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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 8, No. 4, May-June 2006
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Inside
This Issue:
• What is Intended by
"Collapse" Covered by Insurance Policy?
• New Law Restricts Scope of Indemnity Clauses in Subcontracts
for Residential Construction in California
• When is Landowner Liable to Independent Contractor's Employee
for Site Safety?
• Contractor has a Duty to Seek Clarification of Ambiguous
Contract Terms
======================================
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Article 1
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What is Intended by “Collapse”
Covered by Insurance
Policy?
In
a coverage dispute suit by a building owner against its property general
liability insurance carrier, the question to be resolved by the court
was whether the owner was entitled to recover for a potential collapse
of part of its building. The
court rejected the insurance carrier’s argument that there was no
coverage in the absence of actual collapse.
Where collapse is imminent there could be coverage.
A
building owner,
401 Fourth Street
, Inc. (“
Fourth Street
” or “Owner”) purchased an insurance policy from Investors
Insurance Group (“Insurer”) and for additional premium obtained an
endorsement extending coverage for “collapse.”
The language of the endorsement reads as follows:
“We
will pay for loss or damage caused by or resulting from risks of direct
physical loss involving collapse of a building or any part of a building
caused only by one or more of the following: … 2. Hidden decay ….
Collapse does not include settling, cracking, shrinkage, bulging or
expansion.”
When
tenants noticed that a parapet wall was bowed and leaning inward, the
building Owner filed an insurance claim for coverage under the
endorsement. According to an
engineer retained by the Owner, internal bonds that tied the parapet
wall to the structural framing of the building had recently given way,
and a large, sudden movement had occurred.”
The engineer described the situation as “very dangerous and
must be repaired immediately.”
An
engineer retained by the Insurer also concluded that the wall needed to
be repaired, but he concluded that the reason for the problem was that
interior steel had corroded and expanded, thereby causing the bricks to
be jacked upwards. He
further concluded that this was attributable to “a lack of normal
maintenance of the brick joints, roofing and shelf angle.”
Both expert engineers agreed, however, that if repairs were not
made, “the parapet wall could completely collapse.”
Based
on a narrow interpretation of the policy language, the insurance company
denied coverage. The Owner
then filed suit against the company.
The trial court granted a motion for summary judgment on behalf
of the insurance company based on the court’s application of case law
that has construed the term “collapse” to require the actual
physical falling down of the structure. Since the structure had not
fallen, the trial court concluded a “collapse” had not occurred
within the meaning of the policy language.
On
appeal, the appellate court in the case of 401
Fourth Street, Inc. v. Investors Insurance Group, 583 Pa. 445, 879
A. 2d 166 (2005), reviewed
case law of a number of different states that have addressed similar or
even identical policy language. It
looked to these other decisions because the interpretation and
construction of the policy phrase “risks of physical loss involving
collapse” was an issue of first impression” for the court.
A number of other courts have found that provision to be
ambiguous and have interpreted the phrase to provide broader coverage
than just loss occurring only from actual collapse.
The Court here reached a similar conclusion, finding that the
policy “covers not only loss for a collapse, but also the risk of loss
involving a collapse.” The
court said, “To interpret this broad language to be limited to only
the falling of the building, even under existing case law, would be to
give too narrow an interpretation to the broad language drafted by the
insurer.” For this reason,
the court held that the “policy provides coverage for damage caused by
the falling down, or imminent falling down of a building or part
thereof.”
The
court was careful to explain, however, that it would not interpret the
language so broadly as “to cover substantial impairment of structural
integrity” where collapse is not imminent.
To go that far, said the court, “would possibly convert the
policy into a maintenance agreement permitting recovery for damage
which, while substantial, does not threaten collapse of the
structure.”
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. 4.
__________
Article
2
__________
New
Law Restricts Scope of Indemnity Clauses in Subcontracts for Residential
Construction in
California
By: Thelen Reid & Priest LLP
A new law effective in 2006 limits the scope of indemnity clauses in
subcontracts on residential construction projects in California. The law
is important for developers, contractors and subcontractors who are
involved, even on an occasional basis, in the residential construction
industry. Because the terms of the indemnity clause are something
negotiated in almost every significant prime contract or subcontract, it
is important to understand the terms and impact of the new statute.
