In This Issue:
- Additional Insured Entitled to Be Defended Under General Contractor’s Completed Operations Coverage
- Contractor Wins Claim on Implied Warranty of Specifications
Additional Insured Entitled to be Defended Under General Contractor’s Completed Operations Coverage
Insurance Companies that issued Commercial General Liability (CGL) policies to subcontractors, including completed operations coverage as to projects completed before the inception dates of the policies were held to owe a duty to defend the additionally insured general contractor in third party litigation asserting its vicarious liability for the subcontractors’ acts. The carriers argued that the additional insured status was not intended to provide coverage for liability arising out of work performed by the subcontractors prior to the policies’ inception dates. The court concluded that absent clear language excluding such coverage in the policies, certificates and endorsements, the insurer owe the general contractor a duty to defend.
Pardee, the general contractor, subcontracted with various subtrades for installation of insulation, HVAC systems, stucco, plastering, asphalt paving, and the like. Each subcontract required the subcontractor obtain general liability insurance naming Pardee as an additional insured on all policies for work performed on the project, including completed operations.
According to the court, the unambiguous language of the polices and endorsements provides Pardee with coverage for the completed operations of the named subcontractors. The only issue in question was whether the additional insured endorsements explicitly exclude coverage for the subcontractors’ completed operations. Unless coverage limitations are “conspicuous, plain and clear” in nature they will not be effective, says the court. Policies by several carriers were involved. Three of them contained an Insurance Services Office (ISO) “form 2010” additional insured endorsement. They provide coverage for the additional insured limited only by the phrase, “liability arising out of ‘your [the named insured’s] work’ for [the additional insured] by or for you.” Since the products-completed operations hazard definition specifically used the language “arising out of ‘your product’ or ‘your work’” and that “your work” is defined as meaning “work or operations performed by you or on your behalf,” the court concluded that it was apparent that completed operations was intended to be included in the type of liability referred to in the form 2010 endorsements.
The carriers argued that the above-described language demonstrates an intent of the carriers to cover Pardee only for the subcontractors’ work performed on the Pardee project after the insurance was obtained. Prior to 1993, the form 2010 endorsement contained no language expressly limiting the time frame of the additional insured coverage to the time of the ongoing operations of the named insured. The court says, “Had the insurers wished to limit coverage ‘to work in progress,’ they could have easily done so by defining ‘your work’ as work ‘now being performed or to be performed during the term of this policy.’” The endorsements in this case did not limit covered completed operations as to time or particular project.
In 1993, the Insurance Services Office (ISO) revised the language of the form 2101 to expressly restrict coverage for an additional insured to the “ongoing operations” of the named insured, thereby effectively precluding coverage for completed operations losses. As viewed by the court, the insurance carriers in this case could have used available language to expressly exclude completed operations, even without waiting for ISO to revise the form endorsement in 1993. This, consequently, implied an intent by the carriers not to so limit the coverage in this case. Pardee Construction Company v. Insurance Company of the West, 77 Cal. App. 4th 1340; 2000 Cal. App. LEXIS 73; 92 Cal. Rptr. 2d 443 (2000).
Comment on Case:
The case discussed above pertains to additional insured endorsements on CGL policies. When it comes to obtaining additional insured endorsements on design professional, errors and omissions policies, insurance carriers rarely, if ever, grant such endorsements.
By granting an owner blanket, or qualified additional insured status, the professional liability insurer would be exposing itself to coverage (defense and indemnification) for risks, liabilities and claims which potentially may substantially exceed the coverage traditionally offered to design professionals. An owner’s implied warranty of specifications, for example, exceeds the liability that the design professional has for those same specifications. It is entirely possible that the owner could be liable to the contractor for breach of the implied warranty of specifications, but have no recourse against the design professional because the specifications, although imperfect, were not negligently prepared.
In view of these issues, if an endorsement naming the owner as an additional insured is to be issued at all, it should carefully define and limit its own terms to limit the owner’s coverage to that which is afforded to the design professional under the policy. It has been suggested that at a bare minimum such an endorsement, when issued as an accommodation to the design professional should specifically disclaim any obligation or duty to defend the owner. And the indemnity obligation defined in the “owner endorsement” should be limited to liability, judgments, costs or expenses to the extent caused by actual or adjudicated (as distinct from merely alleged) negligence of the design professional in the performance of professional services.
If an owner is to be added as an additional insured, the endorsement must be carefully drafted so as to define the meaning of “additional insured” and to specifically preclude recovery by the owner for claims and damages not caused by the negligence of the design professional. See David Hatem, Architectural/Engineering Briefings, Zurich Insurance, Vol.2, No.1 (February 1997).
