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Inside This Issue:

*  When to Stop Work for Non-payment

*  Insurance Company that Incorrectly Denied Pollution Coverage Did not Act in Bad Faith in Failing to Defend and Indemnify its Insured

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NEW BOOK by ConstructionRisk.com, written by J. Kent Holland, Esq.
“Construction Law & Risk Management: Case Notes and Articles”

 

This book compiles and organizes case notes, articles and papers written by well known and respected attorneys and professional consultants for original publication in a number of newsletters published by a variety of organizations including law firms, claim consultants, financial services providers, accountants, design professionals and contractors.  Articles that do not include a specific byline were written by Kent Holland and first published in the ConstructionRisk.com Report, or a newsletter of one or more organizations to whom he contributes articles.  The cases and articles that are included in this book were selected based on their value for demonstrating risk management principles to be considered and applied.  The intent is to give a sampling of issues and cases, providing risk management ideas and information to serve as a useful resource for the reader.

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ARTICLE # 1
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When to Stop Work for Non-payment

By:  Susan Linden McGreevy, Construction Attorney

EVERY SUBCONTRACTOR has had to deal with slow payment by general contractors who claim that it’s not their fault – the customer hasn’t paid them and, in a slow economy, this refrain is heard more and more frequently.

As sympathetic as the sub might feel, the unfairness of being held up due to a problem you had nothing to do with is more than just irritating, especially when you’ve already had to pay the bills for that work. The temptation to just stop working is hard to resist, even though general contractors may be making serious threats and pointing to contract clauses that (they say) require the sub to stay on the job.

A Virginia drywall contractor’s frustration caused him to take the chance, and it ended him up in court.

Manganaro Corp. was a sub to HITT Contracting for a Lucent Technologies project in downtown Washington . Although Manganaro’s subcontract had a strongly worded “pay if paid” clause (“Contractor’s receipt of payment by the owner shall be a condition precedent to the obligation of the Contractor to make any payment to the Subcontractor”), Manganaro had had the foresight to negotiate in another sentence that took most of the teeth out of this clause: “Notwithstanding the above, it is understood the Contractor has the ultimate obligation to pay the Subcontractor within a reasonable time regardless of payment status from the Owner.”

When payment was not forthcoming – due to non-payment by Lucent – after much discussion and correspondence, Manganaro suspended work. HITT got another contractor in to complete the work and back-charged Manganaro. The next step was federal court.

The judge found first that while a “pay if paid” clause might be enforceable in Virginia , this clause was not, given the extra language Manganaro had negotiated into the contract.

The next question was: “What’s a reasonable time for payment?” HITT argued that Manganaro had not given it enough time to at least try to collect from Lucent, but the court decided that Manganaro didn’t have to wait at all. Accepting Manganaro’s testimony that 30 days from invoice was a “reasonable” amount of time, the court ruled that HITT’s persistent failure to pay within 30 days was unreasonable. Although there were no Virginia court decisions directly on this point, “the authorities uniformly state that a subcontractor who is unreasonably denied payment as he progresses towards completion is justified in suspending performance until he is paid.” Manganaro Corp. v. HITT Contracting Inc., 193 F. Supp.2d 88, 96 (D.D.C. 2002)

HITT argued that even if it was in breach of contract (and it tried hard to convince the court that its delay in payment hadn’t been all that bad), not every breach of contract justifies the other party’s refusal to perform. The court agreed that this had been the law in Virginia for more than 100 years, and that some breaches can be remedied by a payment of money damages after the fact – such as interest, for late payments.

Ironically, one of the reasons why the court went against HITT on this point was that HITT had inserted in its contract the sentence, “Time is of the essence.” While HITT (and most other contractors) intended this clause to apply to Manganaro’s obligation to perform, the court read it as applying both ways: It meant that HITT had to perform its obligation to pay in an expeditious manner.

The case was particularly difficult for the judge to decide, since Manganaro’s billings were not entirely accurate, and HITT could (and did) argue that it thought it was making the appropriate payments, or at least partial payments. The court ruled that it had to look at the objective facts of what Manganaro was really due, since HITT’s own records would have shown that Manganaro was due $140,079 when it suspended performance.

“HITT’s breach of its most fundamental contractual obligation to pay for the work it approved relieved Manganaro of any further obligation under the contract, including the obligation to [do extra work] and to do the repair work on the punch list.”

Not every slow-pay situation will justify suspension of work, given that business relations will inevitably be scarred if not totally ruined in the process, and even with interest of $27,753.60 thrown in, Manganaro was probably not made whole for all the expense it incurred in taking this dispute to federal court. Nevertheless, I expect to see the words of this decision quoted by many lawyers for subcontractors in letters and legal briefs on the subject of slow payment. And the words just might find their way into some court decisions in other states.

