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Inside This Issue:

  • Construction Manager not Responsible for Contractor’s Injury
  • Third-Party Claim for Indemnification Survives SJ Motion
  • Mold Excluded in Homeowner’s Policy is not Covered as an Ensuing Loss of Leaking Water

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Construction Law & Risk Management — Case Notes 2003-2005:

If you enjoy this newsletter, you should buy this 300 page book that compiles and organizes all the articles and case notes that were published in ConstructionRisk.com Report during the three years of 2003, 2004 and 2005 are included here. The cases and articles included in this book demonstrate risk management principles to be considered and applied on construction projects.  The intent is to give a sampling of issues and cases, providing risk management ideas and information to serve as a useful resource for contractors, design professionals, project owners, attorneys, educators, risk managers, and insurance professionals.

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Article 1

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Construction Manager not Responsible for Contractor’s Injury

On a project where an employee of a construction contractor suffered any eye injury when concrete exploded out of a flexible tube he was trying to unclog, the construction manager was not liable for his injuries since the construction manger was under contract with the project owner and not the contractor, had no supervisory control or authority over the work being performed by the plaintiff, did not create the dangerous condition, and did not have actual or constructive knowledge of the condition.

In the case of Shawn Adair v. BBL Construction Services, 25 A.D.3d 971; 809 N.Y.S 2d 592 (2006), the appellate court sustained summary judgment in favor of the construction manager (CM), holding that there was no basis to find liability against the CM for injuries that the plaintiff, an employee of a separate construction contractor sustained while working on the project.

The plaintiff had been attempting to unclog a pipeline that was being used to pour concrete, when concrete exploded in his face.  The plaintiff testified that he himself loosened a clamp that resulted in the explosion of the concrete.  The court found that it didn’t make any difference to its decision what individual loosened the clamp, however, since the CM had nothing to do with the decision of how to operate the equipment and perform the work.

In support of its case against the CM, the plaintiff argued that the CM had authority to supervise, direct and control the concrete pour.  As evidence of that authority, the plaintiff asserted that the CM’s on-site field manager insisted that the concrete pour take place on the day of the accident despite a mix-up in the order from the original concrete supplier.  This was not persuasive to the court because “this directive, however, was entirely consistent with BBL’s administrative role in coordinating the scheduling aspects of the entire job and in no way demonstrates that its field manager had the authority to supervise or control the injury-producing work itself.”  The court noted that the plaintiff had acknowledged that no employee of the CM ever told him how to do his job.

In reviewing the facts of the case, the court stated that the witnesses who testified established that the CM did not provide labor or material to the contractor, and that the CM did not direct the employees of the contractor in how to perform their jobs.

In its short analysis of the law, the court explained that the CM had no contractual relationship with the contractor but instead had a contract directly with the project owner whereby it had responsibility “for ensuring that all contractors performed in accordance with the plans and specifications, for coordinating the safety programs of the contractors and for ensuring that the project proceeded as scheduled.”  Significantly, the court pointed out that the “contract specifically withheld from [CM] any authority to control either the contractors’ work methods or safety programs.”

Since the contract terms and the witness testimony are consistent in establishing that the CM had no supervisory control or authority over the work (and exercised no control or authority), there could be no statutory agency to make the CM liable under the New York Labor Law.  The court also found that the CM could have no liability at common law for negligence since it did not create the dangerous condition or have actual or constructive notice of that condition.    For these reasons, the court sustained the award of summary judgment to the CM.

Comment: This short decision concisely explains several points that are important in understanding the limits of site safety responsibility to be imposed on construction managers and other consultants or design professionals.    The court focused on the contractual relationships between the parties and noted that because the CM was under separate contract to the project owner and had no contract with the construction contractor, and because the CM did not go beyond the scope of its service to exercise authority and control over the contractor’s work, there was no basis under the state statute to impose liability on the CM.  The court also considered the question of whether the CM might be separately subject to liability at common law on a negligence theory.  But in this regard, the court considered the evidence that had been presented and concluded that the CM had no responsibility for condition of the pipe and had no actual or constructive knowledge of its condition which might have created a potential responsibility.

It should be noted that there are a number of cases in courts around the country that hold that if a CM has actual knowledge of dangerous conditions it must take action to avoid injury to workers even if their contract states they have no site safety responsibility.   There are also a number of cases that have found liability on the part of a CM when the CM has actively exercised authority and control over the work of the contractor, despite contract language disavowing responsibility.   Consistent with decisions such as Herczeg v. Hampton Township and Bankson Engineers, it is significant that the court here has explained that even though the CM’s contract had a reference to coordinating safety programs of the various contractors, the CM’s real responsibility under its contract with the project owner was to assist the owner in getting the job performed on schedule and per the plans and specifications.  This is the point that needs to be consistently made, and the fact that the contract in this case clearly stated that the CM had no site safety responsibility was a critical element in making that point.   This should be carefully considered when drafting CM contracts.

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. 5.

