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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 11, No. 5, May 09
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Inside
This Issue:
• “Additional
Insured” Prime Contractor is Entitled to be Defended on Claim Arising
out of Insured Subcontractor's Work
• Broad
Release Agreement of Contractor Also Releases its Performance Bond
Surety
• Copyright
Infringement: Summary
Judgment for Defendant because floor plans not substantially similar
• Workers’
Compensation Law Bars Suit against Joint Venture Partner by Co-venturer’s
Injured Employee
• Certificate
of Merit not Required for Counts of Complaint against Design
Professional that are not Based on Negligence
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Article
1
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“Additional
Insured” Prime Contractor is Entitled to be Defended on Claim Arising
out of Insured Subcontractor's Work
By: J.
Kent Holland
Where a prime contractor was named as an additional
insured on its subcontractor’s commercial general liability (CGL)
policy with respect to liability “arising out of” the
“subcontractor’s work”, it was held that the insurance company
owed a duty to defend and indemnify the prime contractor for claims
relating to the prime’s own alleged negligence that led to injuries
sustained by subcontractor employees.
The allegations were that the prime contractor was negligent for
failing to ensure a safe work environment, failing to provide cave-in
protection, failing to properly inspect work, failing to supervise
independent contractors, and failing to enforce compliance with
regulations.
Evidence of any subcontractor negligence was
excluded from consideration at the underlying trial because the workers
compensation law barred an independent action against the subcontractor.
The court further granted a motion in limine to prohibit evidence
of subcontractor negligence from being considered. Because
this meant the plaintiffs now could only recover against the prime
contractor by proving the prime contractor was itself negligent, the
carrier denied any duty to defend and indemnify the prime contractor
since additional insured coverage only applied to liability “arising
out of subcontractor’s work.” (The
carrier nevertheless defended the claim through trial).
A jury found the prime contractor liable on the theory that it
had a nondelegable duty to provide a reasonably safe workplace, and that
it had violated that duty by negligent errors and omissions as claimed
by the plaintiffs. The jury
award was for over $6 million.
The issue on appeal was weather the prime
contractor was an “additional insured” for these claims that arose
out of the contractor’s nondelegable duty.
Both the trial court and appellate court concluded that despite
the prime contractor’s own role, it was nevertheless entitled to be
considered an “additional insured” since the claims arose
out of the subcontractor’s work. Royal Indemnity Company v. Terra Firma, Inc. 287
Conn.
183, 947 A.2d 913.
Comment:
The
term “arising out of” seems to be increasingly confusing and
ambiguous. When used by
contract drafters it is generally intended to be a very inclusive term
that is broad enough to catch an extremely wide range of possible
claims. For those interested
in narrowing what will be covered either by insurance or indemnification
clauses, it may be more prudent to replace the term “arising out of”
with a plainly worded phrase such as “caused by”.
This could be further narrowed down by phrasing it something like
the following: “caused by
the negligence of the named insured.”
This would eliminate confusion as well as a lot of unnecessary
litigation over policy intent.
About the author: All articles
in this issue of the ConstructionRisk.Com Report are written by
J. Kent Holland, a construction lawyer located in Tysons Corner,
Virginia, with a national practice (formerly with Wickwire Gavin,
P.C. and now with Construction Risk Counsel, PLLC) representing design
professionals, contractors and project owners. He is also founder
and president of ConstructionRisk, LLC, a consulting firm providing
consulting services to owners, design professionals, contractors and
attorneys on construction projects. He is publisher of
ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com
or by calling 703-623-1932. This article is published in
ConstructionRisk.com Report, Vol. 11 No. 5 (May 2009).
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Article
2
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Broad
Release Agreement of Contractor Also Releases its Performance Bond
Surety
Where school district entered into a settlement and
release with its contractor, the contractor’s surety was held by a
court to be released from any further duty regardless of fact that the
release was silent as to any intent to release the surety.
The school district had declared the contractor to be in default,
withheld final payment, and demanded that the surety assume
responsibility for the remaining work – but failed to give the balance
of funds remaining in the contract to the surety. In response to a suit
by the contractor seeking payment, the district countersued the
contractor and joined the surety as a third party.
While litigation was pending, the district and contractor settled
their dispute, with the district agreeing to pay the contractor an
additional sum, and with agreement to enter into a release.
The settlement specified some language to be included in the
release. The agreed upon
language said nothing about the surety.
The settlement was placed on the record in the
litigation via a hearing before the court.
Following the hearing, the parties attempted to negotiate the
terms of the release – with the surety requesting that it state that
the surety was released from any obligations.
The district refused to include such language in the release.
It argued that it had reserved its rights as against the surety.
