Inside this Issue
- A1 - Arbitration Decision in Condo Claims Against Contractor Constituted Collateral Estoppel, Barring Subsequent Litigation by Condo against Architect
- A2 - Multi-Employer Worksite Doctrine Inapplicable in Utah
- A3 - Clarifying the Confusing World of Indemnification, Hold Harmless, and Defense Clauses
- A4 - No Duty To Defend under CPL Policy for Natural Gas Pipe Explosion
- A5 - Up in the Air: The Emerging Risk of Drones in the Construction Industry
Article 1
Arbitration Decision in Condo Claims Against Contractor Constituted Collateral Estoppel, Barring Subsequent Litigation by Condo against Architect
See similar articles: Betterment | Collateral Estoppel | Condominium | Damages
By J. Kent Holland Jr., Esq.
ConstructionRisk Counsel, PLLC
Where a condominium association filed suit against the Architect that designed certain repairs for balconies, summary judgment was properly granted to the architect on the basis that previous arbitration by the condo association against its construction contractor fully decided the issues in the current claim and constituted collateral estoppel, meaning that the issues had been fully considered and decided, and the outcome was binding on any future dispute, even though the Architect was not a party in the arbitration. Casa Del Mar Association, Inc. v. Gossen Livingston Associates, Inc., 434 S.W.3d 211 (Tex. Ct. App. 2014).
The architect had provided a design for balcony repairs and also performed some limited construction administration services. Rather than using that design, the condo association had its contractor build a modified, less expensive, version of the design – replacing a single piece of stainless steel flashing called for by the design with a lesser-grade steel that was in two pieces. The architect highly discouraged the condo from accepting the revised designs, but ultimately the condo association and architect “approved the construction of the balconies to proceed based on a mock up constructed by the contractor.”
This flashing, as constructed, apparently allowed water to infiltrate, but the arbitration panel found that none of the four major alleged construction defects “were shown as causing or contributing to the staining of the walls.” The panel concluded that the construction deficiencies “taken all together do not arise to a ‘material breach of contract” and would, therefore, not afford the condo a monetary remedy.
The condo association had asked the arbitration panel to award it over a million dollars that it expended in repair costs for the balconies. The arbitration panel concluded, however, that the contractor would not be liable for the expense of the remedy sought by the condo that was “based on a repair protocol that far exceeds the ‘bath tub’ design and agreed upon mock up.” The panel stated that while the condo association may choose to install the new “fix” it proposed, that “fix incorporates many of the attributes of the originally proffered design which was rejected as too costly by the Owner’s representative. While [condo] may choose to install the fix, there is extreme ‘betterment’ in the fix as contrasted with the Detail 4 and/or the installed design. [Condo] cannot recover from [contractor the construction] costs for these betterments.”
The arbitration panel concluded that the proper measure of damages was the cost of cleaning the outside wall and applying “elastrometric paint.” It held the contractor responsible for $24,000, or 30 percent of the painting costs and the condo association itself responsible for the other 70 percent.
The architect was named in the original arbitration claim by the condo association, but it succeeded in having itself dismissed from that action on the basis that there its contract with the condo association did not include an agreement to arbitrate.
The panel issued a “Reasoned Award” that addressed the construction defect claims against the contractor as well as the contractor’s argument that the alleged problem was caused by a “design defect” of the architect.
Being unsatisfied with the arbitration damages, the condo association proceeded to file suit against the architect alleging it failed to properly design the balcony and exterior siding system by failing “to properly perform contract administration to the standard of a competent architect” when “it allowed deviations from the plans to occur without objection.”
The architect answered with an affirmative defense of collateral estoppel, along with other defenses. It argued that the arbitration proceedings addressed the same legal and factual issues as the law suit and that the panel’s dismissal of the architect on summary judgment and its subsequent reasoned award against the contractor were “conclusive on the parties to all matters of fact and law submitted to the arbitrators.”
In response, the condo argued the panel could not have ruled on the merits of the claim against the architect since it had been dismissed from the proceedings a month before the hearing.
In holding that collateral estoppel did, indeed, apply to prevent the condo association from bringing its claim against the architect in court, the appellate court explained that the question of design defect had been decided during arbitration because one of the contractors key defenses was that the condo association’s expert report criticized the balcony design, and the contractor itself submitted expert witness testimony that the design was not appropriate and that the drawing were defective.
