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Inside This Issue:

  • Additional Insured” Prime Contractor is Entitled to be Defended on Claim Arising out of Insured Subcontractor’s Work
  • Broad Release Agreement of Contractor Also Releases its Performance Bond Surety
  • Copyright Infringement:  Summary Judgment for Defendant because floor plans not substantially similar
  • Workers’ Compensation Law Bars Suit against Joint Venture Partner by Co-venturer’s Injured Employee
  • Certificate of Merit not Required for Counts of Complaint against Design Professional that are not Based on Negligence

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Article 1
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“Additional Insured” Prime Contractor is Entitled to be Defended on Claim Arising out of Insured Subcontractor’s Work

By:  J. Kent Holland

Where a prime contractor was named as an additional insured on its subcontractor’s commercial general liability (CGL) policy with respect to liability “arising out of” the “subcontractor’s work”, it was held that the insurance company owed a duty to defend and indemnify the prime contractor for claims relating to the prime’s own alleged negligence that led to injuries sustained by subcontractor employees.  The allegations were that the prime contractor was negligent for failing to ensure a safe work environment, failing to provide cave-in protection, failing to properly inspect work, failing to supervise independent contractors, and failing to enforce compliance with regulations.

Evidence of any subcontractor negligence was excluded from consideration at the underlying trial because the workers compensation law barred an independent action against the subcontractor.  The court further granted a motion in limine to prohibit evidence of subcontractor negligence from being considered.   Because this meant the plaintiffs now could only recover against the prime contractor by proving the prime contractor was itself negligent, the carrier denied any duty to defend and indemnify the prime contractor since additional insured coverage only applied to liability “arising out of subcontractor’s work.”  (The carrier nevertheless defended the claim through trial).   A jury found the prime contractor liable on the theory that it had a nondelegable duty to provide a reasonably safe workplace, and that it had violated that duty by negligent errors and omissions as claimed by the plaintiffs.  The jury award was for over $6 million.

The issue on appeal was weather the prime contractor was an “additional insured” for these claims that arose out of the contractor’s nondelegable duty.  Both the trial court and appellate court concluded that despite the prime contractor’s own role, it was nevertheless entitled to be considered an “additional insured” since the claims arose out of the subcontractor’s work.  Royal Indemnity Company v. Terra Firma, Inc. 287 Conn. 183, 947 A.2d 913.

Comment: The term “arising out of” seems to be increasingly confusing and ambiguous.  When used by contract drafters it is generally intended to be a very inclusive term that is broad enough to catch an extremely wide range of possible claims.  For those interested in narrowing what will be covered either by insurance or indemnification clauses, it may be more prudent to replace the term “arising out of” with a plainly worded phrase such as “caused by”.  This could be further narrowed down by phrasing it something like the following:  “caused by the negligence of the named insured.”  This would eliminate confusion as well as a lot of unnecessary litigation over policy intent.

About the author: All articles in this issue of the ConstructionRisk.Com Report are written by J. Kent Holland, a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He 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. 11 No. 5 (May 2009). 

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Article 2

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Broad Release Agreement of Contractor Also Releases its Performance Bond Surety

Where school district entered into a settlement and release with its contractor, the contractor’s surety was held by a court to be released from any further duty regardless of fact that the release was silent as to any intent to release the surety.  The school district had declared the contractor to be in default, withheld final payment, and demanded that the surety assume responsibility for the remaining work – but failed to give the balance of funds remaining in the contract to the surety. In response to a suit by the contractor seeking payment, the district countersued the contractor and joined the surety as a third party.  While litigation was pending, the district and contractor settled their dispute, with the district agreeing to pay the contractor an additional sum, and with agreement to enter into a release.  The settlement specified some language to be included in the release.  The agreed upon language said nothing about the surety.

The settlement was placed on the record in the litigation via a hearing before the court.  Following the hearing, the parties attempted to negotiate the terms of the release – with the surety requesting that it state that the surety was released from any obligations.  The district refused to include such language in the release.  It argued that it had reserved its rights as against the surety.  Since the parties could not agree upon terms, they executed a release that contained exactly the same terms that had been suggested in the settlement that was filed with the court – which was silent as to the surety.   In the district’s suit against the surety, the appellate court held in favor of the surety on the basis that any reservation of rights against a surety on a performance bond must be expressly stated in the language of the release of the contractor.

