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Inside This Issue:

  • No Damage for Delay Clause Enforced;
  • OSHA and Multi-Employer Worksite Safety Responsibility Significantly Changed;
  • Repair of Subcontractor’s Defective Work on Concrete Slab
    not Covered by CGL Policy;
  • Defective Roof Work Excluded from CGL Coverage but damage caused by defective roof to  property inside building is covered (Contractual Liability Exclusion not Applicable) ;
  • Contractor’s Failure to Obtain Requisite Signatures
    on a Change Order Bars Breach of Contract Claim

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Article 1

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No Damage for Delay Clause Enforced against Contractor Claim

By:  J. Kent Holland, Jr.

A contractor that was delayed in completing its construction of three buildings on a college campus due principally to the existence of an excessive number of errors, omissions and conflicts in the design documents provided by the owner was not entitled to recover monetary compensation because it had  agreed to a no damage for delay provision in the contract, and because it failed to meet the contractual requirement of requesting a time extension.   The contract provided, “Time is of the essence to the Contract Documents and all obligations thereunder.”  In the event of delay, the contract provided specific procedures for contractor notice to the owner and for relief to the contractor.  Specifically, the contract provided that the contractor’s failure to request an extension of time within ten days after the occurrence or condition necessitating an extension of time “shall constitute waiver by the Contractor of any claim for extension or for mitigation of liquidated damages.”   A no-damages-for-delay clause in the contract provided that “extension of time … shall be the sole remedy which may be provided by the Department” and that Contractor shall not “be entitled to additional compensation or mitigation of Liquidated Damages for any delay….”

Work by the contractor fell behind schedule to the point that it appeared to the owner that the project would not be completed in time for college classes in the Fall.  Despite the delays in completion, the contractor did not make any written requests for an extension of time for the delays in question.   Attempts to get the project on schedule were unsuccessful and the Owner terminated the contractor and replaced the contractor with another.  From the amount outstanding which the Contractor demanded from the Owner, the Owner deducted the reprocurement  costs paid to the replacement contractor.  Owner also assessed liquidated damages for 188 days of delay.  In response, Dugan & Meyers filed suit seeking $3.4 million.

In its complaint, the Contractor acknowledged the delays but claimed they were caused by inaccurate and incomplete plans that required it to submit over 700 requests for information (RFIs).  Contractor also alleged that no timely response was provided to many of the RFIs, and that the architect issued over 250 field work orders and 85 architectural supplemental instructions directing Contractor to perform work outside the contract.  The essence of the complaint was that the Owner breached its duty to provide the Contractor with plans that were buildable and accurate, and that the Owner unreasonably rejected legitimate time extension requests.  The Owner responded with a counterclaim for liquidated damages and for costs of substituting another contractor.

The trial court case was assigned to a referee who found that the contractor’s delay was excusable due to errors, omissions and conflicts in the design documents provided by the owner.  The referee concluded that the owner had breached its contractual duty to the contractor and that the contractor was excused from liquidated damages and in fact entitled to additional compensation for the delay and impact costs caused by the defective design documents.  The Spearin doctrine was the basis for the Owner’s duty to the contractor said the referee.

The Ohio Court of Claims referee’s decision was appealed to the Ohio court of appeals.  The appellate court reversed the trial court, and the Ohio Supreme Court, in the case of Dugan & Meyers Construction Company v. Ohio Dept. of Admin Services, 113 Ohio St.3d 226,  affirmed the appellate court decision to reverse the trial court.

The first issue the Supreme Court addressed was whether the Spearin doctrine applied in Ohio   to delay in completion cause by plan changes.  The Spearin doctrine stands for the proposition that where the government provides specifications, it impliedly warrants the accuracy of its affirmative indications in the documents.  The court acknowledged that the doctrine is applied by Ohio courts but concluded that it does not apply to damages flowing from delay in completion resulting from plan changes.

