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______________________________________
ConstructionRisk.com Report with Kent Holland
http://www.ConstructionRisk.com
Vol. 5, No. 3, April 2003
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Inside
This Issue:
*
When to Stop Work for Non-payment
*
Insurance Company that Incorrectly Denied Pollution Coverage Did
not Act in Bad Faith in Failing to Defend and Indemnify its Insured
=====================================
NEW
BOOK by ConstructionRisk.com, written by J. Kent Holland, Esq.
“Construction Law & Risk Management: Case Notes and
Articles”
This book
compiles and organizes case notes, articles and papers written by well
known and respected attorneys and professional consultants for original
publication in a number of newsletters published by a variety of
organizations including law firms, claim consultants, financial services
providers, accountants, design professionals and contractors.
Articles that do not include a specific byline were written by
Kent Holland and first published in the ConstructionRisk.com
Report, or a newsletter of one or more organizations to whom he
contributes articles. The
cases and articles that are included in this book were selected based on
their value for demonstrating risk management principles to be
considered and applied. The
intent is to give a sampling of issues and cases, providing risk
management ideas and information to serve as a useful resource for the
reader.
-- 310
Pages -- FOR MORE
INFORMATION and TO ORDER for $49.00, go to this link: http://www.constructionrisk.com/constructionlawbook/index.htm
=======================================
___________
ARTICLE # 1
___________
When to
Stop Work for Non-payment
By:
Susan Linden McGreevy, Construction Attorney
EVERY
SUBCONTRACTOR has had to deal with slow payment by general contractors
who claim that it’s not their fault – the customer hasn’t paid
them and, in a slow economy, this refrain is heard more and more
frequently.
As sympathetic as the sub
might feel, the unfairness of being held up due to a problem you had
nothing to do with is more than just irritating, especially when
you’ve already had to pay the bills for that work. The temptation to
just stop working is hard to resist, even though general contractors may
be making serious threats and pointing to contract clauses that (they
say) require the sub to stay on the job.
A
Virginia
drywall contractor’s frustration caused him to take the chance, and it
ended him up in court.
Manganaro Corp. was a sub to
HITT Contracting for a Lucent Technologies project in downtown
Washington
. Although Manganaro’s subcontract had a strongly worded “pay if
paid” clause (“Contractor’s receipt of payment by the owner shall
be a condition precedent to the obligation of the Contractor to make any
payment to the Subcontractor”), Manganaro had had the foresight to
negotiate in another sentence that took most of the teeth out of this
clause: “Notwithstanding the above, it is understood the Contractor
has the ultimate obligation to pay the Subcontractor within a reasonable
time regardless of payment status from the Owner.”
When payment was not
forthcoming – due to non-payment by Lucent – after much discussion
and correspondence, Manganaro suspended work. HITT got another
contractor in to complete the work and back-charged Manganaro. The next
step was federal court.
The judge found first that
while a “pay if paid” clause might be enforceable in
Virginia
, this clause was not, given the extra language Manganaro had negotiated
into the contract.
The next question was:
“What’s a reasonable time for payment?” HITT argued that Manganaro
had not given it enough time to at least try to collect from Lucent, but
the court decided that Manganaro didn’t have to wait at all. Accepting
Manganaro’s testimony that 30 days from invoice was a “reasonable”
amount of time, the court ruled that HITT’s persistent failure to pay
within 30 days was unreasonable. Although there were no
Virginia
court decisions directly on this point, “the authorities uniformly
state that a subcontractor who is unreasonably denied payment as he
progresses towards completion is justified in suspending performance
until he is paid.” Manganaro Corp. v. HITT Contracting Inc., 193 F.
Supp.2d 88, 96 (D.D.C. 2002)
HITT argued that even if it
was in breach of contract (and it tried hard to convince the court that
its delay in payment hadn’t been all that bad), not every breach of
contract justifies the other party’s refusal to perform. The court
agreed that this had been the law in
Virginia
for more than 100 years, and that some breaches can be remedied by a
payment of money damages after the fact – such as interest, for late
payments.
Ironically, one of the
reasons why the court went against HITT on this point was that HITT had
inserted in its contract the sentence, “Time is of the essence.”
While HITT (and most other contractors) intended this clause to apply to
Manganaro’s obligation to perform, the court read it as applying both
ways: It meant that HITT had to perform its obligation to pay in an
expeditious manner.
The case was particularly
difficult for the judge to decide, since Manganaro’s billings were not
entirely accurate, and HITT could (and did) argue that it thought it was
making the appropriate payments, or at least partial payments. The court
ruled that it had to look at the objective facts of what Manganaro was
really due, since HITT’s own records would have shown that Manganaro
was due $140,079 when it suspended performance.
“HITT’s breach of its
most fundamental contractual obligation to pay for the work it approved
relieved Manganaro of any further obligation under the contract,
including the obligation to [do extra work] and to do the repair work on
the punch list.”
Not every slow-pay situation
will justify suspension of work, given that business relations will
inevitably be scarred if not totally ruined in the process, and even
with interest of $27,753.60 thrown in, Manganaro was probably not made
whole for all the expense it incurred in taking this dispute to federal
court. Nevertheless, I expect to see the words of this decision quoted
by many lawyers for subcontractors in letters and legal briefs on the
subject of slow payment. And the words just might find their way into
some court decisions in other states.
About the Author:
Susan McGreevy is a partner at
Husch
&
Eppenberger
,
Kansas
City,
Mo.