The court found, “the issues regarding [architect’s] provision of the bath tub design, the sufficiency of that design, and the role that design played in the actual construction of the balconies were fully and fairly litigated in the arbitration proceeding, and they are also issued of ultimate fact in the current proceeding….” The court also found that the nature of the condo’s claims against the contractor and the fact that the contractor argued that the problem was due to design defect rather than construction defect, made this fact determination essential to the panel’s Reasoned Award.”
The condo association argued that collateral estoppel does not apply since the architect didn’t participate in the arbitration hearing. But the Court concluded that the only thing that mattered in this regard was that that the architect demonstrated that the party against whom collateral estoppel is being asserted [the condo association] was a party in the prior proceeding. The court concluded that each essential element of the collateral estoppel defense had been established and precludes the condo association from prevailing in a subsequent lawsuit against the architect. In any event, the court also found that because the architect’s “design was not actually used in constructing the balconies, [the condo association] cannot establish that the design provided by [architect] caused any damages.”
Comment: This decision provides valuable education in many respects. It does a nice job of addressing “betterment” and explains that the condo association cannot expect to recover from its contractor the costs of implementing the original architectural design that the condo association rejected in favor of a cheaper remedy, and eventually, after the water problems, decided was needed for the balconies afterall. Instead, the arbitration panel (as explained by the court) limited the recovery to just the amount incurred by the condo association to get the quality of work from the contractor it paid for under the limited scope of work actually agreed upon in the contract with the contractor.
It is also interesting that the condo association suit against the architect appears to be, at least in part, based on an argument that the architect should not have approved the design change that was proposed by the contractor and accepted by the condo association, and is somehow negligent for doing so. If an AIA B101 (2007) contract form had been used here, it would have been clear that the architect had no responsibility since a provision in the contract states, “The Architect shall not be responsible for an Owner’s directive or substitution made without the Architect’s approval.”
Generally when the doctrine of collateral estoppel is applied, the parties involved in the subsequent litigation were also involved in the previous arbitration or litigation. In this case, the architect was not part of the actual hearing on the merits of the case during the arbitration proceeding, but the court found that because the condo association was part of that hearing, and the issues it wanted to claim against the architect had been fully argued in that proceeding, the arbitrators’ findings against the condo association on the design issues applied against the condo association in any subsequent litigation.
It is not a matter of barring a suit by the condo association against the architect, but rather a matter that when the suit is brought, the condo association gets stuck with the binding affect of the findings from the arbitration decision. The court does not address (and indeed did not need to address) an arbitration determination of whether design defects could have been used against the architect in subsequent litigation. That is a different issue.
About the author: Article written by J. Kent Holland, Jr., 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 founder and president of a consulting firm, ConstructionRisk, LLC, 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. 16, No. 8 (August 2014).
Copyright 2014, ConstructionRisk, LLC
Article 2
Multi-Employer Worksite Doctrine Inapplicable in Utah
See similar articles: Jobsite Safety | multi-employer | OSHA
By J. Kent Holland, Esq
ConstructionRisk Counsel, PLLC
The Utah Supreme Court rejected the multi-employer worksite doctrine as incompatible with the governing Utah statute, holding, “The responsibility for ensuring occupational safety under the governing statute is limited to an employer’s responsibly to its employees. And because the cited contractor in this case was not an employer of the workers in question [subcontractor employees], we reverse the citation and penalty at issue.” Hughes General Contractors, Inc. v. Utah Labor Commission, 322 P.3d 712, 2014).
The violation at issue concerned improper use and erection of scaffolding in connection with masonry work performed by one of the 100 subcontractors on a high school project. In addition to citing the subcontractor, the state OSHA cited the general contractor for failure to inspect and take correction action – concluding that the GC was a “controlling employer,” in that it had general supervisory authority over the worksite. In holding to the contrary, the court found that the governing state statute was not an mirror-image of the federal statute, but that it was limited to requiring that “each employer … furnish each of the employer’s employees employment and a place of employment free from recognized hazards….”
The court concluded that, “the text and structure of this provision are singularly focused on the employment relationship.” So the duty to furnish a workplace free from recognized hazards is one that runs only to “each employer.” And “employer” is defined “in terms that contemplate a tradition employment relationship—and that accordingly forecloses the multi-employer worksite prince applied below.” An employer, says the court, is “one who engages employees under a contract of hire.” Looking a the definition of “employee” in the state statute, the court found it to be defined a circular manner to be “any person suffered or permitted to work by an employer.”