The focus of the decision, however, was not the applicability or non-applicability of the Spearin doctrine.  Rather the court keyed in on the unambiguous contract language that addressed the contractor’s remedy when changes were made to the plans.  The court found that “even if the plans required more changes than originally contemplated, the contract established a detailed procedure to be followed for the changes.”  The court found that the Owner had not made an implied warranty of the plans but that even if it had done so, the implied warranty would not prevail over express contractual provisions concerning the limitations on the contractor’s recovery or the procedures by which the contractor was required to notify the Owner of its claim.

With regard to the no-damages-for-delay clause, the court noted that although the state had recently enacted legislation making such clauses unenforceable, the law was not retroactive and did not apply to this particular case.  Looking at the facts of this case, the court held that the clause was enforceable against the contractor.  The court reviewed favorably decisions from other states that have upheld no-damages-for-delay clauses – including a Washington state decision that upheld the clause and held a contractor responsible for liquidated damages for delay despite the exisitence of multiple errors and omissions in plans supplied by the owner.

The court also cited Ohio decisions that have strictly enforced contract provisions requiring that the express dispute provisions of a contract must be followed and that the courts “will not rewrite the contract to achieve a more equitable result.”

In this case, the Ohio Supreme Court declined to review and comment on the findings of the trial court that the plans contained numerous errors and inaccuracies and could not be built as provided by the Owner.   Instead, the court stated, “the express language of the no-damage-for –delay clause renders irrelevant the cause of the delay.

One final argument by the contractor was that he should be excused from complying with the change-order procedure for requesting time extensions because the Owner had actual notice of the need for changes to the deadline, and any failure to comply with the procedure was therefore harmless error.   In looking at the record before it, the court stated that there was no evidence of an affirmative or implied waiver by the Owner of the change-order procedures contained in the contract.  The contractor failed to convince the court that its failure to request time extensions was harmless to the Owner.     For these reasons, the court held against the contractor.

Comment: The court’s interpretation of the Spearin doctrine seems a bit strained in this decision, and I believe the dissenting opinion of Justice Pfeifer provides a more appropriate understanding of the doctrine and correctly concludes that the Spearin doctrine would be applicable in this case to create an implied warranty of the specifications whereby the contractor should have been able to recover for delay and impact costs (including cumulative impacts).  However, the court’s analysis of the express provisions of the contract requiring the contractor to follow specified notice and disputes procedures appears to  be solid. Thus, even if the Spearin doctrine should have been applied, the contractor would not be excused from express, unambiguous provisions of the contract that required requests for time extensions be timely filed and provisions barring monetary compensation for delay.

This decision should once again be a reminder to contractors to pay attention to the details of their contracts when negotiating them.  Design professionals are generally advised against agreeing to “time is of the essence” clauses since performing professional services consistent with the exercise of the appropriate standard of care may not permit the schedule to be satisfied despite diligent prosecution of the professional services.  Contractors on the other hand must typically agree to such clauses and should be aware of the consequences and pay attention to any time requirements set forth in the contract for reporting delays to which the contractor believes relief from the schedule is warranted.   “No-damage-for-delay” clauses shift significant financial risk to the Contractor because even where delays are caused by others, the contractor forfeits its right to recover costs.  More states are beginning to enact legislation prohibiting such clauses –at least in the context of public or government agency contracts, but these clauses are still used in many, many contracts – particularly in the private sector.  Ohio also enacted legislation but it did not apply retroactively to apply to the contract in this case.  Assuming the clause cannot be negotiated out of the contract, all bidders/contractors will need to add a contingency to their bids on the project in an effort to include in their price the cost of delay and impact costs that they will not be able to recover through change orders.  Personally, I believe it is preferable that owners allocate risk more reasonably and avoid inflated bids that include contingencies to cover possible delay costs.

About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice representing design professionals, contractors and project owners.  He is principal of ConstructionRisk, LLC, providing insurance risk management services and construction risk management services, including but not limited to, advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation.  Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 9, No. 6.