Since the parties could not agree upon terms, they executed a
release that contained exactly the same terms that had been suggested in
the settlement that was filed with the court – which was silent as to
the surety. In the
district’s suit against the surety, the appellate court held in favor
of the surety on the basis that any reservation of rights against a
surety on a performance bond must be expressly stated in the language of
the release of the contractor.
In Kiski Area
School District v. Mid-State Surety Corp., 2008 WL 5244817 (Penna.,
Dec. 17, 2008), the school district argued that the court should
consider extrinsic evidence to determine that by its repeated refusals
to specifically release its claims against the surety, it must be
understood from the terms of the agreement, that were silent with regard
to the surety, that the district had intended by the agreement to
preserve its claims. The
surety on the other hand argued that the district’s failure to
expressly reserve its rights in the release was fatal to the
district’s claim. In
agreeing with the surety, the court explained its reasoning as follows:
Here the
School District
entered into a settlement agreement with Lanmark, pursuant to which it
paid Lanmark on the Contract, and agreed that Lanmark would have no
continuing obligations under the Contract or relating to the Project.
Following execution of the Release, the
School District
could not seek from Lanmark damages for any defective work or delay.
Because Mid-State as surety had no greater obligation than
Lanmark, the
School District
’s broad release necessarily released Mid-State to the same extent as
Lanmark was discharged. The
School District cannot now seek liquidated damages against Mid-State,
because those damages are part and parcel of the Contract obligations
which the
School District
agreed to settle. Any
finding to the contrary would violate the fundamental nature of the
surety relationship. Moreover,
the
School District
fundamentally changed the parties’ relationship when it simultaneously
paid the Contract balance to Lanmark while demanding completion from
Mid-State. Because Mid-State
stands in Lanmark’s shoes, the
School District
could not utilize the Contract balance as a settlement payment for
Lanmark while still expecting Mid-State to assume responsibility for
Lanmark’s work.”
Comment:
The general rule is that a surety is discharged
by a release of the contractor. There
can be no reservation of rights against a surety where the project owner
has released the contractor from further performance.
Accordingly, in this case, even if the release had stated on its
face that the district reserved its rights against the surety, it is
difficult to imagine how the result of this decision could have changed
since the district had already released the contractor and therefore had
no independent rights against the surety regardless of what the language
of the settlement agreement may have stated concerning the surety.
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Article
3
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Copyright
Infringement: Summary
Judgment for Defendant because floor plans not substantially similar
Summary judgment was granted and affirmed—holding
there had been no copyright infringement.
The trial judge compared protectable aspects of two floor-plans,
focusing only the narrow arrangement and coordination of otherwise
standard architectural features. Although
there were obvious similarities in the architectural work, the court
noted that not all copying constitutes infringement.
The court focused on the many dissimilarities or differences in
the plans and found the differences to be so significant that no
reasonable jury could find the works substantially similar.
Architectural work, by definition, includes the overall form,
arrangement and composition of spaces and elements in the design but
does not include individual standard features such as common windows,
doors and other staple building components.
This is similar to a definition of “compilation” such that a
work formed by the collection and assembling of preexisting materials or
data that are selected, coordinated and arranged in a particular way
causes the resulting work as a whole to constitute the original work of
authorship. Consequently,
for purposes of judging whether there is a copyright infringement, the
comparison of similarity of the works must focus on the arrangement and
coordination of the common elements rather than on similarities of the
common elements themselves.
The copyright infringement case of
Intervest Construction,
Inc. v. Canterbury Estate Homes, Inc., 554 F.3d 914 (D.C.,
Fla
, 2008), involved competitor home-builders and a floor plan for a house
depicting four bedrooms and a two car garage.
The plaintiff Intervest Construction had a floor plan copyrighted
in 1992. Ten years later, a
competitor, Canterbury Estate homes created a floor plan with a similar
layout that Intervest claimed infringed its copyright.
The trial court went through a very thorough and detailed
analysis of the floor plans-- noting specific similarities and
differences throughout the houses.
When viewed through the narrow lens of compilation
analysis, the court said that only the original, and thus protected,
arrangement and coordination of spaces, elements and other building
components should be compared. The court stated that determining the
issue of potential copyright infringement in a case such as this one was
better addressed through summary judgment than allowing it to be decided
by a jury. The logic for
that was explained as: “In fact, when the crucial question in a
dispute involving compilations is substantial similarity at the level of
protectable expression, it is often more reliably and accurately
resolved in a summary judgment proceeding.
This is so because a judge is better able to separate original
expression from the non-original elements of a work where the copying of
the latter is not protectable and the copying of the former is
protectable. The judge understands the concept of the idea/expression
dichotomy and how it should be applied in the context of the works
before him.”