Comment:
The key to the court decision is its determination that the critical question is whether the entity being charged with a violation by OSHA had a right to control the individual that was injured. Since the state statute adopted a legal term-of-art understanding of the employment relationship that focuses on the employer’s “right to control the employee,” the court concluded that, “the relevant control is not over the premises of a worksite, but regarding the terms and conditions of employment.” That concept of employment, says the court, forecloses the “multi-employer” construct that was the bases of the citation.
About the author: Article written by J. Kent Holland, Jr., 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 founder and president of a consulting firm, ConstructionRisk, LLC, 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. 16, No. 8 (August 2014).
Copyright 2014, ConstructionRisk, LLC
Article 3
Clarifying the Confusing World of Indemnification, Hold Harmless, and Defense Clauses
See similar articles: Hold Harmless | Indemnification clause | Insurance - Duty to Defend
By: Sarah E. Swank
O B E R | K A L E R
We often get the all too familiar question from our clients, “What is the hold up on that contract?” When the answer is the indemnification, defense, or hold harmless provision, the authors have found a lack of resources for clients who often struggle to understand the significance and distinction among these complex concepts. This article aims to arm attorneys and their clients with an easy-to-understand guide of these seemingly “standard” clauses. Attorneys are encouraged to share this article with their clients. It is also suggested that you check with your attorney when reviewing these clauses, as factors including the type of agreement and insurance requirements can change the analysis of these arrangements. To help illustrate these concepts, the authors placed them in the context of an academic medical center (AMC) contracting with an industry research sponsor (Sponsor) to perform a clinical trial at AMC with AMC’s patients (Subject). This Executive Summary provides a summary of what the term means, its importance to the client, and some pointers in the scope and use of the provision.
For purposes of this article, the authors examine the following sample contract provision in the clinical trial agreement between AMC and Sponsor:
Sponsor agrees to indemnify, defend, and hold harmless AMC and its trustees, officers, directors, employees and agents, including Principal Investigator (“Indemnitees”) from and against any loss, expense, liability, damage, claim (including reasonable attorneys’ fees)(“Claim”) made or brought on behalf of a Subject for personal injury, including death, that arises out of the study drug, a protocol required procedure, or Sponsor’s negligence or willful misconduct and omission.”
Indemnification
Meaning- An indemnification clause obligates a party (or both parties) to compensate the other party for losses or damages set out in the provision. This compensation is separate and apart from other contractual obligations and damages. For example, indemnification occurs when a third party, such as the Subject of the clinical trial, sues AMC, and AMC seeks indemnification from the Sponsor to pay for the loss incurred by AMC defending the lawsuit. Another way to think about indemnification is that, in the example above, Sponsor is reimbursing AMC for AMC’s loss. Indemnification typically occurs after an adjudicator determines whether the AMC is liable for a “Claim.” For example, if the study drug harms a Subject and the Subject sues AMC, AMC may seek reimbursement for court costs and attorneys’ fees to prepare for and defend the lawsuit only after a court determines that the harm to the Subject was due to the Sponsor’s negligence.
Importance- Case law in certain states may permit a party to seek a court order for indemnification. Generally, the courts look to the contract between the parties to determine indemnification obligations. Certain insurance policies require indemnification clauses be included in agreements and, depending on the level of risk of the agreement, may be a key term of the agreement. For example, state-funded AMCs may choose to limit indemnification to the extent of insurance limitations.
Drafting Points- Areas of concern when reviewing or drafting an indemnification clause are the specific persons being indemnified, as well as the conditions under which indemnification will arise and scope of the indemnification. Indemnification can be written narrowly so that Sponsor only pays for AMC’s losses in very specific circumstances; but it can also be written broadly so that Sponsor indemnifies AMC for anything resulting out of an event or even resulting from the agreement. In this case, the Sponsor must indemnify (or pay) for the “loss, expense, liability, damage, or claim.” Additional items to include are governmental or regulatory fines and court cost as well as “reasonable” attorneys’ fees. Depending on the type of claim, attorneys’ fees can be the most expensive part of the indemnification obligations of a party.
