Ongoing Operations and Completed Operations Coverage

I often speak with prime contractors and owners who assure me that they require subcontractors to name them as additional insureds. This is the correct line of thinking as additional insured treatment is one of the key principals to adequately transfer the risk of construction defects or non property injury.

The devil, as they say, is in the details, however. During these inquiries I often ask for a copy of subcontract documents which, all too often, remain unclear as to the insurance policy requirements of subcontractors who are naming the prime contractor as an additional insured. For instance, the subcontracts are sometimes vague as to what coverage must be obtained by the subcontractor in order to adequately insure the general.

A prime contractor seeking additional insured coverage is limited to that specific coverage possessed by the subcontractor. For instance, if a subcontractor's policy is subject to exclusion(a), it follows that the prime contractor will also be excluded by those limitations.

Perhaps more widely overlooked is the fact that CGL policies recognize two forms of insurance. The first is completed operations coverage. This is the coverage which is triggered after completion of the project. It is key to triggering coverage for latent defects. The other form of coverage is ongoing operations coverage, which is the coverage which protects the parties during the period beginning at project commencement and ending at project completion.

The latter coverage, ongoing operations, is key in many job related injuries. For example, during the construction of a hotel, the subcontractor constructing the elevator fails to secure the opening and, tragically, a non employee or pedestrian is injured after falling several stories while exploring the construction site after work.

A claim like the one I just highlighted can be catastrophic, subjecting the prime contractor and sun to a multi million dollar judgment. Without obtaining ongoing operations coverage, both entities are "naked" when a claim is made that the injury occurred due to the subcontractors failure to secure the shaft.

A general contractor should take the small additional step of requiring both types of CGL coverage by having its contracts specifically require subcontractors to name it as an AI for both ongoing operations and products-completed operations coverage.

To discuss Additional Insured details in South Carolina and securing adequate protection, please contact Clay Olson of Harper Whitwell PLLC at 843-224-6676. Email clay@harperwhitwell.com.

DELAY CLAUSES IN CONSTRUCTION CONTRACTS

Delays on construction projects cost money. Because delays are typically the result of several factors and actors, contractors need to address delays and the apportionment of damages in their contracts.

No Damage for Delay Clauses

These clauses are exactly as they sound.  The enforceability of these varies from jurisdiction to jurisdiction.   South Carolina has ruled “In many respects, SC policy does not favor punishing a party for a delay arising from negligence and unlucky circumstances.  Generally, no-damage-for-delay provisions are valid and enforceable so long as they meet ordinary rules governing the validity of contracts.” U.S. for Use and Benefit of Williams Elec. Co., Inc. v. Metric Constructors, Inc., 325 S.C. 129, 132, 480 S.E.2d 447, 448 (1997). South Carolina recognizes several exceptions to this general rule, including “delay caused by fraud, misrepresentation, or other bad faith; active interference; delay which amounts to an abandonment of the contract; and gross negligence.” Id. at 137, 480 S.E.2d at 451.

Logic tells us that damages should be paid by the party causing the delay.  Very often, delays are caused by multiple parties relying on a condition which fails to occur or, sometimes, delays are simply the fruit borne from the confluence of confusion and justifiable misunderstanding.   

Drafting a No Damage for Delay clause can result in an instant debate settler and limit the likelihood of a lawsuit which might cause further delay and waste. Contractors and subcontractors faced with No Damage for Delay clauses can adjust their prices to account for increased risk or, in some cases, elect to pursue other opportunities.

Negotiation of Clauses 

Allocation of risk for delays should be considered and thoughtfully negotiated.   AIA and Consensus  Construction contracts frequently include some type of No Damage for Delay clause. For example:

No payment or compensation of any kind shall be made to the Contractor for damages because of hindrance or delay from any cause in the progress of the work, whether such hindrances or delays are avoidable or unavoidable;

or,

Contractor agrees that it may be subject to delay in the progress of the work and that the sole remedy for such delay shall be an extension of time;

or,

In the event the subcontractor’s performance of this subcontract is delayed by acts or omissions of the owner, contractor or other subcontractors, subcontractor may request an extension of time for the performance of this subcontract, but shall not be entitled to any increase in the subcontract price or to damages or additional compensation as a consequence of such delays.