In explaining how the court then proceeds to
analyze the merits of the matter, the court stated “while a creative
work is entitled to the most protection, a compilation is entitled to
the least, narrowest or “thinnest” protection.
In performing the trial court’s analysis of “substantial
similarity” the appellate court found the court had appropriately
modified the definition to accentuate the narrower scope of protection
available and had correctly determined that the differences in the
protectable expression of the floor plan as a whole, were so significant
that, as a matter of law, no reasonable properly-instructed jury of lay
observers could find the works substantially similar.
For these reasons, the court affirmed the summary judgment.
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Article
4
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Workers’
Compensation Law Bars Suit against Joint Venture Partner by Co-venturer’s
Injured Employee
An employee of one of two companies that were
working in a joint venture arrangement was injured filed a personal
injury suit against his employer’s co-venture partner to recover
damages in excess of what he could obtain through workers’
compensation through his own employer.
Although the workers’ compensation statute establishes an
exclusive remedy as to recovering from an employer, it also applies to
agents of the employer. The
question of whether co-venturers of a joint-venture arrangement are in
an agency relationship was held to be a matter of law to be decided by
summary judgment. The court
held that under
Illinois
law, joint ventures are governed by partnership principles and partners
are deemed agents of the partnership, and of one another, for purposes
of the business. As a co-venturer,
each co-venturer was entitled to invoke the same immunity afforded to
the other by the exclusive remedy provisions of the workers’
compensation act.
In Ioerger v.
Halverson Construction Company, (Ill, Jan 2009), the supreme court
of Illinois affirmed the trial’s court summary judgment decision that
the immunity afforded to an employer by the exclusive remedy provisions
of the state’s workers’ compensation act extends to the co-venturer
in a joint venture and to the joint venture itself.
The firms of Midwest Foundation Corporation and Halverson
Construction Company entered into a joint venture to repair a bridge.
Their written agreement provided that they “constitute
themselves as joint venturers for the purpose of submitting joint bids
… for the performance of the construction contracts herein before
described, and for the further purpose of performing and completing such
construction project.” If
they received the contract, their agreement called for the contract to
be “entered into in the names of the parties as joint venturers.”
Pursuant to the agreement, Midwest was responsible
for “the performance of all labor for the Joint Venture, including
payroll, payroll taxes, fringes and other employee expenses, including,
but not limited to, the establishment of worker[s’] compensation
insurance and the payments of all premiums therefore.”
Halverson was obligated to reimburse
Midwest
its share of these costs.
While working on the bridge, four ironworkers
employed by
Midwest
fell into the river when the platform they were suspended on collapsed.
Three were injured and one was killed.
In addition to seeking workers’ compensation from their
employer, the individuals brought action against Halverson as well as
against the joint venture. The
trial court found that the co-venturers were each others agents and
partners for purposes of making the exclusive remedy of the workers’
compensation statute apply equally to both.
The trial court also considered and rejected the plaintiff’s
argument that because only Midwest was specifically obligated by the
joint venture agreement to employ the workers and pay for the workers’
compensation insurance only Midwest should benefit from the workers’
compensation statute.
An intermediate appellate court reversed the trial
court because it agreed with the plaintiffs’ argument that since
Midwest actually employed and paid the employees only
Midwest
was entitled to the workers’ compensation act protection.
The Supreme Court, reversed that decision and agreed that the
trial court got it right. It
held that because the joint venture agreement specified that
Midwest
was entitled to reimbursement from the Joint Venture for the costs
incurred in paying the workers and the insurance premiums, the ultimate
responsibility for payment of the insurance premiums lay with the Joint
Venture. “Because the
Joint Venture bore the expense of the workers’ compensation premiums
and was thus responsible for making workers’ compensation benefits
available to plaintiffs, it was entitled to avail itself of the Act’s
exclusive remedy provisions.”
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Article
5
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Certificate
of Merit not Required for Counts of Complaint against Design
Professional that are not Based on Negligence
The Texas Certificate of Merit Statute that
requires an affidavit executed by a licensed design professional to be
filed with a plaintiff’s complaint against a defendant that is based
on the negligent performance of professional services by licensed
professionals. The state Court of Appeals applied a narrow
interpretation of the statute to hold that an affidavit is only required
to support the counts of a complaint based on negligence, and is not
required to support other non-negligence based counts and allegations of
the complaint. The court
also held that a certificate of merit was not automatically required to
support a negligent misrepresentation claim against a design
professional, but that the trial judge would have to make an initial
determination of whether the alleged misrepresentation concerned
negligent performance of professional services.
In Consolidated
Reinforcement v. Carothers Executive Homes, 271 S.W. 3d 887 (
Tex
, 2008), a home builder filed suit against a contractor that designed
and constructed foundations for duplex houses.