The example above includes a broad scope of institutions and people required to be indemnified. The persons that will be indemnified are not only the AMC but also “its trustees, officers, directors, employees and agents, including Principal Investigator.” In certain circumstances, the Principal Investigator may not be an employee and instead could be a separate party to the agreement that could provide indemnification to AMC. Often, AMCs and institutions will request that a party indemnify not only AMC and AMC’s employees, but also AMC’s affiliates and the affiliates’ employees.
The scope of who will be indemnifying and indemnified should be set out in the provision along with what will be indemnified. Often both intentional and negligent acts as well as omission are included in indemnification provisions. The failure to act can create liability just as readily as an act itself. Clauses may also include the higher standard of “gross negligence” rather than “negligence.” Consider whether you are concerned about the indemnifying party’s potential for causing you liability before taking on this higher level of negligence. In addition, consider if the same standard applies to your party as the other party. The indemnification is set by how the agreement is drafted. For example, it can arise out of the performance of the agreement, a breach of the agreement, or a specific event depending on how the clause is drafted.
Hold Harmless
Meaning- A hold harmless provision means that an organization is not liable for certain damages under an Agreement. This clause effectively bars the party responsible for indemnification from bringing suit against the party being indemnified.
Importance- Certain courts and scholars find that hold harmless is not distinct and is the same as indemnification. While others find the duty to hold harmless also requires protection against liability. It is important to check state law based on the type of agreement entered into by the parties.
Drafting Points- Generally, it is advisable to include both indemnification and hold harmless language because of the variety of definitions of hold harmless. Ensure that if you include only hold harmless language, to have the correct party held harmless for the correct scope. In the sample clause, Sponsor is required to hold harmless the AMC for its negligence or intentional acts and omissions. In certain circumstances, parties include a “responsibility” clause rather than indemnification or hold harmless clause. Responsibility clauses may be less protective than indemnification clauses so consult state law and your attorney for information on the risks and benefits of this language. For example, state-funded AMCs may want to agree to responsibility clauses given potential restrictions related to state immunity laws.
Defense
Meaning- A defense clause creates or requires the duty to defend the other party to an agreement in certain circumstances including preparing for and defending a lawsuit. The party with a duty to defend will control the defense. This obligation is triggered as soon as there is a claim rather than after a judgment is entered or loss has been proven, like an indemnification clause. The duty to indemnify is independent from the duty to defend.
Importance- The duty to defend should be carefully considered because of the significant amount of time, effort, and resources that can go into preparing for trial. “Defense” generally means that the defending party, Sponsor, will actually hire its own attorneys to go to court for the party defended—in this case, AMC. Some entities, especially those that are self-insured, prefer to control their own defense and should try to negotiate defense language out of the provision.
Drafting Points- If your client wants to engage his or her own counsel for the litigation and control its defense, then consider avoiding “defense” language. At the same time, separately consider the use of indemnification and hold harmless language. Details related to the selection of counsel and control over settlement discussions could also be included in defense clauses.
Good Drafting Upfront, Avoids Downstream Risk
Indemnification, hold harmless, and defense clauses dictate the degree of liability of each party and the extent that you take on or shift risk. Certain organizations may not be in a position or want to take on these responsibilities—examples include nonprofit organizations, those with deep pockets, or “risky” duties under the agreement. When reviewing this language, consider the worse possible scenario under the agreement and determine the level of risk. It is best to engage counsel early in the negotiation to ensure the contract is drafted to meet your needs.
http://www.ober.com/publications/2113-clarifying-confusing-world-indemnification-hold-harmless-defense-clauses
Sarah Swank
Principal
O B E R | K A L E R
Attorneys at Law
202.326.5003 Direct
202.336.5203 Fax
202.270.8508 Mobile
This article is published in ConstructionRisk.com Report, Vol. 16, No. 8 (August 2014).
Copyright 2014, ConstructionRisk, LLC
Article 4
No Duty To Defend under CPL Policy for Natural Gas Pipe Explosion
See similar articles: duty to defend
By J. Kent Holland, Esq. and James N. Rhodes, Esq.
ConstructionRisk Counsel, PLLC
Published on IRMI.com
A Wisconsin appeals court found that an insurer's duty to defend under a contractors pollution liability (CPL) policy was not triggered by an explosion caused when a contractor hit a natural gas line. The court explained that the CPL policy only covered property damage and personal injury due to direct contact with a contaminant—such as natural gas—not from an explosion due to the leaked contaminant.
