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Inside This Issue:
* Surety Hit with Substantial Punitive Judgment
* Violation of
New York City Ordinance Does Not Constitute Negligence Per Se
*
Architect Cannot Sue Construction Manager for Negligence
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Results
of Our Request for Reader Feedback
Thanks to all who responded to our request for feedback on how we
are doing at issuing a newsletter meeting your needs.
The vast majority of responders said to just keep doing what we
are doing – that the content and mix of articles is what you want.
Most of you prefer receiving it in plain, simple e-mail where you can
read the entire text without going to links or websites.
Very few felt we should change over to the more professional
looking HTML format. A
frequent comment was that you prefer content and speed over good looks.
So, we will continue sending it in the current e-mail format
since that seems to work.
I was surprised to learn how few of you know about or use the
website for viewing back issues of the newsletter or searching by
subject matter for topics of interest to you.
Please try it out. A
new feature that will soon be added will be a community discussion board
in which you can ask questions and review responses by anyone that
chooses to respond to the various issues raised.
In addition to our online risk management course for design
professionals located our website at http://www.constructionrisk.com/course1.htm,
we will be adding several other online courses covering topics such as
risk management in documentation/communication; design-build risk
management; and risk management for construction managers.
The comments received were very encouraging.
Some of you wondered why I (Kent Holland) spend the time and
effort doing this newsletter, and you expressed hope that I am getting
some benefit out of it. Actually,
I wish I were getting some financial benefit, but I still haven’t
figured out how to make any meaningful money on the internet.
This has been strictly a public service.
I enjoy researching, writing, speaking and assisting companies in
managing their construction risks. Producing this newsletter, with its
companion website, is easier than all the writing I have done for law
books, law journals, periodicals, and other publications – a partial
list of which is maintained at http://www.constructionrisk.com/aboutus.htm.
The website is made possible by my 16 year old son, Joel, who is an
exceptional webmaster. In exchange for his professional services, I cut
the lawn, provide him a car, and might help with college costs – if he
stays close to home. You can check out his web design company at http://www.dynamichorizon.com.
He also hosts a TV show called “Megahertz Kids” and operates
several ventures, including a web-based interview program: http://www.streamingfuture.com,
in which kids can learn about career paths by viewing his interviews of
top executives of major corporations. This is more than you wanted to
know about my kid, but I felt like bragging a little, and since you get
to read this for free, I’m entitled to a little editorial license.
===============================================
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Surety
Hit with "A Substantial Punitive Judgment" for
Failing to Settle Subcontractor's Payment Bond Claim
By:
Jerry Katz, Esq.
Katz
& Stone, L.L.P.
Sureties
play a vital role in public construction projects.
As a result, many states have enacted statutory guidelines
regulating how insurance companies and sureties administer claims made
on their policies or bonds. Massachusetts is one such state that has enacted a
legislative framework under which sureties can face substantial punitive
damages if they do not fairly investigate and settle valid bond claims. That framework includes Massachusetts’ Little Miller Act (G.L.c.
149 § 29), its claims settlement statute (G.L.c. 176D), and its
Consumer and Business Protection Act (G.L.c. 93A).
On September 6, 2001, in R.W.
Granger & Sons, Inc. v. J&S Insulation, Inc.; United States
Fidelity & Guaranty, SJC-08338 (Mass. 2001), the Massachusetts
Supreme Judicial Court unanimously affirmed a trial court’s
substantial punitive judgment against a surety that had forced a
claimant to litigate a valid bond claim.
In reaching its decision, the court made clear that in
Massachusetts, sureties who force claimants to litigate bond claims
where liability is reasonably clear will be harshly punished for such
conduct.
In J&S
Insulation, which arose out of construction work performed at Logan
International Airport, the surety failed to effectuate settlement of a
$203,000.00 payment bond claim even after the bond claimant, an
insulation subcontractor, obtained a jury verdict against the
project’s general contractor. After
the verdict was issued, but before the subcontractor’s request for
statutory attorneys’ fees was resolved, the subcontractor demanded the
surety pay the undisputed portion of the judgment (principal and
interest). The surety,
however, ignored the subcontractor’s demand, raised what the court
later described as “insincere defenses” and forced the subcontractor
to litigate collection of the judgment.
The bond claim judgment, which was finally entered some ten
months after the jury verdict, included the base claim for the
subcontract balance, ($203,867.31),
interest ($86,835.02), and the attorneys’ fees ($119,543.50) the
subcontractor spent pursuing its claim.
The general contractor ultimately paid the entire bond judgment
to the subcontractor.
As
a result of the surety’s dilatory conduct, the subcontractor asserted
a claim against the surety for unfair and deceptive insurance practices.
The trial court agreed with the subcontractor and found that the
surety’s “cavalier” attitude toward its legal obligations
“manifestly” violated the Massachusetts statues in question.
