Brad Pitt is in the news once again. This time, however, Pitt is seeing headlines in architectural and building materials journals as a result of litigation which has spawned from his Make it Right Foundation’s efforts in the Ninth Ward post Hurricane Katrina.
Make it Right was recently named in class action allegations made by beneficiaries of a sustainable project hyped as a renewal for storm ravaged New Orleans. This project was one of several high profile Katrina related endeavors.
Construction began in 2008, working toward replacing portions of lost housing with 150 avant-garde dwellings. The residences were touted as storm-safe, solar-powered, highly insulated, and “green.” The homes were available at an average price of $150,000 to residents who received resettlement financing, government grants and donations from the foundation itself.
Pitt has publicly spoken about the pride he feels with regard to the project. It can not be suggested that his motivations were anything less than pure.
At the risk of editorializing, I am friends with an individual who was involved with MIR. This person always had the nicest of things to say about Brad Pitt and his efforts. This isn’t a critique of good deeds gone wrong.
On September 7th, two homeowners filed a lawsuit against MIR on behalf of themselves and others similarly situated. The lawsuit cites mold, poor air quality, structural failures, faulty heating, ventilation and cooling, electrical malfunctions, plumbing mishaps and rotting wood among the deficiencies.
MIR has now filed suit against architects who were paid large sums during the design phase of construction based, in part, on sustainable “green” building products specified by those architects.
The cases against MIR and design professionals assisting MIR will likely name additional defendants as legal concepts such as indemnity, warranties of habitability, warranties related to plans and specifications , and product liability will serve to render this a story not fit for TMZ.
Legal practitioners, insurers, construction professionals and design professionals should pay attention as the case is likely to further the age old concept which cautions against the abutting of dissimilar and untested materials in the construction and renovation of residential and commercial structures.
Court rules that insurers must treat notice of claim for construction defects as a lawsuit for purposes of duty to defend. A pre suit letter is deemed to be a “suit” or “suit papers” in a policy.
The Sapphire Condominium in Fort Lauderdale (Credit: Keller Williams Realty)
Florida has issued a controversial and sweeping ruling which will impact insurers in the construction defect arena. “w]here an insurer issued a commercial general liability policy to a general contractor, the property owner’s notices of claim invoked the insurer’s duty to defend the contractor under the policy because the notice and repair pre-suit process of ch. 558, Fla. Stat., was an ‘alternative dispute resolution proceeding’ under the policy’s definition of ‘suit.’” Id. Altman Contrs., Inc. v. Crum & Forster Specialty Ins. Co., No. SC16-1420, 2017 Fla. LEXIS 2492 (Dec. 14, 2017)
The notice which triggered the duty to defend in Altman was Florida’s 558 Notice which is similar to South Carolina’s Notice and Opportunity to Cure letter.
Each day brings another detail about how what was intended to be a charming, $14-million pedestrian bridge at Florida International University near Miami took only seconds to become a national tragedy. The partly completed structure’s sudden, catastrophic collapse at 1:47 p.m. on March 15 killed five motorists and one project worker. Robert L. Sumwalt, chairman of the National Transportation Safety Board, which is conducting one of several investigations, said the design-build contractor’s handling of risks—including those associated with continuing construction over live traffic—will be a focus . . .
— Read on www.enr.com/articles/44160-before-collapse-bridge-builders-dismissed-concerns-about-cracks
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;
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;
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 firstname.lastname@example.org
In Mississippi email James Harper email@example.com
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.
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.
While the South Carolina Construction Defect Blog focuses legal issues impacting CD litigation, we would not be providing “full treatment” to the topic if we did not, once and a while, discuss case law with subject matter outside the realm of defective construction as these discussions directly affect construction defect litigation.
Additional insured policy endorsements are a powerful weapon, in theory. The concept known as an “additional insured” refers to a person or organization that enjoys the benefits of being insured under an insurance policy, in addition to whoever originally purchased the insurance policy. Typical language within insurance policies seeks to limit the subject matter that can be “additionally insured.” Standard policy language providing for additional insured treatment states something similar to the following: “any person or organization whom you (the named insured) are required to add as an additional insured on this policy under a written contract … that person is only an additional insured with respect to liability arising out of ‘your work’ for that additional insured.” The limits of this coverage is still being tested, defined, and applied within the contract law(s) of individual states.
In New York, the Court of Appeals ruled that a subcontractor had a duty to defend and indemnify an upstream contractor based upon the language of the additional insured endorsement, which provided coverage to the superior contractor for claims “arising out of” the operations of a subcontractor. The court rationalized that the additional insured coverage need not be restricted to actions or omissions limited to the scope of the subcontract duties as the only requirement is that “there be some causal relationship between the injury and the risk for which coverage is provided.”
The scope of coverage “is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained.”
