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

Vol. 8, No. 1, Jan/Feb 2006

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Inside This Issue: 

•  The Fair Housing Act: Discrimination in Multi-Family Residential Development, Construction, and Design

•   Defective Workmanship Exclusion Bars Coverage for Falling Walls

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Book Review

Design-Build Lessons Learned (2004 Edition), 240 pages, US$60.00  

            In the last issue, I reviewed the newest edition of Design-Build Lessons Learned, an annual publication authored by Mike Loulakis, the president of the law firm of Wickwire Gavin, and one of the country’s foremost authorities on design-build.  Since then, a number of readers asked where they could order the book.  The easiest way to order it is directly from AECTraining.com at the following link: http://www.aectraining.com/lessonslearned/2004.htm 

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ARTICLE #1
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The Fair Housing Act: Discrimination in Multi-Family 
Residential Development, Construction, and Design

By:  R. Carson Fisk  

            The Department of Justice has stepped up its enforcement efforts in recent years battling discrimination in housing. However, the DOJ’s efforts focus not only on discriminatory actions based on race, color, religion, sex, familial status, and national origin. The Fair Housing Act (“the FHA”), in part, prohibits discrimination against disabled individuals. Under the FHA, it is unlawful to discriminate in the sale or rental, or to otherwise make unavailable or deny, a dwelling to any buyer or renter because of a handicap. Additionally, under the FHA it is unlawful to discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling or in the provision of services or facilities in connection with such dwelling due to a handicap. This can have a direct effect  on property developers and those involved in the design or construction of multi-family dwellings as discrimination includes a failure to follow certain accessibility and design requirements.  

            Some of the accessibility and design requirements of the FHA include: (i) public use and common use portions that are readily accessible to and usable by handicapped persons; (ii) doors designed to be sufficiently wide to allow passage by handicapped persons in wheelchairs; (iii) an accessible route provided into and through the dwelling; (iv) light switches, electrical outlets, thermostats, and other environmental controls in accessible locations; (v) reinforcements in the bathroom walls to allow later installation of grab bars; and (vi) usable kitchens and bathrooms such that an individual in a wheelchair can maneuver about the space. The failure to comply with these requirements subjects the violating parties to civil penalties in an amount not exceeding $55,000 for the first violation and in an amount not exceeding $110,000 for any subsequent violation. Monetary damages may be awarded to aggrieved persons and the court may award injunctive relief on a temporary or permanent basis.  

            These requirements apply to the design and construction of all ground floor units in non-elevator buildings and all units in buildings with elevators in “covered multi-family dwellings.” The FHA is effective for all covered dwellings built in or after March of 1991. Covered multi-family dwellings include apartments, condominiums, and townhomes with four or more units that are for sale or lease. The failure to design and construct buildings covered by the FHA in accordance with the requirements has resulted in significant monetary awards and penalties assessed against those involved in such construction projects.  

            Although recent increases in enforcement and educational efforts concerning the FHA have resulted in a greater awareness, those formerly and currently involved in the construction of multi-family buildings should understand that the FHA applies to any such building built in or after 1991. Enforcement efforts may be brought by the Department of Housing and Urban Development, private persons, or the Department of Justice. When the Attorney General has reasonable cause to believe that a pattern or practice of discrimination is being engaged in or that any group of persons has been discriminated against to a degree that raises an issue of general public importance, the Attorney General may commence a civil action.  

            A possible violation of the FHA is sometimes identified upon notification by the DOJ that a subject property is under investigation for failure to comply with the FHA. Generally, the DOJ will seek to obtain contract documents such as plans and specifications for review. Additionally, the DOJ will generally seek information concerning all parties involved in design or construction of the subject property, certificates of occupancy, and other general information concerning the property. Following this initial investigation, the DOJ may proceed to inform certain parties that it has been authorized to file a complaint. Any complaint filed will generally include the owner, developer, architect, engineer, and contractor as parties. The DOJ will generally allow some time for negotiation but will likely forward a proposed consent decree to the parties setting forth settlement terms. Often these terms are harsh and generally include items such as a general injunction against discriminatory practices, non-discrimination in future design and construction, modifications of existing properties, educational programs, public notice of a non-discrimination policy, damages for aggrieved persons, and civil penalties. Due to issues surrounding exposure to damages, often the main concern for defendants in an FHA action is minimizing damages. However, contesting the claims may be a viable option for certain parties and under certain facts.  

