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ConstructionRisk.com Report
http://www.ConstructionRisk.com

Vol. 7, No. 2, April  05

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Inside This Issue: 

•  Contractors May Now Bring Direct Action for Economic Losses Against Design Professionals in Pennsylvania 

•  Why Some Mediations Fail

•  Pollution Exclusion in D&O Policy Applied to

Exclude Coverage for Alleged Business Torts

•  Project Manager Required by Fiduciary Duty to Owner to agree to Settlement with a Supplier Contrary to its Own Interest. 

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Article # 1

Contractors May Now Bring Direct Action for Economic Losses Against Design Professionals in Pennsylvania

By:  Andrew B. Cohn, Esq.

A very recent Pennsylvania Supreme Court opinion (January 2005) has significantly changed Pennsylvania law, allowing a general contractor to directly sue an architect in negligence for additional construction costs caused by defective plans, drawings, and specifications.  Based on this decision, contractors working on Pennsylvania projects may now bring direct actions against design professionals to recover purely economic losses caused by errors and omissions in their design documents. 

In Bilt-Rite Contractors, Inc. v. The Architectural Studio, a general contractor on a public school project claimed that it incurred substantial additional construction costs because the aluminum curtain wall, sloped glazing, and metal support systems could not be installed and constructed through the use of normal and reasonable construction means and methods.  The contractor claimed the Project drawings and specifications were deficient and caused the additional costs, which resulted from special construction means and methods which the contractor was compelled to utilize. 

The general contractor sued the architect directly under the theory of “Negligent Misrepresentation”, alleging that the architect’s specifications were false and/or misleading.  The contractor had contracted with a School District , and therefore it did not have  a direct contract with the architect.  Moreover, its damages were purely economic (i.e., it did not allege bodily injury or physical damage to property).  The trial court dismissed the contractor’s suit, and the Pennsylvania Superior Court affirmed the decision, applying established Pennsylvania law which had previously held that a third party contractor could not directly sue a design professional for negligence causing purely economic losses.  However, the Pennsylvania Supreme Court reversed, holding in a decision of first impression by the Supreme Court, that a contractor can sue a design professional in negligence for purely economic losses resulting from defective plans and specifications. 

The Supreme Court reasoned that contractors fall squarely within the class of companies which reasonably rely on the representations of design professionals in their design documents.  Applying Section 552 of the Restatement of Torts (2d), the Court stated that it was reasonable for a design professional to expect that contractors would rely on information supplied in project design documents, and reasonably foreseeable that contractors could incur economic losses if the design information was incorrect or erroneous.  These expectations, according to the Court, reflected modern business realities which justified holding design professionals responsible for economic harm caused to those who rely on this information in project plans and specifications.

The significance of this decision cannot be overstated.  In addition to their contractual responsibility to their clients, Pennsylvania design professionals will now be exposed to direct causes of action for economic losses sustained by contractors who rely on defective plans and specifications.   Such damages may exceed those sustained by a design professional’s clients (e.g. project owners).  On the other hand, contractors (and most likely subcontractors) now have the option, in addition to seeking change orders from owners under their contracts, to bring a direct action against a design professional for increased construction costs caused by design errors and omissions.

About the Author:  Mr. Cohn is an attorney with the law firm of Kaplin Stewart Meloff Reiter & Stein, PC, 350 Sentry Parkway Building 640, Blue Bell, PA 19422; acohn@kaplaw.com; 610-260-6000.             

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Article # 2

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Why Some Mediations Fail

by Allan H. Goodman

Mediation is often used to resolve disputes arising during performance of construction contracts. Mediation is the non-binding, cooperative process in which parties to a dispute select a neutral third party, the mediator, to help them resolve their differences. The goal of mediation is a settlement agreement. While mediation is usually voluntary, many courts mandate an attempt to settle cases by mediation before setting a trial date. In a typical mediation, the mediator meets with all the parties and their attorneys in a joint session and then conducts a series of private, ex parte caucuses. In these private caucuses, the mediator assesses the strengths and weaknesses of the parties’ positions and helps them frame settlement offers. The mediator may transmit settlement offers between the parties or may have the parties meet together in settlement discussions. A skilled mediator is able to help the parties overcome impasses in negotiations and guide the parties to a settlement.