Copyright 2001, ConstructionRisk.com, LLC – Virginia
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Contractor Wins Claim on Implied Warranty of Specifications
When a contractor expends time and money attempting to comply with design specifications that fail to accomplish the owner’s performance needs, it is entitled to recover its costs from the owner on the basis that the owner breached its implied warranty of specifications. A curtain wall contractor on a federal courthouse was entitled to an equitable adjustment for costs it incurred in redesigning wall systems that had conformed to the owner’s design specifications but which could not satisfy performance requirements for the walls. The owner, General Services Administration (GSA), argued that it had no liability to the contractor because the contract described the drawings as merely “diagrammatic” and put the design and engineering responsibilities for the curtain wall on the contractor.
The project A/E rejected the system proposed by the contractor’s curtain wall subcontractor, and required the wall to be redesigned at the subcontractor’s expense. GSA argued that the specifications were “performance specifications,” and that the contractor was required to do what it takes to design a wall that would meet the performance requirements of the specifications. The contractor argued that it did not have discretion to meet the performance specifications by ignoring the detailed design details contained in the specifications. Whether particular specifications are of the design or performance type often turns on the degree of discretion the contract provided the contractor in meeting the specification.
In this case, the contract documents stated that the drawing details were “requirements.” The contractor’s discretion was, therefore, confined by the requirements shown on the drawing details. Another section of the contract required the contractor to “provide shapes and profiles as shown” for aluminum members. The Board of Contract Appeals, therefore, concluded: “We cannot agree with the Government’s argument that the drawing details were merely schematic, or that the written specifications subordinated the drawing details to the performance requirements.”
In trying to overcome the contractor’s right to rely upon the specifications, the owner argued that if there was a defect, it was patent (readily apparent) and one which the contractor had a duty to seek clarification of before submitting its bid. Because the ambiguity was not found to be glaring, substantial or patently obvious, the Board rejected the GSA’s argument. An ambiguity is only patent when a cursory examination would have revealed inconsistencies in the details of two drawings and where the inconsistencies could be resolved without reference to other drawings or written specifications. Finally, the Board stated: “A reasonably prudent construction contractor is not expected to become an amateur structural engineer and hunt down defects in Government design drawings upon which the contractor has been told to rely,” especially given the relatively short time for preparing bids. For these reasons, the Board held that the contractor was entitled to recover its redesign costs from the project owner. J.E. Dunn Construction Company v. General Services Administration, GSBCA No. 14477, 01- BCA 30,806, March 2000.
Comment on Case:
The underlying principle of this decision is founded upon what is commonly referred to as the Spearin doctrine. In the seminal case of Spearin v. United States, 248 U.S. 132 (1918), the U.S. Supreme Court held that a contractor is entitled to rely upon the accuracy and adequacy of design specifications provided by the government, with the understanding that, if followed, they will produce a project meeting the performance requirements of the owner. Moreover, that decision states that the government cannot disclaim the right of the contractor to rely upon the specifications by creating requirements such as site inspection in advance of bidding. The Supreme Court stated that “if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications (citations omitted). This responsibility of the owner is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work (citations omitted)”
The legal theory allocates the risk to the government when the specifications it furnishes are not suitable for their intended purpose. It does not matter that the government was innocent of any negligence or wrongdoing. What owner’s sometimes fail to realize is that their duty to the contractor is greater than the A/E’s duty to the owner. It is not necessary for the contractor to prove negligence on the part of the owner or those for whom the owner is responsible in order to recover from the owner. The implied warranty means what it says. It is a warranty and can be breached even in the absence of wrong doing or negligence. Having incurred liability to the contractor, the owner may be unable to recover the cost of that liability from not all design errors are negligent ones. Only those that result from the design professional’s failure to follow the generally accepted standard of care are deemed negligent. And the owner can only recover against the A/E if the A/E is found negligent. In this same regard, professional liability policies for A/E’s only cover damages arising out of the A/E’s negligent performance of professional services.
Copyright ã 2001, ConstructionRisk.com, LLC – Virginia
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About This Newsletter
This newsletter is published and edited by J. Kent Holland, Jr., J.D. It is distributed free of charge once per month. The case summaries in this current issue were also written by Mr. Holland. Past issues are archived at https://www.constructionrisk.com, where you will also find an extensive, free risk management library, including a subject index to Zurich Insurance Architectural/Engineering Briefings, also edited by Mr. Holland, an online A/E contract guide and risk management course, and contract review (Q&A) examples, among many other resources.
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Copyright ã 2001, ConstructionRisk.com, LLC – Virginia
Editor: J. Kent Holland, Jr., J.D.
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