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Inside This Issue:

•  What is Intended by “Collapse” Covered by Insurance Policy?
•  New Law Restricts Scope of Indemnity Clauses in Subcontracts for Residential Construction in California
•  When is Landowner Liable to Independent Contractor’s Employee for Site Safety?

•  Contractor has a Duty to Seek Clarification of Ambiguous Contract Terms

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23.0      Site Safety

24.0      Standard of Care

25.0      Surety

26.0      Time Limitations on Suits

27.0      Warranty

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Article 1
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What is Intended by “Collapse” Covered by Insurance Policy?

In a coverage dispute suit by a building owner against its property general liability insurance carrier, the question to be resolved by the court was whether the owner was entitled to recover for a potential collapse of part of its building.  The court rejected the insurance carrier’s argument that there was no coverage in the absence of actual collapse.  Where collapse is imminent there could be coverage.

A building owner, 401 Fourth Street , Inc. (“ Fourth Street ” or “Owner”) purchased an insurance policy from Investors Insurance Group (“Insurer”) and for additional premium obtained an endorsement extending coverage for “collapse.”  The language of the endorsement reads as follows:

“We will pay for loss or damage caused by or resulting from risks of direct physical loss involving collapse of a building or any part of a building caused only by one or more of the following: … 2. Hidden decay …. Collapse does not include settling, cracking, shrinkage, bulging or expansion.”

When tenants noticed that a parapet wall was bowed and leaning inward, the building Owner filed an insurance claim for coverage under the endorsement.  According to an engineer retained by the Owner, internal bonds that tied the parapet wall to the structural framing of the building had recently given way, and a large, sudden movement had occurred.”  The engineer described the situation as “very dangerous and must be repaired immediately.”

An engineer retained by the Insurer also concluded that the wall needed to be repaired, but he concluded that the reason for the problem was that interior steel had corroded and expanded, thereby causing the bricks to be jacked upwards.  He further concluded that this was attributable to “a lack of normal maintenance of the brick joints, roofing and shelf angle.”   Both expert engineers agreed, however, that if repairs were not made, “the parapet wall could completely collapse.”

Based on a narrow interpretation of the policy language, the insurance company denied coverage.  The Owner then filed suit against the company.  The trial court granted a motion for summary judgment on behalf of the insurance company based on the court’s application of case law that has construed the term “collapse” to require the actual physical falling down of the structure. Since the structure had not fallen, the trial court concluded a “collapse” had not occurred within the meaning of the policy language.

On appeal, the appellate court in the case of 401 Fourth Street, Inc. v. Investors Insurance Group, 583 Pa. 445, 879 A. 2d 166 (2005),  reviewed case law of a number of different states that have addressed similar or even identical policy language.  It looked to these other decisions because the interpretation and construction of the policy phrase “risks of physical loss involving collapse” was an issue of first impression” for the court.  A number of other courts have found that provision to be ambiguous and have interpreted the phrase to provide broader coverage than just loss occurring only from actual collapse.  The Court here reached a similar conclusion, finding that the policy “covers not only loss for a collapse, but also the risk of loss involving a collapse.”  The court said, “To interpret this broad language to be limited to only the falling of the building, even under existing case law, would be to give too narrow an interpretation to the broad language drafted by the insurer.”  For this reason, the court held that the “policy provides coverage for damage caused by the falling down, or imminent falling down of a building or part thereof.”

The court was careful to explain, however, that it would not interpret the language so broadly as “to cover substantial impairment of structural integrity” where collapse is not imminent.  To go that far, said the court, “would possibly convert the policy into a maintenance agreement permitting recovery for damage which, while substantial, does not threaten collapse of the structure.”

About the author: Kent Holland is a construction lawyer  in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 8, No. 4.

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Article 2

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New Law Restricts Scope of Indemnity Clauses in Subcontracts for Residential Construction in California

By: Thelen Reid & Priest LLP

A new law effective in 2006 limits the scope of indemnity clauses in subcontracts on residential construction projects in California. The law is important for developers, contractors and subcontractors who are involved, even on an occasional basis, in the residential construction industry. Because the terms of the indemnity clause are something negotiated in almost every significant prime contract or subcontract, it is important to understand the terms and impact of the new statute.

