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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 9, No. 2, February 2007
Inside This Issue:
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Article
1
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Why Should I Pay for Your Mistakes?
Indemnification: Addressing the Contract
Language Details
By: J.
Kent Holland, Jr.
Indemnification clauses in contracts are described by some courts
as being Type I, Type II or Type III.
Others categorize the clauses as “Broad Form,”
“Intermediate Form” and “Narrow Form” as explained in this paper
that was presented by Kent Holland at the last American Bar Association
(ABA) Forum on the Construction Industry Conference that was held in
Scottsdale, AZ in the Autumn of 2006. These
different designations are both informative but they don’t necessarily
track with each other and it is important to review actual court
opinions to understand the significance of the categories.
For a copy of the complete 27 page paper, you may download it as
a pdf file from the ConstructionRisk.com website.
A recent decision by the Court of Appeal of the State of
California
in the case of McCrary
Construction Company v. Metal Deck Specialists, Inc.
McCrary Construction Co. v. Metal Deck Specialists, Inc.,
133
Cal.
App. 4th 1528 (2005) is quite helpful in understanding
some of the more practical aspects of indemnification provisions and how
the language may affect the outcome of litigation concerning
indemnification obligations.
McCrary describes the
different types of indemnification provisions.
Type I indemnity is
described by the court as providing “expressly and unequivocally that
the Indemnitor is to indemnify the Indemnitee for, among other things,
the negligence of the Indemnitee, and the Indemnitee is indemnified
whether its liability arises from its sole or concurrent negligence.”
(McCrary
Construction, quoting MacDonald
& Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413.)
The court calls the next level indemnity “Type II indemnity,” which it describes as being where “the
Indemnitee would be indemnified for his or her own passive negligence
but not for active negligence.” Typical
examples of such Type II clauses, says the court, include
those that indemnify the Indemnitee for the Indemnitee’s liability
“howsoever same may be caused” or “regardless of responsibility
for negligence” or “which might arise in connection with the agreed
work” or “caused by or happening in connection with the equipment or
the condition, maintenance, possession, operation or use thereof.”
(McCrary
Construction, quoting MacDonald
& Kruse, at p. 419.)
Finally, Type
III indemnity “is that which provides that the Indemnitor is to
indemnify the Indemnitee for the Indemnitee’s liabilities caused by
the Indemnitor, but which does not provide that the Indemnitor is to
indemnify the Indemnitee for the Indemnitee’s liabilities that were
caused other than by the Indemnitor.” (McCrary
Construction, quoting MacDonald
& Kruse, at p. 420.) An example suggested by the Court of a Type
III clause is a promise to hold Indemnitee harmless “from any …
liability … in any way caused by [Indemnitor].”
The McCrary court also
quoted from a California Supreme Court in the case of
Rossmoor Sanitation, Inc.
v. Pylon, Inc., 13 Cal.3d 622 (1975), for the proposition that “If an indemnity clause does not address
itself to the issue of an indemnitee’s negligence, it is referred to
as a ‘general’ indemnity
clause. [citations omitted]. While
such clauses may be construed to provide indemnity for a loss resulting
in part from an indemnitee’s passive
negligence, they will not be interpreted to provide indemnity if an
indemnitee has been actively negligent.”
The court further stated that provisions purporting to hold an
owner harmless “in any suit at law” or “from all claims for
damages to persons” or “from any cause whatsoever,” without
expressly mentioning an indemnitee’s negligence are deemed to be
“general” clauses.
These examples of general indemnity clauses described by the Rossmoor court included provisions of what were classified as type
II and type III clauses. Thus,
following the Rossmoor decision,
the McCrary court states that
“an indemnity provision that does not refer to the issue of the
indemnitee’s negligence will be considered to be a general indemnity
clause under which the indemnitee is not entitled to indemnity for its
active negligence, unless the circumstances of the case and language of
the contract evince a different intent by the parties.”
Turning to the facts of this particular case, the indemnity
provision in Metal Deck’s subcontract with McCrary provided:
Subcontractor agrees to indemnify
Contractor against, and save him harmless from, any and all claims,
suits or liability for injuries to property, injuries to persons,
including death, and from any other claims, suits or liability on
account of, or related to, any act or omission, or alleged act or
omission of the Subcontractor, or any of his officers, agents, employees
or servants. Subcontractor
shall be liable to Contractor for all expenses, including court costs
and attorney’s fees incurred by Contractor in connection with any such
claims, suits or liability, and/or in connection with any claim by
Contractor against Subcontractor arising out of the provisions of this
article.
A laborer on the project fell through a hole in the roof at the
construction site. Metal
deck was responsible for having cut the hole.
