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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 8, No. 6, October 2006
Inside This Issue:
- Arbitration Clause in AIA
Design-Build Subcontract Bars Third-Party Claim in Litigation;
- Architect’s
Admissions in Settlement Agreement used against Him by State Board
of Examiners to Revoke his License;
- Additional Insured is not
Covered for Sole Negligence;
- Court Finds Coverage for
Construction Defects Despite Exclusions to the Contrary
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The intent is to give a sampling of issues and cases, providing
risk management ideas and information to serve as a useful resource for
contractors, design professionals, project owners, attorneys, educators,
risk managers, and insurance professionals.
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Article
1
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Arbitration
Clause in AIA Design-Build Subcontract Bars Third-Party Claim in
Litigation
J. Kent
Holland, Jr.
A Design/Builder that was sued by project owner for
alleged design and construction defects was barred from bringing a
third-party claim or separate legal action against its subcontractor
architect, because the AIA sub-contract document required that claims
first be submitted to arbitration.
In the case of The
Hillier Group, Inc. v. Torcon, Inc., (Case No. 2D05-4615, Florida
District Court of Appeal, 2006),
when Torcon was sued by the
project owner, Torcon, in turn, filed a separate action against its
architect, Hillier, as well as against several other subcontractors –
asserting actions for indemnity and breach of contract.
Hillier responded by moving the court to dismiss the complaint on
the basis that Torcon had failed to first submit its claim to
arbitration as required by the contract.
Torcon responded to Hillier’s motion by arguing
that judicial economy required the court to decide all matters related
to the owner’s claim against Torcon, including Torcon’s claims
against its subcontractors, in a single judicial proceeding.
Torcon also argued that Hillier waived any right it may have had
to arbitration by failing to timely serve a demand for arbitration as
required by the contract. And
Torcon argued that the arbitration provision of the AIA contract did not
require binding arbitration but could have contemplated nonbinding
mediation or arbitration instead. One
final argument by Torcon was that by filing an answer to an action for
declaratory relief that had been filed by Torcon, Hillier waived any
right to arbitration. The trial court rejected Hillier’s motion and
allowed the third-party claim to proceed in the litigation.
The appellate court reversed the trial court for a
number of reasons. The court
found the language of paragraph 6.1 of the AIA form is sufficient to
create an enforceable agreement for binding arbitration.
The language states that disputes “shall be subject to and
decided by mediation or arbitration.”
In reaching its conclusion concerning the adequacy of the
language, the court said it declined to adopt a rule requiring an
arbitration clause to contain one or more “magic words” to be
enforceable.
With regard to the argument concerning judicial
efficiency, the court followed the precedent of another appellate
district in Florida that in a similar case concluded “we cannot accept
the proposition that a party to a contract calling for arbitration may
avoid that undertaking by the simple device of joining as defendants in
its lawsuit others with which the party has no such agreement to
arbitrate.” A party
cannot avoid a contractual duty to arbitrate, says the court, by
asserting claims against additional parties. Thus,
considerations of judicial economy have no role to play in determining
whether the parties’ dispute is subject to arbitration.
In rejecting Torcon’s argument that Hillier
waived its right to arbitration by failing to make a timely arbitration
demand, the court found that all that was required under the AIA
language was: “A demand for arbitration shall be made within a
reasonable time after the claim, dispute or other matter in question has
arisen.” No specific time
frame is established by the contract.
The trial court found that Hillier’s failure to
demand arbitration prior to being sued amounted to a waiver of its
arbitration right. But since
Hillier had no claim against Torcon, it had no reason to file a lawsuit
or initiate arbitration against Torcon.
Consequently, the appellate court concluded that it was
sufficient that Hillier promptly opted for arbitration instead of
litigation after Torcon initiated its suit against Hillier.
The way the appellate court explained its reasoning is as
follows: “We think that the adoption of the rule that a defending
party waives the right to arbitration by failing to demand it prior to
being sued would be unwise. Such
a rule would enable one of the contracting parties to circumvent an
arbitration provision by filing a lawsuit before the other party filed a
demand, thereby encouraging the immediate resort to litigation as soon
as a dispute became a glimmer on the horizon.
This would upset the established expectations of contracting
parties who have chosen arbitration as the preferred means of settling
their disputes.
For these, and other reasons, the court reversed
and remanded the case to the trial court for the entry of an order
compelling arbitration of the parties’ dispute.
Comment:
This case demonstrates once again how important it is that the
dispute mechanism specified in subcontracts be consistent with that
which is set forth in the prime contract with the project owner.