In Kiski Area School District v. Mid-State Surety Corp., 2008 WL 5244817 (Penna., Dec. 17, 2008), the school district argued that the court should consider extrinsic evidence to determine that by its repeated refusals to specifically release its claims against the surety, it must be understood from the terms of the agreement, that were silent with regard to the surety, that the district had intended by the agreement to preserve its claims.  The surety on the other hand argued that the district’s failure to expressly reserve its rights in the release was fatal to the district’s claim.   In agreeing with the surety, the court explained its reasoning as follows:

Here the School District entered into a settlement agreement with Lanmark, pursuant to which it paid Lanmark on the Contract, and agreed that Lanmark would have no continuing obligations under the Contract or relating to the Project.  Following execution of the Release, the School District could not seek from Lanmark damages for any defective work or delay.  Because Mid-State as surety had no greater obligation than Lanmark, the School District ’s broad release necessarily released Mid-State to the same extent as Lanmark was discharged.  The School District cannot now seek liquidated damages against Mid-State, because those damages are part and parcel of the Contract obligations which the School District agreed to settle.  Any finding to the contrary would violate the fundamental nature of the surety relationship.  Moreover, the School District fundamentally changed the parties’ relationship when it simultaneously paid the Contract balance to Lanmark while demanding completion from Mid-State.  Because Mid-State stands in Lanmark’s shoes, the School District could not utilize the Contract balance as a settlement payment for Lanmark while still expecting Mid-State to assume responsibility for Lanmark’s work.”

Comment:

The general rule is that a surety is discharged by a release of the contractor.  There can be no reservation of rights against a surety where the project owner has released the contractor from further performance.  Accordingly, in this case, even if the release had stated on its face that the district reserved its rights against the surety, it is difficult to imagine how the result of this decision could have changed since the district had already released the contractor and therefore had no independent rights against the surety regardless of what the language of the settlement agreement may have stated concerning the surety.

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Article 3

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Copyright Infringement:  Summary Judgment for Defendant because floor plans not substantially similar

Summary judgment was granted and affirmed—holding there had been no copyright infringement.  The trial judge compared protectable aspects of two floor-plans, focusing only the narrow arrangement and coordination of otherwise standard architectural features.  Although there were obvious similarities in the architectural work, the court noted that not all copying constitutes infringement.  The court focused on the many dissimilarities or differences in the plans and found the differences to be so significant that no reasonable jury could find the works substantially similar.  Architectural work, by definition, includes the overall form, arrangement and composition of spaces and elements in the design but does not include individual standard features such as common windows, doors and other staple building components.  This is similar to a definition of “compilation” such that a work formed by the collection and assembling of preexisting materials or data that are selected, coordinated and arranged in a particular way causes the resulting work as a whole to constitute the original work of authorship.  Consequently, for purposes of judging whether there is a copyright infringement, the comparison of similarity of the works must focus on the arrangement and coordination of the common elements rather than on similarities of the common elements themselves.

The copyright infringement case of  Intervest Construction, Inc. v. Canterbury Estate Homes, Inc., 554 F.3d 914 (D.C., Fla , 2008), involved competitor home-builders and a floor plan for a house depicting four bedrooms and a two car garage.  The plaintiff Intervest Construction had a floor plan copyrighted in 1992.  Ten years later, a competitor, Canterbury Estate homes created a floor plan with a similar layout that Intervest claimed infringed its copyright.  The trial court went through a very thorough and detailed analysis of the floor plans– noting specific similarities and differences throughout the houses.

When viewed through the narrow lens of compilation analysis, the court said that only the original, and thus protected, arrangement and coordination of spaces, elements and other building components should be compared. The court stated that determining the issue of potential copyright infringement in a case such as this one was better addressed through summary judgment than allowing it to be decided by a jury.  The logic for that was explained as: “In fact, when the crucial question in a dispute involving compilations is substantial similarity at the level of protectable expression, it is often more reliably and accurately resolved in a summary judgment proceeding.  This is so because a judge is better able to separate original expression from the non-original elements of a work where the copying of the latter is not protectable and the copying of the former is protectable. The judge understands the concept of the idea/expression dichotomy and how it should be applied in the context of the works before him.”