The defendant filed a motion to dismiss the suit because the
plaintiff did not file an affidavit form a professional engineer in
support of its complaint. The
complaint contained multiple counts including: breach of contract,
deceptive trade practices, negligence, negligent misrepresentation, and
breach of warranty.
Although the defendant corporation was not itself a
design professional firm, it provided professional engineering services
as part of its construction work and did this by licensed professional
engineers. In response to
the defendant’s motion to dismiss, the plaintiff filed an amended
complaint-- deleting the negligence count, apparently because the time
for filing the certificate of merit to support the negligence count had
already lapsed.
The motion to dismiss argued that even though the
negligence count was removed, the certificate of merit was still
necessary to support the balance of the complaint based on the
substantive allegations it contained that “implicate” the
engineering and design services it performed.
The state statute in question reads as follows:
(a) In any action or arbitration
proceeding for damages arising out of the provision of professional
services by a licensed or registered professional, the plaintiff shall
be required to file with the complaint an affidavit of a third-party
licensed architect, registered professional land surveyor, or licensed
professional engineer competent to testify, holding the same
professional license as, and practicing in the same area of practice as
the defendant, which affidavit shall set forth specifically at least one
negligent act, error, or omission claimed to exist and the factual basis
for each such claim….”
(d)
The plaintiff’s failure to file the affidavit in accordance
with “Subsection (a) or (b) shall result in dismissal of the complaint
against the defendant. This
dismissal shall be with prejudice.”
The defendant argued that the intent of the statute
was that an affidavit must be filed in any action that calls into
question the provision of services by a registered architect or
engineer. In rejecting that
argument, the court of appeals concluded that the legislative intent was
for the affidavit requirement “to apply only to actions alleging
negligence.” Only those
counts of a complaint based on negligence would therefore be dismissed
for failure to file an affidavit with the complaint.
With regard to the count of the complaint alleging “negligent
misrepresentation” the court found that since “negligence” is a
necessary element of a negligent misrepresentation claim, it is required
that an affidavit be filed in support of such a claim if it arises out
of the provision of professional services.
Since it was not clear to court whether the misrepresentation
claim arises out of the provision of professional services, the court
remanded that issue back to the trial court for reconsideration.
Comment:
Certificate of merit cases continue to pop up around the country
as plaintiff lawyers that are apparently unfamiliar with the nuances of
filing suits against design professionals fail to comply with state
statutes requiring an affidavit be filed with the complaint.
The point of the statute is to help avoid frivolous suits.
The statute serves this valuable purpose.
Contract
Drafting Point: In
a dissenting opinion one of the judges of the court contends that the
word “negligent” in the statute only modifies “act” and that it
does not modify the balance of the phrase in “negligent act, error or
omission.” The
majority opinion rejects that argument and correctly explains that if
the dissent’s argument were accepted it would result in rewording the
phrase to read “error, omission, or negligent act.”
The court explains the significance of the grammar as follows:
A straight forward reading leads to the conclusion
that the adjective “negligent” modifies the three nouns ‘act,’
‘error,’ and ‘omission’ that are connected with the conjunction
‘or.’ See [
] stating the ‘rule of grammatical construction’ that the use
of an adverb before the first of a string of verbs, ‘ “with the
disjunctive construction used only between the last two of them, shows
quite plainly that the adverb is to be interpreted as modifying them
all” ‘); see also [
] (adjective preceding a series of nouns generally modifies every
noun in the series: ‘only reasonable construction’ in insurance
policy of clause ‘negligent act, error or omission’ is that policy
covers only negligent behavior.’ Further,
had the legislature intended for ‘negligent’ to modify only
‘act,’ it would have worded the phrase as the dissent does [error,
omission, or negligent act].”
It is refreshing to see the court’s nice and
concise explanation of grammar. This
question has been raised in conversations in which I have been involved
on numerous occasions and now I will know exactly where to go to bring
the question to a quick conclusion.
Note also that this explanation demonstrates the
importance of paying attention to indemnification clause wording in
contracts to be sure that if the indemnitor intends to only indemnify
for claims caused by its negligence,
the clause needs to have “negligence” before “act, error or
omission” and not buried somewhere in the middle of the phrase or at
the end of the phrase. If
the word “negligence” is anywhere other than in front of the words
to be modified, those words are not modified.
That would mean the indemnitor could have to indemnity for
damages caused by any and all acts, errors and omissions – even if not
negligent.
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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 2009, ConstructionRisk, LLC
Publisher & Editor:
J. Kent Holland,
Jr., Esq.
1950
Old Gallows Rd
Suite 750.
Vienna
,
VA
22182
703-623-1932
Kent@ConstructionRisk.com
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