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Article 2

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OSHA and Multi-Employer Worksite Safety Responsibility Significantly Changed by New OSHA Review Commission Ruling

By Lawrence F. Feheley , Esq.

Since 1976, OSHA has imposed responsibility for safety at multi employer worksites on a wide range of employers. Although a multi-employer worksite, which is one in which a number of contractors or employers work at the same site contemporaneously, is not limited to construction sites, construction is the most prevalent incidence of multi-employer situations.

The landmark OSHA decision in this area was the 1976 decision of the Occupational Safety and Health Review Commission in Anning-Johnson Co., 4 OSHC 1193 (1976). In that case, the Review Commission ruled that an employer whose employees are exposed to a hazard can be held liable even if it did not did not create the hazard, but it had the means to control or rectify the violation.

This was consistent with OSHA’s 1994 Field Inspection Reference Manual, which provided that OSHA citations could be issued to any employer on the jobsite who created or controlled hazards, or who corrected hazards, regardless of whether that employer’s own employees were exposed to the hazard or not. This was interpreted to mean that any employer who “controlled” the jobsite could be cited for safety violations at the site, regardless of whether that employer’s employees created the hazard. This meant that an employer or contractor who had supervisory control over the worksite, including the power to correct safety hazards or to require others to make corrections, such as a general contractor, could be cited for safety hazards at the site. Therefore, general contractors were often held responsible for safety violations committed by subcontractors.

Two months ago, the Review Commission issued a new decision which significantly retreated from this longstanding rule. In Secretary v. Summit Contractors, 21 OSHC 2020 (2007), the Review Commission ruled that an employer whose employees were not exposed to a safety hazard could not be issued a citation. The basis for this ruling was an OSHA construction safety regulation, which provides that “each employer” must protect the employment of “each of its employees” engaged in construction work. Although this was a 2-1 decision, with a vigorous dissent, the ruling appears to establish the principle that each contractor has responsibility for protecting the safety of its own employees at the site, and that a contractor will generally not be liable for the safety violations of other contractors.

The Summit Contractors case was somewhat unique on its facts and its future applicability may be limited to those facts. In the case, Summit Contractors was the general contractor on the site and it employed only supervisors to the job. All of the actual construction work was performed by employees of the subcontractors. A subcontractor was cited for not providing fall protection to its workers. Summit Contractors had assumed no responsibility for safety compliance, inspections or supervising other workers in its contract, and it did not otherwise undertake any of those responsibilities at the job. Further, none of Summit Contractors’ employees were exposed to the fall hazard.

By all accounts, the Summit Contractors decision appears to be a major shift in OSHA’s regulation of the multi-employer worksites. General contractors can still expect OSHA citations for safety hazards they create, or those to which their own employees are exposed (regardless of who created them). However, unless this decision is reversed on appeal, or by legislation or a later contrary decision, general contractors should not be liable for OSHA citations for safety violations committed by subcontractors simply because of their ability to control the jobsite.

About the author:  Lawrence F. Feheley,  is Director of the law firm, Kegler, Brown, Hill & Ritter, Capitol Square, Suite 1800; 65 East State Street; Columbus, Ohio 43215-4294; Telephone: (614) 462-5400; e-mail: lfeheley@keglerbrown.com.  He practices primarily in the labor and employment law area, focusing on the representation of management in all aspects of labor and employee relations law. Larry chairs the labor and employee relations practice area at the firm.   This article was first is reprinted with permission and was originally published in the law firm’s July 2007, newsletter.  An index of the firm’s newsletters is available at the website: http://www.keglerbrown.com/publications/construction/index.asp.

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Article 3

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Repair of Subcontractor’s Defective Work on Concrete Slab
not Covered by CGL Policy

By:  J. Kent Holland, Jr.