In explaining how the court then proceeds to analyze the merits of the matter, the court stated “while a creative work is entitled to the most protection, a compilation is entitled to the least, narrowest or “thinnest” protection.  In performing the trial court’s analysis of “substantial similarity” the appellate court found the court had appropriately modified the definition to accentuate the narrower scope of protection available and had correctly determined that the differences in the protectable expression of the floor plan as a whole, were so significant that, as a matter of law, no reasonable properly-instructed jury of lay observers could find the works substantially similar.  For these reasons, the court affirmed the summary judgment.

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Article 4

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Workers’ Compensation Law Bars Suit against Joint Venture Partner by Co-venturer’s Injured Employee

An employee of one of two companies that were working in a joint venture arrangement was injured filed a personal injury suit against his employer’s co-venture partner to recover damages in excess of what he could obtain through workers’ compensation through his own employer.  Although the workers’ compensation statute establishes an exclusive remedy as to recovering from an employer, it also applies to agents of the employer.  The question of whether co-venturers of a joint-venture arrangement are in an agency relationship was held to be a matter of law to be decided by summary judgment.  The court held that under Illinois law, joint ventures are governed by partnership principles and partners are deemed agents of the partnership, and of one another, for purposes of the business.  As a co-venturer, each co-venturer was entitled to invoke the same immunity afforded to the other by the exclusive remedy provisions of the workers’ compensation act.

In Ioerger v. Halverson Construction Company, (Ill, Jan 2009), the supreme court of Illinois affirmed the trial’s court summary judgment decision that the immunity afforded to an employer by the exclusive remedy provisions of the state’s workers’ compensation act extends to the  co-venturer in a joint venture and to the joint venture itself.    The firms of Midwest Foundation Corporation and Halverson Construction Company entered into a joint venture to repair a bridge.  Their written agreement provided that they “constitute themselves as joint venturers for the purpose of submitting joint bids … for the performance of the construction contracts herein before described, and for the further purpose of performing and completing such construction project.”  If they received the contract, their agreement called for the contract to be “entered into in the names of the parties as joint venturers.”

Pursuant to the agreement, Midwest was responsible for “the performance of all labor for the Joint Venture, including payroll, payroll taxes, fringes and other employee expenses, including, but not limited to, the establishment of worker[s’] compensation insurance and the payments of all premiums therefore.”   Halverson was obligated to reimburse Midwest its share of these costs.

While working on the bridge, four ironworkers employed by Midwest fell into the river when the platform they were suspended on collapsed.  Three were injured and one was killed.  In addition to seeking workers’ compensation from their employer, the individuals brought action against Halverson as well as against the joint venture.   The trial court found that the co-venturers were each others agents and partners for purposes of making the exclusive remedy of the workers’ compensation statute apply equally to both.  The trial court also considered and rejected the plaintiff’s argument that because only Midwest was specifically obligated by the joint venture agreement to employ the workers and pay for the workers’ compensation insurance only Midwest should benefit from the workers’ compensation statute.

An intermediate appellate court reversed the trial court because it agreed with the plaintiffs’ argument that since Midwest actually employed and paid the employees only Midwest was entitled to the workers’ compensation act protection.  The Supreme Court, reversed that decision and agreed that the trial court got it right.  It held that because the joint venture agreement specified that Midwest was entitled to reimbursement from the Joint Venture for the costs incurred in paying the workers and the insurance premiums, the ultimate responsibility for payment of the insurance premiums lay with the Joint Venture.  “Because the Joint Venture bore the expense of the workers’ compensation premiums and was thus responsible for making workers’ compensation benefits available to plaintiffs, it was entitled to avail itself of the Act’s exclusive remedy provisions.”

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Article 5

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Certificate of Merit not Required for Counts of Complaint against Design Professional that are not Based on Negligence

The Texas Certificate of Merit Statute that requires an affidavit executed by a licensed design professional to be filed with a plaintiff’s complaint against a defendant that is based on the negligent performance of professional services by licensed professionals. The state Court of Appeals applied a narrow interpretation of the statute to hold that an affidavit is only required to support the counts of a complaint based on negligence, and is not required to support other non-negligence based counts and allegations of the complaint.  The court also held that a certificate of merit was not automatically required to support a negligent misrepresentation claim against a design professional, but that the trial judge would have to make an initial determination of whether the alleged misrepresentation concerned negligent performance of professional services.