While most mediations result in a settlement, some do not. A major cause of a failed mediation is that the participants approach mediation as informal, adversarial litigation. A party or attorney acting in this manner will address his or her remarks solely to the mediator, as if the mediator were a judge. Despite the mediator’s efforts, the party refuses to have a dialogue with the opposing party and does not make a good faith effort to engage in settlement discussions. The mediation fails because the mediation process has never actually begun.

            Another reason why a settlement may not be reached is that participation in mediation may reinforce a party’s assessment that it has a very strong case and that a better result can be achieved in litigation. A party who has come to this conclusion has benefited from mediation without achieving a settlement. However, the party must proceed in litigation and achieve an acceptable outcome in order to validate its assessment.

            Failure to achieve a settlement during mediation can also be caused by the personalities of the participants. Some disputes have their origin in or are sustained by personality conflicts that supersede the issues in dispute. If the parties and their attorneys treat each other disrespectfully before or during the mediation, this may cause psychological damage that prevents them from focusing upon and resolving the merits of the issues of the dispute.

            A mediation may terminate without a settlement because of a participant’s impatience. A party or its attorney may expect results too quickly or may think that the process is simply not working. Unrealistic deadlines or milestones for achieving results may be imposed on the mediator and the other party. This attitude is non-productive and self-defeating.  A mediation conducted under such an arbitrary time frame will terminate simply because time has expired.

            Finally, the parties may blame the mediator for the mediation’s failure. There are good mediators and bad mediators, and the mediator selected by the parties or the court may not possess adequate skills to deal with the issues and personalities involved.  On the other hand, dissatisfaction with the mediator may also result from the parties’ unrealistic expectations or their own failure to commit to the process. The parties may fail to prepare for the mediation properly and refuse to attempt a dialogue with each other, but then demand that the mediator "do his magic." There is no magic in mediation. If the parties are not willing to prepare and work together toward a solution, it is difficult to achieve a settlement solely from the mediator's efforts.

Allan H. Goodman is an experienced mediator and arbitrator, a Judge on the U.S. General Services Administration Board of Contract Appeals, and the author of Basic Skills for the New Mediator and Basic Skills for the New Arbitrator.   He is also an instructor for Redvector.com, where he offers online courses on construction mediation and arbitration. For a detailed description of his books and courses, visit www.solomonpublications.com and www.redvector.com.

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New Books on Alternative Dispute Resolution - The revised second editions of Basic Skills for the New Mediator and Basic Skills for the New Arbitrator by Allan H. Goodman are now available! These best-selling titles are not just for new mediators and arbitrators. They are valuable resources for experienced ADR professionals, attorneys, and clients involved in mediation and arbitration.

Visit www.solomonpublications.com for details.

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Article # 3

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Pollution Exclusion in D&O Policy Applied to

Exclude Coverage for Alleged Business Torts

By:  J. Kent Holland, Esq.

            When a property purchaser discovered pollution on its newly acquired property it filed suit against the seller and the seller agreed to pay certain cleanup costs.  But the seller subsequently reorganized its corporate structure and asserted the cleanup costs could not be paid out the reorganized company.  The seller then brought suit alleging the seller intentionally and wrongfully reorganized its corporate structure to escape the liabilities.  The seller asked its directors & officers insurance carrier to defend the suit and the carrier refused to do so because it claimed a pollution exclusion in the policy barred coverage.  The seller filed suit against it carrier and after much litigation, the carrier’s position was ultimately found correct by an appellate court which held that because there was a relationship between the purchasers claims concerning wrongful reorganization and the pollution on the property, the policy’s pollution must be applied to deny coverage.

The seller in this case was The Danis Companies  (“Danis” or “TDC”). The purchaser was  Waste Management, Inc. (“WM”) .  The insurance carrier was Great American Insurance Company (“Great American”).  Great American refused to advance defense costs for Danis because it asserted that a pollution exclusion in the D&O policy barred coverage on the underlying claim against Danis by WM. 

Waste Management had acquired the landfill from Danis as part of a sale of all outstanding shares of certain companies from Danis to Waste Management.  In connection with the stock purchase, Danis agreed to indemnify WM against liabilities arising out of ownership of any landfill. The indemnity covered environmental liabilities, but it was not limited to just environmental liabilities. 