Prime contractor’s commercial general liability (CGL) policy was held to clearly and unambiguously exclude coverage for faulty workmanship performed by a subcontractor.   Prime contractor, Greer Construction, was hired by the project owner for construction of an oilfield service facility.  Subcontractors working under the supervision of Greer poured concrete that cracked in both the building and exterior slabs.  The prime contractor then cut out the cracked sections and poured a new slab in its place.  Cracks continued to develop in the concrete, however.  The owner filed suit against its prime contractor and the architect to recover damages resulting from the allegedly faulty design and construction of the concrete slabs.  Greer brought a third-party claim against its insurer, AXA Global Risk U.S. (AXA) to defend and indemnify it under its CGL policy.  AXA moved for summary judgment, arguing that the “work product” exclusion of the policy excluded coverage for improper construction by the insured’s own workers or any of its subcontractors.  The trial court granted the summary judgment motion for AXA but that decision was reversed by the court of appeal which held that (1) the “work product” exclusion was inapplicable to the work performed by subcontractors and (2) the “products-completed operations hazard” (PCOH) provision was ambiguous and should be interpreted in favor of coverage.   The Supreme Court of Louisiana reversed the appellate court decision and reinstated the trial court decision in favor of AXA for the reasons explained below.

The exclusions of the CGL policy in question included exclusion j. “Damage to Property”, subparagraph (6), which states that insurance does not apply to property damage to “That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.”   A concluding paragraph of the property damage exclusion (j) states: “Paragraph (6) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard.”

Two other exclusions were also at issue.  Exclusion (k) “Damage to Your Product” excludes coverage for “Property Damage” to “your work” arising out of it or any part of it.”  Exclusion (L) “Damage to Your Work” excludes coverage for “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”

The ambiguity that the court of appeal found was based on the fact that a concluding paragraph of the “L. Damage to Your Work” exclusion provides: “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

In the definitions section of the CGL policy, “Your work” is defined to mean: “(a) Work or operations performed by you or on your behalf; and (b) Materials, parts or equipment furnished in connection with such work or operations.”

The Louisiana Supreme Court decision in Supreme Services and Specialty Co., Inc. v. Sonny Greer, Inc. (06-C-1827 — May 2007), begins its analysis with an explanation (quoted in part form the Civil Law Treatise of the state) that the “work product” exclusion reflects the insurance company’s intent to “avoid the possibility that coverage under a CGL policy will be used to repair and replace the insured’s defective products and faulty workmanship.”  As noted by the court, a CGL policy is not written to guarantee the quality of the insured’s work in process.   In this case, the court found that the “work” includes the operations of the prime contractor as well as the subcontractors who performed on behalf of the prime, and that this “work” included the laying of the concrete slab by the subcontractor.  “We find that a reading of the exclusionary language in this liability policy makes it clear that damage to the product itself (concrete slabs) is excluded from coverage.”

Applying exclusion (j)(5), the court found that the policy excluded coverage for the damage to the property on which the prime contractor and its subcontractor worked.  Applying exclusion (j)(6), the court found that the CGL policy excluded coverage to property (concrete slab) that must be repaired or replaced because the work performed by the contractor, or on its behalf, was incorrectly performed.

With regard to whether the “products-completed operations hazard” (PCOH) exclusion had applicability in this case and created ambiguity with the “work product” exclusion, the court explained that there was no conflict and no ambiguity because the PCOH exclusion is not to be applied to the faulty work itself but rather to “other damage that might arise from faulty work.”   The court analyzed decisions cited by the contractor where coverage had been found, and concluded that in those cases there had been damage to persons or property and not just to the work product itself.  In the absence of injury to a third person or product as a result of the damaged work, the court concluded that the PCOH coverage would not triggered. Therefore, only the “work product” exclusion remains in play, and that exclusion clearly excludes coverage.  Quoting from another decision upholding the work product exclusion, the court explained that “repair and replacement costs for faulty work are excluded, whereas, any damage to other property that may result is included.”  Another decision that was quoted by the court explained its own reason for finding no ambiguity between the “work product” exclusion and the PCOH provision as follows:

“The products hazard definition allows generally for coverage to property damage ‘arising out of’ the insured product.  The work product exclusion precludes recovery for damage to the product itself.  Coverage remains for personal injury and ‘other property’ damage.  The purpose of any exclusion is to limit the coverage provided elsewhere in the policy; the fact that this exclusion effectively limits some of the coverage provided does not yield an automatic ambiguity.  An argument that a policy provision is ‘somewhat confusing’ does not warrant a finding of ambiguity.”