The case was brought by another insurer (Acuity) that provided the same contractor with a commercial general liability (CGL) policy that covered damage from the explosion. Based on the decision, the CGL insurer could not require the CPL insurer to share in the costs of defense and indemnification. See Acuity v. Chartis Specialty Ins. Co., 353 Wis. 2d 554, 846 N.W.2d 34 (Wis. App. 2014).
The Insurance Dispute
Four consolidated lawsuits were brought by several plaintiffs against a contractor, Dorner, Inc., following an explosion that occurred when Dorner employees hit an underground natural gas line. The ruptured line caused an explosion and fire that destroyed a church, damaged nearby houses, and injured two employees of an electric utility company.
The contractor had a CPL policy issued by Chartis Specialty Insurance and a CGL policy issued by Acuity. Acuity provided defense and indemnification to the contractor, settling the lawsuits for about $1.5 million, plus defense costs of almost $300,000. However, from the outset, Acuity contended that Chartis was required to share in the defense and indemnification costs under its CPL policy. Chartis denied that its policy was triggered, prompting Acuity's suit in circuit court against Chartis for breach of the policy.
The county circuit court decision, which was reversed on appeal, had found that Chartis had breached its policy and owed Acuity 50 percent of the defense and indemnification costs. The court looked to the language of CPL policy, which covered damages due to "Pollution Conditions." The policy defined pollution conditions in part as "the discharge, dispersal, release or escape of any solid, liquid, gaseous or thermal irritant or contaminant." The circuit court theorized that the leak of the "gaseous combustible fuel" met the definition of a contaminant under the pollution policy. Accordingly, the circuit court found that Chartis breached the policy and ordered it to provide Acuity with half of the defense and indemnification costs.
The Wisconsin Court of Appeals disagreed, finding that the CPL insurer was not under a duty to defend. Under Wisconsin law, an insurer's duty to defend is triggered when the allegations in a lawsuit, if proven, would "give rise to the possibility of recovery" under the policy. A duty to defend "is necessarily broader than the duty to indemnify because the duty to defend is triggered by arguable, as opposed to actual, coverage." Assuming the facts in the complaint are correct, the insurer's coverage under the policy must at least be "fairly debatable" for the insurer to have a duty to defend the insured.
The appeals court found that, even assuming all the facts in the complaint were correct, the insurer had no duty to defend under the CPL policy. The appeals court explained that the lawsuits against the contractor alleged property damage and injury due to the explosion and resulting fire, not from contact to the escaped natural gas itself. Without any damage or injury due to direct contact with a "contaminant or irritant," there was no "Pollution Condition" under the policy. The court concluded that, since coverage under the policy was not "fairly debatable," Chartis was under no duty to defend under the CPL policy.
Conclusion
This case highlights the distinction between damages and injuries that are caused by a covered pollution condition that would be covered under a CPL policy versus those that are caused by a nonpollution event (such as explosion) even when that event might itself cause the release of a contaminant (in this case, gas). The point is that the complaint did not allege that the gas caused the injuries. It alleged that the explosion caused the injuries. The court found that it was undeniable that the natural gas did not cause or contribute to the damages or injuries alleged in the complaint. Consequently, there could be no possible trigger of pollution coverage under the CPL policy, and this meant there could be no duty under the CPL policy to defend the claims.
ConstructionRisk.com Report, Vol. 16, No. 8 (August 2014).
Copyright 2014, ConstructionRisk, LLC
Article 5
Up in the Air: The Emerging Risk of Drones in the Construction Industry
See similar articles: Drone Act | Drones | UAS | UAV
By John Babel
XL Group
What is a Drone?
Unmanned aerial vehicles (UAV or “UAVs”) are changing the way construction companies do business. For the purposes of this article I will use the term UAV, as it has the broadest connotation. Contractors are increasingly using camera-mounted UAVs to monitor their construction activities. These devices provide a way to obtain real-time data on job progress, may identify potential hazards or quality issues, and help acquire other useful information in a very expeditious and cost-effective manner. The larger the construction site the more helpful they are in monitoring the project. Types of UAVs typically available for commercial application include packages with four, six, or eight rotary blades. More blades mean more lift, and that provides more power for attached payloads. Many of today’s drone systems are iPhone controlled, connected by Wi-Fi, and positioned using Global Positioning (GPS). Due to the rotary blade design, unmanned aerial UAVs can remain in one place for extended periods without the extravagant costs associated with helicopters and small planes.