Courts generally enforce No Damage for Delay clauses.  Courts generally enforce all contractual clauses between businesses.    One way for contractors and subcontractors to avoid such clauses is to use an unmodified industry form agreement such as ConsensusDocs 200 -Agreement and General Conditions between Owner and Constructor or ConsensusDocs 750 -Agreement between Constructor and Subcontractor which do not have No Damage for Delay clauses. But many owners and contractors will use their own form which will frequently include a No Damage for Delay clause.

Even if the contract includes a No Damage for Delay clause, the clause may prove to be unenforceable.

Next time we will examine exceptions to No Damage for Delay Clauses

As always, any questions in SC call or email Clay Olson.   843-224-6676 clay@harperwhitwell.com 

In Mississippi email James Harper james@harperwhitwell.com

Insurance Market Leader Ames and Gough report Premium Price Decreases

Although a slim majority of insurance companies providing architects and engineers professional liability insurance saw their rates stabilize in 2016, nearly one in three experienced modest rate decreases, according to a new survey by Ames & Gough.

Despite intense competition, insurers are maintaining underwriting discipline and placing greater emphasis on claims experience. This year, 95 percent of the insurers surveyed identified recent claims experience as a top reason to raise a firm’s professional liability insurance rates, a significant jump from the 79 percent that cited the factor last year. The other top three underwriting factors this year are: type of projects (84 percent); historic claims experience dating back more than two years (63 percent), and type of work or service (47 percent).

When asked whether plans to develop and repair the U.S. infrastructure raised concerns for architects and engineers professional liability exposures, 63 percent of the insurers surveyed cited the failure of design firms to adhere to contractual best practices when negotiating new projects, 53 percent pointed to firms accepting contractual responsibility outside their expertise, and 32 percent were wary of the inability of design firms to effectively assess and manage subconsultants.
“Even though there’s widespread enthusiasm over opportunities arising from the anticipated investment in infrastructure, design firms still need to maintain sound risk management in evaluating new projects, beginning with reviewing their contracts,” said Joan DeLorey, Ames & Gough senior vice president and partner. “While the insurance market is competitive, the buyers benefitting the most will be those that maintain high standards for managing risk, including evaluating the risk-reward potential of new projects and knowing how a change in project mix might affect their risk profile and insurance program.”
For the second consecutive year, 79 percent reported no change in their overall claim activity compared to prior years; in 2016, however, a greater percentage of insurers (21 percent) saw their claims experience improve and none had a worse experience.
Meanwhile, insurers have been monitoring emerging issues. Among the most prominent were: judicial rulings that are eroding protections for design firms under state statutes, such as economic loss doctrine (79 percent); evolving project delivery methods (e.g., design-build and private-public partnerships), cited by 68 percent; innovation, such as the use of BIM, technology and new construction materials/methods, and international exposures (each at 32 percent).

The Miller Act and Performance Bonds

The Miller Act, 40 U.S.C. §§ 3131–3134, provides that, before any contract for the construction, alteration, or repair of any public building or public work of the United States of more than $150,000 (increased fris awarded to any person, that person (usually the general contractor) must furnish:

(1) A performance bond in an amount the contracting officer considers adequate for the protection of the United States;

The United States and federally created bodies such as GSA are the beneficiaries of the performance bond piece.  If an awarded prime contractor defaults in the performance of its work or is terminated for cause, the United States may turn to the surety to step in and take over the general contractor’s obligations under the prime contract.  Bond language allows the surety to bring another qualified entity to finish the work, at the surety’s expense on behalf of citizens.

 

The Miller Act: An Introduction

The Miller Act is codified at 40 U.S.C. §§ 3131-3134.  The Act requires a general contractor contracting with the federal government or a federal governmental entity for a construction project with a contract in excess of $150,000 to obtain both a performance bond and a payment bond.

