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

Vol. 11, No. 1, January 09

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Inside This Issue: 

•  How Building Information Modeling (BIM) Impacts Insurance Availability by Changing the Roles, Responsibilities, and Risks of Project Participants.  

•  Subcontract Installation of Unattractive Wrong Shingles not Property Damage Covered by CGL Policy.  

•  Mechanic’s Lien Waiver Found Unenforceable because Violation of Public Policy.  

•  Plan Drafter Penalized for Practicing Architecture without a License.  

•  No Coverage in Homeowner’s Policy for Mold Damage from Water Pipe leak

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Article 1  
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How Building Information Modeling (BIM) Impacts Insurance Availability by Changing the Roles, Responsibilities, and Risks of Project Participants.    

J. Kent Holland, Jr. – (with attribution to Rod Taylor – AON) (Short excerpt from ABA Presentation to ABA Forum on the Construction Industry – Winter Conference (January 15-16, 2009 – Bonita Springs, FL)  

         What are the key risk allocation issues that may be impacted by the use of Building Information Modeling (BIM) on a specific construction project?   According to some attorneys and commentators, the risks unique to BIM are minimal and more than offset by its many benefits.  For example, my friend, attorney Rick Lowe, writes: “When all of these issues are analyzed, the perceived legal risks in using 3D modeling melt away and are outweighed by the obvious benefits of clash detection and greater project collaboration. It should only be a matter of time before insurers offer discounts to encourage clients to wear the clash-detection ‘safety belts’ of 3D modeling.  Ultimately, the question will morph into whether team leaders actually increase risks by not using 3D modeling, much like not using seat belts.”(1)  

         While underwriters may agree that there are benefits of early conflict detection and resolution through 3D modeling, they are less likely to see how they can underwrite their single insured, who has a minor participation in the BIM model, and who may pick up full responsibility and liability for claims arising out of mistakes caused by use of or reliance on that model.  The challenge for the insurer is that this scenario resembles insuring someone “for all damages caused in whole or in part by their acts, errors or omissions.” 

         The courts interpret language of this type to mean the responsible party is liable for all damages arising out of the acts of all parties involved in a transaction, so long as the assuming party was responsible to any degree for the resulting loss or damage.   The collaboration of contractors and subcontractors in the design has the potential to create uninsurable professional liability risks for themselves, as well as the design professionals, where BIM is used for design and construction of a project.  Similarly, the collaboration of the design professionals in the means, methods and procedures of construction has the potential to create uninsured general liability risks for the design professionals.  In fact, both professional liability and general liability risks may be difficult to insure in projects where BIM is utilized.  

         Risks as Viewed by a Professional Liability and Environment Insurance Broker

         Many serious risk allocation and insurance concerns have been raised by the managing director of Aon Environmental Insurance Services Group, Rodney J. Taylor, in a white paper entitled: “Professional Liability Risks in BIM Applications:  If BIM is Here to Stay, How Can We Insure Errors and Omissions?” (2)   Because of the major role he plays in one of the most significant insurance brokers for construction industry, we should consider carefully his view of the impact of BIM risks.  Rather than paraphrase or edit his comments, I will quote him directly:  

Reliance on the information developed and maintained in a BIM system raises questions concerning the role of the architect in performing professional services associated with the construction process.  With systems that are capable of generating beam sizes and concrete thickness from three-dimensional models, who is responsible for the specification of the final elements incorporated into a structure designed and built with BIM technology?  Is the answer the same if the architect’s data is supplemented by data from the contractors, vendors and the owner that result in the selection of different elements from those originally specified by the architect and/or the BIM system? 

Over-reliance on BIM technology presents a chance for heightened liability on the part of design professional if the information being input into a BIM system is incorrect or the software processes it incorrectly. (3)  Some architects and structural experts fear that this will result in catastrophic failures where no human judgment is applied after the fundamental construction components have been selected by computer programs based on the architect’s design parameters.  There is also fear that the new breed of architects that interface with the BIM systems may lack field experience and “street-sense”.  This could lead to construction using materials and systems that experienced personnel would intuitively understand to be unworkable.

Legal issues will also arise in determining responsibility for design errors where greater collaboration among the construction team spreads decision-making for design elements beyond the traditional set of design professionals. Liability may depend on what information is included in the database; who has the ability to add or change data and how much reliance contractors place on the output from the BIM system.  With the lines of responsibility blurred, professional liability risks may spread from the traditional design professionals to include contractors, subcontractors and even building owners that alter the data in the BIM databases.