, 816/421-4800, e-mail to susan.mcgreevy@ husch.com. This
article was first published in Contractor Magazine, the Newsmagazine of
Mechanical Contracting and is reprinted with permission.
Penton Media, Inc.; 2700 South River Road, Suite 109; Des
Plaines, IL 60018; Tel: (847) 299-3101.
=======================================
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=======================================
____________
ARTICLE # 2
____________
Insurance
Company that Incorrectly Denied Pollution Coverage Did not Act in Bad
Faith in Failing to Defend and Indemnify its Insured
When an
insurance carrier refused to defend the owners of a building
under a general liability policy against claims by occupants alleging
injuries from toxic fumes from carpeting, the owners sued the carrier to
enforce their rights under the policy.
They also sued for punitive damages, claiming that the insurance
carrier denied coverage in bad faith.
The courts held that despite an absolute pollution exclusion, the
policy could not be applied to deny coverage for fumes from carpet glue.
On the issue of bad faith, however, the court held that although
the insurance carrier’s failure to indemnify was wrong, it had a
reasonable basis for incorrectly interpreting its policy and, therefore,
it did not act in bad faith.
In Freidline
v. Shelby Insurance Company, 774 N.E. 2d 37 (
Indiana
, 2002), the building occupants complained that substances that were
used to install new carpeting in their offices caused them to become
sick and to suffer bodily injuries.
In response to a request by the building owners to defend them in
the legal proceedings, and to indemnify them in case of judgment, the
insurance carrier declined to do either.
The owners then sued the carrier as stated above.
On the issue of whether the pollution exclusion effectively
precluded coverage, the appellate court concluded that the fumes
emanating from carpet glue were not included in the policy’s
definition of pollutants, and that bodily injury arising from the fumes
would therefore be covered.
The
exclusion provided as follows: “This
insurance does not to: ... Bodily injury and property damage arising out
of the actual, alleged or threatened discharge, dispersal, seepage,
migration, release or escape of pollutants...
Pollutants means any solid, liquid, gaseous or thermal irritant
or contaminant, including smoke, vapor, soot, acids, alkalis, chemicals
and waste. Waste includes
materials to be recycled, reconditioned or reclaimed.”
The court found this exclusion to be ambiguous and construed it
against the insurance company so as not to exclude coverage for injuries
arising from carpet glue fumes.
On the
issue of bad faith, the court explained that in order to prove bad
faith, the plaintiff would have to establish with clear and convincing
evidence that the insurance carrier had knowledge that there was no
legitimate basis for denying coverage.
In seeking to prove this, the plaintiffs argued that the insurer
knew of previous case precedent from the Court that had found the
definition of pollutants to be ambiguous, and which had strictly
construed the pollution exclusion against insurance companies.
The court acknowledges that in several reported decisions it did,
in fact, find the pollution exclusion to be ambiguous, and that it had
construed the language strictly against the insurance companies.
The court noted, however, that the defendant insurance carrier in
this case argued that each of those previous decisions dealt with
business operations that involved the “handling and use of toxic or
potentially polluting substances, so that the pollution exclusion would
virtually negate coverage.” In
contrast, the carrier argues that this case should be viewed differently
because the insured building owner owns an office building which is an
operation that does not regularly use toxic or caustic substances.
They also argued that those previous cases involved environmental
clean-up costs, whereas the instant case involves bodily injury to
office workers. The
insurance company cited to the court numerous recent out-of-state
decisions holding that injuries resulting from similar types of
emissions are excluded from insurance by the pollution exclusion.
Based on
the good faith arguments and logic presented by the insurance company,
the court found that there was a rational basis for the company’s
decision, even though that decision was wrong in the opinion of the
court.. Consequently, the
insurance carrier was entitled to summary judgment in its favor on the
question of bad faith despite the court’s conclusion that the company
would be required to acknowledge coverage against damages arising out of
bodily injuries.
=====================================
ARCH
INSURANCE GROUP
For
information on design professional liability and environmental liability
insurance available from ARCH, contact Richard Zarandona at 973-206-8025
(senior vice president), rzarandona@archinsurance.com;
Victoria Szot, P.E., J.D. (professional liability underwriter), at
973-206-8026, vszot@archinsurance.com;
Jim Boyes (environmental liability underwriter) at
973-206-8027, jboyes@archinsurance.com;
or Kent Holland (risk management) at 703-623-1932, kholland@archinsurance.com.
Underwriting is done out of the Arch Insurance Group office at
55 Madison Ave.
,
Morristown
,
NJ
,
07960
.
=====================================
ON-LINE
RISK MANAGEMENT COURSES BY KENT HOLLAND
Currently available risk management courses written by Kent Holland for
RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195)
include the following: Contract Guide for Design Professionals; Risk
Management for Design Professionals; Design Build Professional Liability
Risk Management and Insurance; Site Safety Risk and Liability; Risk
Managing Communication, Documentation and Reports; Construction
Contract Law; Contract Claims against Design Professionals; and
Environmental Claims.
=====================================
ABOUT
THIS NEWSLETTER & A DISCLAIMER
This newsletter Report is published and edited by J. Kent Holland, Jr., Esq., Director of Risk Management Services for
the Environmental and Design Professional Liability Units of Arch
Insurance Group. The
Report 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.
=====================================
Copyright 2003, ConstructionRisk.com, LLC
Publisher
& Editor: J. Kent Holland, Jr., Esq.
6505 Chesterfield Ave.
McLean
,
VA
22101
703-623-1932
Kent@ConstructionRisk.com
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