The Miller Act’s primary function is to foster construction and development in the public sector, while protecting infrastructure and public projects from the potential lien rights of material suppliers and subcontractors.

Miller Act v. Mechanics Lien

When a subcontractor is not paid for labor or materials furnished to a prime contractor in a private construction contract, the aggrieved party is normaly able to seek recourse if not paid by taking out a mechanic’s lien against the property. However, the doctrine of sovereign immunity prohibits a lien being taken out against any public property, and this applies to construction contracts awarded by the federal government.

To afford subcontractors a form of redress, Congress enacted the Miller Act (40. U.S.C.A. § § 3131 and 3133).   In our next installment we will discuss specific details covered by the Act including the distinctions between a payment bond and performance bond.

If interested in this topic, please see next post on performance bonds.

 

 

 

 

 

Construction Manager entitled to Additional Insured Status

A recent decision in New York has held that a construction manager was entitled to additional insured treatment under a general contractor’s CGL policy.  Turner Constr. Co. v. Navigators Ins. Co., 2015 N.Y. Misc. LEXIS 2704 (N.Y. Sup. Ct. July 23, 2015).

The Construction Manager (“Turner”)    was hired to “provide pre-construction services and construction management services for the Project.”  

The owner hired two prime contractors under condition that each would procure endorsements to their CGL policies which were to name the owner and a “construction manager” which went unnamed.  

Plaintiff in the underlying suit, Edward Walls, was an employee of a prime contractor and was injured at the job site. He sued Turner and others for injuries. Turner claimed it was an additional insured under a Travelers policy which was issued to the prime contractor employing Plaintiff. Travelers argued Turner was not an additional insured because it was not named in the policy and was nowhere identified as the construction manager. Travelers further contended that Turner was not entitled to a defense because its costs in the underlying action did not equal the deductible in the Travelers’ policy.

The court found that Turner was the construction manager and the contractor’s promise in the contract with the project owner to provide additional insured coverage for the construction manager applied to Turner. 

The court went on to find that additional insured status was conferred under Travelers’ policy for any entity that the insured was required by a written contract to name as an additional insured.  

It was of no consequence that Turner was not named specifically in the contract or policy. Therefore, Travelers had a duty to defend Turner.

Florida Rules Developer Not Entitled to Additional Insured Coverage for Negligent Misrepresentation

A Florida court has determined that a project owner’s (Cypress) general partner was not an additional insured under an insurance policy issued to the Genral Contractor (WPC) who constructed the project.  The ruling was made in conjunction with a lawsuit brought by a homeowners association for construction defects, maintenance issues and failure to disclose material facts.  WPC’s insurer (St. Paul) was not obligated to defend or indemnify General Partner (Vineland) for damages arising from alleged construction defects. St. Paul Fire & Marine Ins. Co. v,. Cypress Fairway Condo. Ass’n (M.D. Fla. July 20, 2015).

It should be noted for factual understanding that Cypress and Vineland were both named additional insureds on three policies issued to WPC.  These policies were issued in 1999-2001 by St. Paul to WPC.  Cypress and Vineland were named as separate defendants and alleged to have mismanaged the property and negligently omitted information allegedly relied upon by buyers making up the Plaintiff association.

Defective Construction

While it conceded a duty to defend Cypress, St. Paul argued on summary judgment the policies did not include Vineland as an additional insured because it was not an owner of the property. The policies covered, “[a]ll owners, contractors . . . who require that you add them as an Additional Protected Person in a specific written contract entered into by you.” The construction contract required WPC to indemnify the owner, officers, directors, shareholders, partners and many others. This broad and general indemnification provision did not convert all the indemnitees into additional insureds. Therefore, St. Paul had no duty to defend or indemnify Vineland.

Negligent Misrepresentation 

As insurer for the general contractor, St. Paul argued it had no duty to defend or indemnify Vineland or Cypress as developer/sellers because the negligent supply of information did not cause property damage. The court agreed. 