It is possible that on this project, the design-builder utilized
the AIA subcontract containing arbitration language without giving any
thought to whether that language needed to be modified due to the prime
contract provisions. Form
contracts serve an excellent purpose but they need to be carefully
reviewed on a project by project basis to determine what terms and
conditions may need to be deleted, added or modified in order to provide
appropriate allocation of risks for the specific project—particularly
in light of any conflicting terms in other contracts applicable to the
work. One
possible way to remedy the language of the subcontract form that created
the problem in this case is to add a sentence stating that in the event
that either party is sued in court, on a matter arising out of or
relating to the project, by someone that is not party to the
subcontract, it will be
agreed that for the purposes of judicial economy either party to the
subcontract may assert third-party
claims or other causes of action against the other party in that
judicial proceeding.
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. 6.
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Article
2
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Architect’s
Admissions in Settlement Agreement used against Him by State Board of
Examiners to Revoke his License
J. Kent Holland, Jr.
A State Board of Examiners of Architects was
legally permitted to consider admissions against interest by Architect
in a settlement agreement with its client which was incorporated into a
court order resolving litigation.
The architect’s argument that the settlement was intended to be
confidential and that it should not have been considered by the Board
was rejected by a court. In
addition, the appellate court held that the facts admitted to in the
settlement agreement, when adopted by a trial court order containing
conclusions of fact and of law, establish res judicata—meaning that
the issues are resolved and need not be further litigated.
In Nye v.
Ohio Board of Examiners of Architects (No.05AP-833, (Ct. of Appeals
– Ohio, 2006), the
appellate court affirmed a judgment of a lower court that had affirmed
an order of the state Board of Examiners revoking the architect’s
certificate of qualification to practice architecture in Ohio.
The architect argued that the Board should not have deemed
admissions by the architect in a settlement agreement with its client to
be binding and irrefutable evidence of professional misconduct.
The client had filed lawsuits against the architect asserting
fraudulent transfer of assets, misstatements made with fraudulent
intent, and fraudulent actions involving the creation of corporations
for illegal purposes and breach of contract.
The architect, according to the court, “specifically admitted
to fraud, fraudulent transfers and conduct preventing the discharge of
debt under the bankruptcy code.”
The settlement agreement was by its own terms
incorporated into an agreed judgment entry that the common pleas trial
court issued. The court
order entered judgment against the architect, pursuant to the settlement
agreement, in the amount of $110,000 and stated that the judgment entry
“constitutes a finding of fact and law regarding the substantive
merits of each of [client’s] underlying claims.”
After the matter was resolved by settlement
agreement and court order, the client filed a complaint with the board
of examiners requesting that the board revoke or suspend the
architects’ license. The
architect received an administrative hearing before the Board and the
Board considered as documentary evidence the court’s judgment entry as
well as the facts contained in the settlement agreement.
The hearing officer for the Board concluded that the
architect’s actions violated various sections of the state statutes.
The court of common pleas (trail court) then affirmed the
decision of the Board and the architect appealed the court’s decision.
On appeal, the architect argued that it was improper for the trail
court to affirm the board’s order because the board improperly applied
the doctrine of res judicata
and deemed architect’s admissions in the settlement agreement to be
conclusively binding evidence in the proceedings before the board. The
court explained that the doctrine of res
judicata includes two separate concepts: (1) claim preclusion,
historically called estoppel by judgment, and (2) issue preclusion,
traditionally called collateral estoppel.
The doctrine of collateral estoppel, said the court, “provides
that an issue or a fact that was fairly, fully, and necessarily
litigated and determined in a prior action may not be drawn into
question in a subsequent action between the same parties or their
privies, whether the cause of action in the two actions be identical or
different.”
Because the architect’s factual admissions were
incorporated into the agreed judgment entry, the civil action by the
client is deemed actually litigated and determined by final judgment of
the court. But the architect
argued that because the Board was not a party to the civil action that
gave rise to the admissions, the principal of res
judicata cannot be applied because mutuality of parties is a
prerequisite to apply res judicata.
The appellate court declined to apply the general requirement that
there must be complete mutuality of parties for res judicata to be applied. Instead,
it held that “because [architect] was not preclude from litigating
whether the admitted facts from the prior civil litigation warranted the
revocation of his architect’s license, the trial court did not err in
affirming the board’s use of offensive collateral estoppel to give
conclusive effect to [architect’s] prior admissions, even though the
board was not a party in the prior civil litigation.”
