP developed Moisture Design Reference Years (MDRY) from hourly climate records for 100 locations in the United States and 7 locations in Canada. The current data include a collection of three ‘worst’ years for each location. ASHRAE 1325 recommends the third year, which corresponds to the 10th percentile for a 30-year dataset and a severity event…

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Lost Profit Claims in Construction Litigation: Speak Now, Or Forever Hold Your Peace?

Image by Nemo / pixabay.com

C. Clay Olson:

Lost profits in context of construction defect litigation. A North Carolina opinion and great article by Matt Bouchard, Esq

Originally posted on N.C. Construction Law, Policy & News:

In an unpublished February 18, 2014 decision, the North Carolina Court of Appeals (“COA”) refused to let a project owner pursue drastically higher lost profit damages after its counterclaim had been tried, appealed and remanded for further findings on the issue of damages.
Image by Nemo / pixabay.com

Image by Nemo / pixabay.com

In J.T. Russell & Sons, Inc. v. Silver Birch Bond, LLC, the owner, Silver Birch Pond (“SBP”), was the developer of a subdivision that had hired a paving company to perform the project’s asphalt paving work for about $150,000.  SBP refused to pay for the work, citing deficiencies in the contractor’s performance.  At trial, SBP successfully defeated the contractor’s claim for payment and prevailed on its own counterclaim for construction defects, but on appeal, the contractor successfully argued that the jury’s award of damages wasn’t fully supported by the evidence.  The COA agreed, sending the case back to the trial level for further…

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