The court went on to hold that a CGL policy containing the “work product” exclusion and the PCOH provisions is not inherently ambiguous and that the inclusion of the two provisions does not “create a vagueness or possible room for dual interpretation of the policy.”   The court’s explanation for its reasoning is so clear that it is quoted here at length as follows:

“In reviewing both the ‘work product’ exclusion and the PCOH provision, we find no contradiction in their language.  Under the ‘work product’ exclusion, the insured or its subcontractor becomes liable for damages to its work or its product caused by its faulty workmanship.  Under the PCOH provision, damages, other than the faulty product or work itself, arising out of the faulty workmanship are covered by the policy.  Stated differently, if a subcontractor’s faulty electrical work caused the building to burn down before completion, the ‘work product’ exclusion would eliminate coverage for the faulty electrical work performed by the contractor or subcontractor.  However, the operations hazard coverage applies not to the faulty work, but to damages arising out of the faulty work.  Damage to real property arising out of the faulty work (fire damage) would not be excluded as it would be covered under the PCOH provision.  The case sub judice involves a claim for damages to the work product itself, i.e., cracked concrete slab, not a claim arising out of the work and covered by the PCOH provision.  Thus, the exception for the work performed on the insured’s behalf by a subcontractor under the PCOH damage section of the policy simply is inapplicable to the present case.  In other words the PCOH provision only applies to those injuries which might occur as a result of the damaged product.  In the instant case, there is no need to delineate the PCOH provision because there is no other product damaged or third person injured.  Here, the only applicable provision is the ‘work product’ exclusion, which applies to work performed by Greer or on its behalf by subcontractors.”

For these reasons, the state Supreme Court held there was no coverage for damage to the concrete slab.

Comment:   In addition to the above-described explanations of the court’s reasoning, the court quoted from the Louisiana Civil Law Treatise article by Professors McKenzie and Johnson, who explained the PCOH provision with the following example:  “Suppose an insured contracted to make and install a sign on a commercial building.  After the work was completed, the sign fell due to defective installation, causing damage to the sign, the building’s canopy, a parked car, and also bodily injury to a pedestrian.  The insurer covering the products-completed operations hazard would cover all claims except the contractor’s responsibility to repair and replace the sign, coverage for which would be excluded under the product and work exclusions.”

In this decision, the court has provided a clear and logically reasoned explanation for how the sections of a CGL policy work together to provide coverage for damages to third persons and to property other than the contractor’s and subcontractor’s own work.  The CGL language concerning “work product” exclusion and the “products completed operations hazard” provision may not win any writing awards for artistic writing.  But, the lack of great writing style doesn’t, in the opinion on this court decision, make the policy ambiguous and unenforceable.  But the policy language continues to be interpreted and applied differently by different courts in different jurisdictions.  How the claimant asserts the nature of the damages has much to do with the outcome of the case as to whether a court finds coverage under the insurance policies.

About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice representing design professionals, contractors and project owners.  He is principal of ConstructionRisk, LLC, providing insurance risk management services and construction risk management services, including but not limited to, advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation.  Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 9, No. 6.

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Article 4

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Defective Roof Work Excluded from CGL Coverage but damage caused by defective roof to  property inside building is covered (Contractual Liability Exclusion not Applicable)

J. Kent Holland, Jr.

Where a contractor and its subcontractor allegedly performed defective work while repairing  and replacing a roof on an apartment building allowing extensive water damage to the interior of the building while the work was in progress, a court held that the “your work” exclusions only excluded coverage for repairing or replacing the defective roof but did not exclude coverage for other property damage to the building.  The principal issue addressed by the court involved how to define “work product” – in particular whether it was the entire apartment building or only the roof that the contractor was actually performing work on.  Another issue was whether the “contractual liability” exclusion of the policy would bar coverage since work was performed under a contract between another contractor and the owner which had been assigned to become a subcontract to the Insured prime contractor.