            HUD adopted the Fair Housing Accessibility Guidelines to provide builders and developers with technical guidance on how to comply with the specific accessibility requirements of the FHA. However, the DOJ has, on more than one occasion, characterized compliance with these guidelines as mandatory. Design professionals and builders should be well versed as to the guidelines and any acceptable alternatives. For example, compliance with the American National Standard for buildings and facilities providing accessibility and usability for physically handicapped people, commonly cited as “ANSI A117.1,” satisfies the requirements of the FHA.  

            Due to the recent enforcement of the FHA accessibility and design requirements, case law on such is relatively sparse. This provides some latitude in formulating creative defenses and arguments on behalf of all parties involved in the design and construction of a multi-family building. Counsel should be consulted immediately upon notice of a possible FHA violation. Given the significant exposure and liability for all parties involved in the particular construction transaction, an attorney knowledgeable in the defense of FHA claims will provide invaluable assistance.  

About the Author:  R. Carson Fisk is an attorney at Ford Nassen & Baldwin P.C. in Austin . The firm specializes in the representation of owners, developers, general contractors, subcontractors, major suppliers, and sureties in both the public and private sectors. He may be reached at 512-236-0009 or by e-mail at rcfisk@fordnassen.com.  

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Contract & Risk Management Guide – Written by J. Kent Holland 

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ARTICLE #2
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Defective Workmanship Exclusion Bars Coverage for Falling Walls 

By:  J. Kent Holland

Where masonry walls collapsed during construction due to premature removal of supportive braces, a commercial general liability policy provided no coverage for the loss because such loss was excluded under the defective work exclusion of the policy.

            In Farmington Casualty Company, v. Rick Duggan, ( U.S. 10^th Cir, No. 04-1200, Aug 2005), the court eloquently describes the facts of the case as follows:  “Without so much as the blast of a shofar, the perimeter masonry block walls of … [the] partially constructed office building in Golden, Colorado, came tumbling down in a high wind in December 1997.”   The matter went to arbitration.  The arbitrator concluded that the cause for the walls falling was primarily the negligence of a subcontractor, Masonry Designs.  Before the building owner, Rick Duggan, was able to recover the $500,000 judgment from Masonry Designs, however, Masonry Designs went out of business.  

            Rather than waiting for Mr. Duggan to assert a claim against Masonry Designs’ commercial general liability (CGL) policy, the CGL carrier, Farmington Casualty, brought a declaratory judgment action against Duggan, asking the court to declare that the policy did not cover the arbitrator’s award.  The trial court concluded that there was coverage and ruled against Farmington .  On appeal, this was reversed. 

            The 10^th Circuit Court of Appeals addressed several distinct arguments that are important.  First, the court explained, “The purpose of a CGL policy is to protect the insured from liability for damages when his own defective work or product damages someone else’s property.”   As stated by the court, “The rationale for such exclusions is that faulty workmanship is not an insurable ‘fortuitous event,’ but a business risk to be borne by the insured.”  The policy excluded coverage from damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”   

            There was a typical exception to the defective workmanship exclusion to the extent that the damages might arise out of completed work.  This exception to the exclusion extends coverage to property damage included in the “products-completed operations hazard.”  Work is deemed completed according to the policy “when all of the work called for in your contract has been completed.”  

            The subcontract under which Masonry Designs was performing required Masonry Designs to build the masonry walls and also to “clean the walls with a light acid solution.”  Only a third of the acid-washing had been finished as of the time the walls fell.  The trial court concluded that the work was sufficiently completed at that point to be deemed “completed’ for purposes of the coverage under the products-completed operations coverage.  The appellate court disagreed with that reasoning, and held it that relevant coverage under the policy kicks in only after ALL the work has been completed.  For these reasons, the appellate court held in favor of the insurance carrier denying coverage. 

Comment:  For another case addressing the question of coverage for defective work and the application of the specific language of the exclusions, see Limbach Company, LLC v. Zurich North American  (CA-03-685-A, 4^th Cir. U.S. Ct. App., Jan 2005), discussed in  Vol. 7, No. 4, July/Aug, 2005 of this newsletter.  In that case the prime contractor was able to recover under its policy for the losses caused by faulty work of its subcontractors.  The court focused on the meaning of “your work” in the defective work exclusion.  The policy in that case excluded “’Property damage’ to ‘your work’ arising out of it or any part of it.” An exception to the exclusion provided:  “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 covered the cost of repair or replacing damaged work performed by subcontractors and third parties rather than work performed directly by the contractor.  Thus, Limbach argued that the damaged work was not excluded from coverage under its policy since it had not itself performed the work.   

            The opinion in the case of Farmington Casualty Company, v. Rick Duggan does not explain why the subcontractor, Masonry Designs, was held liable directly to the project owner, instead of the owner having only an action against its prime contractor. Perhaps the arbitration proceeding joined the subcontractor into an action that was brought by the owner against its prime contractor.  It is possible that different questions might have been raised if it had been the prime contractor and its insurance carrier that had been the subject of the insurance litigation.  

