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Inside This Issue:

  • Alert: Are Terrorists Requesting Copies of Building Plans?
  • Fee Offset May be Insured Claim
  • No Damage for Delay Clause Not Enforceable
  • Architect May be Liable to Unpaid Supplier

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Alert!  Are Terrorists Requesting Copies of Building Plans?

In a letter to AIA members, Norman L. Koonce, Executive Vice President/CEO of the
American Institute of Architects wrote:

A number of firms from the design and engineering community have contacted
us to report recent or past requests for building plans that, in light of
the attacks of September 11, 2001, appear unusual due to the structures
identified in the requests or the type of information solicited. The
American Institute of Architects and the National Society of Professional
Engineers, in conjunction with the U.S. General Services Administration,
are coordinating with the Federal Bureau of Investigation (FBI) to provide
design firms with information on this situation.

Please follow this link ( http://www.aia.org/letter/ ) for details and for
guidance on contacting the FBI if you or anyone in your firm has received
unusual or suspicious requests for information.

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Online Continuing Education

ConstructionRisk.com is now are offering an online continuing education course created by Kent Holland. It is titled: Risk Management for the Design Professional: Contract Terms and Conditions. This is a 3 credit hour course for only $109.95. Once you register for it you may take the course and answer the test questions at your leisure, entering and leaving the course as many times as you like, until you have completed it. Upon successful completion you will receive a certificate of completion, and if you are a member of the AIA, we will submit your credits directly to the AIA Office of Continuing Education.

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Fee Offset May be An Insured Claim

Where a subcontract filed suit against the general contractor to collect the balance of its fee and the general contractor defended itself by claiming the right to an offset in the fee to cover damages that it alleged were caused by the subcontractor, a court held that the offset constituted a claim for damages that created a duty of the subcontractor’s insurance carrier to defend the subcontractor.

A general contractor (SHC) retained CPS Security Services to provide security on a construction project. After the project was damaged by fire, the contractor withheld approximately $27,000 in fee from CPS. CPS sued SHC for the fee it claimed was owed. In its answer to the pleadings, SHC pleaded as an affirmative defense that it was entitled to “an offset” pursuant to common law and/or the Code of Civil Procedure, as a result of CPS’s deficiencies in performance which resulted in damage to the construction project.

CPS tendered the defense of the affirmative defense to its insurance carrier, but the carrier refused to defend the matter, and CPS proceeded to employ its own attorney to defend the affirmative defense. While the matter was pending the contractor settled the case with CPS, with CPS forgiving part of the amount in question plus paying attorneys fees incurred by the contractor. CPS then sued its insurance carrier (TIG Specialty Insurance Company) for reimbursement, plus punitive damages. TIG asked the court to dismiss the action on the basis that the affirmative defense in the action between the contractor and the insured did not constitute a “suit” as defined by the policy and in case law, and that there was consequently no suit triggering a defense duty on TIG’s part. TIG also asserted that the contractor was only seeking to mitigate its own damages but did not seek any “damages” against CPS, as required for coverage. The trial court agreed with the insurance carrier and dismissed the case.

The appellate court reversed the decision, and held that the pleading of an offset “rose to the level of a suit.” According to the court, “damages are money ordered by a court” and an offset comes within this definition of damages. It didn’t matter that the contractor elected to assert an offset as an affirmative defense instead of bringing a counter-complaint or cross-complaint against CPS. The court cited cases from other jurisdictions that have held an “offset claim was in substance and effect a suit against the insured seeking damages for legal malpractice.” Construction Protective Services, Inc. v. TIG Specialty Insurance Company, 90 Cal. App. 4th 149 (June 27, 2001).

Risk Management Note: It is somewhat surprising that there are not more reported cases of disputes between insurance carriers and their insureds over the question of whether a fee offset constitutes an insured damage or claim. In the majority of cases in which a contractor or design professional sue their client for fee, the client defends itself with a counter-claim or offset claim alleging that they do not owe the fee since the plaintiff was negligent or otherwise failed to adequately perform the services required under the contract. The standard professional liability policy, for example, states that fee disputes do not constitute insurable damages or claims. As seen by the reported case, the matter may be less than perfectly clear.

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GlobalConstruct.net – Better knowledge, better decisions, better performance

GlobalConstruct is an on-line benchmarking and analysis tool specific to the building and construction industries. It is a fast, easy way to compare your performance with that of other industry players – by industry segment, country and strategic focus. GlobalConstruct also identifies key industry success indicators and drivers of leading edge performance. It provides a fast, easy way for users to: (1) Identify and compare business or industry performance – globally, regionally, and within industry segments; (2) Recognize which are the critical success factors within specific segments and understand how these interact; and (3) Take steps to improve performance, apply best practice, and monitor results.

For more information go to http://www.globalconstruct.net/static_about.phtml or call Ben Nolan of Arthur Andersen at 703-962-3579.