Metal Deck left the hole uncovered when it left the work site and
an employee of another subcontractor covered the hole at the request of
the prime contractor, McCrary. In
covering the hole with plywood, this other subcontractor failed to
secure the plywood.
The trial court found that Metal Deck was negligent in not
covering the hole and apportioned part of the damages to Metal Deck and
part of the damages to McCrary for its action of assuming responsibility
for covering the hole. Metal
Deck argued that the Prime was not entitled to indemnity under the
agreement because the Prime was actively negligent with respect to the
accident. The trial court
rejected the argument because the indemnity clause didn’t state that
the Prime’s active negligence would have any effect on the Metal
Deck’s indemnity obligations.
The court found the Prime’s conduct didn’t preclude
indemnification because “indemnity should be afforded under any
circumstances where to do so furthers the manifest intent of the parties
to the contract and where the loss sustained would not have occurred
without the indemnitor’s negligence.”
McCrary,
quoting Morton Thiokol, Inc. v.
Metal Building Alteration Co., (1987) 193 Cal.Appl.3d 1025, 1029. The
court awarded McCrary judgment against Metal Deck in the amount of
$688,832.
On appeal, Metal Deck argued that it owed no indemnity to the
Prime under the parties’ contract for several reasons.
First, it argued that the issue should be determined in
accordance with principles of comparative negligence and second, it
argued that even under an all-or-nothing approach to indemnity, the
Prime should receive nothing because the Prime had been actively
negligent. The
appellate court agreed with Metal Deck and held that that “The
language of the indemnity clause did not purport to require indemnity
from Metal Deck for this [negligent] conduct by McCrary, and there is
nothing otherwise to suggest that the intent of the parties was to
provide indemnity under these circumstances.
Accordingly, we find no reason to depart from the general rule
that an actively negligent Indemnitee cannot recover under a general
indemnity contract.”
Applying these principles to the application of the indemnity
provision in the contract between Metal Deck and the prime contractor,
McCrary, the court stated that the Prime would not be entitled to
indemnity at all because the indemnity provision is Type III indemnity
calling for indemnity for liabilities “on account of, or related to,
any act or omission” of the subcontractor.
Since the clause did not address itself to the issue of the
Indemnitee’s negligence, it is a “general” indemnity clause, and as explained by the court could
not be interpreted to provide indemnity if an Indemnitee has been
actively negligent.
The appellate court acknowledged that the trial court would have
the discretion to permit indemnification in some cases of active
negligence by the Indemnitee, but it found that in this particular case,
the intent of the parties did not contemplate indemnification where, as
here, the actions of the prime contractor were not only actively
negligent, but where those actions also directly led to the condition of
the roof.
This case demonstrates that the decision on how a court will
apply the indemnification provisions of a contract ultimately comes down
to a determination of the intent of the parties, as evidenced from the
language of the contract. Clear
and concise language in the indemnification clause of a contract should
expressly state the parties’ intent with such clarity that it is
unnecessary to argue in court over the meaning and applicability of the
clause.
The next section of this paper presents examples of
indemnification clauses found in various contracts and explains issues
and disputes that might arise in interpreting and applying the clauses.
To read this section, please go to the pdf version of this paper
that you will find BY CLICKING HERE.
http://www.constructionrisk.com/newsletter/pdfPapers/ABAIndemnificationPaper.pdf.
To review a pdf set of the the PowerPoint slides
that were presented with this paper at the ABA Scottsdale conference,
click HERE: http://www.constructionrisk.com/newsletter/pdfPapers/ABA
Indemnification PwrPoint.pdf.
About the
author: Kent
Holland is a construction lawyer located in
Tysons Corner
,
Virginia
, with a national practice. He
is principal of ConstructionRisk, LLC, providing construction risk
management services including change order and claim preparation,
analysis and defense, contract preparation, review and negotiation,
insurance consulting and risk management, and other services.
Mr. Holland is publisher of ConstructionRisk.com
Report and may be reached at Kent@ConstructionRisk.com.
This article is published in ConstructionRisk.com
Report, Vol. 9, No. 2. All
articles published in this newsletter are available at www.ConstructionRisk.com.
This article is the first section of a 27 page paper written and
presented by Kent Holland at the last American Bar Association (ABA)
Forum on the Construction Industry Conference that was held in
Scottsdale
,
AZ.
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Article
2
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Pollution
Exclusions in CGL Policy Bars Coverage for
Carbon Monoxide Poisoning
By: J.
Kent Holland, Jr.