In the case of Acuity Mutual Insurance Company v. Burd & Smith Construction, (2006 ND 187), the Supreme Court of North Dakota considered facts quite different from those in the cases where the only damage alleged was damage to the actual construction work itself (e.g., a concrete slab poured improperly).  In this case, a building owner contracted with Burd & Smith to replace a roof.  The essence of their complaint against the contractor was that it failed to exercise reasonable care in replacing the roof – in particular failing to secure the premises against water damage from rainstorms, and that the interior of the building was damaged and two tenants sustained property damage as well.  The owner sued for breach of contract.   In a separate action, Acuity, the insurance company filed a declaratory judgment action seeking a declaration by the court that the CGL policy did not provide coverage for the Owner’s damages in the underlying action.

On counter motions for summary judgment, the trial judge granted judgment for the Owner, concluding that damages to the apartment building were covered by the policy and that the various exclusions did not bar coverage.

The state supreme court affirmed the trail court decision, with slight modification.  On the issue of whether the claim arose out of “contractual liability” and was therefore excluded from coverage by the contractual liability exclusion, the court explained that the exclusion was not intended to apply to every claim merely because arising out a contractual agreement.  The “contractual liability” exclusion of the policy reads as follows:

“Contractual Liability.  Bodily injury or property damage for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.   This exclusion does not apply to liability for damages: (a) That the insured would have in the absence of the contract or agreement; or (2) Assumed in a contract or agreement that is an insured contract, provided the bodily injury or property damage occurs subsequent to the execution of the contract or agreement.”

Acuity argued that the Owner’s claims were grounded in breach of contract and were not within the scope of coverage provided under the CGL policy.  Acuity argued in particular that the contractual liability provision excludes coverage of any potential liability of the Insured based on a contract ratification theory whereby the prime contractor ratified the contract of another contractor to make it a subcontract under its own prime contract. In rejecting that argument, the court quoted another decision in which it had previously said:  “The key to understanding  this exclusion, and its very important exception, is the concept of liability ‘assumed’ by the insured,” and “In the CGL policy and other liability policies an ‘assumed’ liability is generally understood and interpreted by the courts to mean the liability of another which one ‘assumes’ in the sense that one agrees to indemnify or hold the other person harmless therefor.”  Since there was no evidence of liability arising out of an indemnity provision in the contract at issue, the court held that the “contractual liability” exclusion did not exclude coverage for the claimed damages.

On the issue of whether the claim was excluded from coverage by the property damage exclusions for defective work, the court distinguished between damages occurring to the insured’s work product or project itself and damage to property other than the work product or project.  Quoting from a previous decision, the court explained the intent and purpose of the exclusions so clearly that rather than attempt to paraphrase the court’s explanation, it is quoted here verbatim as follows:

“The exclusions from coverage for property damage . . . are generally referred to as ‘business risk’ exclusions, and are designed to exclude coverage for defective workmanship by the insured causing damage to the project itself. The principle behind such exclusions is based on the distinction made between two kinds of risk incurred by a contractor . . . . The first is the business risk borne by the contractor to replace or repair defective work to make the building project conform to the agreed contractual requirements. This type of risk is not covered by the CGL policy, and the “business risk” exclusions in the policy make this clear. The second is the risk that the defective or faulty workmanship will cause injury to people or damage to other property. Because of the potentially limitless liability associated with this risk, it is the type for which CGL coverage is contemplated. “While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting. . . . The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage [applicable under the CGL policy] is for tort liability for . . . [injury to persons and damage to other property] and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.”