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ZURICH NORTH AMERICA INSURANCE – The environmental and design professional risk specialists of Zurich N.A. can bring a new perspective to protecting your bottom line from the expenses and liabilities that can arise from environmental and professional exposures. In addition to innovative coverage, Zurich offers superior claims and risk management services tailored to the specialized needs of these firms. For more information visit http://www.ZurichNA.com/designprofessional.

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HILL INTERNATIONAL – Founded in 1976, Hill is a worldwide construction consulting firm which provides innovative approaches to both avoidance and resolution of construction disputes. It also offers clients a full spectrum of project management services, including a unique form of objective project management oversight designed to better assure that capital projects are completed on schedule and within budget. Hill is ranked in the top 15 largest Construction Management Firms by ENR magazine. Visit http://www.hillintl.com

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No Damage for Delay” Clause Not Enforceable

Where an electrical contractor was delayed in completing its work, the project owner, school district, asserted that the contractor’s claim for delay damages was barred by a “no damages for delay” clause in the contract. The trail court concluded that the clause did not bar the plaintiff’s claim, and the appellate court agreed. Delays were caused by actions of the owner as well as by the construction manager’s failure to adequately supervise the coordinate the work of various contractors and failure to prepare the coordinated construction schedules and drawings.

The contract stated: “Contractor expressly agrees for itself, its Subcontractors and suppliers not to make, and hereby waives, any claim for damages on account of any delay, obstruction or hindrance. Contractor’s sole remedy for any delay, obstruction or hindrance shall be an extension of the time in which to complete the Work.” Despite clauses such as this one, the court explains that damages may be recovered for (1) delays caused by the owner’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the owner, and (4) delays resulting from the owner’s breach of a fundamental obligation of the contract.

In this case, Phase II of the construction was to be for 10 months and be finished in February, but was finished in September instead. And Phase III was completed almost a year later than planned. One of the causes of delay was that the owner terminated both the construction manager and the general contractor, and hired 30 subcontractors in lieu of replacing the general contractor. According to the court, the project impediments were wholly unanticipated and, according to expert testimony, were of a character and magnitude not ordinarily encountered or anticipated by parties to a contract of this nature. The court also found that the construction management team failed to substantially fulfill the express contractual obligation to schedule and coordinate the work, resulting in extensive work interruptions or delays and inefficient labor deployment, and that this justified the trial court finding a pervasive and ongoing breach of contract.

Another important aspect of this case concerns a 72 hour notice requirement that “prohibited a contractor from obtaining an extension of time to complete its work if it failed to issue a written request for such relief within 72 hours of the delay.” The court found the requirement applied to the claim and barred damages incurred prior to date the electrical contractor provided notice of its claim to the owner. Clifford R. Gray, Inc. v. City School District of Albany, 277 A.S2d 843; 716 NYS 2d 795.

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International Risk Management Institute

Don’t miss the IRMI Construction Risk Conference, the premier forum for sharing ideas and techniques for improving the ways we do business. More than 1,000 representatives of the construction and insurance industries, as well as many project owners, attend each year for the exceptional educational value and unparalleled networking opportunities. This year’s conference is October 29 through November 1 in New Orleans. For more information visit http://www.irmi.com/rd/rd.asp?id=crr

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Architect May be Liable to Unpaid Supplier

Where the project architect knew there was no payment bond and that subcontractor was not being paid, yet continued to certify payments to the general contractor and reduced the amount of retainage, it could be liable for breach of duty to use reasonable care to ensure payment was being made to subcontractors.

The architect’s responsibilities under its contract included reviewing the general contractor’s payment applications, certifying the amounts due, and determining whether work had been performed according to the requirements of the contract. It had the ability to withhold the certification of payments if the contractor failed to properly pay the subcontractors. Although the general contractor was required to obtain performance and payment bonds it failed to do so. In addition, the contractor was contractually required to submit to the architect with each payment application satisfactory evidence that all indebtedness connected with the part of the work for which application for payment was made had been paid, and submit a subcontractor waiver of lien for that work. The general contractor never submitted the lien waivers with its payment applications. Despite knowing all of this and knowing that the subcontractors were not being paid, the architect continued to certify payments to the general contractor.

On the question of whether an unpaid subcontractor had a cause of action against the architect, the court stated that where there is a special relationship between the design professional and the contractor, the design professional may owe a duty to the contractor. In this case, the appellate court held that this is a factual issue to be determined by a jury and that the trial court erred in granting summary judgment in favor of the architect. The case was, therefore, remanded so that a jury may decide whether such a special relationship existed and whether the architect’s actions constituted negligence. Callum Mechanical Construction, Inc. v. South Carolina Baptist Hospital, 344 S.C. 426; 544 S.E. 2d 838.

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Disclaimer

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Copyright 2001, ConstructionRisk.com, LLC

Editor: J. Kent Holland, Jr., J.D.
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