The pollution exclusion of a commercial general
liability (CGL) policy was enforced to exclude coverage for injuries
allegedly caused from carbon monoxide that was emitted from a
propane-powered grinder that was being used to grind terrazzo floors
while another contractor’s worker was working in the same area
installing drywall. The
worker filed suit in state court against the owner of the grinder,
alleging the company was negligent in failing to provide proper
ventilation when operating its grinders and that it failed in its duty
to properly monitor the work environment for carbon monoxide gas.
The insurance companies filed a separate
declaratory judgment action in federal court, contending that the
absolute pollution exclusion bars coverage.
The court granted summary judgment in favor of the insurance
companies, and this was affirmed by the Federal circuit court on appeal,
holding carbon monoxide is an “irritant” that was “dispersed”
throughout the work site by the insured contractor.
Moreover, the court held that this was a pollutant “brought
on” to the premises by the contractor and therefore excluded from
coverage.
In Continental
Casualty Company v. Advance Terrazzo, 462 F.3d 1002 (8th
Cir., 2006), two insurance
policies were at issue. The
first, by Transportation Insurance Company was issued to the floor
contractor, Advance Terrazzo, as the primary commercial general
liability (CGL) policy. It is this contractor that was operating the
grinder at the job site. In
addition to this policy, Advance Terrazzo had an umbrella policy from
Continental Casualty Company. Both
policies contained absolute pollution exclusions – that applied to
exclude coverage whether the pollution was gradual or sudden and
accidental.
The language of the absolute pollution exclusion
stated that coverage was excluded for “(1) ‘Bodily injury’ or
‘property damage’ arising out of the actual, alleged or threatened
discharge, dispersal, seepage, migration, release or escape of
pollutants: (d) At or from any premises, site or location on which any
insured or any contractors or subcontractors working directly or
indirectly on any insured’s behalf are performing operations…. (
) If the pollutants are brought on or to the premises, site or
location in connection with such operations by such insured, contractor
or subcontractor…”
Pollutant is defined under the policy as “any
solid, liquid, gaseous or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
The federal district court granted the insurance
companies’ motion for summary judgment, finding that the absolute
pollution exclusion barred coverage for the worker’s claims for
injuries arising out of the carbon monoxide that was exhausted from the
grinder. Advance Terrazzo,
on appeal, argued that the absolute pollution exclusion is ambiguous
when applied to routine business hazards such as the release of carbon
monoxide from the grinders.
Courts in other states have found the clause to be
susceptible to more than one reasonable interpretation, and therefore
ambiguous when it comes to applying it situation like this one, where
the pollutant is such a common one that it may not readily be considered
by some people to be a pollutant within the meaning of the policy
exclusion. Courts in
Minnesota
, however, whose law is applicable here, have previously found the
exclusion to be unambiguous when applied to pollutants occurring in the
normal course of business activities.
This includes indoor pollution.
In particular, the Minnesota Court of Appeals, in
the case of Auto-Owners Insurance
Co, v. Hanson (1999), applied the absolution pollution exclusion in
a situation where an individual was injured from ingestion and
absorption of lead in paint chips at a rental property.
As additional precedent for applying the exclusion to the facts
of this matter, the court cited League
of Minn. Cities Insurance v. City
of Coon Rapids, which held that the pollution exclusion applied to
bar coverage for lung injuries suffered by individuals inside an ice
rink that resulted from nitrogen dioxide, a toxic by-product of a
Zamboni ice cleaning machine.
In that case, the court held that “merely bringing a Zamboni
machine on the premises merits exclusion under [the policy].”
In the case at bar, the federal circuit court found
no discernable distinction between the release of nitrogen dioxide from
a Zamboni and the release of carbon monoxide from a terrazzo grinder.
The court rejected Advance Terrazzo’s argument that it did not
bring the pollutant (carbon monoxide) onto the premises but instead
merely brought on the machine which contained LP
gas which is not a pollutant. The
court declined to make a distinction between bringing on the machine
with LP gas and the carbon monoxide that was directly emitted by using
the machine. As explained by
the court, because the
contractor brought on to the premises the machine that produced the
carbon monoxide, “it falls squarely into the policy language
triggering the absolute pollution exclusion.”
Comment: This
case once again demonstrates that courts in different states have widely
different views of the pollution exclusion.
Whether the exclusion will be applied to virtually identical
facts will often depend upon the jurisdiction.
Rather than taking a chance of having no coverage for injuries
such as those alleged in this case, contractors that are performing
services that have any significant chance of creating a pollutant in the
course of their operations should consider purchasing a contractor’s
pollution liability (CPL) policy to cover that risk.
