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Inside This Issue:

  • Anti-Indemnity Statute does not Void Additional Insured’s Coverage
  • Mold-Related Construction Defect Claims: Who is Liable for Alleged Damage Caused by Exterior Insulation Finishing Systems (“EIFS”)
  • Statute of Repose Applies to Contract and Negligence Actions
  • Review of Ava Abramowitz book “Architect’s Essentials of Contract Negotiation”

ARTICLE # 1
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Anti-Indemnity Statute does not Void Additional Insured’s Coverage

Where a construction contractor signed a contract containing an indemnification clause agreeing to indemnify the project owner for all claims arising under the contract, including those caused by the owner’s negligence, a court held that a liability insurance policy that had been purchased by the contractor naming the owner as an additional insured was enforceable against the insurance company to recover for personal injuries that were caused by the owner’s negligence despite a state statute precluding a project owner from requiring a contractor to indemnify the owner for damages arising out of the owner’s own negligence.

In Chrysler Corp. v. Merrell & Garaguso, 796 A.2d 648 (Del.Supr. 2002), an injury was sustained by an employee of Merrell and Garaguso (“Merrell”), the contractor, as a result of the alleged negligent operation of a forklift by an employee of Chrysler, the project owner. The Merrell employee sued Chrysler for his injuries, and Chrysler, in turn, brought a third party action against Merrell pursuant to the terms of the indemnification provisions of the Merrell contract. The issue in this reported case arises out of cross motions for summary judgment on the extent of Merrell’s duty to defend Chrysler against the injured worker’s claim. The trial court ruled that the indemnification provision was unenforceable because it was contrary to the statutory prohibition against being indemnified for one’s own negligence. The court also ruled that the provision of the contract requiring Merrell to obtain insurance naming Chrysler as an additional insured was “void as an indirect requirement to indemnify.” According to the trial court, even if the contractual duty to provide insurance has been satisfied, the resulting coverage is unenforceable.

On appeal, Chrysler argued that the public policy purpose of the anti-indemnity statute did not extend to the insurance aspect of indemnification. As asserted by Chrysler, although the statute in its first paragraph makes void a contract clause that requires indemnification for a party’s own negligence, the second paragraph of the statute provides “(b) Nothing in subsection (a) of this section shall be construed to void or render unenforceable policies of insurance issued by duly authorized insurance companies and insuring against losses or damages from any causes whatsoever.” In sorting out the interplay between the two sections of the statute, the appellate court found that there has been no consistency in the courts of the various state jurisdictions that have considered similar statutes. The court was impressed, however, with a decision by the Maryland Court of Appeals addressing similar statutory language and holding that liability insurance, once issued, may create coverage for one’s own negligence under an indemnity agreement, “even if the wrong party paid the premiums.”

The Maryland holding, as described by the Delaware court, “reflects a practical accommodation of the insurance savings provision with the right of a party to a construction contract to refuse, ab initio¸ and directly, to indemnify another party for that party’s own negligence.” In support of enforcing the insurance savings provision, the court noted that this was beneficial from the viewpoint of the injured worker. And the court further stated that if, in fact, the insurer issues an endorsement to cover the actions of a third party and charges a premium for that coverage, the insurer should not be permitted to create an illusion that insurance exists and then deny coverage. In conclusion, the court stated: “The savings provision has meaning only if it cannot be used as a shield by insurers to decline coverage for insurance once purchased and duly issued to any insured, however identified or designated.” For these reasons, the court affirmed the trial court ruling to the extent that it relieved Merrell of any direct obligation to indemnify Chrysler for that firm’s own negligence, and it reversed the trial court as to the rights Chrysler may be able to assert under Merrell’s insurance policy.

Risk Management Note: The court states that there is separate litigation going on between the insurance carrier and Chrysler concerning the matter of what, if any, coverage Chrysler may be entitled to under the policy. The issues in that litigation are not described in this decision. It is worth noting, however, that insurance companies appear to be rethinking the availability of additional insured status for project owners on a contractor’s policy. And on professional liability errors and omissions policies, insurance companies rarely, if ever, agree to make a project owner an additional insured. It would be prudent for parties that are executing contracts containing language requiring additional insured status of project owners should obtain advice of their insurance agent and concurrence of the insurance company in advance of signing such contracts.