Commercial Applications
The United States is the world leader in the production of UAVs. However, we lag far behind the rest of the world in terms of commercial UAV applications, which include movie making (Wolf of Wall Street, Skyfall, and the Harry Potter movies), real estate (showing homes), roof inspections, mining (post-blast surveys), environmental, and emergency response and recovery, missing person searches, etc. In the United States, several news organizations, including the Sacramento Bee have recently acquired UAVs for news gathering. Contractors and engineers are exploring the technology around the country. Engineering firm Wilson & Co. has worked with Kansas State University to build and fly a UAV for surveying and mapping a landfill near Manhattan, Kansas. Eric Cenovich, a Kansas City, Mo.-based principal of the firm, says the UAV follows a programmed path at 35 to 40 mph. It can document the 160-acre site in about 40 minutes on one battery charge. "It dramatically affects the price that smaller areas can be mapped for," Cenovich says. "It's easily a 50% reduction." Moreover, he says, the use of UAVs will eliminate the need for significant investment to enter the surveying-and-mapping business and likely will result in increased competition. Wilson & Co. has invested millions of dollars in aircraft, cameras and LiDAR mapping tools, Cenovich says. "All of those capital assets and investments that needed to be made to get into this aerial photography and mapping game are no longer going to be applicable for smaller-type projects," he says. "It's going to allow a lot more people to get into this."
For many years, UAVs have been used safely for commercial purposes in Australia, Japan, and the United Kingdom; primarily for agricultural purposes. Regulations in Australia require commercial UAV operators to demonstrate their ability to fly the vehicle, and each must meet minimum standards set by the United Nations Aviation Body. The “commercial UAV” has not had a major accident in over 10 years of operation in Australia. In the United States, where there are no federal legislative rules, there is a distinction between recreational use and commercial use of the vehicles. The Federal Aviation Administration (FAA) currently “permits” recreational use of UAV’s. They stipulate that UAVs must weigh less than 55 pounds, cannot fly higher than 400 feet above the ground, or interfere with manned airplane traffic. If the craft is operated within five miles of an airport, the operator must contact airport personnel.
Laws Up in the Air
Laws regarding the use of UAVs in the United States are unclear. While the commercial use of UAVs is not technically illegal, the FAA has held that it has regulatory authority over their use and has been sending cease and desist letters to companies as well as individuals it suspects of violating its UAV policy. Those who have been cited include aerial photographers, journalists and even tornado researchers (see examples below). Further complicating the matter, there is currently no criteria or legal definition differentiating UAVs used for recreation and those used for commercial purposes. It is nearly impossible to differentiate between the $17 million “Reaper” surveillance attack drone used by the military, from a $1,500 commercially available, camera-equipped, hand launched drone available at retail stores and online. To date, the FAA has officially permitted the commercial use of UAVs in just two cases. Both permits were granted to Conoco Phillips for documenting whale migration and pack ice movements using a very sophisticated Insitu ScanEagle UAV (Boeing) in remote areas of the Arctic in Alaska.
According to the FAA, which controls U.S. National airspace, there are over 7000 aircraft over U.S. skies at any given time. They assert adding thousands of commercial unmanned aircraft (UAVs) into already-crowded skies is part of the reason they have been slow to recognize commercial use of the devices, or create regulations pertaining to their use. The FAA is rightly concerned with sharing of limited airspace and with related homeland security issues, e.g., use by extremist groups and illegal surveillance. There are also concerns about the potential for hacking UAV controls or loss of drone power, which could result in personal injury, death or physical damage to vehicles or structures.
Congress recently passed a law (February 14, 2012) to compel the FAA to issue rules making commercial UAV use legal by 2015. The 2012 law, called the FAA Modernization and Reform Act, contains a seven-page provision known as the “Drone Act” requiring the FAA to fully integrate unmanned aircraft into the National Airspace System by September 2015. Additionally, the “Drone Act” allows law enforcement agencies, including local police forces, to buy and use unmanned aircraft for evidence gathering and surveillance. In response, the FAA released a memorandum in February 2013 regarding the selection of test sites for an “Unmanned Aircraft System (UAS) Test Site Program”. According to the FAA, the “UAS program will help the FAA gain a better understanding of operational issues such as training requirements, operational specifications, and technology considerations, which are primary areas of concern to our chief mission, which is ensuring the safety and efficiency of the entire aviation system.” Six states will be test sites for integrating UAVs into domestic airspace: Alaska, Nevada, New York, North Dakota, Texas, and Virginia.