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ARTICLE #3
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OSHA Not Required to Get Warrant to Conduct Surprise Inspection

By: J. Kent Holland

A contractor unsuccessfully argued that evidence gathered during surprise OSHA inspection should be suppressed and barred from the case because the OSHA inspector did not have a warrant.  The excavation site was a public street, not private property, and the court held the contractor had no reasonable expectation of privacy in an open trench dug on a public roadway.

            In the case of Lakeland Enterprises v. Elaine L. Chao (7^th Cir. Ct. App. 2005), an OSHA compliance officer (“ Greenwood ” or “OSHA inspector”) happened across a construction site and conducted an impromptu inspection.  He had been driving by an industrial park project when he noticed an excavation in progress.  He parked his car and, in order to see what was going on, he walked past some traffic cones blocking street and pedestrian traffic from the site.  After he passed the cones, we walked up to an open trench where observed an employee of the contractor (“Lakeland Enterprises”) working.  He also observed a backhoe operating beside the trench.

            Without announcing himself or who he was, Greenwood began videotaping the scene. It is not clear from the case, where he was in relation to the backhoe that was operating at the site and how it was possible for him to videotape without getting in the way.  In any event, a surprised supervisor approached him and advised him that  the site was closed to the public and to please step back behind the cones. 

            It was only after being addressed by the supervisor that Greenwood explained who he was and stated that he was conducting an inspection.   At that point the contractor’s personnel began cooperating with him as he proceeded to measure the trench wall slopes and the length and width of the trench.  Greenwood also took soil samples from the trench. He also noted that there was no ladder and that there was no trench box in place to support the walls.

            Based on this evidence, as well as certain testimony, OSHA issued three citations, including one for willfully permitting an employee to work in a trench witout adequate protection (inadequately sloped trench walls).  Lakeland contested the citations and an administrative law judged conducted a two-day evidentiary hearing and decided against Lakeland . 

            At the ALJ hearing, Lakeland argued for the suppression of the evidence gathered by the inspector, asserting that the search violated the Fourth Amendment because it was conducted without a warrant.  The ALJ denied the motion, concluding that Lakeland had no right of privacy on the excavation site because “that land and that road was a publish road that [ Lakeland ] did not own.” In addition, said the ALJ, “it was covered by the open fields doctrine.”  The ALJ also concluded that any Fourth Amendment claim was waived because Lakeland did not object to the inspection and ask for a warrant at the site.

            On appeal, the U.S. Court of Appeals for the Fourth Circuit stated that it was an open question in this Circuit whether the exclusionary rule for evidence applies to OSHA civil enforcement proceedings.  Other Circuits have held that the exclusionary rule applies.  But in this case, the court concluded that it didn’t need to decide that constitutional question because “ Lakeland loses even if the rule applies in this context.”  This is because the court agreed with the ALJ that there is no reasonable expectation of privacy in an open trench dug on a public roadway. The court also agreed with the ALJ that any potential Fourth Amendment objection was waived when Lakeland failed to object to the inspection and demand a warrant at the scene.  

Comment:  The contractor may have faired better in this case if it had objected to the inspection instead of cooperating.  When the inspector walked past cones and warning signs barring the public from access to the site, and began videotaping without identifying himself, he crossed the line both physically and metaphorically. 

            Whereas laborers at the site may have been wearing protective gear, here is an unidentified man (apparently without protective gear) that the contractor initially took to be a foolhardy member of the public walking right into the middle of an active construction site – while heavy equipment was operating. The contractor may have reasonably been concerned for the safety of this individual and also been concerned that his presence would cause confusion and a potential accident at the site affecting the safety of the contractor’s workers. 

            At that point, it may have been appropriate for the contractor to have simply demanded that the inspector get back behind the line.   I have no personal knowledge about this case, but it is hard for me to imagine that the Contractor would have suffered any worse penalty if, when the inspector belatedly identified himself, the contractor had just said no – get back behind the line.   Perhaps some of you who are reading this will have an opinion concerning this that is better informed or different from my own.  Your comments are welcome.  Please send them to Kent@ConstructionRisk.com and I will consider publishing them in a future issue of this newsletter. 

About the author:   Kent Holland is a construction lawyer  in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 8, No. 1.

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ABOUT THIS NEWSLETTER & A DISCLAIMER 

          This newsletter Report is published and edited by J. Kent Holland, Jr., J.D.  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 2006, ConstructionRisk.com, LLC

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

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