Thirty nine states have enacted some form of anti-indemnity statute. The details vary widely from state-to-state. It is advisable to have counsel familiar with the laws of the jurisdiction applicable to any specific contract review the indemnification clause of the contract to evaluate how it may be interpreted and applied within the relevant jurisdiction.

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ARTICLE # 2
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Mold-Related Construction Defect Claims: Who is Liable for Alleged Damage Caused by Exterior Insulation Finishing Systems (“EIFS”)?

By: Gordon & Rees, LLP

EIFS or synthetic stucco is at the forefront of construction defect allegations regarding water intrusion, property damage and mold growth. EIFS generally consists of a layer of exterior grade gypsum glued to a foam board. The foam board is then coated with a heavy base coat of the synthetic stucco. Next, a layer of fiberglass mesh is pressed into the base coat. The final step is an application of an acrylic, water-resistant finish.
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EIFS is used for its properties of better insulation, more durability, and as a less expensive alternative to traditional stucco. Prior to 1996, there are claims that the EIFS did not provide a path for water that migrates behind the EIFS to drain back out. Since 1996, manufactures have new EIFS products that provide migration paths. However, the use of EIFS has declined following the 2000 International Residential Code (“IRC”) decision to ban EIFS. Several states have adopted the IRC recommendation.
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Recent lawsuits allege that the synthetic stucco material actually becomes porous and allows water to seep in and become trapped, rotting the wood beneath the exterior finish and causing potentially severe structural damage and mold. Often claims are made that improper installation causes water from rain and other sources to migrate through damage or gaps in the coating or below and along windows, doors and other wall penetrations where there is not adequate flashing.
EIFS claims are being made against manufacturers, developers, architects and builders. The claims are a hybrid of product liability and construction defect. Manufacturers point to poor installation and maintenance, while the trades look to the inherent properties of the product. While typical theories of liability and defenses among the parties are present, there are issues that may limit the number of defendants on these claims.
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A national class action settlement agreement has been reached on behalf of homeowners of EIFS-clad homes in states other than North Carolina against one manufacturer, Dryvit Systems, Inc. Bobby R. Posey, et al. v. Dryvit Systems, Ind., No. 17,715-IV (Tenn. Cir. Ct., Jefferson City.) There is an “opt out” deadline of September 3, 2002 for class members. A fairness hearing on the settlement is set for October 1, 2002. There is controversy regarding the benefits to homeowners. Plaintiffs claim the settlement is “repair-oriented” and based upon agreements reached with the company in North Carolina in 1997 and 1998. The agreement provides that members are entitled to free inspections, partial reimbursement for repairs and a three-year limited warranty. The warranty does not include any incidental or consequential damages and specifically excludes liability for mold. Repairs are reimbursed at 40 percent of the estimated cost of repair, up to a maximum of $6,000. The settlement offers no money up front to any members other than the named plaintiffs. Critics of the agreement claim it is wrongly based on the premise that the EIFS can be repaired and fails to address the substantial consequential damages potentially caused by mold. For more information on the settlement see www.stuccosettlement.com. For members that do not “opt out,” any claims for mold related damages cannot be made against Dryvit.
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In some instances the manufacturer is no longer a viable defendant due to bankruptcy. In Baltimore, six homeowners of a gated townhouse community sued the developers, general contractor and subcontractor for allegedly defective installation of a synthetic stucco product called InsulScreen that is claimed to have allowed moisture intrusion and mold to grow underneath the siding. Gerzanich, et al. v. Struever Bros., et al. (Md. Cir. Ct., Baltimore City). The InsulScreen EIFS is also allegedly defective. The manufacturer United States Gypsum, a division of USG Corp., filed for Chapter 11 bankruptcy in 2001 due in part to asbestos related liabilities. As such, the manufacturer cannot be named as a defendant in lawsuits such as Gerzanich until the company emerges from bankruptcy.
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The issue of limited liability due either to class action settlements or bankruptcy of EIFS manufactures is likely to present issues in future lawsuits as to whether builders and developers will bear a greater portion of liability for the uncompensated consequential property damage and bodily injury claims resulting from these suits.

About this Article. This article is reprinted with permission from the April-August 2002 newsletter by the law firm of Gordon & Rees. The newsletter is titled “Coverage, Claims and Technical Information Today: Breaking the Mold.” For further information contact: Gordon & Rees, LLP; Embarcadero Center West; 275 Battery Street, Suite 2000; San Francisco, CA 94111; (415) 986-5900; Fax: (415) 986-8054; Sara M. Thorpe (sthorpe@gordonrees.com) or Laura L. Geist (lgeist@gordonrees.com).