Several recent court cases against the FAA dispute their jurisdiction over commercial UAV use in the absence of regulations. In March 2014, a federal administrative judge held that the FAA has no legal authority to regulate UAVs used for commercial purposes. Judge Patrick Geraghty of the National Transportation Safety Board ruled that the FAA had issued internal guidance on UAVs, but had not followed the required rulemaking to restrict the use of them by the public. He ruled the FAA lacked authority, concluding that UAVs are model aircraft, which FAA excludes from regulation. The case involved a vendor providing aerial video footage of the University of Virginia for promotional purposes. The vendor was hit with a $10,000 fine for “reckless operation” of the UAV while filming (the fine was overturned by the judge). Interestingly, the director of “Wolf of Wall Street” did not receive any fines for his use of UAVs. Sales of UAVs have surged 25% ever since the ruling. The FAA is appealing to the full NTSB board. Pending the outcome, the agency maintains that use of a UAV for anything other than hobby or recreational purposes is "unauthorized" and subject to regulatory action. In another case, Texas based Eqqu-Search has been conducting searches for missing persons since 2000 and using UAVs since 2006. The organization was recently ordered by the FAA (via email) to stop using a hand-launched UAV. The company responded to the FAA with a letter asserting the agency has no legal authority to prohibit UAV use, and threatened to take legal action if the agency didn’t rescind its order. The FAA asserted that Eqqu-Search should find one of the police departments, public universities, or other public entities that already hold FAA “certificates for non-emergency use” of UAVs for their searches.
Commercial UAV use on construction sites raises the question of whether contractors have coverage for liability arising out of their use. The standard commercial general liability (CGL) policy and many if not all non-standard CGL policies excludes liability arising out of the insured's "ownership, maintenance or use" of an auto, aircraft, or watercraft. Contractors thinking of using UAVs should consult with their broker and/or carrier to see if a UAV would constitute an aircraft (and thus trigger the exclusion). The FAA only defines aircraft used for manned general aviation and recreational aircraft. These aircraft include: light sport Aircraft, small airplanes (e.g. Cessna 124), ultralights, amateur built, and vintage/surplus aircraft. If the FAA is the agency responsible for defining what is an aircraft in United States National airspace, owners and insurance companies may have to wait for the new FAA regulations mandated by Congress for a definition of whether a UAV is an aircraft. The FAA’s use of the term “Unmanned Aircraft System” may also provide an indication on how the FAA will define a UAV in the future, which may indeed affect the definition in terms of the CGL Policy. Until rules for commercial use of UAVs are developed by the FAA, the legality of using them commercially in the U.S. will likely remain murky. In the absence of a federal definition or regulatory framework, contractors should determine what the laws are in the states where they operate, as many states are considering bills, and several have already passed legislation governing the commercial use of UAVs.
Construction companies using or considering the use of UAVs on their projects should examine their CGL policy to determine whether a UAV would be considered an excluded aircraft. IRMI recently noted that a “strong argument” can be made that a UAV with a camera attached qualifies as an aircraft. If this is true, contractors may attempt to negotiate a specific exception to the exclusion for UAVs with their underwriter. If an exception cannot be obtained, risk management strategies may include purchasing a specific aviation policy to cover the UAV exposure, or to use an insured bonded subcontractor for this task, since the CGL exclusion does not reach an insured's liability for a subcontractor's use of an aircraft that is not owned, rented, or maintained by the insured. Certainly, the subcontractor would also have to meet state and federal guidelines, and operate within those restrictions.
This is a developing issue, and questions remain whether the FAA currently has jurisdiction over the commercial use of UAVs, or if UAVs are considered “aircraft” for purposes of the CGL Policy. How is your company handling this exposure? What kind of protocol(s) have you implemented to ensure the legal and safe use of UAVs? Have you discussed this issue with your insurance broker and carrier?
John Babel
AVP, Senior Risk Engineering Consultant, North America Construction, XL Group
john.babel@xlgroup.com
This article is re-published, with permission, in ConstructionRisk.com Report, Vol. 16, No. 8 (August 2014).
Copyright 2014, ConstructionRisk, LLC
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