The court went on to state that this quoted decision well explains the concept that a CGL policy is not intended to insure business risks that are the normal, frequent, or predictable consequences of doing business and which businesses can control and manage.   “A CGL policy does not insure the insured’s work itself; rather, it insures consequential damages that stem from that work…. As a result, a CGL policy may provide coverage for claims arising out of tort, breaches of contract, and statutory liabilities as long as the requisite accidental occurrence and property damage are present.”   As its bottom line in this case, the court held that “property damage caused by faulty workmanship is a covered occurrence to the extent that the faulty workmanship causes bodily injury or property damage to property other than the insured’s work product.”

The exclusions in this case, when read in their entirety, said the court, only excluded coverage for repairing or replacing the defective roof but did not exclude coverage for other property damage to the building.

About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice representing design professionals, contractors and project owners.  He is principal of ConstructionRisk, LLC, providing insurance risk management services and construction risk management services, including but not limited to, advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation.  Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 9, No. 6. 

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Article 5

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Contractor’s Failure to Obtain Requisite Signatures
on a Change Order Bars Breach of Contract Claim

By:  Katz & Stone law firm

In order to maintain a suit for breach of contract based upon a change order, contractors must ensure that their change orders satisfy the requisite contractual requirements.  And depending upon the jurisdiction, contractors must also ensure that their change orders meet certain additional statutory requirements.  As the case of Davis Brothers Construction Co., Inc. v. City of Richmond, 70 Va. Cir. 409 (2006) demonstrates, a contractor’s failure to obtain the required signatures on a change order can bar a contractor’s breach of contract claim.

In Davis Brothers, a general contractor contracted with the city to perform stabilization work upon a historically valuable building within city limits.  After work had commenced upon the project, the parties realized that further work would be required to stabilize the building in a proper manner.  This additional work was beyond the scope of work for the original contract.  Although the general contractor submitted two change orders to the city, the general contractor began such work prior to the execution of the second change order by all of the city representatives.  Ultimately, the city became dissatisfied with the general contractor’s performance and terminated the general contractor without compensation for the extra work.

Alleging that the city had breached the change orders, the general contractor sued for damages.  In response, the city argued that the second change order was unenforceable due to the fact that the change order lacked the signatures of two key city personnel.  Specifically, the city code required the signature of the city manager on large changes to the contract.  The circuit court found that the general contractor’s breach of contract claim (for the change order) was barred because the statutory requirement requiring certain signatures was not satisfied. Notwithstanding, the general contractor was still allowed to maintain its quantum meruit claim (an equitable claim for damages based upon the value of the services rendered where there is no enforceable contract) against the city.

Davis Brothers illustrates the long-standing doctrine in Virginia that a contractor must obtain the requisite signatures on a change order in order to maintain a breach of contract suit against the non-paying party.  For example, in Trustees of Asbury United Methodist Church v. Taylor & Parrish, Inc., 249 Va. 144 (1995), the Supreme Court of Virginia upheld the trial court’s determination that a general contractor’s failure to have the appropriate person sign a change order barred an otherwise valid breach of contract claim.

As the cases of Davis Brothers and Trustees of Asbury United Methodist Church demonstrate, a contractor should not proceed with any change order work (even when directed by the owner’s personnel) without first making a determination as to whether any statutory or contractual provisions place specific change order authorization requirements on the contractor.  Such a determination is necessary in order to ensure that a change order will be valid and binding.

Even though a contractor may still be able to recover damages under the doctrine of quantum meruit where it fails to comply with statutory/contractual change order requirements, the contractor should make its best effort to comply with these requirements in order to maximize its chances of full recovery.

About the authors:  This article was is reprinted with permission of Gerald Katz, Esq.  It was originally published in the Katz and Stone law firm newsletter.  Access to all the firm’s newsletters is available able at the Katz & Stone Website, http://www.katzandstone.com.    The firm is located at 8230 Leesburg Pike, Suite 600 ; Vienna , VA 22182 . 703-761-3000.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

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.

Copyright 2007, ConstructionRisk.com, LLC

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

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