Construction Risk Report, Oct 2000 – Vol. 2 No. 10

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This newsletter is edited by J. Kent Holland, Jr., Esq., and published by e-mail once per month. Past issues are archived at  You will also find an extensive portal to other websites and a library of risk management materials, including articles indexed by subject matter. Each case summary in this current issue was written by Kent Holland.

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A/E Would Be Entitled to Compensation for Additional Services Due to Contractor Delay if it Hadn’t Failed to Prove Damages

An architect proved that it was entitled to be compensated for additional services it provided as a result of the construction contractor’s delay in completing work.  Due to the delay, the A/E performed extra duties such as responding to questions from subcontractors; responding to lengthy punch lists; preparing lists and information that the contractor was supposed to provide; and providing extended inspections.  Using the A/E’s records, however, it was impossible to differentiate between performance of basic services and additional services.  For this reason, no recovery was awarded.

The project owner argued that the A/E had not provided additional services and was not entitled to recover.  It based its argument on an incorrect reading of the contract.  According to the Owner, the A/E was required to perform basic services for 60 months.  It also argued that the A/E was required to perform basic services until the issuance of final payment – apparently even if that were beyond 60 months.   What the contract actually provided, according to the court, was that the A/E was “to provide basic services until final payment or 60 days after substantial completion of the work.

Another paragraph of the contract, however, “entitles [A/E] to recover for additional services made necessary by [contractor’] failure to perform.”  Since the contractor was found, through arbitration, to be in default, and since “it appears that there were substantive problems with construction performance” the court found the requirements of the contract entitling the A/E to compensation were satisfied.

Having won the battle on the merits, the A/E lost the war by failing to prove the amount of its damages.  He “did not keep daily time records of the tasks he performed, nor did he have detailed records of his time spent on contingent additional services.” “At trial , [he] submitted an exhibit containing pages from a computer-generated calendar showing the individual days and hours he spent on the school project.  However, there were no specific tasks listed.  The entries merely say ‘Construction Contract Administration.’”  The inadequate records precluded the court from evaluating how many hours the A/E dedicated to contingent additional services.  For this reason, the A/E lost its case at both the trial court and on appeal.  Allen Belot Architects v. Unified School District, Douglas County, KS, 4 P.3d 626, Kansas App. (April 14, 2000).

Contractor Recovers More in Quantum Meruit Than it Would Have Under a Void Contract

Engineer that performed feasibility planning and design services for a City’s new water treatment facility was replaced by the City by another engineer, and was not paid for its work nor allowed to complete the project.  The trail court awarded the engineer damages for the City’s breach of contract. The city appealed the verdict.  It claimed that the contract was not properly executed and was, therefore, invalid.  In an ironic twist, the appellate court agreed with the city concerning the contract, but awarded the engineer twice as much on the basis of quantum meruit.  This theory permits parties to recover the value of their services even in the absence of a contract.

In this case, the engineer (PES), did substantial work picking a site for the proposed water filtration plant, locating needed equipment, and performing various preparatory work.  It claimed that its designs were eighty-five percent complete.  Although the city approved a resolution stating it would engage PES to “design plans, inspect construction, and perform other related project services,” the city council subsequently hired a different firm to study the feasibility of alternatives to the construction of a new water treatment facility.   Eventually, the city hired that same firm to design and install an alternative system it proposed.

When PES filed suit against the city for breach of contract, the city responded that there was no valid contract because the contract which had been signed by the mayor had not been approved by the city council and the city attorney as required by the city charter.   The trial court held it was a valid contract, that the city had breached it, and that the engineer was entitled to $56,488.  The appellate court reversed and held that the contract was ultra vires (executed without proper authority) because it violated the provisions of the charter.   The court was persuaded, however, that the engineer was entitled to recover on the basis of quantum meruit, and awarded the engineer $123,277.

