|
ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 7, No. 4, July/Aug, 2005
______________
Inside
This Issue:
• Subcontractor
forfeits right to arbitration by filing demand untimely
• Faulty
Workmanship Coverage Under CGL Policy
• Architect
Required to Review Adequacy of Engineer’s Structural Report
Before
Proceeding with its Design Services
======================================
_______________
ARTICLE 1
_______________
Subcontractor
forfeits right to arbitration by filing demand untimely
By:
J. Kent Holland
Where
a subcontract required subcontractor to commence arbitration proceedings
no later than 30 days following receipt of an adverse decision by the
contractor, the failure of the subcontractor to contest a decision
within 30 days was fatal to later seeking arbitration.
Holt,
a drywall subcontractor, entered into a contract with Choate, the
general contractor, to perform drywall installation on a new high-rise
building. In the event Holt
failed to meet its obligations under the schedule, the contractor was
entitled to issue written decisions terminating its employment or
supplementing its work with labor and materials the cost of which would
be deducted from payment to Holt. The
contract further provided that the subcontractor would be conclusively
bound by and abide by contractor’s decision unless the subcontractor
timely commenced arbitration within 30 days following receipt of notice
of a contractor decision, “otherwise, contractor’s decision becomes
final and binding .”
On
March 20 and again on April 12, the contractor notified the
subcontractor that it was in default and must immediately remedy its
defective performance or the contractor would hire additional or
replacement contractors at the subcontractor’s expense.
On May 29 the contractor sent the sub a certified letter
informing it of its decision to supplement the sub’s work forces.
The contractor thereafter employed additional workers and sent
the sub change orders setting forth the amounts to be back-charged to
the sub for this work.
It
was not until November 5, after the contractor had closed out its prime
contract with the project owner, that the sub filed a demand for
arbitration. The contractor
promptly filed suit in court to stay or stop the arbitration.
The trial court agreed with the contractor and granted a stay to
the arbitration. In
affirming that decision on appeal, the appellate court explained that it
found the plain language of the contract places the burden on the
subcontractor to timely arbitrate any decision made by the contractor or
be bound by it. The court
was not impressed with the subcontractor’s argument that the various
notices and certified letter did not constitute a “decision” within
the meaning of the contract. According to the court, the certified
letter was a decision within the plain language of the contract.
The
court was equally blunt in finding no merit to the subcontractor’s
assertion that the 30-day period to file an arbitration claim was
impermissibly short. Relying
upon applicable state law, and quoting case precedent, the court stated
that parties to a contract may
fix upon a shorter period for filing claims than that which is set by
the state statute of limitations. Setting
a shorter period violates no principle of public policy, said the court,
“provided the period fixed not be so unreasonable as to show
imposition or undue advantage in some way.” For
these reasons, the court held that because the subcontractor failed to
avail itself of arbitration within 30 days, it was bound by the adverse
contractor decision. Holt & Holt, Inc. v. Choate Construction Company, (2004
Ga.
App. LEXIS 1602).
Comment:
This case once again demonstrates the importance of knowing and
abiding by the time requirements set forth in contracts.
When commercial entities agree to contract terms and conditions
setting forth various restrictions and limitations on submitting change
orders requests, claims, and arbitration demands, the parties must be
careful to abide by them. As
seen by the decision in this case, unless there is a clear conflict with
public policy, courts will not void the contract or re-write its terms.
About
the author: Kent
Holland is a construction lawyer in Tysons Corner, Virginia, and is risk management consultant for
the environmental and design professional liability. He
is also publisher of ConstructionRisk.com Report.
_______________
ARTICLE 2
_______________
Faulty
Workmanship Coverage Under CGL Policy
By:
J. Kent Holland
Costs
of ripping out and replacing defective work was held to be potentially
covered as property damage under a CGL policy issued by Zurich American
Insurance, where employees of the insured contractor caused a leak in
steam pipes by improperly unpacking the pipe prior to installation.
The contractor claimed that ripping out work of its various
subcontractors, including the backfill subcontractor, and the concrete
subcontractor, the landscape subcontractor was all work performed on its
behalf by subcontractors and, therefore, covered under the policy
despite the defective workmanship exclusion that excludes coverage for
property damage to “your work.”