Assembly Bill 758 amended Civil Code §2782, in particular Subsections
(c) and (d), so as to provide:
(c) For all construction
contracts, and amendments thereto, entered into after January 1, 2006,
for residential construction, as used in Title 7 (commencing with
Section 895) of Part 2 of Division 2, all provisions, clauses,
covenants, and agreements contained in, collateral to, or affecting any
such construction, contract, and amendments thereto, that purport to
indemnify, including the cost to defend, the builder, as defined in
Section 911, by a subcontractor against liability for claims of
construction defects are unenforceable to the extent the claims arise
out of, pertain to, or relate to the negligence of the builder or the
builder’s other agents, other servants, or other independent
contractors who are directly responsible to the builder, or for defects
in design furnished by those persons, or to the extent the claims do not
arise out of, pertain to, or relate to the scope of work in the written
agreement between the parties. This section shall not be waived or
modified by contractual agreement, act, or omission of the parties.
Contractual provisions, clauses, covenants, or agreements not expressly
prohibited herein are reserved to the agreement of the parties.
(d) Subdivision (c) does
not prohibit a subcontractor and builder from mutually agreeing to the
timing or immediacy of the defense and provisions for reimbursement of
defense fees and costs, so long as that agreement, upon final resolution
of the claims, does not waive or modify the provisions of subdivision
(c). Subdivision (c) shall not affect the obligations of an insurance
carrier under the holding of Presley Homes, Inc. v. American States
Insurance Company (2001) 90 Cal.App.4th 571. Subdivision (c) shall not
affect the builder’s or subcontractor’s obligations pursuant to
Chapter 4 (commencing with Section 910) of Title 7 of Part 2 of Division
2.
It is important to
analyze what the new statute does and does not do. First, the statute
applies to residential construction only, as defined in Civil Code
§§895, et. seq. Thus, it does not apply to commercial contracts,
condominium conversions or apartment construction. Second, it only
applies to contracts entered into after January 1, 2006. Third, the
statute is limited to claims for construction defects.
The statute is clear that all contractual provisions purporting to
require a subcontractor to indemnify a builder or the builder’s other
independent contractors are unenforceable to the extent that the claims
arise out of the negligence of parties performing other work on the
project.
The intent of this new language apparently is to prevent enforcement of
indemnity clauses that require the subcontractor to indemnify the
"builder" for negligent acts of the builder or third parties.
It appears to have achieved this purpose. But it does not appear to
change the rule that a subcontractor may be required to indemnify a
builder (or contractor) for all claims "arising out of" the
subcontractor’s work. Such clauses can require a subcontractor to
indemnify a contractor even when the subcontractor was not negligent. See,
Centex Golden Construction Co. v. Dale Tile Co., 78
Cal.
App. 4th 992 (2000).
The "builder" as defined in Civil Code §911 is the party who
is in the business of selling the residential units. Any contracts
between such a builder and a subcontractor technically would not be
"subcontracts" (which require a prime contractor). However,
the statute appears intended to capture subcontracts when a developer
also is acting as general contractor and contracting directly with
"subcontractors."
The limitation in the
statute applies when a subcontractor enters into a subcontract with a
prime contractor that contains an indemnity provision for claims against
the owner. Even if the subcontract’s indemnity clause requires the
subcontractor to indemnify the owner and general contractor, the
indemnity obligations to the owner are limited by §2782.
An unsettled issue is whether prime contractors who do not qualify as
"builders" under §911 still can impose broad indemnity
obligations on subcontractors on residential construction projects. For
example, assume a prime contract between an owner and a general
contractor, and a subcontract between the general contractor and a
subcontractor, and assume the owner is sued for construction defects.
The owner will sue the contractor for indemnity, and the contractor will
sue the subcontractor for indemnity. Will a broad indemnity clause in
the subcontract still allow the contractor to be indemnified by the
subcontractor for the contractor’s negligence or the negligence of
other subcontractors?
Another issue is whether it is necessary for "builders" to
amend the indemnity clauses in their form subcontracts for residential
construction projects. It may be that the effect of the statute is to
modify the subcontract clause. Since the statute is limited to
construction defects, it makes sense to continue to use a broad
indemnity clause in subcontracts so as to allow for broad indemnity for
claims for personal injury or wrongful death.
General contractors on residential construction projects now need to be
careful about broad indemnity clauses in prime contracts because they
may not be able to pass those broad indemnity obligations down stream to
their subcontractors.
General contractors faced with an owner who is demanding an overly broad
indemnity clause on a residential construction project may consider
proposing instead to use a form of indemnity clause that contains broad
indemnity provisions but that then recites the language in §2782 (c) to
limit the indemnity obligations for construction defects.
About the Author:
This article first appeared in the Thelen Reid &
Priest newsletter posted at ConstructionWebLinks on April 3, 2006.
For further information, contact Paul Berning, Esq.,attorney with
the
San Francisco
office of Thelen Reid & Priest, LLP.
His address is
101 Second Street
,
Suite
1800
,
San Francisco
,
CA
94105-3606
. He may be reached at
415-369-7229 or at pwberning@thelenreid.com.