            As a result of pollution found after the transfer the landfill, the Environmental Protection Agency (“EPA”) issued notices of liability to Danis and WM as potentially responsible parties under Superfund.  WM demanded indemnification from Danis, and Danis eventually entered into a settlement agreement to indemnify WM for claims arising from environmental pollution, remediation, failure to remediate, toxic torts, bodily injury, and property damage.  At some point, just before the settlement agreement was finalized, Danis underwent a major restructuring whereby Danis Building Construction Company (“DBBC”) was separated from Danis Industries Corporation (“DIC”) and The Danis Companies (“TDC”). 

            Waste Management alleged in its litigation against Danis that DBBC had been a profitable subsidiary of TDC and was split off to insulate DBBC from environmental liabilities to WM.  Waste Management also claims that the recapitalization/split-off of DBBC stripped DIC and TDC of assets, leaving insufficient funds to satisfy the indemnification obligations owed to WM under the settlement agreement.  WM’s complaint further alleged breach of several agreements by Danis concerning responsibility for the landfill remediation and liabilities.

            Great American denied coverage for Danis and refused to advance costs for the WM lawsuit, asserting that the pollution exclusion of the policy barred coverage.  The policy language stated that the policy excludes claims “based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving actual or alleged… pollution…;” provided, however, that this exclusion shall not apply to any derivative suit by a security holder of the Company if the security holder bringing such Claim is acting totally independent of any without the solicitation, assistance, active participation or intervention of any Director or Officer of the Company.”

            Danis filed suit against Great American for breach of contract and declaratory judgment.  The trial court agreed with Danis that coverage was not excluded by the pollution exclusion.  The state appellate court reversed, however, because it concluded, “The use of the modifying words “directly or indirectly” indicates that an indirect causal relationship is sufficient for the exclusion to apply.  Consequently, even though we have found that the federal claims are intertwined with the pollution settlements, coverage for these claims would additionally be excluded as matters ‘indirectly related to … pollution.”

            The reason the trail court concluded the pollution exclusion didn’t apply was that it found the underlying federal claims revolved around allegations of corporate reorganization to escape liabilities.  What the court essentially decided was that the alleged actions of the officers and directors in reorganizing and recapitalizing the corporate entities was the immediate cause of the harm alleged by Waste Management, and that these actions served as an intervening cause between the pollution and the damages incurred by Waste Management.  Thus, as an “intervening cause,” the damages resulting from that cause would be independent of the pollution and would not be excluded by the pollution exclusion.

            Great American argued that the trial court was wrong to apply an “intervening cause” approach.  Although Great American admitted that the business torts create a separate cause of action, it argued that they are not independent causes of loss, because they could not have arisen in the absence of the underlying environmental liabilities. 

            The appellate court agreed with Great American that only one loss occurred—that  being damage caused by the polluted site.  “The acts of the Danis companies” concluded the court, “did not cause a separate injury or loss; instead, the alleged wrongful acts were an attempt to avoid paying for the loss.  This is not the typical situation in which one party commits a tort, and the negligent or wrongful act of another party operates to cause either sharing or a complete release of liability for the injury.”  To be an intervening cause, explained the court, “the second negligent act must be both ‘independent’ and ‘new….’ The second act must not have occurred as a result of the first.”

            Applying these legal concepts, the appellate court found that the claims involved in the litigation by WM against Danis were not independent of the original pollution settlements but instead that the underlying settlements were part of the necessary predicate for liability of Danis is the federal case.  The original pollution settlements and the alleged illegal transfers of assets are so intertwined and directly connected that pollution exclusion is applicable to all the claims asserted.  For these reasons, the court held in favor of Great American and reversed the trail court decision.

Danis v. Great American Insurance Co., 2004-Ohio-6222 (November 19, 2004).

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Article # 4

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Rapid Result Drug Testing

By William F. Current

ã 2005 William F. Current

Would you be surprised to learn that nearly a quarter of your workers were illegal drug users? It could happen. Consider what a California-based contractor discovered several years ago when it decided to prove that its workers were not druggies.