Although this site attempts to address South Carolina precedent, trends, and other events which might impact the construction and insurance industries in South Carolina only, our blog tracks cases in other jurisdictions these are indicative of how the courts in Columbia might treat a similar factual scenario. The impact of the decision is potentially significant in that insurers will have an obligation to provide coverage for additional insured(s) for activities that do not necessarily involve negligence on the part of their named insured, and where there may be negligence on the part of the additional insured. There need only be a logical connection between the work being performed by the named insured and the accident giving rise to a personal injury claim. The potential negligence of the additional insured, even if it contributes to the injury, will not serve as a basis for disclaiming coverage to the additional insured.
South Carolina Insurance Coverage in 2009
In the recent Supreme Court ruling on appeal of Auto Owners v. Virginia Newman, et al, (Newman II), the question was presented as to whether faulty construction that causes physical damage to tangible property (residential home) will trigger insurance coverage. In the initial case (Newman I), assertions were made by a claimant that Trinity Construction built a defective home for Virginia Newman back in 1999. The primary issue surrounded a subcontractor’s stucco application to the home’s exterior, and damages resulting from the application. As an interesting side note, this was not an EIFS clad home, rather, traditional Portland cement/traditional stucco.
The Plaintiff in the case, Ms. Newman, noticed water intrusion and subsequently retained an inspector to document the issues. The expert (Engineer) observed that the stucco was improperly installed and the stucco, sheathing, and other components were damaged. An arbitrator awarded Ms. Newman nearly $56,000 for her claims against Trinity.
Auto Owners had issued a CGL policy to Trinity, and the claim was defended under a reservation of rights by the insurer. Auto Owners filed a declaratory judgment action as South Carolina case precedent was murky, at best after the LJ-Bituminous decision in 2004.
In its first published opinion on the matter, our court of appeals held that defective construction was an “Occurrence” as determined by rules of construction in the insuring agreement issued to Trinity. Further, the court held that any exclusions (EIFS/Stucco etc) was construed in favor of the policyholder if the work excepted was performed by a subcontractor. Of particular significance was that the interior damage to elements other than the cladding were covered as was the stucco removal due to the fact that the siding had to be removed in order to reach the damaged interior components.
In September of 2009, the court withdrew and re-issued its opinion. In a bizarre twist, the opinion relies not on the subcontractor exclusion, or stucco exclusion, rather the rarely considered “Sistership” Exclusion. In reaching this conclusion, Chief Justice Toal reversed her earlier holding that the cost to remove the stucco was covered. The opinion seemed to further validate the concept that defective work performed by a subcontractor is an “occurrence” and, therefore, a damage which is covered.
Newman clarified that coverage does not exist for the removal and demolition of exterior components excluded under the policy. This is the most significant aspect of the opinion as logic would now presume that other defective construction claims will be interpreted and evaluated using the Newman case.
1. Roofing Material Removal: Not covered in situations where leaking causes a roof to be removed in order to access and correct water damaged areas beneath the roof membrane.
2. Windows and Doors: Removal and replacement would, arguably, not be covered to make corrections to components such as pan flashing. windows pulled to install flashing omitted during original construction. The biggest losers, though, may be homebuilders and commercial contractors who purchased CGL policies over the years, believing they were covered for all damages.
3. HVAC and Electrical: Removal and replacement of equipment would not be covered when such removal is necessary to correct issues involving floor deflection, indoor air quality, and caulking/fireproofing issues.
HISTORY AND BACKGROUND
The September 2009 decision was actually the second opinion on the issue as well as a rehearing of Auto Owners Ins. Co. v. Newman, 2008 WL 64856 (S.C. Mar. 10, 2008) (Newman I). Newman I overturned the LJ case which is mentioned above. The LJ opinion was doomed from its inception as it was based on a non-traditional factual pattern whereby damage to a road (Cracking) was determined to have been caused by a subcontractor’s work. In sum, the court found no coverage due to the court’s opinion that the “Your Work” exception was applicable to the entirety of damages as the cracking was the only “damage” and that damage was the subcontractor’s work product.
Because of the facts surrounding LJ, lawyers immediately looked for a case to overturn the opinion. Since most construction defect cases involved houses and other commercial, horizontal structures, insurance policies were typically covering these risks, not highway construction.
Newman I was the case that made the cut, as the SC Court of Appeals ruled in 2008 that defective stucco work performed by an insured subcontractor was covered under the general contractor’s policy. The court found an “Occurrence” (Prong A) had caused physical damage to tangible property (Prong B) due to water intrusion causing damage to the component products and labor of other trades. The court attempted to further clear up any confusion by listing the actual areas of the home that were damaged outside and apart from the actual stucco siding.