Misresentations about the condition of the buildings might have induced Plaintiffs to purchase units, but these misrepresentations did not cause water intrusion and the resultant property damage. Further, representations were not accidents and could not be “events” within the meaning of the policies. While the Association may have suffered economic damage based on Cypress and Vineland’s representations, it did not suffer property damage caused by an event as defined in the policy.

Kentucky Commercial Subcontractor’s Work Deemed to be Faulty and Insurance Not Triggered

ImageA recent unpublished opinion by the Sixth Circuit Court of Appealshas held that a contractor’s allegedly poor workmanship did not   constitute an “occurrence” under the contractor’s policy of insurance.  The facts in this matter can be summarized, as follows:  Wal-Mart contracted with MW Builders (“Contractor”) to construct a new store in Kentucky. Contractor subcontracted the site preparation and some preliminary foundation work to a subcontractor specializing in infrastructure related work. (“Site Subcontractor”)

Wal-Mart put Contractor on notice when cracks and other blemishes began to appear in the concrete areas constructed by Subcontractor.  The Contractor subsequently notified Subcontractor and demanded remedy.  Subcontractor put its insurer on notice, and the claim was denied under the “your work” exclusion, citing that damage was contained to the concentrated work area where Subcontractor had supplied labor and materials.  Subcontractor challenged its insurer’s decision and prevailed in a summary judgment motion which was appealed.

The Sixth Circuit Court of Appeals reversed the trial court’s decision, holding that the damages caused by Subcontractor’s deficient workmanship were damages to the part of the project that was “within the control” of Subcontractor. The Sixth Circuit distinguished this from situations in which a general contractor’s work, or the work of a subcontractor, damaged other parts of a project.

Editor’s Note

The matter discussed in this entry is not anymore significant from similar rulings from other states discussed in this blog before.  I bring your attention to  Liberty Mutual Fire Insurance Co. v. Kay & Kay Contracting L.L.C. and MW Builders Inc., however, because it illustrates how facts, and not contract law, may govern the court’s ruling in certain instances.

In the MW Builders case, Subcontractor’s scope of work was limited to offsite fabrication of a building pad.  This type of offsite construction, which is limited to one specific trade, can be factually distinguished from situations in which a subcontractor’s work is performed onsite, in and around the work of the general contractor and other subcontractors.  Kentucky may not be stating, per se, that faulty work will never be covered under a policy of insurance in that state.  The localized damage, in this case, is clearly to the insured’s work product and this might have provided the most significant factor in the court’s reasoning.

This blog discussed the “occurrence” issue at length during 2009 and 2010.  In sum, not too much has changed as the norm remains that states treat this issue in varying ways.  Some attempt to organize holdings from state to state in an attempt to determine exactly what each state’s position is with regard to the issue of faulty work and the existence of an occurrence.  In reality, however, it is not always black letter law which governs each state.

When the Plans & the Code Don’t Mix, Can a Sub Sue a Design Professional for Negligence?

Great article by Matthew Brouchard, Esq. on the rights of a subcontractor to sue design professionals for inadequate plans

N.C. Construction Law, Policy & News

Talk about being stuck between a rock and a hard place.

You’re an electrical sub who notices during your performance that installing certain light fixtures per plans would run afoul of the manufacturer’s instructions and violate the building code.  You bring the issue to the attention of your general contractor, who submits an RFI.  The architect’s response directs you to proceed per plans.  The system later malfunctions, and you incur significant cost researching the problem, ultimately concluding that the installation method directed by the architect is the culprit.  The architect refuses to pay your costs for researching the issue.

Might you have a claim for negligence against the architect?

View original post 653 more words

An LLC does not shield active members from liability in South Carolina Construction Defect ruling

In this case of first impression arising from a general contractor’s liability for construction defects, the Court held that a member of a limited liability company (LLC) can be held personally liable for negligent acts committed while working for the LLC of which he was a member. The Court stated that, based upon the General Assembly’s intent, the Uniform Limited Liability Act does not shield the member from personal liability from his own torts.

Opinion in Jade Street