On a given day following 30 days advance notice employees were asked to volunteer for a drug test.  Of the 179 people on the payroll, 80 volunteered. The urine samples were collected by an independent laboratory, tested and reported directly to the contractor. No names were used in either the collection or the reporting of the results. Three different construction sites were chosen to represent a cross section of employees from northern, central and southern California .

The results speak for themselves:  the percentage of tests that were positive for one or more drugs was 24 percent, a quarter of the employee population. From that group 15 percent tested positive for marijuana and 10 percent tested positive for cocaine.[i] Wow!  And that was from a group of volunteers.

The Drug Problem Today

America has made progress in addressing its drug problem over the past 10 years, but unfortunately the problem has not gone away. The federal government’s annual report on substance abuse indicates just how serious the issue is.

For example, there are approximately 19 million current (use in the last 30 days) illicit drug users 18 and older.  Further, there are about 35 million prescription drug abusers. There are nearly 16 million adults 21 and older who admit to being “heavy” drinkers (5 or more drinks on at least 5 or more occasions every month); and there are 2.3 million Americans younger than 21 who admit to being heavy drinkers.[ii]

Several national reports on teen substance abuse do not paint a promising picture of the near future outlook.  And, of course, today’s teen drug user is tomorrow’s job applicant.

Drugs in the Construction Workplace

The federal government estimates that 77 percent of all illicit drug users 18 and older are employed.[iii] And the industry that is often identified for having the highest rate of illicit drug users is the construction industry.

A 1996 federal government survey, the last such survey conducted by the government, showed how serious the problem is for construction companies. Among full-time construction workers between the ages of 18 and 49 more than 12 percent reported illicit drug use in the month before the survey was conducted; almost 21 percent reported illicit drug use during the past year. Additionally, approximately 13 percent admitted to being “heavy” alcohol users.[iv]

Rates of substance abuse among different occupations in the construction industry included:

How Drug Abuse Affects the Construction Industry

Generally speaking, we know that substance abusing workers are less productive, tend be unreliable, are more likely to be involved in workplace confrontations and acts of violence, and steal from their employers and others at a higher rate than their non-using co-workers. 

A compelling study by the U.S. Postal Service found that substance abusers, again when compared to their non-substance abusing co-workers, are involved in 55 percent more accidents, and sustain 85 percent more on-the-job injuries.[v]  Further, the National Safety Council reported that 80 percent of those injured in “serious” drug-related accidents at work are not the drug abusing employees but innocent co-workers and others.[vi]

It also stands to reason that if the construction industry employs more drug users than other industries, then the impact of drug abuse would be significant at construction sites. And, given the safety sensitive nature of the construction industry, that impact is most significant in the area of safety.

A study conducted by a Cornell University graduate student found that construction laborers between 25 and 34 years of age who have been treated for substance abuse have a time-loss injury rate of 23.6 per 100 full-time equivalent workers (FTEs). That’s nearly double the rate of non-substance abusers, who had a rate of 12.2 FTEs. 

The majority of the cases, 85 percent, involved treatment for alcohol abuse.  The study concluded that the difference between the known substance abusers and the non-substance abusers is “likely understated.” The study observed that:

“Injuries were counted as related to substance abuse only after substance abuse was diagnosed, yet 1/3 of the substance abusers’ work-related injuries occurred before diagnosis.”[vii] The study only tracked workers on union jobs and only substance abusers treated in programs paid for by union health insurance.

Drug Testing As a Solution

The construction industry is especially affected by drug abuse given that it tends to hire a higher proportion of substance abusers. As a result, employers in the construction industry tend to be very concerned about the issue and are probably more likely to have a comprehensive drug-free workplace program in place. And among the components of such a program is drug and alcohol testing.

Drug and alcohol testing have proven to be highly effective ways of deterring substance abuse and identifying those who need help.  It is legal in every state, though a handful of states regulate it, and commonly accepted as way of life in American industry.

For many years construction companies that drug test have utilized the services of a laboratory certified by the federal government’s Substance Abuse and Mental Health Services Administration (SAMHSA) to analyze all drug screens.  And for many years this was the best testing method available.  However, while drug testing makes a lot of sense for many construction companies waiting 2-4 days to get a result from a lab is highly impractical. When a drug test result is the only thing stopping a crew of 20 or 30 new workers from starting a job, an immediate, accurate result is really what is needed.