The trial court ruled the damage was excluded but this was
reversed on appeal.
Summary
of the Facts
Limbach
Company, LLC (Limbach) had a contract with Morse Diesel/Essex to perform
mechanical work on a project at
Howard
University
in
Washington
,
D.C.
Limbach was responsible for
installing a prefabricated, insulated, underground steam line.
It subcontracted the production of the steam line to Thermacor
Process, Inc. (Thermacor). It
subcontracted the excavation and backfilling of the trench for the line
to Legacy Builders.
A
leak was discovered in the steam line after it was installed.
The leak damaged the insulation covering the pipe, the backfill
placed around the steam line, and the landscaping in the area
surrounding the leak – including concrete walkways.
In order to excavate and repair the damaged pipe, Limbach had to
remove concrete that was installed by a third party.
As a result, Limbach had to hire a company to perform concrete
replacement.
Limbach
filed a claim with it commercial general liability (CGL) carrier, Zurich
American Insurance, for the costs of replacing the damaged steam line
and repairing the work damaged by the leak.
This included the cost of repairing the backfill, the cost of
replacing the steam pipe, the cost of repairing the landscaping, the
cost of replacing the concrete, and the cost of a temporary steam
boiler.
Zurich
agreed only to cover the cost of the temporary steam boiler and part of
the cost of the landscaping. The
balance of the claims were denied by
Zurich
on the basis of policy exclusions.
Relevant
Insurance Policy Language
The
Zurich policy provided that Zurich “will pay those sums that the
insured becomes legally obligated to pay as damages because of ‘bodily
injury’ or ‘property damage’ to
which this insurance applies.” The
policy applied to completed operations, as defined by the policy under
“products-completed operations hazard.”
This terms was defined in the policy as follows:
“
Products completed operations hazard: (a) Includes all ‘bodily
injury’ and ‘property damage’ occurring away from premises you own
or rent and arising out of ‘your product’ or ‘your work’ ….”
The
definition of “your work” is “work or operations performed by you
or on your behalf” and includes “materials, parts or equipment
furnished in connection with such work or operations.”
Exclusions
to the policy included what is known as the “your work” exclusion.
This excludes “’Property damage’ to ‘your work’ arising
out of it or any part of it and included in the ‘products-completed
operations hazard.’”
An
exception to this exclusion provides:
“This exclusion does not apply if the damaged work or the work
out of which the damage arises was performed on your behalf by a
subcontractor. Making
this exception key to its argument for coverage, Limbach argued that its
insurance claim covers the cost of repair or replacing damaged work
performed by subcontractors and third parties.
Thus, Limbach argued that the damaged work was not excluded from
coverage.
Choice
of Law.
As
in initial matter it is important to note that although the project was
in Washington, D.C. and the court that decided the case was located in
Virginia, the law the Court applied was applied was the law of the State
of Pennsylvania because that is where the insurance policy was
delivered.
Backfill
Claim: The parties
agreed that the backfill was damaged by the leak.
The backfill work had been performed by a subcontractor.
Zurich
maintained that the “your work” exclusion precluded coverage for the
damage to the backfill because it was performed on the insured’s
behalf. As work performed
“on your behalf”
Zurich
argued this made it subject to the exclusion.
The court rejected
Zurich
’s argument because, “The exclusion specifically states that it
‘does not apply if the damaged
work or the work out of which the damage arises was performed on
your behalf by a subcontractor.’”
In reaching that conclusion, the court reviewed the history of
the Insurance Services office (ISO) exclusion on which this policy was
based. The court
quoted a decision from a
Pennsylvania
court that had analyzed the same exclusion and reached a “holding that
the ‘unambiguous terms’ of the ‘your work’ exclusion do not
eliminate coverage for harm done to a subcontractor’s work.”
In
the present case, the court
concluded that since the backfill was performed on Limbach’s behalf by
a subcontractor, the “your work” exclusion does not preclude
coverage for the cost of repair to the damaged backfill and that “to
hold otherwise would be to ignore the unambiguous terms of the
exclusion’s exception for work performed by a subcontractor.