In rendering its decision on the unfair practices claim, the
trial court found it particularly egregious that the surety could not
explain why it waited more than four months to respond to the
subcontractor’s original demand, or why its only offer to settle the
claim ($230,000.00 of $373,206.17) was “wholly inadequate” in light
of the damages known to be due the subcontractor at the time of the
offer. Pursuant to the
Consumer and Business Protection Act (the “Act”), the surety was
found liable for twice the amount of the underlying bond judgment plus
interest and the attorneys’ fees the subcontractor spent to recover
the punitive damages award. Accordingly,
the judgment against the surety arising out of the original $203,000.00
bond claim totaled $966,284.94 after the application of the Act.
The surety appealed.
On appeal, the surety argued that since the underlying bond
judgment had been fully paid, it was not liable for any amount at all.
Alternatively, the surety argued that at the very least it was
entitled to reduce the punitive damages judgment by $410,245.83 as a
“credit” for the amount the subcontractor had already been paid
directly by the general contractor.
The
Massachusetts Supreme Judicial Court, however, rejected the surety’s
arguments and affirmed “in all respects” the trial court judgment.
The court noted that the surety’s “unreasonable settlement
practices” clearly denied the subcontractor prompt recovery of the
money it was owed, a direct violation of the law.
In addition, the court rejected the surety’s argument that it
was entitled to reduction of its punitive damages liability by a
“credit” for the amount paid by the surety’s principal.
In rejecting this argument, the court stated that the insurance
practice statutes were expressly designed to deter unfair and deceptive
acts or practices by imposing an “in terrorem” sanction on
defendants who violate the statute.
The court stated that allowing the surety a credit against its
punitive damage liability would undermine the plain language of, and
legislative intent behind the applicable statutory framework.
The
J&S decision represents an important victory for bond claimants in
Massachusetts and provides significant incentive for sureties in that
state to take an active role in assuring that proper claims are promptly
and fairly resolved. Bond
claimants and sureties alike would be well-advised to familiarize
themselves with the applicable claims settlement and insurance practices
statutes and how these statutes may impact their rights and obligations.
About
the Author: Katz
& Stone represented the bond claimant in the appeal before the
Massachusetts Supreme Judicial Court.
For further information contact Katz & Stone at 8230 Leesburg
Pike, Vienna, VA 22182; 703-761-3000; http://www.katzandstone.com.
Jerry
Katz is a nationally recognized attorney whose practice emphasizes
construction law. He is a
prolific writer and frequent speaker on matters of construction law,
construction risk management, risk transfer, insurance, and numerous
related subjects.
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ARTHUR ANDERSEN – Andersen's construction
professionals provide expertise
to clients involved in all aspects of construction contract claims,
including claims avoidance procedures, investigations, contract
compliance reviews, schedule delay analysis, and contract cost audits,
among other services. For more information, contact Ben Nolan, PE, the
principal in charge of Andersen's construction risk management practice
at 703-962-3579.
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ON-LINE CONTINUING EDUCATION –ConstructionRisk.com
is now offering an online continuing education course (with 3 AIA
learning units), created by Kent Holland. It is titled: Risk Management for the Design Professional:
Contract Terms and Conditions. Other
online courses will soon be offered as well.
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Violation
of New York City Ordinance
Does Not Constitute Negligence Per Se
By: J. Kent Holland, Jr., Esq.
An individual who was injured when he fell from bleachers that
were not protected by handrails sued the City of New York and others for
negligence based on an alleged violation of a city building code.
A trial court found that the violation constituted negligence per
se. This was reversed on
appeal, with the appellate court holding that although the code
violation constituted evidence of potential negligence it did not
automatically require a finding of negligence.
In explaining its reasoning, the court found that although New
York City was free to enact building codes, such codes must be
recognized as distinct from State statutes for purposes of establishing
negligence. Under New York law, the court stated, “As a rule, violation
of a State statute that imposes a specific duty constitutes negligence
per se, or may even create absolute liability.
By contrast, violation of a municipal ordinance constitutes only
evidence of negligence.” Even
when a section of the Administrative Code has the force of statute with
respect to its application, this does not determine its tort
consequences. In this
particular case, the court found that in the absence of a violation of a
duty statutorily imposed by the State, it was unwarranted to reach
negligence per se finding. Kevin
Elliott v. City of New York, 95 N.Y. 2d 730; 747 N.W.2d 760 (2001).
--- Risk Management Note
--- Just as a violation
of a local building code may not constitute negligence per se with
automatic liability, proof of compliance with a local building code may
not prove that parties were not negligent.
If, for example, a building code requires a minimum spacing of
six inches between rails on balcony banisters, an architect might argue
that designing within those code requirements proves that it met the
standard of care and could not be found negligent. This might be true.