As explained by the court, “An action in quantum meruit provides an equitable substitute for contract claims.  Such an action allows parties who have provided goods and services to another to recover the reasonable value of these goods and services.  In order to recover under quantum meruit, the following factors must be established: (1) there must be no existing, enforceable contract between the parties covering the same subject matter; (2) the party seeking recovery must prove that it provided valuable goods and services; (3) the party to be charged must have received the goods or services; (4) the circumstances must indicate that the parties involved in the transaction should have reasonably understood that the person providing the goods or services expected to be compensated; and (5) the circumstances must also demonstrate that it would be unjust for the party benefiting from the goods or services to retain them without paying for them.” The engineer established these factors in this case and prevailed accordingly.

Professional Engineering Services v. City of Red Boiling Springs, TN, No. M1999-00342-COA-R3-CV, 2000 Tenn. App. LEXIS 256 (April 26, 2000).

Contractor Recovers as Additional Insured Despite Certificate of Insurance Being Issued After Date of Accident

Where subcontractor agreed by contract to procure insurance for itself and the prime contractor, the prime was deemed to be insured under the subcontractor’s policy from the date it was issued without regard to the fact that the certificate of insurance naming it as an additional insured was not issued until several months later – long after an accident had occurred.

Navigators Insurance Company provided primary liability coverage to the subcontractor (A&B) under the Commercial General Liability (CGL) policy effective April 18, 1997.  The policy included a Blanket Additional Insured Endorsement.  As part of the policy, that endorsement was also effective on the date the policy was issued.

An accident occurred on May 1, 1997, causing personal injury to an employee of A&B.   The injured employee sued the project owner in a personal injury suit.  The city in turn cross-complained against the prime contractor.  Travelers Indemnity Company (Travelers) defended the city and the prime contractor, and paid to settle the lawsuit.  It then sued A&B’s insurer, Navigators Insurance Company, to recover under equitable subrogation.  Navigators refused to defend or indemnify the parties because it believed the insurance was not in force on the date of the accident.

It was only after the date of the accident that Navigators received a request for approval, via a certificate of insurance, identifying Esquivel as an additional insured.  Esquivel was named as a certificate holder on the certificate of insurance issued on August 4, 1997.  The certificate and an additional insured endorsement were approved by Navigator’s underwriter on August 7, 1997.  On that same date, the injured A&B employee also filed suit against the City.

The basic dispute between the insurance companies was that Travelers asserted that the blanket endorsement afforded coverage to Esquivel effective on the date the policy was issued to A&B.  Navigators countered that coverage under the blanket endorsement became effective when Esquivel, the additional insured, received Navigator’s approval.  The Court states that “the explicit contract language required A&B, not Esquivel, to procure and maintain insurance at its own expense.  Therefore, Esquivel was not required to make a direct request to Navigators to be added to A&B’s policy.”  The court also found that by including the blanket endorsement, A&B intended to provide coverage for Esquivel, a party with whom it was required to procure insurance per its contract.

As noted by the court, there are a number of cases holding that blanket endorsements automatically extend additional insured status to organizations or persons by virtue of the contract requiring insurance.  The result is that automatic insureds are considered additional insureds as of the date the named insured was required by contract to purchase insurance for another party.

Navigators’ blanket endorsement was different from the industry standard endorsement because it included a unique 30-day approval clause.  Navigators’ endorsement extended coverage to organizations or persons “that the named insured is obligated by virtue of a written contract or agreement to provide insurance such as is afforded by this policy and is approved by the company in writing within 30 days.”  The court concluded that this was patently ambiguous because it did not include a reference point for the 30-day period and it does not explain the basis for approval or disapproval.

In deciding in favor of Travelers against Navigators, the court held that nothing in the policy or blanket endorsement suggests that the parties intended that coverage for an additional insured covered by the blanket endorsement would begin on a different date than the policy itself.   The fact that A&B paid a premium for the blanket endorsement at the outset and did not pay additional premium when Navigators’ “approved” Esquivel confirms, says the court, that the parties intended that the blanket endorsement coverage would commence at the beginning of the policy period.  Travelers Indemnity Co. v. Navigators Insurance Co., No. C 99-4509 CRB, 2000 U.S. Dist. LEXIS 6702 (May 8, 2000).

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Copyright 2000,, LLC

Editor:  J. Kent Holland, Jr.

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