The
damaged pipe. With
regard to the damaged pipe, Limbach argued that the damage was not
excluded from coverage because the pipe was manufactured by a
subcontractor, Thermacor. The
lower court determined that Thermacor was a “materialman” rather
than a subcontractor, and that the damaged steam pipe was therefore
excluded from coverage by the “your work” exclusion.
Again the appellate court disagreed.
The court found that Thermacor’s role was highly
distinguishable from that of a supplier because it had custom
manufactured the steam pipe in accordance with shop drawings and project
specification for this particular project, and one of Thermacor’s
representative visited the work site, reviewed the installation drawings
with Limbach, and provided specific instruction regarding the
installation of the pipe.
Replacing
concrete and repairing damaged landscaping
The
lower court applied the “your work’ exclusion to preclude coverage
for Limbach’s costs of replacing the concrete and repairing the
damaged landscaping that resulted from removing the damaged pipe.
The appellate court reversed this and held that the exclusion
does not exclude coverage for damage to a third party’s work.
“Since the landscaping and concrete work were performed by
third parties, the “your work” exclusion does not preclude coverage
for the costs of repairing and replacing the landscaping and
concrete.”
For
these reasons, the appellate court reversed and remanded the district
court’s award of summary judgment that had been granted to
Zurich
. Limbach
Company, LLC v.
Zurich
North American (CA-03-685-A,
4th
Cir. U.S. Ct.
App., Jan 2005).
Commentary.
This decision may have been decided differently by another
court applying the law of a different state.
When underwriting and pricing insurance policies, it is important
for insurance carriers to consider differences in how courts in various
states interpret the sample language to reach very different results.
It is important to consider where the insured will be performing
its work and what state’s law will apply.
Many companies include a choice of law provision in the policy
itself dictating that disputes between insureds and the insurance
company will be decided in a particular jurisdiction and will apply the
law of that jurisdiction. The
decision in this case does not explain whether the policy included such
a provision. One might
conclude that when the court says the policy was “delivered” in
Pennsylvania
, it is also saying that it was issued pursuant to the law and
regulations of
Pennsylvania
applicable to policies issued in that state.
Insured
firms, such as construction companies, may also benefit from
understanding differences in how the law of different states may affect
the interpretation of both their insurance policy and their construction
contract. It is
interesting to compare court decisions that reach opposite conclusions
concerning the intent of policy language.
For a lengthy journal article analyzing in some detail issues and
decisions surrounding coverage for construction defects, see John Lennes
& Kent Holland, Insurance for Construction Defects, re-printed in Construction Risk
Management Law and Case Notes, available at Amazone.com.
About
the author: Kent
Holland is a construction lawyer in Tysons Corner, Virginia, and is
a risk management consultant for
the environmental and design professional liability.
He
is also publisher of ConstructionRisk.com Report.
NEW
BOOK – a/e ProNet’s Risk Management & Contract Guide for Design
Professionals by J. Kent Holland
In
this a/e ProNet book authored by Kent Holland, detailed examples of over
30 contract clauses are provided. The
discussions include risk management ideas and suggestions for
negotiating contracts with reasonable allocation of risk between the
contracting parties. Much
attention is given to explaining how contract language may affect the
availability of insurance coverage for claims against design
professionals. Several
chapters address managing communication and documentation, with
particular emphasis on e-mail, and records maintenance, retention, and
destruction. Three
continuing education courses are included.
Each is registered with the AIA.
Additional payment is required to receive credit for taking the
courses. At a cost of only
$39.95 this 300 page book is a bargain.
_______________
ARTICLE 3
_______________
Architect
Required to Review Adequacy of Engineer’s Structural Report
Before
Proceeding with its Design Services
J.
Kent Holland
A
material factual dispute existed regarding whether an architect met the
requisite standard of care in reviewing an engineering report prior to
its client’s purchase of property and prior to the architect
proceeding with plans for renovation of the building.
Contractual language stating that the architect could rely on
independent reports prepared for the owner by other firms did not
relieve the architect of its responsibility to exercise reasonable care
to review the engineering report and request additional inspection if it
deemed it necessary for conducting its services.