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Article 2

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Third Party Claim for Indemnification Survives SJ Motion

When a design-build engineering firm filed suit in federal court against its construction subcontractor for breach of contract, the subcontractor filed a Third-Party Complaint against one of its suppliers for contribution and indemnity.  The supplier filed a motion to dismiss the third party complaint – asserting that the court had no jurisdiction over it and that the indemnity claim failed to state a claim under the federal rules of civil procedure. The court found the third party complaint was proper because to the extent that defective performance by the supplier subjected the construction contractor to liability to its client, this type of issue is related to the plaintiff’s primary claim and therefore fits nicely within the subject matter of the case.  On the question of whether the contribution or indemnity claim was viable, the court found that the applicable state law recognizes common-law or equitable indemnity and in addition gives effect to parties’ contractual indemnification provisions such as those applicable in this case.

In the case of Maxfour Engineers and Architects, v. ARB, Inc. (233 F.R.D. 602 (D.C. Colorado, 2006), the plaintiff had a prime contract for construction work for the U.S. Bureau of Land Management (BLM).  It subcontracted construction to ARB, Inc. which in turn subcontracted with Western Homes Corporation who was to supply manufactured buildings.  Plaintiff claimed ARB breached its contract by failing to pay its suppliers and employees and by failing to adequately supervise its subcontractors (including Western) and perform its work.

In response to the complaint, ARB filed a Third-Party Complaint against its subcontractor, Western alleging that (1) Western breached its subcontract by supplying ARB with buildings that allegedly deviated from the subcontracts’ specifications, and (2) Western owed contractual contribution and/or indemnity for any damages suffered by ARB in this law suit.

Although the project was constructed in Colorado , and the litigation was filed in Colorado , the court applied California law to the contract.  California recognizes common-law or “equitable” indemnity in a form that resembles contribution among jointly liable parties based on their comparative fault.  Where parties expressly contract with respect to the scope and boundaries of the duty to indemnity, equitable indemnity is not available.  Instead, California law gives effect to the parties’ contractual indemnification provisions.

ARB’s contribution/indemnity claim against its subcontractor is derived from and dependent upon the Plaintiff’s successful prosecution of its breach of contract claims against ARB.  ARB’s third party claim asserts that if it is found liable to the plaintiff then all or part of that liability is attributable to its subcontractor, who should therefore contribute.   The court stated that it cannot seriously be argued that Western’s conduct was unrelated to the Plaintiff’s primary claim, and therefore to the extent that defective performance by Western exposes ARB to liability to the plaintiff, ARB’s third party claim against Western must be permitted to stand, as it is appropriate under federal rule of civil procedure, Rule 14(a).

The contract between ARB and Western included the following indemnity clause:

“Western shall, to the maximum extent permitted by law, defend, indemnity, and save harmless [ARB] from and against any loss, damage, liability, cost, and expense … arising out of any injury (including death) to any person or damage to any property resulting from or in any way connected with the performance caused by [Western’s] breach of this Purchase Order or the goods, materials or services furnished hereunder… To the extent that conditions, acts, activities, or conduct involve the contributory negligence or misconduct of [ARB], liability will be apportioned between the parties, according to comparative fault.”

Western essentially argued that the above clause did not require it to indemnify ARB because the plaintiff’s claim against ARB was not for “injury…to any person or damage to any property.”   The court rejected this argument and concluded that the indemnification was not limited to bodily injury and property damage claims.  According to the court, the term “injury” is ambiguous in the contract and might refer to only physical injuries or “it might refer to the broad classes of economic injuries persons might sustain as a result of Western’s breaches of the contract.”

The court did not make an ultimate decision on how “injury” is to be interpreted but instead held that it is too early in the litigation to decide what it means and that ARB has therefore sufficiently stated a claim for contribution or indemnification under the terms of the contract.    The court concludes moreover, that “ARB has alleged that Western failed to perform as required by the contract, and that as a result, ARB sustained economic injuries, in the form of liability to the Plaintiff.  This is sufficient to state a claim for contractual contribution or indemnity under California law.”

Comment: A close reading of the indemnification clause would seem to suggest that the parties based the clause to a great extent on language found in one of the standard form contracts used in the construction industry, and that language in fact is generally interpreted to require indemnification only for bodily injury and property damage rather than for pure economic losses and consequential damages.   It is important when negotiating indemnification clauses to make them as clear and unambiguous as possible.  There is much case law interpreting indemnification clauses in standard form contracts such as those of the American Institute of Architects (AIA).  Understanding the history of how such language has been interpreted and applied by the courts is a must for anyone litigating a case such as the one discussed here.

 

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Article 3

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Mold Excluded in Homeowner’s Policy is not Covered as an Ensuing Loss of Leaking Water

Summary judgment was correctly awarded against a homeowner that claimed it was entitled to coverage under its homeowner policy for damages arising out of mold growth that occurred as a result of construction defects that caused serious water leakage through the roof and moisture seepage through the foundation.  An exclusion in the policy expressly stated that there was no coverage for rust, rot, mold or other fungi.  An exception to the exclusions allowing coverage for ensuing loss caused by water damage was held not to apply in this case.  The ensuing loss exception is intended, says the court, to allow coverage for an otherwise covered type loss (water damage) that follows from an excluded loss (mold) but will not create coverage for an excluded category of loss (mold) that follows from a covered loss (water damage).