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Another question that has been asked with respect to the use of BIM systems is whether they alter the standard of care applied to design professionals for their work in developing building concepts and specifications.  It is important to understand that BIM does not promise “perfect” drawings.  The work of the architects and engineers is still subject to errors that can result in change orders during construction or future structural problems.  The owner still needs to set aside a contingency fund for construction coordination issues that arise during construction * * *.  

         In his White Paper, Mr. Taylor also makes several suggestions for design professionals that, if followed, may facilitate the availability of insurance to cover the risks arising out of BIM.  If a design professional’s current policy does not provide affirmative coverage for BIM, it should, at a minimum, not contain an exclusion expressly excluding claims arising out of BIM.  An astute underwriter will want to inquire as to the following:

         (1) Is the design professional obtaining risk allocation clauses in its contracts stating that the use of BIM is not intended to alter the normal standard of care applicable to the design professional’s services?  

         (2) Who can input data into the BIM model and can that affect the data or the results of the data provided by the design professional?  

         (3) If the design professional’s BIM content can be altered by future decisions of the Owner or contractors, is there a contractual indemnity provision to protect the design professional against liability resulting from those changes?  

         (4) Does the design professional’s contract with its owner/client include a third-party beneficiary clause stating that use of the BIM model is not intended to create any contractual relationship with third parties (e.g., contractors and suppliers) that may also be using the model?   

         (5)  Does the design professional contract include a waiver of consequential (and even direct) damages resulting from flaws or failure of a BIM system for which it was not responsible? (4)   

Footnotes:

1) Richard H. Lowe, Constructor Magazine, January/February 2007 (McGraw-Hill Co.).  

2) Rodney J. Taylor, J.D, P.E., CPCU, CLU , ARM – Director , Professional Liability Risks in BIM Applications,  AON Risk Services, unpublished white paper (December 14, 2007), pages 7-9.  

3)  Gary Prather, Building Information Modeling:  The Wave of the Future?, INSIGHT, September 18, 2007 .  

4)  See Taylor, Professional Liability Risks in BIM Applications, supra, pages 8-10 for additional risk management suggestions from the insurance professional’s perspective.

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Article 2

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Subcontract Installation of Unattractive Wrong Shingles not Property Damage Covered by CGL Policy

Where a subcontractor, without knowledge or permission of the prime contractor, purchased and installed shingles on the roof of a new garage that were a different color and an inferior grade than specified by the contract, the homeowner sued the prime contractor for damages for breach of contract, negligence and consumer fraud.  The prime contractor’s general liability (CGL) carrier defended the case.  Before the case was given to the jury for deliberations, the plaintiff withdrew the negligence count of the complaint.  The jury returned a verdict for the plaintiff on the remaining counts of breach of contract and consumer fraud.  The CGL carrier then withdrew its defense and refused to indemnify the prime for the damages awarded by the jury – stating that the award was not covered by the terms of the policy.  Both the trial court and appellate court found that the CGL carrier correctly denied coverage because there had been no “property damage” as defined under the policy.   

In a declaratory judgment action by the prime contractor against its CGL carrier, the trial court ruled in favor of the insurance carrier on a summary judgment motion – holding that the jury award was excluded from coverage under the policy.  On appeal, the appellate court affirmed the decision, and explained that the basis of its holding was that neither “physical injury” nor “loss of use” of property occurred in this case.   

The key to the court’s decision was the term  “property damage” which was defined by the policy (CGL Form 23-3) to be “physical injury to tangible property” or the “loss of use of tangible property that is not physically injured.”  

The court decided that although the shingles were inferior in quality and different in color from those specified in the contract, “Nothing in the record, however, suggests that any physical defect existed in the shingle material used or in the manner in which the shingles were installed, or that the [homeowner] was unable to use their new garage as a result of the inferior shingles.”    For this reason, the court stated “We decline to find coverage for aesthetic damage under a CGL policy that does not explicitly provide for it.”    Down Under Masonry, Inc. v. Peerless Insurance Co., 950 A.2d 1213 ( Vt. 2008).   

Comment:  Where the only item asserted to be damaged is the work itself, many cases have held that the “your work” exclusion in the policy bars coverage.  In this case, the court did not address that issue.  It limited its review to the more basic question of whether an inferior quality product that was aesthetically unpleasing to the homeowner could be considered to be “property damage” under the policy.  There was no allegation that the shingles leaked or that they otherwise permitted damage to occur to other parts of the building or to equipment stored inside the building.  Had there been such allegations, there are a number of court decisions in various jurisdictions holding that the damages to these areas or items (other than the shingles themselves) could potentially be covered as “property damage” under the policy.    