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ARTICLE #3
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Statute of Repose Applies to Contract and Negligence Actions

When the exterior EIFS system of a building wall fell down following a severe storm more than 10 years after construction had been completed, a ten year statute of repose was held to bar the building owner’s suit against the construction contractor regardless of whether the legal cause of action was framed as tort (negligence) or breach of contract.

In Hagerstown v. Hagerstown, 793 A.2d 579 (Md. 2002), the court reviewed the purpose and the details of the Maryland statute of repose affecting construction contracts, and concluded that the statute in question was not limited in its application to tort actions, but applied as well to claims for breach of contract or breach of warranty. As noted by the court, many states have adopted statutes of repose with respect to actions on defective improvements to real property. These statutes vary widely “in terms of what they cover, who is protected, and the time periods allowed.” Some statutes such as the District of Columbia, New Mexico and Connecticut expressly exclude breach of contract actions from the statute of repose. Other states have statutory language quite similar to that of Maryland and interpret the language such that it will only apply to tort actions and not to breach of contract. Examples of these, says the court, include Ohio and Minnesota. While Texas courts conclude that their state’s statute applies to both breaches of contract and tort actions.

According to the Maryland Court of Appeals, the state statute is “intended to protect architects, engineers, contractors, and others involved in the construction industry from being hauled into court by reason of latent defects that did not become manifest until years after the completion of construction.” The court says, “That protection would be fragile, indeed, if it depended on how a plaintiff chooses to frame and plead its cause of action.” In the final analysis, says the court: “The issue should be whether, if the injury or damages arises from the defective and unsafe condition of an improvement to real property, that injury or damage occurs more than ten [ ] years after ‘the date the entire improvement first became available for its intended use,’ and not whether the claim is pleaded as one in contract or tort.” Since it concluded that the clear intent of the statute was to terminate liability ten years after the damage caused by the latent defect, the court held that both the tort and breach of contract claims were barred by the ten-year statute of repose.

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BOOK REVIEW
Architect’s Essentials of Contract Negotiation
Ava J. Abramowitz, Esq., Hon. AIA
Published by John Wiley & Sons, copyright 2002 (286 pages)

Book Review by J. Kent Holland, Jr., Esq.

With this marvelous book on negotiation, Ava Abramowitz has provided a most excellent public service to design professionals and all other participants in the construction industry. If more people followed the advice contained in this book, there would be more trust between parties, more effective risk management, better projects, happier project participants, and less litigation. This book challenged my own thinking, as I’m sure it will challenge yours. If you follow her reasoning, you will find yourself asking more questions to help focus on your client’s problems and needs, and you will learn to listen to them better so that you will propose solutions that go beyond their design needs and reach their basic business and personal concerns. Not only will the principles of communication and negotiation make you more effective in relationships with your clients, you may even find yourself listening better to your spouse and children. I think that all of us who learn to apply the principles of communication and negotiation so artfully and enjoyably explained by Ava, will better appreciate that we negotiate every day over little (and sometimes big) matters. Ava encourages us to approach negotiation from a new perspective instead of the tired old concepts of hard and soft negotiation, win-lose negotiation, or even win-win negotiation. Negotiation, as she explains, does not fit into simple formulas; it does not have to be complex; and it certainly does not need to be intimidating or dreaded. Whether you negotiate contracts with clients or just haggle with your boss, employees or co-workers over every-day decisions in the office or in the field, this book is must reading. I highly recommend this book not only for design professionals but for other project participants and their attorneys.

Personal anecdotes and war stories from the author’s experience, as Deputy General Counsel of the American Institute of Architects (“AIA”) and Risk Management Services Director of a major insurance company, bring this book to life. Highlighted boxes of text sprinkled throughout the book help emphasize and organize key principles. The friendly, conversational writing style, with numerous succinct headings, subheadings, bullets and lists, make for enjoyable and easy reading, and virtually assures that this book will become a continuous reference.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for environmental and design professional liability.  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.

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Copyright 2002, ConstructionRisk.com, LLC

Publisher & Editor: J. Kent Holland, Jr., Esq.

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