Assembly Bill 758 amended Civil Code §2782, in particular Subsections (c) and (d), so as to provide:

(c) For all construction contracts, and amendments thereto, entered into after January 1, 2006, for residential construction, as used in Title 7 (commencing with Section 895) of Part 2 of Division 2, all provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any such construction, contract, and amendments thereto, that purport to indemnify, including the cost to defend, the builder, as defined in Section 911, by a subcontractor against liability for claims of construction defects are unenforceable to the extent the claims arise out of, pertain to, or relate to the negligence of the builder or the builder’s other agents, other servants, or other independent contractors who are directly responsible to the builder, or for defects in design furnished by those persons, or to the extent the claims do not arise out of, pertain to, or relate to the scope of work in the written agreement between the parties. This section shall not be waived or modified by contractual agreement, act, or omission of the parties. Contractual provisions, clauses, covenants, or agreements not expressly prohibited herein are reserved to the agreement of the parties.

(d) Subdivision (c) does not prohibit a subcontractor and builder from mutually agreeing to the timing or immediacy of the defense and provisions for reimbursement of defense fees and costs, so long as that agreement, upon final resolution of the claims, does not waive or modify the provisions of subdivision (c). Subdivision (c) shall not affect the obligations of an insurance carrier under the holding of Presley Homes, Inc. v. American States Insurance Company (2001) 90 Cal.App.4th 571. Subdivision (c) shall not affect the builder’s or subcontractor’s obligations pursuant to Chapter 4 (commencing with Section 910) of Title 7 of Part 2 of Division 2.

It is important to analyze what the new statute does and does not do. First, the statute applies to residential construction only, as defined in Civil Code §§895, et. seq. Thus, it does not apply to commercial contracts, condominium conversions or apartment construction. Second, it only applies to contracts entered into after January 1, 2006. Third, the statute is limited to claims for construction defects.

The statute is clear that all contractual provisions purporting to require a subcontractor to indemnify a builder or the builder’s other independent contractors are unenforceable to the extent that the claims arise out of the negligence of parties performing other work on the project.

The intent of this new language apparently is to prevent enforcement of indemnity clauses that require the subcontractor to indemnify the “builder” for negligent acts of the builder or third parties. It appears to have achieved this purpose. But it does not appear to change the rule that a subcontractor may be required to indemnify a builder (or contractor) for all claims “arising out of” the subcontractor’s work. Such clauses can require a subcontractor to indemnify a contractor even when the subcontractor was not negligent. See, Centex Golden Construction Co. v. Dale Tile Co., 78 Cal. App. 4th 992 (2000).

The “builder” as defined in Civil Code §911 is the party who is in the business of selling the residential units. Any contracts between such a builder and a subcontractor technically would not be “subcontracts” (which require a prime contractor). However, the statute appears intended to capture subcontracts when a developer also is acting as general contractor and contracting directly with “subcontractors.”

The limitation in the statute applies when a subcontractor enters into a subcontract with a prime contractor that contains an indemnity provision for claims against the owner. Even if the subcontract’s indemnity clause requires the subcontractor to indemnify the owner and general contractor, the indemnity obligations to the owner are limited by §2782.

An unsettled issue is whether prime contractors who do not qualify as “builders” under §911 still can impose broad indemnity obligations on subcontractors on residential construction projects. For example, assume a prime contract between an owner and a general contractor, and a subcontract between the general contractor and a subcontractor, and assume the owner is sued for construction defects. The owner will sue the contractor for indemnity, and the contractor will sue the subcontractor for indemnity. Will a broad indemnity clause in the subcontract still allow the contractor to be indemnified by the subcontractor for the contractor’s negligence or the negligence of other subcontractors?

Another issue is whether it is necessary for “builders” to amend the indemnity clauses in their form subcontracts for residential construction projects. It may be that the effect of the statute is to modify the subcontract clause. Since the statute is limited to construction defects, it makes sense to continue to use a broad indemnity clause in subcontracts so as to allow for broad indemnity for claims for personal injury or wrongful death.

General contractors on residential construction projects now need to be careful about broad indemnity clauses in prime contracts because they may not be able to pass those broad indemnity obligations down stream to their subcontractors.

General contractors faced with an owner who is demanding an overly broad indemnity clause on a residential construction project may consider proposing instead to use a form of indemnity clause that contains broad indemnity provisions but that then recites the language in §2782 (c) to limit the indemnity obligations for construction defects.

About the Author: This article first appeared in the Thelen Reid & Priest newsletter posted at ConstructionWebLinks on April 3, 2006.  For further information, contact Paul Berning, Esq.,attorney with the San Francisco office of Thelen Reid & Priest, LLP.  His address is 101 Second Street , Suite 1800 , San Francisco , CA 94105-3606 .  He may be reached at  415-369-7229 or at pwberning@thelenreid.com.  This article is reprinted in the May/June 2006 ConstructionRisk.com Report with permission.