About the
author: Kent
Holland is a construction lawyer located in
Tysons Corner
,
Virginia
, with a national practice. He
is principal of ConstructionRisk, LLC, providing construction risk
management services including change order and claim preparation,
analysis and defense, contract preparation, review and negotiation,
insurance consulting and risk management, and other services.
Mr. Holland is publisher of ConstructionRisk.com
Report and may be reached at Kent@ConstructionRisk.com.
This article is published in ConstructionRisk.com
Report, Vol. 9, No. 2. All
articles published in this newsletter are available at www.ConstructionRisk.com.
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Article
3
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Damage
from Fill Material Eroding into Creek Excluded from
Insurance Coverage
by Pollution Exclusion
By: J.
Kent Holland, Jr.
When EPA issued an administrative order to the
operator of a rock quarry, and subsequently filed a lawsuit, alleging
that the operator had, without a permit, discharged fill material
consisting of dirt and rocks into a creek, the quarry operator tendered
defense to its Commercial General Liability (CGL) insurance carriers.
The insurers denied coverage based on pollution exclusions in
their policies. In the
quarry operator’s suit against the carriers for breach of contract,
the trial court granted summary judgment in favor of the carriers and
this judgment was affirmed on appeal.
The rocks and dirt in question were placed by the
operator along a stream bed to fill in the main access road to the
quarry which had been washed out by the overflowing creek during severe
storms. Some of these fill
materials then apparently eroded into the creek.
The EPA order directed the quarry operator to cease the discharge
of fill material and submit an erosion control plan and site restoration
plan for both the site and for the creek. EPA asserted that the dirt and
rocks “are dredged and fill material, hence, pollutants within the
meaning of sections 301(a) and 404” of the Clean Water Act.
The insurance carriers asserted that dirt and rocks
were pollutants within the policy definitions and thus subject to the
pollution exclusion. It did
not matter that dirt and rocks are naturally occurring in nature.
The fact that they were dumped by the operator into the waterway
made them pollutants.
In the comment at the conclusion of this case, note
that I offer the following thought: I am starting to wonder if perhaps
it is appropriate to begin filing lawsuits against plaintiffs who sue
their carriers for pollution coverage in a jurisdiction where courts
have repeatedly interpreted and applied identical or virtually identical
pollution exclusions to bar coverage for the virtually the same matters
claimed. At what point is it
an abuse of process to sue a carrier demanding coverage for something
one knows or should know is not covered under the terms of the policy as
commonly understood and as commonly applied by the courts in that
jurisdiction?
In Ortega
Rock Quarry v. Golden Eagle Insurance Corp., 141
Cal.
App. 4th 969, the quarry operator (Ortega) argued that the
pollution exclusion could not be enforced to bar coverage because it was
ambiguous in that it failed to adopt the definition of pollutants set
forth in the Clean Water Act. Ortega
also argued that because the rocks and dirt were naturally occurring
they could not be considered pollutants.
Finally, Ortega argued that because the pollution exclusion of
the policy listed examples of pollutants that were not covered, anything
that was not listed as an example could not be deemed a pollutant under
the definition. The
appellate court rejected each of Ortega’s arguments as explained
below.
Failure to
Incorporate Statutory Definitions of Pollution
Using the definition of pollutants found in the
Clean Water Act (CWA) for insight into the scope of the policy
definition of pollutant is useful. It defines pollutants as “dredged
spoil, sewage sludge, munitions, chemical wastes, biological materials,
radioactive materials, heat, wrecked or discarded equipment, rock, sand,
cellar dirt and industrial, municipal and agricultural waste discharged
into water.” From this
definition, it is readily apparent that rock and dirt such as that
involved in this case are within the definition of pollutant under the
CWA.
The court concluded that state and federal
environmental laws may provide insight into the scope of the policies’
definition of pollutants without being specifically incorporated into
the definitions. Failure to
specifically incorporate statutory definitions does not make the
language of the pollution exclusion ambiguous.
Application
of Pollution Exclusion to Natural Materials
Natural dirt and rocks are pollutants within the meaning of the
Clean Water Act when placed in waters of the
United States
. A creek such as that
involved here is considered “waters of the
United States
” within the meaning of the Act. Previous
decisions in the courts have held that naturally occurring substances
can be pollutants when they are moved to a place differing from where
they occur naturally. For
example, natural organic fertilizer has been held to be a pollutant
within the meaning of CGL pollution exclusions when the fertilizer
leached into ground water or contaminated water sources.
(See Space v. Farm Family Mutual Ins. Co., 235 A.D.2d 797).