Comment:
When entering into a settlement agreement with an angry client,
it may be advisable to put as few substantive facts and admissions as
possible into the agreement. I
prefer settlement agreements that state that without either party
admitting wrong doing, fault or liability, it is agreed that the matter
is settled according to terms set forth in the settlement agreement, and
this agreement should further state that it is waiver and release of all
claims--known and unknown. If
possible under relevant state law, it may be advisable to make the
settlement agreement conditioned on waiver of subsequent complaint to
the Board. Rules of ethics do not permit such a release of ethics
complaints a client may have against their attorney, but the rules may
be different for other professions in different jurisdictions.
In this current case, the settlement agreement purported on its
face to be confidential. A
major exception to the confidentiality requirement was provided for in
the agreement, however, to allow disclosure if either the client or
architect “requires use of this Agreement for evidence or otherwise in
litigation, bankruptcy proceeding or other court proceeding.”
The appellate court concluded hat this was broad enough to allow
its use before the board of examiners. It
is likely, however, that the intent of this exception to the
confidentiality agreement was merely to permit a party to enforce
divulge its contents in a subsequent proceeding in order to enforce its
terms. Having it used as a
weapon in an unrelated matter such as before a state board of examiners
was probably never anticipated by the architect.
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Article
3
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Additional
Insured is not Covered for Sole Negligence
J. Kent Holland, Jr.
Insurance coverage was provided to a third-party
(project owner) as an additional insured under a contractor’s excess
insurance policy. Where the
additional insured endorsement excluded coverage for the additional
insured’s sole negligence, the court determined that contract language
such as indemnification requirements had no bearing on the scope of the
coverage because only the insurance policy and endorsement would
determine the extent of coverage.
In Evanston Insurance
Company v. ATOFINA Petrochemicals, Inc. (No. 03-0647, Texas –
2005), Triple S Industrial Coporation (Contractor) was hired to perform
maintenance and construction work for ATOFINA Petrochemicals (Owner) at
ATOFINA’s Port Arthur oil refinery.
An employee of the Contractor was killed at the owner’s
facility while performing work. Relatives
of the employee sued Owner for wrongful death and received a favorable
settlement for $6.75 million. ATOFINA
then sought indemnification for the settlement from the Contractor’s
insurance carriers. The
primary commercial general liability (CGL) carrier tendered its $
million policy limit to ATOFINA. The
excess carrier (Evanston Insurance Company), however, denied the claim
and refused to contribute toward the settlement.
ATOFINA was named as an additional insured on both the Admiral CGL
policy and on the
Evanston
excess policy. The Admiral
CGL policy specifically excluded from coverage any liability arising
from ATOFINA’s sole negligence. The
Evanston
excess policy was a “follow form” policy so that it covered only the
same liabilities covered by the underlying policy.
In addition, the
Evanston
policy contained two relevant definitions of who is an insured under the
policy. Under section
III.B.5 it stated that an insured is “any … person or organization
who is insured under a policy of ‘underlying insurance.’
The coverage afforded such insureds under this policy will be no
broader than the ‘underlying insurance’ except for this policy’s
Limit of Insurance.” The
policy contained an additional provision stating that an insured may
also be “a person or organization for whom [Contractor] has agreed to
provide insurance as is afforded by this policy; but that person or
organization is an insured only with respect to operations performed by
[Contractor] or on [Contractor]s] behalf, or facilities owned or used by
[Contractor]. ATOFINA
qualifies as an insured under both provisions of the policy.
As an initial matter, the Texas Supreme Court noted
that the indemnity clause in the contract between the Contractor and
ATOFINA would not limit the scope of the insurance provided by the
carriers because the additional insured provisions stand separately from
the indemnity provision. Next,
the court found that regardless of what insurance coverage the
Contractor may have been required by contract to purchase for the
benefit of ATOFINA, it was only the terms of the actual policies that
would determine the coverage provided and, therefore, the extent of
responsibility of the carriers.
Looking at the terms of the excess policy, the
court held that the two definitions quoted above had to be read
holistically rather than independently.
Since the one section clearly stated that ATOFINA would not be
covered for its sole negligence, ATOFINA could not avoid that
restriction by arguing that it was covered under the other section which
did not contain that same limitation.
The sole negligence restriction had to be read into both
definitions of the contract to make sense of the policy as a whole.
The court determined that ATOFINA has no coverage
under the
Evanston
policy for its own sole negligence.