But how a court rules will likely depend upon the facts of the
case. If, for example, the
banister was located in a high traffic area where infants or small
children might fall through, it is conceivable that an expert witnesses
would testify that the architect should have met a higher standard of
care than what was established by the local code.
This would be based upon what the expert testified ordinarily
would be done by architects on similar projects under similar
circumstances at the time this project was designed.
That expert would have to present evidence that other architects
designed smaller width rails for such projects.
In defending itself, the architect and its insurance carrier
would need to present expert witness testimony showing that the
generally accepted standard was to design the width at six inches.
The local building code would then be used as one source of
evidence to support that standard of care – but might not necessarily
prove the case.
Please
note that creating a claim hypothetical is risky business, particularly
for a risk management consultant to an insurance company. I disclaim in
advance any knowledge of whether this hypothetical resembles any actual
or potential claim situations, and deny any intent to render an opinion
on any actual or potential claim.
About
the Author: Mr. Holland is a construction lawyer. He is a
risk management consultant for Zurich North America Insurance and an
Of-Counsel with the law firm of Wickwire Gavin, P.C. For more
information please see the "about
us" section of this website.
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Architect
Cannot Sue Construction Manager for Negligence
Where the project architect sued the construction manager (CM),
asserting that that the CM negligently
performance its services and thereby impacted the architect’s
services, costs, fees, and profits, the court held that the contract
between the CM and owner did not create a duty of the CM to the
architect, and that the architect no third party rights against the CM
under the contract.
Courts
sometimes impose a duty to protect against pure economic loss even in
the absence of a contract between parties if the injured party is an
intended beneficiary of a contract between the defendant and another
party such as an owner. Here,
however, the court found that the contract between the project owner and
the CM specifically excluded third party beneficiaries and stated that
no third parties would have any rights under the contract.
Moreover, the court was impressed by the fact that the very
purpose of the CM was to assist the school in retaining and negotiating
with other contractors, including architects.
They were expected to review the architect’s cost estimates and
designs. Having such a duty
to the school, “any duty to Architect would represent a potential
conflict of loyalty….”
If
the architect was concerned about protecting itself against losses that
the CM might cause, it could have added provisions to its contract with
the owner to give it such protection.
Another claim by the architect that was rejected by the court was
that the CM owed a duty to indemnify the architect for losses it
sustained. The contract between the CM and owner stated that the CM
would indemnify the owner and its “officers, agents, representatives,
and employees.” The owner
settled a claim against the CM and chose not to require the CM to
indemnify its agents and representatives.
In arguing its right to be indemnified by the CM, the architect
asserted that it had an independent right to enforce the indemnity
requirement in the Owner-CM contract.
Several
reasons for rejecting this argument were given by the court. Although it agreed that the CM could be required to indemnify
agents and representatives of the owner, the court concluded that the
owner had the exclusive right to decide whether to enforce the
provision. This was
supported by the clause stating that no third-party beneficiary rights
were intended under the contract. If
the architect wanted the right to independently enforce the indemnity
provision against the CM, the court says it should have included such
language in the contract. Ratcliff Architects v. Vanir Construction Management, Inc.,
106 Cal. Rptr. 2d 1 (2001).
-----Risk
Management Note----- This
case demonstrates the difficulties that one professional has in suing
another professional for damages alleged to arise out of contracts with
owners on construction projects. Generally,
a party will submit a claim directly to the owner for its damages (or
possibly sue the owner), whether the damages are caused by the owner or
some other party for whom the owner is responsible.
What this court is saying is that if an architect wants to have
recourse directly against a third party such as a construction manager
or contractor, it must clearly make itself a named third-party
beneficiary under that third party’s contract with the owner. For more
examples of cases prohibiting negligence suits arising out of breaches
of other parties’
contracts, see the cases discussed in previous issues of this newsletter
in the subject index under “economic loss.”
http://www.constructionrisk.com/articles.
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DISCLAIMER
This
newsletter is independent of any insurance company, law firm, or other
entity, and is distributed with the understanding that
ConstructionRisk.com, LLC, and the editor and writers, are not hereby
engaged in rendering legal services or the practice of law.
Further, the content and comments in this newsletter are provided
for educational purposes and for general distribution, and cannot apply
to any single set of specific circumstances. If you have a legal issue
to which you believe this newsletter relates, we urge you to consult
your own legal counsel. ConstructionRisk.com, LLC, and its writers and
editors, expressly disclaim any responsibility for damages arising from
the use, application, or reliance upon the information contained herein.
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Copyright 2001, ConstructionRisk.com, LLC
Editor: J. Kent Holland, Jr., Esq.
1313 Dolley Madison Blvd.
Suite 333
McLean, VA 22101
703-623-1932
Kentr@ConstructionRisk.com
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