This article is reprinted in the May/June 2006
ConstructionRisk.com Report with permission.
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__________
Article 3
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When is Landowner liable to
independent contractor’s
employee for site safety?
A landowner that hires an independent contractor may be liable
to the contractor’s employee if the landowner knew or should have
known of a latent or concealed preexisting condition on its property,
the contractor didn’t know and couldn’t have reasonably discovered
the hazardous condition, and the landowner failed to warn the contractor
about the condition. In the case of Kinsman
v. Unocal Corporation, (Cal. 2005), the Supreme Court of California
concluded that at the trial on the merits of a jobsite injury claim by
an employee of an independent contractor against the property owner,
Unocal, the jury had not been sufficiently instructed by the judge who
should have explained that a landowner could be liable under the
circumstances of the case only if it had failed to warn the contractor
about a hidden hazardous condition at the property.
The plaintiff in this case, Ray Kinsman, had worked
as a carpenter at Unocal’s refinery in
Wilmington
,
California
during the 1950’s. He was
employed by an independent contractor that had been hired by Unocal to
perform scaffolding work during periods of shutdown and repair and the
refinery. He alleged that
the work had exposed him to asbestos and that he later developed cancer
as a result.
The suit by Kinsman against Unocal argued two
theories of liability. The first was a premises liability theory,
arguing that Unocal was negligent in the use, maintenance, or management
of the areas where Kinsman worked. The
second theory was that Unocal was negligent in the exercise of retained
control over the methods of the work or the manner of the work performed
by Kinsman. The jury found
in favor of Kinsman on the first theory – premises liability.
The case went to appeal first to the Court of
Appeal and then ultimately to the Supreme Court of California.
In the Court of Appeal decision, the court held that “a
contractor’s employee cannot recover under a premises liability theory
unless the landowner had control over the dangerous condition and
affirmatively contributed to the employee’s injury.”
That court reversed the jury award because it concluded the jury
instructions did not accurately reflect Unocal’s limited duty.
The California Supreme Court granted review of that decision and
affirmed it insofar as it reversed the jury award, but reversed it as to
the instructions to be followed by the trial court on remand.
The discussion presented by the Supreme Court
analyzes the theories of liability in great detail and sets forth some
considerations to be applied when determining a landowner’s
responsibility in situations like this one.
The court explained the basic rule applying to a landowner when
that landowner hires someone to work on the land.
The analysis begins with a review of Privette
v. Superior Court (1993) as follows: “At common law, it was
regarded as the norm that when a hirer [like Unocal] delegated a task to
an independent contractor, it in effect delegated responsibility for
performing that task safely, and assignment of liability to the
contractor followed that decision…. For various policy reasons …
courts have severely limited the hirer’s ability to delegate
responsibility and escape liability.
But in Privette and its progeny, we have concluded that, principally
because of the availability of workers’ compensation, these policy
reasons for limiting delegation do not apply to the hirer’s ability to
delegate to an independent contractor the duty to provide the
contractor’s employees with a safe working environment.
In fact, the policy in favor of delegation of responsibility and
assignment of liability is so strong in this context that we have not
allowed it to be circumvented on a negligent hiring theory.
Nonetheless, when a hirer does not fully delegate the task of
providing a safe working environment, but in some manner actively
contributes to the employee’s injury, the hirer may be liable in tort
to the employee.”
Starting from the above-explained principles, the
court went on to analyze the doctrine of landowner liability as it
applies to independent contractor’s employees.
The basic rule, said the court, is that a property owner must
manage his property, acting as a reasonable man in view of the
probability of injury to others.
Where, for example, the owner knows of a dangerous concealed
condition, and knows that a person is about to come into contact with
it, the owner can be liable for negligence in failing to warn or failing
to repair the condition. The
question before the court is how these principles apply when the
landowner hires an independent contractor whose employee is injured by
hazardous conditions on the premises.
The court concludes that when there is a safety
hazard on the hirer’s premises that can be addressed through
reasonable safety precautions on the part of the independent contractor,
the owner may delegate the safety responsibility to the contractor.
The owner would not then be liable to an employee of the
contractor that is injured because the contractor failed to execute the
work safely. But, if the
hazard is one that is concealed from the contractor but known to the
owner, a different rule will apply.
The court concludes that “A landowner cannot effectively
delegate to the contractor responsibility for the safety of its
employees if it fails to disclose critical information needed to fulfill
that responsibility.” Therefore,
says the court, “the landowner would be liable to the contractor’s
employee if the employee’s injury is attributable to an undisclosed
hazard.”