Rapid result, on-site testing has become a popular alternative to traditional lab-based testing, especially in safety-sensitive industries such as the construction industry. Often a construction company can significantly reduce the time it takes to conduct a test by utilizing rapid result testing. The results are available within minutes and, depending on the product being used, can be as accurate as the screening technologies used in laboratories. 

When accidents or some other unacceptable behavior occurs, construction companies rarely have the luxury of waiting for a lab result to come in 24-48 hours later. Rapid result testing is a viable option for post-accident and reasonable suspicion drug testing. 

Rapid Drug Testing Is Union Friendly

Union members are typically in favor of drug testing. A Gallup survey found that 71 percent of full-time union workers favor employers’ right to conduct pre-employment testing.  Further, when asked, “would you favor or oppose your company adopting or maintaining a drug testing policy,” 66 percent of union respondents said they would favor such a policy compared to 26 percent who said they would not.

Union workers are just like any other workers, the vast majority are not drug users, yet they know who the drug users at work are and they don’t like working side by side with them, especially in safety-sensitive worksites.

The general concerns that some union may have about drug testing are addressed with rapid drug testing.  Rapid drug testing delivers fast results making it possible for workers who test negative to get back on the job quickly.  

Unions are interested in the integrity of the testing process. A rapid drug test can be witnessed throughout every phase of the testing process.  Workers actually get to see the entire test take place.  There is never a question about chain of custody.  And because the analysis can be witnessed there is rarely any confrontation between the tested worker and the test administrator over a result.

Unions are interested in preserving the clean records of their members.  Again, because the majority of all drug screens are negative, tested workers are not only back on the job faster, but there’s no lingering question about the result as management, the union, and workers wait a couple of days for a lab-tested result to come back.

Oral Fluid Testing

Construction employers also now have options available in terms of what specimen to test. No longer is urine the only specimen recognized as an accurate medium for detecting drugs. Oral fluid and hair samples have proven to be effective in detecting drugs of abuse. Oral fluid testing, in particular, is an attractive option to the construction industry because it can be conducted either with a rapid result device or through a laboratory.

Oral fluid testing eliminates the inconvenience of securing a restroom in the middle of a construction site. It makes it possible for every collection to be observed, and eliminates concerns about mixed gender collections.

Studies show that oral fluid testing is an accurate indicator of the presence of drugs in a person’s system.

When Choosing a Rapid Result Testing Device

A word of caution about rapid result testing: Not all of these testing devices are created equal. While the prices of these products have come down significantly in the last few years, the old adage “you get what you pay for” often comes into play. When considering instant testing, be it with urine or oral fluid, consider the following:

1. Make sure your state allows it. Most states have no restrictions on instant testing or oral fluid testing, some do.

2. Look for urine devices that are approved by the U.S. Food & Drug Administration (FDA). This is quickly becoming the gold standard for instant urine testing. Instant oral fluid testing has not passed FDA muster yet, though are there several reliable products available.

3. Limit your considerations to devices that come with independent scientific data to back up all accuracy claims. It’s not enough to see it in writing; make sure the source is an independent, objective one.

4. Try all devices under consideration in real work situations. Devices differ in how they are administered, how results are read, how long it takes to get a result, etc. Make sure the device you’re considering will work for you.

5. Deal with a provider who has been in the business more than a few months (and maybe even years). You’re going to need support, both technical and perhaps legal. Not all providers have staffs of experts on hand to answer your questions.

About the Author: Mr. Current is a principal with the firm WFC & Associates,

Substance Abuse Prevention Consultants

8627 N.W. 50 Drive

Coral Springs , FL 33067

Ph: 954-255-8650 / Fax: 954-344-0707

bcurrent2@aol.com

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RED VECTOR.COM --- ON-LINE 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 the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Risk Management for the Design Professional; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.  This is an efficient, easy and cost-effective to get your continuing education credits. 

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ABOUT THIS NEWSLETTER & A DISCLAIMER

          This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., is a construction lawyer and risk management consultant for the Environmental and Design Professional Liability.  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 only, 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 2005, ConstructionRisk.com, LLC

Publisher & Editor: J. Kent Holland, Jr., Esq.

8596 Coral Gables Lane

Vienna, VA 22182

703-623-1932

Kent@ConstructionRisk.com

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