In Consolidated Reinforcement v. Carothers Executive Homes, 271 S.W. 3d 887 ( Tex , 2008), a home builder filed suit against a contractor that designed and constructed foundations for duplex houses.   The defendant filed a motion to dismiss the suit because the plaintiff did not file an affidavit form a professional engineer in support of its complaint.  The complaint contained multiple counts including: breach of contract, deceptive trade practices, negligence, negligent misrepresentation, and breach of warranty.

Although the defendant corporation was not itself a design professional firm, it provided professional engineering services as part of its construction work and did this by licensed professional engineers.  In response to the defendant’s motion to dismiss, the plaintiff filed an amended complaint– deleting the negligence count, apparently because the time for filing the certificate of merit to support the negligence count had already lapsed.

The motion to dismiss argued that even though the negligence count was removed, the certificate of merit was still necessary to support the balance of the complaint based on the substantive allegations it contained that “implicate” the engineering and design services it performed.

The state statute in question reads as follows:

(a) In any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional, the plaintiff shall be required to file with the complaint an affidavit of a third-party licensed architect, registered professional land surveyor, or licensed professional engineer competent to testify, holding the same professional license as, and practicing in the same area of practice as the defendant, which affidavit shall set forth specifically at least one negligent act, error, or omission claimed to exist and the factual basis for each such claim….”

(d)   The plaintiff’s failure to file the affidavit in accordance with “Subsection (a) or (b) shall result in dismissal of the complaint against the defendant.  This dismissal shall be with prejudice.”

The defendant argued that the intent of the statute was that an affidavit must be filed in any action that calls into question the provision of services by a registered architect or engineer.  In rejecting that argument, the court of appeals concluded that the legislative intent was for the affidavit requirement “to apply only to actions alleging negligence.”  Only those counts of a complaint based on negligence would therefore be dismissed for failure to file an affidavit with the complaint.  With regard to the count of the complaint alleging “negligent misrepresentation” the court found that since “negligence” is a necessary element of a negligent misrepresentation claim, it is required that an affidavit be filed in support of such a claim if it arises out of the provision of professional services.  Since it was not clear to court whether the misrepresentation claim arises out of the provision of professional services, the court remanded that issue back to the trial court for reconsideration.

Comment: Certificate of merit cases continue to pop up around the country as plaintiff lawyers that are apparently unfamiliar with the nuances of filing suits against design professionals fail to comply with state statutes requiring an affidavit be filed with the complaint.  The point of the statute is to help avoid frivolous suits.  The statute serves this valuable purpose.

Contract Drafting Point: In a dissenting opinion one of the judges of the court contends that the word “negligent” in the statute only modifies “act” and that it does not modify the balance of the phrase in “negligent act, error or omission.”   The majority opinion rejects that argument and correctly explains that if the dissent’s argument were accepted it would result in rewording the phrase to read “error, omission, or negligent act.”  The court explains the significance of the grammar as follows:

A straight forward reading leads to the conclusion that the adjective “negligent” modifies the three nouns ‘act,’ ‘error,’ and ‘omission’ that are connected with the conjunction ‘or.’  See [  ] stating the ‘rule of grammatical construction’ that the use of an adverb before the first of a string of verbs, ‘ “with the disjunctive construction used only between the last two of them, shows quite plainly that the adverb is to be interpreted as modifying them all”  ‘); see also [   ] (adjective preceding a series of nouns generally modifies every noun in the series: ‘only reasonable construction’ in insurance policy of clause ‘negligent act, error or omission’ is that policy covers only negligent behavior.’  Further, had the legislature intended for ‘negligent’ to modify only ‘act,’ it would have worded the phrase as the dissent does [error, omission, or negligent act].”

It is refreshing to see the court’s nice and concise explanation of grammar.  This question has been raised in conversations in which I have been involved on numerous occasions and now I will know exactly where to go to bring the question to a quick conclusion.

Note also that this explanation demonstrates the importance of paying attention to indemnification clause wording in contracts to be sure that if the indemnitor intends to only indemnify for claims caused by its negligence,  the clause needs to have “negligence” before “act, error or omission” and not buried somewhere in the middle of the phrase or at the end of the phrase.  If the word “negligence” is anywhere other than in front of the words to be modified, those words are not modified.  That would mean the indemnitor could have to indemnity for damages caused by any and all acts, errors and omissions – even if not negligent.

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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 2009, ConstructionRisk, LLC

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

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Suite 750.

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703-623-1932

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