A
purchaser, Kerry, retained an architect, Angus-Young, to study potential
sites for a business facility. The
architect noted that the “structural stability of the ‘over the
river’ building was unknown at this time,” and consequently
recommended that Kerry obtain further inspection by a structural
engineer. Kerry obtained
such an inspection by Rust Environment & Infrastructure, which later
became Earth Tech Environment & Infrastructure.
Based
upon visual inspection, Rust found the building to be in good structural
condition. Its report
concluded that “at this time, the piers and caissons are not
considered a significant safety concern.
Kerry went forward with the purchase of the building and a
retained Angus-Young to do the architectural services for renovating the
building. As work began, the
flooring was removed and it was discovered that one corner of the
building was three and three-quarters inches lower than the rest of the
floor.
Further
engineering by another firm determined that the reason for the problem
was that the building rested on timber piles below the water line
instead of on concrete piles and caisson as had been thought.
Much time and expense were involved in repairing the foundation
before renovation could begin, and Kerry sought to recover that cost
from Angus-Young and from Rust Environment because it asserts it
wouldn’t have purchased the property and incurred the additional cost
if the true condition had been reported beforehand.
Kerry’s
theory against the Architect was that it breached its contract,
committed negligence and made negligent misrepresentations by failing to
properly review the Rust report and failing to properly determine the
renovation project requirements and costs.
Rust also filed a cross-claim against Angus-Young, for
contribution and indemnification in the event it lost to Kerry.
The trial judge ruled that Angus-Young was contractually entitled
to rely on the Rust report which had been independently obtained by
Kerry and furnished to Angus-Young, and it therefore granted summary
judgment to the architect.
This
was reversed on appeal, with the appellate court finding that the
contract language did not absolve Angus-Young “from its duty to
exercise ‘due architectural care’ in performing services for
Kerry—that the duty pre-existed the parties’ contract and attached
itself to all of the activities Angus-Young performed in fulfilling its
contract with Kerry relating to the renovation project.”
The
architect contended the scope of its services was limited and that
evaluation of the adequacy of the Rust report was not within its scope
of services. It also argued
that the list of “optional additional services” that Kerry did not
opt for must be considered in limiting the scope.
Included in these optional services that Angus-Young was not
required to perform were “providing planning surveys, site evaluations
or comparative studies of prospective sites,” “providing services to
investigate existing conditions or facilities,” “providing services
to verify the accuracy of drawings or other information furnished by the
Owner,” and “providing services in connection with the work of …
separate consultants retained by the Owner.”
The
contract also specifically required Kerry, and not Angus-Young, to
furnish “surveys describing physical characteristics…”
And, finally, the contract provided that as to “services,
information, surveys and reports” furnished by Kerry, Angus-Young was
“entitled to rely upon the accuracy and completeness thereof.”
Based
on the above-quoted provisions of the contract, Angus-Young argued it
had no responsibility to perform its own investigation and that it
accept the Rust report as furnished to it by Kerry without further
inquiry or investigation. The
court rejected this argument. It
found that Kerry wasn’t arguing that Angus-Young
was required to do its own structural inspection but rather that
Angus-Young was required to exercise due care so as to recognize the
inadequacy of the Rust report to serve as a basis for its preparation of
architectural plans for the renovation of the building.
In particular, Kerry argued that because the Rust report didn’t
say anything about the foundation below the water line and was also
silent as to whether underwater features had been inspected, Angus-Young
was required by the standard of care to call for a more detailed
inspection before beginning to perform its own services.
The
court particularly keyed in on language in the contract that permitted
Angus-Young to retain consultants to assist it in performing its duties.
It further focused on language of the contract that obligated
Kerry to “furnish the services of other consultants when such services
are reasonably required by the scope of the Project and are requested by
the Architect.” The
fact that Angus-Young did not request additional services here was
deemed important by the court.
For
these reasons, the court reversed the summary judgment and remanded the
case to the trial court for trial on the merits of the complaint.
Kerry Inc. v.
Angus-Young Associates, Inc., 694 N.W.2d. 407 (
Wis.
App., 2005)
=====================================
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.
=====================================
ABOUT
THIS NEWSLETTER & A DISCLAIMER
This newsletter Report is published and edited by J. Kent Holland,
Jr., J.D., 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.
=====================================
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
_____________________________________________
_____________________________________________
|