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Article 3
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When is Landowner liable to independent contractor’s
employee for site safety?

A landowner that hires an independent contractor may be liable to the contractor’s employee if the landowner knew or should have known of a latent or concealed preexisting condition on its property, the contractor didn’t know and couldn’t have reasonably discovered the hazardous condition, and the landowner failed to warn the contractor about the condition. In the case of Kinsman v. Unocal Corporation, (Cal. 2005), the Supreme Court of California concluded that at the trial on the merits of a jobsite injury claim by an employee of an independent contractor against the property owner, Unocal, the jury had not been sufficiently instructed by the judge who should have explained that a landowner could be liable under the circumstances of the case only if it had failed to warn the contractor about a hidden hazardous condition at the property.

The plaintiff in this case, Ray Kinsman, had worked as a carpenter at Unocal’s refinery in Wilmington , California during the 1950’s.  He was employed by an independent contractor that had been hired by Unocal to perform scaffolding work during periods of shutdown and repair and the refinery.  He alleged that the work had exposed him to asbestos and that he later developed cancer as a result.

The suit by Kinsman against Unocal argued two theories of liability. The first was a premises liability theory, arguing that Unocal was negligent in the use, maintenance, or management of the areas where Kinsman worked.  The second theory was that Unocal was negligent in the exercise of retained control over the methods of the work or the manner of the work performed by Kinsman.  The jury found in favor of Kinsman on the first theory – premises liability.

The case went to appeal first to the Court of Appeal and then ultimately to the Supreme Court of California.  In the Court of Appeal decision, the court held that “a contractor’s employee cannot recover under a premises liability theory unless the landowner had control over the dangerous condition and affirmatively contributed to the employee’s injury.”  That court reversed the jury award because it concluded the jury instructions did not accurately reflect Unocal’s limited duty.  The California Supreme Court granted review of that decision and affirmed it insofar as it reversed the jury award, but reversed it as to the instructions to be followed by the trial court on remand.

The discussion presented by the Supreme Court analyzes the theories of liability in great detail and sets forth some considerations to be applied when determining a landowner’s responsibility in situations like this one.   The court explained the basic rule applying to a landowner when that landowner hires someone to work on the land.  The analysis begins with a review of Privette v. Superior Court (1993) as follows: “At common law, it was regarded as the norm that when a hirer [like Unocal] delegated a task to an independent contractor, it in effect delegated responsibility for performing that task safely, and assignment of liability to the contractor followed that decision…. For various policy reasons … courts have severely limited the hirer’s ability to delegate responsibility and escape liability.  But in Privette and its progeny, we have concluded that, principally because of the availability of workers’ compensation, these policy reasons for limiting delegation do not apply to the hirer’s ability to delegate to an independent contractor the duty to provide the contractor’s employees with a safe working environment.  In fact, the policy in favor of delegation of responsibility and assignment of liability is so strong in this context that we have not allowed it to be circumvented on a negligent hiring theory.  Nonetheless, when a hirer does not fully delegate the task of providing a safe working environment, but in some manner actively contributes to the employee’s injury, the hirer may be liable in tort to the employee.”

Starting from the above-explained principles, the court went on to analyze the doctrine of landowner liability as it applies to independent contractor’s employees.  The basic rule, said the court, is that a property owner must manage his property, acting as a reasonable man in view of the probability of injury to others.   Where, for example, the owner knows of a dangerous concealed condition, and knows that a person is about to come into contact with it, the owner can be liable for negligence in failing to warn or failing to repair the condition.   The question before the court is how these principles apply when the landowner hires an independent contractor whose employee is injured by hazardous conditions on the premises.

The court concludes that when there is a safety hazard on the hirer’s premises that can be addressed through reasonable safety precautions on the part of the independent contractor, the owner may delegate the safety responsibility to the contractor.  The owner would not then be liable to an employee of the contractor that is injured because the contractor failed to execute the work safely.  But, if the hazard is one that is concealed from the contractor but known to the owner, a different rule will apply.  The court concludes that “A landowner cannot effectively delegate to the contractor responsibility for the safety of its employees if it fails to disclose critical information needed to fulfill that responsibility.”  Therefore, says the court, “the landowner would be liable to the contractor’s employee if the employee’s injury is attributable to an undisclosed hazard.”