POLICY INTERPETATION UNDER NEWMAN I
The court relied on the plain meaning examination of the insurance policy in question which both fail to define “accident” or “physical damage to tangible property” in the context of a trade contractor’s work damaging the work of another trade. For example, it is not clearly defined whether a window installer’s defective placement of windows triggers coverage for damages to the interior wall and floor.
Significantly, the court in Newman I determined that costs associated with remedying the other property damage that resulted from an “occurrence”, the removal of such otherwise excluded work was also covered. This issue prompted the rehearing.
AUTO OWNERS INSURANCE AND CLARIFICATIONS SOUGHT BY REHEARING
AO argued that, based on L-J v. Bituminous, there was no “occurrence” within the terms of the CGL policy considered by the court in Newman. Once again, the court disagreed and upheld its prior holding that the negligent application of stucco by the subcontractor resulted in an “occurrence” of water intrusion, resulting in “property damage” that was tangible and adversely impacted the home owned by Ms. Newman. Hence, the court ruled that this was covered.
The court reiterated that the subcontractor’s negligent application of the stucco did not, in and of itself, constitute an “occurrence” absent tangible damage to the work or products integrated within the house by others. The Supreme Court appears to be in line with the definition of an occurrence as opined by the SC Ct. of Appeals as recently as Spring, 2009 in Auto Owners v. Rhodes.
The South Carolina Supreme Court in Newman II also addressed the applicability of two exclusions in the CGL policy. Auto Owners argued that, even if an occurrence was present, indemnity was not appropriate if that damage was within the expected or intended damages exclusion that was discussed in a very important Texas opinion, Lamar Homes v. Mid-Continent Casualty.
In this argument, Auto Owners contended that damages awarded to Ms. Newman which were relative to the framing and exterior sheathing of the home were not covered due to the assumption that a builder should expect moisture intrusion from defective stucco placement to result in water related damages. The court ruled that it was not reasonable to assume a contractor intended or expected an inferior product, citing the Lamar Homes decision. Therefore, the court rejected the argument based on the expected or intended injury exclusion, that argument being essentially a restatement of arguments rejected by the courts listed above as to the ability to foresee property damage arising from defective workmanship.
The “Sistership Exclusion” was effectively argued by Auto Owners in Newman II. (Author’s Note: Many of us that practice in the construction realm anxiously awaited the Newman II decision and had varying theories as to how the court would come to either one or two conclusions regarding the defective work of a subcontractor. In my discussions, I never heard the sistership exclusion mentioned once. I bashfully admit that I had not ever heard of it, much less considered it).
The Sistership argument is based on the following logic:
Even if the damage to the home constituted an occurrence of property damage to tangible property within the insuring agreement, the exclusion nullified coverage for replacement and repairing defective stucco itself as an incidental cost to repairing the damage to other property.
The “sistership exclusion,” is an often ignored element of the standard CGL policy as it argues that there is no coverage for damages claimed for any loss, cost, or expense incurred as a result of the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal, or disposal of the insured’s product, work, or impaired property in the event such is withdrawn or recalled from the market or from use because of a known or suspected defect, deficiency, inadequacy, or dangerous condition in it.
Everyone ignored this ancillary, “Plan C” argument. Everyone but the court, that is, as it agreed with this argument. In contractual matters, the insurance policy is to be read and applied independently of any other exclusion. Since the subcontractor exception preserved coverage for property damage that would otherwise be excluded as the named insured’s work, the court pointed to another exclusion that barred coverage for damage to the defective workmanship itself.
There is wide speculation that the court’s reliance on this exclusion will serve to further muddy the waters. This reasoning states that a “Product Recall” exclusion (“Sistership) should not be applicable in the analysis of property damage and coverage in residential or commercial construction. The court’s reasoning is troublesome to both defense attorneys and those that represent owners of property in construction defect claims. The court appears to have ignored the primary issue on appeal, which was whether construction deficiencies causing physical damage to tangible property constitute “occurrences” and “property damage”.
The reliance on obscure exclusions or endorsements affecting coverage is damaging to both contractors and their insurers as both sides want some clarity. If you build houses, you have the right to know whether or not your policy will cover your subcontractor’s work. As an insurance company, billions of dollars rest on the same question. Therefore, the construction industry and insurance industry should certainly agree that consistency is needed if they are going to engage in business practices which are based on some element of risk. Had the court answered the primary issues left open by LJ and Auto Owners I, the construction industry would have a better idea as to what their policies covered and, just as importantly, the insurance industry would have a much better gauge on pricing these policies of insurance. To be continued.
Clay Olson is an attorney in Charleston South Carolina at Olson & Good, PC. With multiple locations in Charleston County, Mr. Olson serves Olson & Good clients in construction matters including insurance defense, construction defect litigation, mechanics lien, commercial loan modification and foreclosure. Mr. Olson services several industries in collection issues, risk transfer and management of business risks, insurance coverage and policy language.