An interesting aspect of the fact pattern in this case, not discussed by the court, was that the jury found the prime contractor liable for fraud.  Fraud is not covered by insurance.  In a case where a plaintiff drops the negligence count from its complaint but prevails on its fraud count, it seems a reasonable argument could be made that all losses, costs, and damages arising out of the fraud (including breach of contract caused by the fraud) would be excluded. 

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Article 3

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Mechanic’s Lien Waiver Found Unenforceable because Violation of Public Policy  

Where a lien waiver provision incorporated by reference into a subcontract applies to prohibit all liens regardless of whether the subcontractor received any payment, the court concluded that such a provision violates public policy.   Enforceability of a lien waiver clause must be resolved on a case-by-case basis to determine, whether public policy is violated.  Likewise, a pay-if-paid clause was found to be a violation of public policy as a violation of public policy to secure payment for contractors.  

In Lehrer McGovern Bovis, Inc. v. Bullock Insulation, 185 P.3d 1055 (Nev. 2008), the  Nevada Supreme Court affirmed the decision of the trial court that both the mechanics lien waiver provision and the pay-if-paid provision of a subcontract violated public policy and could not be enforced to bar the subcontractor’s claim.  The critical facts giving rise to the underlying dispute between the subcontractor (Bullock Insulation), prime contractor (Bovis), and project owner (Venetian Resort), involve a dispute over subcontractor entitlement to be paid for certain services and certain re-work that Bullock asserted was additional work beyond its original scope of services.   

Bovis was the construction management firm for the project.  Bullock Insulation was under subcontract to Bovis to provide firestopping work on the project. This included installation of “firestop putty pads” around the electrical boxes in the separation walls of the hotel rooms.  Due to reasons that are not completed fleshed out in the decision, Bullock did not install putty pads in all the walls in which such pads were ultimately required by the county building department.  Bovis directed Bullock to retrofit all of the guest room walls by installing the omitted putty pads.  After completing this retrofit work, Bullock recorded a mechanic’s lien on the project and filed a complaint in the local court to foreclose on the mechanic’s lien and pursue other claims.   

In response to the Bullock complaint, Bovis counterclaimed for breach of contract.  At the conclusion of the trial, a jury found that the subcontract required Bullock to install the putty pads in all the rooms, but nevertheless found that Bullock was entitled to be paid for the retrofit work.  Although this jury verdict appeared internally inconsistent, Bovis and Venetian Resort did not object to the verdict before the jury was discharged.   On appeal, the court found that because the jury verdict and the jury interrogatory answers had internal inconsistencies, the trial court abused its discretion by entering the judgment as to the extra compensation for the retrofit work.    

The court then focused its analysis on the lien as to the other issues and amounts claimed by Bullock, and whether the lien waiver and/or the “pay-if-paid” clause of the subcontract barred Bullock from recovery.   

Bovis argued that the pay-if-paid clause precluded Bullock from recording a valid lien.  The trial court rejected that argument by finding that the pay-if-paid clause was unenforceable as a matter of public policy because “[i]t deprives people who work on construction projects of a statutory right” to a mechanic’s lien.”   At a subsequent hearing on Bullock’s request to enforce its lien, Bovis argued the lien waiver provision of the contract nevertheless precluded Bullock from filing a lien.  The trial court refused to enforce the lien waiver provision, however, because it found that public policy prohibited lien waiver clauses.    

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Article 4

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Plan Drafter Penalized for Practicing Architecture without a License  

An individual that drafted plans and specifications for a strip shopping center was fined by a stated board of architect examiners for practicing architecture without a license.  The individual appealed the Board decision to court, arguing that since the building for which he prepared design plans was never built, he did not practice architecture within the meaning of the state statute definition of the term.  The court affirmed the penalty and held that it did not matter whether or not the building was built since it was the intent of the statute of safeguard public safety and prevent waste “by prohibiting activities that are undertaken in contemplation of erecting buildings.”  The court held that “the state logically need not wait until the erection actually occurs” before making a determination that an individual has practiced without a license.  

In Davis v. Board of Architect Examiners, 193, P.3d 1019 (Oregon, 2008), the court of appeals affirmed a decision by the Oregon Board of Architect Examiners that imposed a civil penalty of an individual that was doing business under the name of “Coast Drafting and Design.”  Although no employee of Coast was licensed as an architect, the firm advertised itself as available to produce designs.  In response to an advertisement, a builder/developer company contracted with Coast to create preliminary plans for a strip shopping center it was planning to build.  Preliminary plans were defined by contract as being sufficient to create “a final floor plan and elevations.”   