In the case of Lundstrom v. United Services Automobile Association (2006 Tex. App. LEXIS 605), a homeowner was denied coverage under its homeowner’s policy for mold damages to their home.  After moving into their new home, the Lundstroms found water in a stairwell following a rainstorm.  They complained to the builder about leakage and he came to the house on repeated occasions in an attempt to correct the problem.  On two occasions the builder cut a hole in the roof in an effort to try to determine the source of the problem.  On both occasions the builder left the hole open and unprotected from the elements and, on both occasions, severe rainstorms caused large amounts of water to pour into the house.  (See my comment below about this clever contractor).

As a result of the various sources of water ,mold developed.  The homeowner made a claim to its carrier for coverage for the water and property damage, and for the mold.  The carrier granted limited property damage coverage pursuant to a binding appraisal that was provided pursuant to the policy to resolve disputes concerning the value of a loss.  The carrier denied coverage for mold, however, based upon exclusion (f. 1 & 2) of the policy which states: “We do not cover loss caused by … (1) wear and tear, deterioration or loss caused by any quality in property that causes it to damage or destroy itself [and] (2) rust, rot, mold or other fungi.”

The policy further provided at the conclusion of section (f), however that “We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under this policy.”

In their argument against summary judgment, the homeowner acknowledged the applicability of the exclusions but asserted that the “ensuing loss” provision was to “cover ensuing loss caused by … water damage.”  The question for the court, therefore, was whether the alleged mold damage would be covered under the ensuing loss exception to the mold exclusion.

In analyzing the policy language and the intent of the ensuing loss exception, the court relied upon precedent established by the case of Lambros v. Standard Fire Insurance, 530 S.W.2d 138.  That decision, quoting from Webster’s Dictionary,  explained that “To ‘ensue’ means ‘to follow as a consequence or in choronolgoical succession; to result, as an ensuing conclusion or effect.’  An ‘ensuing loss,’ then is a loss which follows as a consequence of some preceding event or circumstance.”

The Lambros decision considered facts quite similar to those in the present case, including the same exclusions and the same ensuring loss provisions.  The way that decision interpreted the ensuing loss exception was that the language of the exception “compels the conclusion that the water damage must be a consequence, i.e., follow from or be the result of the types of damage enumerated in exception k.”  Thus says, that court, “Ensuing loss caused by water damage refers to water damage which is the result, rather than the cause, of “settling, cracking, bulging, shrinkage, or expansion of foundations, walls, floors, ceilings…”  Since in Lambros the water damage was the cause rather than the consequence of settling, the exclusion applied, and the ensuing loss exception to the exclusion was of no help to the homeowner.

In the current case,  the court explains that what Lambros means is that the ensuing loss is to be understood as a loss that results or follows from the listed excluded risks (wear and tear, deterioration, inherent vice, rust, rot, mold, etc.)  “Consistent with Lambros, for the ensuing loss exception to override the exclusion for mold in the present case, the mold must have caused or preceded the water damage, not vice versa.”   Since that is not the case here, the court found that the mold damages are excluded from coverage under the policy.

Comment: The court in this decision stated:  “Regardless of whether we agree with Lambros, it is on point, and as an intermediate court of appeals, this court is bound to follow established precedent from the Texas Supreme Court.”  This suggests that the court did not in fact agree with the logic of Lambros. The court quoted several other unreported and unpublished decisions of Texas courts that interpret the ensuing loss exception quite differently—and in a manner that would have found coverage.

The point of the decision is that in Texas, the way that the ensuring loss exception is interpreted is that the exception does not mean that the policy will not cover an excluded loss that results from an otherwise covered loss.  Instead, it means the policy will permit coverage for an otherwise covered loss that results from a loss that is excluded under the policy.  Thus, mold being plainly stated to be excluded does not become covered just because it results from water damage which is covered.

Another way to look at this is to consider what coverage there might be under a builder’s general liability policy for property damage to automobiles that are destroyed when a partially constructed wall being built by the builder falls down.  The policy would not cover the damage to the builder’s own work on the wall since that is excluded under the “your work” exclusion, but there could be coverage for the property of others that is damaged as a result of the defective work.  Thus, the cause is excluded from coverage but the resulting property damage is covered.  This parallels the reasoning of the Lambros court as applied to a homeowners policy.  From the discussion in the current case, it does not appear that such comparisons to other policies were made or considered.

Secondary Comment: It was only discovered much later that the source of the water problem was a soda can caught inside the scupper and downspout blocking the drainage and causing water to pool on the flat roof. It seems surprising that a contractor would try to find out why water was getting inside the house by cutting a hole in the roof instead of first checking to see if water was exiting the drain pipe, either by looking at the drain where it entered the ground or looking at it on the roof top during a rainstorm or even after using a garden hose to cover the roof with water.  A little common sense could have saved a lot of trouble.

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. 5.

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This newsletter Report is published and edited by J. Kent Holland, Jr., J.D. 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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