But because the wrongful death claim was settled with no
admission of liability by either party, it was impossible for the court
to determine whether ATOFINA’s responsibility for the accident was
“sole.” The court,
therefore, remanded the case to the trail court for a determination of
the respective liabilities of the parties.
Comment:
The court in this case addressed an argument by
Evanston
that its coverage was limited in scope by the indemnity agreement
between ATOFINA and the Contractor.
The indemnity agreement in the contract specifically excluded
indemnity for any acts of ATOFINA’s sole negligence.
The court rejected
Evanston
’s argument in this regard, holding that the additional insured
provision was not limited to covering only the liabilities reflected in
the indemnity agreement. As
explained by the court, “While the indemnity agreement is relevant to
determining what the parties intended with respect to the scope of the
indemnity obligation, an insurance policy secured to insure that
obligation stands on its own.
To the extent the insurance policy fails to satisfy the indemnity
obligation, the obligor [contractor] remains exposed.”
When reviewing a contract to determine whether risk
allocation is appropriate, it is important to understand that parties
are free to negotiate terms that shift risk from one party to another in
a manner that creates uninsured liability for the party that assumes the
risk. In the case at issue,
the indemnity clause of the contract did not limit
Evanston
’s insurance obligations, but nor did it increase those obligations.
The policy speaks for itself and coverage scope is neither
increased nor decreased by the terms of a construction contract.
Another point for consideration in drafting
contracts is what dispute resolution mechanism will be utilized.
This case was resolved by a settlement agreement that did not
assign any responsibility or liability to any party.
Many cases are resolved by arbitration proceedings which
generally do not set forth any factual or legal reasoning for decisions
granting monetary damages to one of the parties.
If insurance is at issue it may be prudent to require that
arbitration decisions include findings of fact and conclusions of law so
that an insurance carrier may determine whether the liability is covered
in a situation like this one under an additional insured endorsement or
other provision of the policy. Without
such information, the carrier might be justified in declining coverage. With
the remand to the trial court in the instant case, the parties will end
up back in trial court with the time and expense of proving the extent
of responsibility for the injuries in order to prove entitlement to
insurance coverage.
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. 6.
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Article
4
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Court
Finds Coverage for Construction Defects Despite
Exclusions to the Contrary
J. Kent Holland, Jr.
Where a contractor was sued for defective work on a
construction project, it demanded that its commercial general liability
(CGL) policy carrier provide coverage for the claim.
A trail court ruled that the policy did not cover the damages
because they were excluded by the “work-product exclusion” of the
policy. This was reversed on
appeal, with the court holding that the subcontractor exception to the
work-product exclusion rendered the exclusion inapplicable.
In addition, the court held that the policy provided coverage for
this loss under its “products-completed operations hazard”
provision.
In Supreme
Services and Specialty Co., Inc. v. Sonny Greer, Inc. (04-1400,
Louisiana
, 3d Cir. Court of Appeal – 2006), Supreme Services and Specialty Co.
(Owner) contracted with Sonny Greer, Inc. (Contractor) for the
construction of a commercial building on a lot owned by Supreme.
After the project was completed the Owner sued Contractor for
breach of contract and breach of a separate warranty agreement arising
out of a problem with cracks in a concrete slab installed by the
contractor’s subcontractors. Contractor
filed a third party claim against its CGL carrier, AXA Global Risk U.S.
Insurance Company (AXA). AXA
filed a motion for summary judgment alleging that the policy
specifically excluded coverage for damages arising out of Greer’s
work. The contractor
in turn filed a motion for summary judgment against AXA seeking a
declaratory judgment that the AXA policy provided coverage.
The trial court granted judgment for AXA – finding that the
exclusion precluded coverage for the damages.
In its reasons for judgment in favor of AXA, the
trail court explained as follows: “The issue before the court is
whether the ‘work product’ exclusions in the CGL policy exclude
coverage to Sonny Greer, Inc. The
pertinent exclusion in the policy reads as follows: Property damage to
… (6) that particular part of any property that must be restored,
repaired or replaced because ‘your work’ was incorrectly performed
on it. 19.
‘Your work’ means: a. work or operations performed by you or
on your behalf; and b. Material, parts or equipment furnished in
connection with such work or operations.”
The court found that this exclusion applied to the work performed
by the subcontractors on the concrete slab.
The cracks in the slab did not cause damage to any other property
at the site. It was only the damage to the work itself that was at
issue. (Note:
This application of what is commonly called the “your work
exclusion” is how insurance carriers intend for the policy to be read
and applied. The key that
sometimes permits a contractor to get around the exclusion is that some
policies only apply the exclusion to the contractor’s own work and not
to work performed by a subcontractor for the contractor.