According to the court, Coast Drafting and Design provided three proposals with completed drawings, one set which was selected by the builder which then entered into another contract with Coast by which Coast would provide the following services: 

“1.  Provide permit ready drawings for a two (2) story, wood frame retail strip center …

2.  Incorporate civil and structural drawings, done by others, into the work drawings.

3.  Periodic site visits and reports to Client during course of construction.

4.  Provide reproductions of drawings as follows, 20 sets Preliminary Drawings for Site Plan Review, and 12 Sets Final Working Drawings.”  

Coast thereafter produced floor plan drawings showing two levels of building units with square footage.   The court states these drawings were “stamped by petitioner.”  Coast and the builder then submitted additional drawings to the city planning director who approved them.  Subsequently, Coast drafted more detailed plans that included framing plans and section details.  These were stamped by Coast and an “engineering firm with which [it] had subcontracted.”  The court does not specifically say so, but this appears to be the first instance in which plans drafted by Coast were stamped by a licensed professional – and it appears that the stamp is as to engineering aspects of the documents only.  

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Article 5

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No Coverage in Homeowner’s Policy for Mold Damage from Water Pipe leak  

Where a homeowner sought to recover under its homeowner’s policy for mold damage that occurred from water from a burst pipe, the insurance carrier denied the claim on the basis of a mold exclusion in the policy. The homeowner filed suit against the carrier seeking a declaratory judgment that the policy covered mold.  The trial court found that the mold damage was subject to an clearly worded, and broad exclusion that specifically addressed mold.  Mold was excluded from coverage even if it resulted from an otherwise covered event such as a water line break.   

In DeVore v. American Family Mutual Insurance, 891 N.E.2d 505 (Ill. App. 2008), the homeowner appealed from the trial court’s judgment.  The appellate court affirmed that there was no coverage based upon a careful review and analysis of the policy exclusion that included a discussion of decisions by other state jurisdictions that have found coverage for homeowners under similar language.   

Quoting from the policy, the court stated: “The policy does not cover ‘a loss to the property *** resulting directly or indirectly or caused by *** mold.’ “ In addition, the policy provided: that “[s]such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.’”  The court stated: “We do not understand how much clearer American Family could have been in excluding coverage relating to an event such as this one, wherein water caused damage to a home and created mold in the home.”  

The homeowner argued that the trial court should have recognized a distinction between mold that results from an otherwise covered event and mold that results from some other source or event.  Courts in some jurisdictions have recognized such a distinction.  According to the homeowner, the mold damage was not a loss excluded under the policy since it was damage caused by a covered loss.   A case cited by the homeowner in support of that proposition is an Arizona case of Liristis v. American Family Mutual Insurance Co., a case which interestingly enough addressed the exact same exclusionary language from the same insurance company’s policy.  

In Liristis, the homeowner sought coverage for mold that grew after a house fire was extinguished with water.  The Arizona court held that “mold damage caused by a covered event is covered under the American Family policy… On the other hand, losses caused by mold may be excluded.”   The court reasoned that the exclusion language:  

“[D]oes not exclude all mold. Rather, it excludes loss ‘resulting directly or indirectly from or caused by’ mold. If American Family had intended to exclude not only losses caused by mold but also mold itself, it could have easily expressed that intention. * * * If American Family had added the words ‘either consisting of, or ...’ to its exclusionary language, then loss ‘consisting of’ mold as well as loss caused by mold would be subject to this restrictive language.”     

The Illinois appellate court in the DeVore case stated: “We respectfully reject this reasoning.”  The court went on to explain that it found the language of the exclusion is ‘clear and unambiguously indicates that a loss from mold from any cause at any time is excluded.”  “The losses in this case were twofold:  (1) water damage; and (2) mold damage.  Under the plain terms of the policy, the former was covered and the latter expressly was not.”  For these reasons, the court held in favor of the insurance company to exclude coverage for mold.  

Comment:  

The issue of whether the otherwise clearly stated mold exclusion is ambiguous when it comes to addressing mold that arises from an otherwise covered event is a question that continues to be litigated in various jurisdictions – with surprisingly different results as seen here between Arizona and Illinois.  In the view of this author, the reasoning of the Illinois court excluding coverage provides the more reasonable interpretation of the policy language.  As suggested by the Illinois court, the Arizona decision is not “well-reasoned.”  The Arizona court did linguistic gymnastics to create a convoluted interpretation of the policy to hold that “only losses caused by mold” are excluded, but that the actual “mold” in and of itself is not excluded.  To reach that conclusion, the court must have affirmatively chosen to ignore what the Illinois court calls the “plain, ordinary, popular meaning” of the policy language, in perhaps a subconscious effort to rewrite the contract to make it read the way it would prefer to have it applied to help out the homeowner. The Illinois court, in contrast, chose to honor the obvious intent of a contract (insurance policy).