It has also been held that naturally occurring hazardous
substances are deemed pollutants when an “unnatural process” such as
mining causes them to be found in a location other than where they
originally naturally occurred. (See Gold
Fields Am. Corp. v.
Aetna
Casualty, 295 A.D.2d 289). In
the current case, the appellate court held the trial court was correct
in concluding that because the rocks and dirt had been moved from their
natural location into the stream bed, they became pollutants within the
meaning of the pollution exclusion of the policies.
Doctrine of
Ejusdem Generis
Ortega argued that because the pollution exclusion
used the word “including” immediately before the list of examples of
pollutants that were excluded, this list was exclusive and that anything
not listed was therefore not deemed a pollutant.
As the court explained, “Ortega contended, the only
‘irritants’ or ‘contaminants’ that are excluded from coverage
are those that are enumerated after the word ‘including,’ i.e.,
‘smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.’”
Under the principle of ejusdem
generis, the more particular expressions in a contract qualify those
that are general. Thus, in
an insurance policy, “specific provisions rather than general
provisions govern the insurance contract relating to a particular
subject, even though the general provision, standing alone, would be
broad enough to include the subject to which the more specific provision
relates.”
The term “including” preceding a list of
examples is not always, says the court, used as a term of limitation.
For example, the word “including” when used in a statute is
typically a term of enlargement rather than one of limitation.
The doctrine of ejusdem generis does not apply to create a limitation on the general
exclusion when the context demonstrates a contrary intention.
In this case, the court found that “the intention that damages
caused by discharge of any irritant or contaminant be excluded is
manifest.
In looking at other decisions from various state
jurisdictions, this court noted that this same question has been raised
and answered with courts repeatedly holding that the exclusion is not
ambiguous and that the listing of pollutants is not exclusive.
One decision cited by the court that appeared to be directly on
point explained that “defendant disregards the controlling term that
precedes the list of examples. The
definition clearly states that pollutants shall consist of ‘any solid,
liquid, gaseous, or thermal irritant or contaminant including smoke, vapor …. In context, the term ‘including’
clearly signifies that the ensuing list is not one of limitation.”
(See
Pa.
Nat’l Mut. Cas. Ins. Co. v.
Triangle Paving, Inc., 973
F. Supp. 560).
For all these reasons, the court concluded that the
pollution exclusion was not ambiguous and that the trial court properly
ruled that it excluded coverage for the quarry activities that resulted
in rocks and dirt being put into the stream.
Comment:
The court cites examples of other naturally
occurring materials that become “pollutants” when they end up in a
place such as ground water or a stream where they would not naturally be
located. Mine tailings
consisting of sand, silt, clay and trace metals have been held to be
pollutants within the meaning of insurance policy pollution exclusions
similar to the ones at issue in this case.
Sand and gravel have also been found to be pollutants within the
meaning of the pollution exclusion.
Once again, this case demonstrates that courts are
recognizing the plain intent of the pollution exclusion to exclude
coverage for situations such as that involved here even though the
“pollutant” is naturally occurring and is not a substance that was
man made such as chemical or hazardous wastes.
And once again, the solution for an operator of a facility such
as a rock quarry is to purchase pollution insurance coverage such as a
pollution legal liability policy, specifically designed to provide
pollution coverage. After
all these years of pollution exclusions being enforced by courts, I find
it surprising that so many cases like this one are continuing to be
filed.
I am starting to wonder if perhaps it is
appropriate to begin filing lawsuits against plaintiffs who sue their
carriers for pollution coverage when courts have repeatedly interpreted
and applied identical or virtually identical pollution exclusions to bar
coverage for the virtually the same matters claimed by these plaintiffs.
At what point is it an abuse of process to sue a carrier
demanding coverage for something one knows or should know is not covered
under the terms of the policy as commonly understood and as commonly
applied by the courts in that jurisdiction?
About the author: Kent
Holland is a construction lawyer located in
Tysons Corner
,
Virginia
, with a national practice. He
is principal of ConstructionRisk, LLC, providing construction risk
management services including change order and claim preparation,
analysis and defense, contract preparation, review and negotiation,
insurance consulting and risk management, and other services.
Mr. Holland is publisher of ConstructionRisk.com
Report and may be reached at Kent@ConstructionRisk.com.
This article is published in ConstructionRisk.com
Report, Vol. 9, No. 2. All
articles published in this newsletter are available at www.ConstructionRisk.com.
_______________________
RED VECTOR.COM --- ON-LINE COURSES
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Also available are: Contract Guide for the Design Professional,
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Claims against Design Professionals; Insurance Coverage Disputes; and
Environmental Claims.
______________________
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 2007, 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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