The language of the policy in this case, however, was apparently
intended by the carrier to apply equally regardless of whether the work
was performed by prime contractor or its subcontractor.)
In reversing this decision, and finding coverage,
the appellate court quoted at length from the policy, focusing on
exclusion j. “Damage to Property”, exclusion k. “Damage to Your
Product”, and exclusion l. “Damage to Your Work.”
The court also focused on the definitions of Property Damage”,
“Your Product”, “Products-completed operations hazard”, and
“Your Work.”
The Property Damage exclusion stated that there
would be no coverage for “That particular part of real property on
which you or any contractors or subcontractors working directly or
indirectly on your behalf are performing operations, if the ‘property
damage’ arises out of those operations.” (j. (5)).
It also excluded “property damage” to “[t]hat particular
part of any property that must be restored, repaired or replaced because
‘your work’ was incorrectly performed on it.” (j. (6)).
An exception to the j.6 exclusion stated “Paragraph (6) of this
exclusion does not apply to ‘property damage’ included in the
‘products-completed operations hazard.”
In exclusion L, the policy stated that it would not
provide coverage for “’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 stated “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.”
Based upon its review of the second paragraph of
2.L stating that the work-product exclusion does not apply to work done
by subconrtractors, the court concluded that this constitutes an
excepton to the work-product exclusion and thereby creates a conflict
with exclusion 2j(5), “which purports to exclude coverage for the
work-product of subcontractors as well as the insured.”
The court found “the subcontractor exception to the
work-product exclusion in part ‘l’ herein renders the exclusion in
the AXA policy inapplicable. To
the extent that other language conflicts with the exception, the
ambiguity created by the conflict also leads to a finding that the
work-product of each subcontractor of Greer is covered under the
policy.”
The contractor also argued that the policy provided
coverage under the “products-completed operations hazard” provision
of the policy.” The court
agreed that it did. To reach
that decision, the court interpreted the damage to the contractors and
subcontractors concrete work itself to be property damage arising out of
completed operations, and also understood this work to be a “work
product” creating product operations liability instead of “your
work” which would have been excluded.
(Note: This is
paraphrased based upon the way the author of this casenote understands
the court’s explanation). Since
the court sees this as a work product and products-completed operations
hazard, it looked to the language of exclusion 2j(6) which excludes
insurance for “that particular part of any property that must be
restored, repaired or replaced because ‘your work’ was incorrectly
performed on it.” The
court relied upon the exception to that exclusion which states
“Paragraph (6) of this exclusion does not apply to ‘property
damage’ included in the products-completed operations hazard,” and
concluded that the exception rendered the exclusion void as to the
cracked concrete which the court opined was work product of the insured
with regard to property damage included in the “products-completed
operations hazard” provision.
Comment:
In reading this decision it is easy to see why contractors file
suit against their carriers who deny coverage based on exclusions that
although they have a long history of use in the market place may yet
appear to some courts to be ambiguous and confusing.
Generally, the type of loss in question in this case would be
called damage to “your work” and would be excluded pursuant the
damage to your work exclusion of the policy.
The court focused instead on work “product” and on
“completed operations” neither of which seem most appropriate.
The view of many courts would be that damage to a contractors own
work is not deemed “Property Damage” within the context of the
policy, or that it is not caused by an “accident” and is therefore
not covered. The language in
the policy at issue made it clear that the exclusion for damage to the
contractor’s own work applied regardless of whether the work was
performed by the prime contractor or its subcontractors.
Some other policies are not as clear on this point and courts
have found coverage where the work in question was performed by a
subcontractor rather the insured prime contractor.
In a lengthy law journal article that I co-authored
with John B. Lennes, Jr. (Zurich North America Insurance), entitled “The
Jonah Perspective on Construction Defects: A View from Inside the Fish,”
(Federation of Defense & Corporate Counsel, Vol. 53, No. 4 –
2003), we review the wide variety of court interpretations of policy
language that often creates insurance coverage where insurance carriers
thought they had carefully constructed language to limit or exclude
coverage, which AXA no doubt thought it had done in this case.
If you are considering suing your carrier for denying
coverage you may find this article useful in framing your arguments.
_______________________
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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.
8596 Coral Gables Lane
Vienna
,
VA
22182
703-623-1932
Kent@ConstructionRisk.com
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