Thus, even if it does not retain control over the work, the landowner can be liable to a contractor’s employee if “(1) it knows or reasonably should know of a concealed, pre-existing hazardous condition on its premises;  (2) the contractor does not know and could not reasonable ascertain the condition; and (3) the landowner fails to warn the contractor.”

Comment: The court was careful to point out that the premises liability doctrine it adopted applies only to preexisting hazardous conditions on the property.  The court specifically reaffirms the right of hirers “to delegate to independent contractors the responsibility of ensuring the safety of their own workers.”  Landowner’s may continue to rely upon their independent contractors to take responsibility for site safety and the safe execution of work provided that the owner discloses to the contractor hazardous conditions that it knows or reasonably should have known about, and which the contractor does not know and could not reasonably ascertain.

Contractors often require by contract that the site owner disclose all hazardous site conditions known to the owner.  Some owners have resisted or deleted this clause.  They have attempted to avoid any responsibility for disclosure and to instead place on the contractor all responsibility for discovering site conditions.  Based on the decision of this court, the contract language is only requiring owners to do what will be required of them in any event in order to avoid liability to employees of those contractors.

About the author: Kent Holland is a construction lawyer  in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 8, No. 4.

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Article 4
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Contractor has a Duty to Seek Clarification of
Ambiguous Contract Terms

Katz & Stone, L.L.P. Construction Newsletter
January/February 2006

A contractor who fails to seek clarification of the meaning of ambiguous contract terms prior to the submission of its bid may be bound by the owner’s reasonable interpretation of those terms.  The case of Delicacies Constr. Co., Inc. v. City of New York, 2005 NY Slip Op 25321, 1 (N.Y. Misc. 2005) illustrates this proposition.

Here, the contractor was the winning bidder for a public improvement construction project involving the replacement of a pedestrian bridge in New York City .  The Contract consisted of various documents—including the Proposal for Bids, the contractor’s Bid, Technical Specifications, and the Agreement.  The project was substantially completed, and the contractor’s claim accrued on May 31, 1999.  However, the contractor brought suit against the City on October 21, 2004.

In its claim, the contractor asserted that it supplied additional labor, materials, equipment and services pursuant to the Contract.  As such, the contractor believed that it was entitled to an equitable adjustment, and claimed that the City’s failure to compensate it for the additional work constituted a breach of contract.  The contractor argued that the City failed to design, administer and manage the construction project properly.  As a result of the city’s aforementioned failures, it took the contractor an additional four years (along with the requisite additional costs and expenses) to complete the project.

In response, the City argued that the contractor’s claims were foreclosed by the statute of limitations contained in the Contract documents.  The City alerted the court to Article 53 of the Agreement which required a claim to be brought within four months after the accrual of the claim. The contractor argued that because its claims for delay damages were based upon the Contract and not specifically the Agreement—the four-month statute of limitations contained in Article 53 of the Agreement was to be applied to “claims based on this Agreement”—the four-month statute of limitations did not apply.

The court disagreed with the contractor’s argument.  The court observed that Article 1 of Chapter I of the Agreement did not readily distinguish between the terms “Contract” and “Agreement.”  In fact, that the terms were used interchangeably throughout the entire Contract and within the Agreement section itself.  As a result, the court interpreted the statue of limitations provision contained in Article 53 of the Agreement to apply to both the claims based upon the Contract and the Agreement. To the extent there was some ambiguity caused by the term “Agreement” in Article 53, there was an additional contractual requirement that the contractor request clarification of such ambiguities. The court found that the contractor failed to clarify the meaning of the contractual language it claimed was ambiguous before submitting its bid; thus, it was bound by the City’s reasonable interpretation of Article 53. As a result, the court ruled that the contractor’s claims were time-barred because the contractor waited over five years to bring suit against the City after its claims accrued in May 1999.

This case illustrates that contractors must be aware of ambiguities in contract language.  Contractors must resolve such ambiguities prior to submitting their bids, or risk being held to the project owner’s interpretation of the ambiguous language.

About the Author: The law firm of Katz & Stone is a nationally recognized firm with a practice emphasizing construction law.   The office is at 8230 Leesburg Pike, Suite 600 , Vienna , VA 22182 ; 703-761-3000.  E-mail: info@katzandstone.comThis article first appeared in the Katz and Stone newsletter and is reprinted in the May/June 2006 ConstructionRisk.com Report with permission.

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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.  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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