Thus, even if it does not retain control over the
work, the landowner can be liable to a contractor’s employee if “(1)
it knows or reasonably should know of a concealed, pre-existing
hazardous condition on its premises;
(2) the contractor does not know and could not reasonable
ascertain the condition; and (3) the landowner fails to warn the
contractor.”
Comment:
The court was careful to point out that the premises liability
doctrine it adopted applies only to preexisting hazardous conditions on
the property. The court
specifically reaffirms the right of hirers “to delegate to independent
contractors the responsibility of ensuring the safety of their own
workers.” Landowner’s
may continue to rely upon their independent contractors to take
responsibility for site safety and the safe execution of work provided
that the owner discloses to the contractor hazardous conditions that it
knows or reasonably should have known about, and which the contractor
does not know and could not reasonably ascertain.
Contractors often require by contract that the site
owner disclose all hazardous site conditions known to the owner.
Some owners have resisted or deleted this clause.
They have attempted to avoid any responsibility for disclosure
and to instead place on the contractor all responsibility for
discovering site conditions. Based
on the decision of this court, the contract language is only requiring
owners to do what will be required of them in any event in order to
avoid liability to employees of those contractors.
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. 4.
__________
Article 4
__________
Contractor
has a Duty to Seek Clarification of
Ambiguous Contract Terms
Katz & Stone, L.L.P. Construction
Newsletter
January/February 2006
A contractor who fails to seek clarification of the
meaning of ambiguous contract terms prior to the submission of its bid
may be bound by the owner’s reasonable interpretation of those
terms. The case of Delicacies Constr. Co., Inc. v. City of New
York, 2005 NY Slip Op 25321, 1 (N.Y. Misc. 2005) illustrates this
proposition.
Here, the contractor was the winning bidder for a
public improvement construction project involving the replacement of a
pedestrian bridge in
New York City
. The Contract consisted of various documents—including the
Proposal for Bids, the contractor’s Bid, Technical Specifications, and
the Agreement. The project was substantially completed, and the
contractor’s claim accrued on May 31, 1999. However, the
contractor brought suit against the City on October 21, 2004.
In its claim, the contractor asserted that it supplied
additional labor, materials, equipment and services pursuant to the
Contract. As such, the contractor believed that it was entitled to
an equitable adjustment, and claimed that the City’s failure to
compensate it for the additional work constituted a breach of
contract. The contractor argued that the City failed to design,
administer and manage the construction project properly. As a
result of the city’s aforementioned failures, it took the contractor
an additional four years (along with the requisite additional costs and
expenses) to complete the project.
In response, the City argued that the contractor’s
claims were foreclosed by the statute of limitations contained in the
Contract documents. The City alerted the court to Article 53 of
the Agreement which required a claim to be brought within four months
after the accrual of the claim. The contractor argued that because its
claims for delay damages were based upon the Contract and not
specifically the Agreement—the four-month statute of limitations
contained in Article 53 of the Agreement was to be applied to “claims
based on this Agreement”—the four-month statute of limitations did
not apply.
The court disagreed with the contractor’s
argument. The court observed that Article 1 of Chapter I of the
Agreement did not readily distinguish between the terms “Contract”
and “Agreement.” In fact, that the terms were used
interchangeably throughout the entire Contract and within the Agreement
section itself. As a result, the court interpreted the statue of
limitations provision contained in Article 53 of the Agreement to apply
to both the claims based upon the Contract and the Agreement. To the
extent there was some ambiguity caused by the term “Agreement” in
Article 53, there was an additional contractual requirement that the
contractor request clarification of such ambiguities. The court found
that the contractor failed to clarify the meaning of the contractual
language it claimed was ambiguous before submitting its bid; thus, it
was bound by the City’s reasonable interpretation of Article 53. As a
result, the court ruled that the contractor’s claims were time-barred
because the contractor waited over five years to bring suit against the
City after its claims accrued in May 1999.
This case illustrates that
contractors must be aware of ambiguities in contract language.
Contractors must resolve such ambiguities prior to submitting their
bids, or risk being held to the project owner’s interpretation of the
ambiguous language.
About
the Author: The law firm
of Katz & Stone is a nationally recognized firm with a practice
emphasizing construction law.
The office is at 8230 Leesburg Pike,
Suite
600
,
Vienna
,
VA
22182
; 703-761-3000. E-mail: info@katzandstone.com.
This article first appeared in the Katz and Stone
newsletter and is reprinted in the May/June 2006 ConstructionRisk.com
Report with permission.
=====================================
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. 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.
8596 Coral
Gables Lane
Vienna, VA
22182
703-623-1932
Kent@ConstructionRisk.com
_____________________________________________
_____________________________________________
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