About the AuthorSusan McGreevy is a partner at Husch & Eppenberger , Kansas City, Mo. , 816/421-4800, e-mail to susan.mcgreevy@ husch.com.  This article was first published in Contractor Magazine, the Newsmagazine of Mechanical Contracting and is reprinted with permission.  Penton Media, Inc.; 2700 South River Road, Suite 109; Des Plaines, IL 60018; Tel: (847) 299-3101.

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ARTICLE # 2

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Insurance Company that Incorrectly Denied Pollution Coverage Did not Act in Bad Faith in Failing to Defend and Indemnify its Insured

When an insurance carrier  refused to defend the owners of a building  under a general liability policy against claims by occupants alleging injuries from toxic fumes from carpeting, the owners sued the carrier to enforce their rights under the policy.  They also sued for punitive damages, claiming that the insurance carrier denied coverage in bad faith.  The courts held that despite an absolute pollution exclusion, the policy could not be applied to deny coverage for fumes from carpet glue.  On the issue of bad faith, however, the court held that although the insurance carrier’s failure to indemnify was wrong, it had a reasonable basis for incorrectly interpreting its policy and, therefore, it did not act in bad faith.

In Freidline v. Shelby Insurance Company, 774 N.E. 2d 37 ( Indiana , 2002), the building occupants complained that substances that were used to install new carpeting in their offices caused them to become sick and to suffer bodily injuries.  In response to a request by the building owners to defend them in the legal proceedings, and to indemnify them in case of judgment, the insurance carrier declined to do either.  The owners then sued the carrier as stated above.  On the issue of whether the pollution exclusion effectively precluded coverage, the appellate court concluded that the fumes emanating from carpet glue were not included in the policy’s definition of pollutants, and that bodily injury arising from the fumes would therefore be covered.

The exclusion provided as follows:  “This insurance does not to: … Bodily injury and property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants…  Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, acids, alkalis, chemicals and waste.  Waste includes materials to be recycled, reconditioned or reclaimed.”   The court found this exclusion to be ambiguous and construed it against the insurance company so as not to exclude coverage for injuries arising from carpet glue fumes.

On the issue of bad faith, the court explained that in order to prove bad faith, the plaintiff would have to establish with clear and convincing evidence that the insurance carrier had knowledge that there was no legitimate basis for denying coverage.   In seeking to prove this, the plaintiffs argued that the insurer knew of previous case precedent from the Court that had found the definition of pollutants to be ambiguous, and which had strictly construed the pollution exclusion against insurance companies.  The court acknowledges that in several reported decisions it did, in fact, find the pollution exclusion to be ambiguous, and that it had construed the language strictly against the insurance companies.  The court noted, however, that the defendant insurance carrier in this case argued that each of those previous decisions dealt with business operations that involved the “handling and use of toxic or potentially polluting substances, so that the pollution exclusion would virtually negate coverage.”  In contrast, the carrier argues that this case should be viewed differently because the insured building owner owns an office building which is an operation that does not regularly use toxic or caustic substances.  They also argued that those previous cases involved environmental clean-up costs, whereas the instant case involves bodily injury to office workers.  The insurance company cited to the court numerous recent out-of-state decisions holding that injuries resulting from similar types of emissions are excluded from insurance by the pollution exclusion.

Based on the good faith arguments and logic presented by the insurance company, the court found that there was a rational basis for the company’s decision, even though that decision was wrong in the opinion of the court..  Consequently, the insurance carrier was entitled to summary judgment in its favor on the question of bad faith despite the court’s conclusion that the company would be required to acknowledge coverage against damages arising out of  bodily injuries.

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ARCH INSURANCE GROUP

For information on design professional liability and environmental liability insurance available from ARCH, contact Richard Zarandona at 973-206-8025 (senior vice president), rzarandona@archinsurance.com; Victoria Szot, P.E., J.D. (professional liability underwriter), at 973-206-8026, vszot@archinsurance.com; Jim Boyes (environmental liability underwriter)  at 973-206-8027, jboyes@archinsurance.com; or Kent Holland (risk management) at 703-623-1932, kholland@archinsurance.com.   Underwriting is done out of the Arch Insurance Group office at 55 Madison Ave. , Morristown , NJ , 07960 .

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ON-LINE RISK MANAGEMENT COURSES BY KENT HOLLAND
Currently available risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include the following: Contract Guide for Design Professionals; Risk Management for Design Professionals; Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Risk Managing Communication, Documentation and Reports;  Construction Contract Law; Contract Claims against Design Professionals; and Environmental Claims.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., Esq., Director of Risk Management Services for the Environmental and Design Professional Liability Units of Arch Insurance Group.  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, 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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