Inside this Issue
- A1 - Economic Loss Doctrine Enforced to Bar Claim against Design Professional by a Third Party Plaintiff
- A2 - Waiver of Subrogation Clause Enforced
Article 1
Economic Loss Doctrine Enforced to Bar Claim against Design Professional by a Third Party Plaintiff
See similar articles: Contribution | Economic Loss | implied indemnity | Implied Warranty | indemnity | Third Party
When Contractor filed suit against residential property owner/client for failure to pay amounts due, the homeowner counterclaimed for construction defects. The Contractor then filed third-party claims against the client’s architect and against the geotechnical engineer – alleging negligence, implied indemnity, breach of implied warranties, and right to contribution. Applying Nevada law applicable to claims for purely economic losses, the court granted the motions by the design professionals to dismiss the Contractor claims. The economic loss doctrine applied to all claims, including claims for contributions and claims for implied indemnity – which the court stated arose out of the alleged negligence. Because professionals make no implied warranty of workmanship, the court also dismissed that count. Pulver v. Kane, 2022 WL 17327 182 (Nev. 2022).
The Architect moved to dismiss all claims against it – arguing that such claims were all barred by the economic loss doctrine, and also arguing that as a design professional, it makes no implied warranties concerning the quality of workmanship.
In Nevada, “economic losses are not recoverable in negligence absent personal injury or damage to property other than the defective entity itself.” The plaintiff argued that this Nevada doctrine applied only to commercial construction projects and not to a residential project such as the one involved in this case. In rejecting that argument, the court stated that it believed the economic loss doctrine also applies to design professionals in residential construction defect cases.
“Pulver alleges only that, “if the Subject Property is defectively constructed,” Design Defendants “are responsible for such defects” and their “acts or omissions ... are the direct and proximate cause of any and all damages.” (Id.) Because it is undisputed that Pulver does not allege damage to property “other than the defective entity itself” … Pulver fails to state a claim upon which relief can be granted.”
Applying the Economic Loss Doctrine to Implied Indemnity and Contribution Claims
Because implied indemnity and contribution are tort-based claims, the economic loss doctrine also bars those claims from being made against the design professionals.
“Pulver's implied indemnity claim arises from its contractual relationship with RTGA but is ultimately based on RTGA's allegedly negligent “conduct ... in constructing the portions of the Subject Property which are allegedly defective,” not on an alleged breach of contract (citation omitted) And Pulver's contribution claim is similarly based on “the amount of negligence and/or fault attributable to [Design Defendants].” (Id. at 8.) Because Pulver's negligence claim is barred by the economic loss doctrine, as already discussed, Pulver has not alleged a valid underlying tort claim to support its implied indemnity and contribution claims.”
Breach of Implied Warranties Claim
The Nevada court concluded that design professional “do not warrant their services and therefore cannot be held liable under claims of implied warranty.”
“In any case, the implied warranty of workmanship has historically applied to builders and contractors in American jurisprudence. See 3 Philip Lane Bruner & Patrick J. O'Connor, Bruner & O'Connor on Construction Law § 9:77 n.2 (2022) (collecting cases). Moreover, “a claim for breach of the implied warranty of workmanship requires privity of contract” (citation omitted). Therefore, as to A & E, such a claim also fails because Pulver itself admits that it did not contract with A & E and does not allege any privity of contract with A & E in its pleadings (citation omitted).”
In this case the court explained that where Nevada lacks case law on a particular issue the courts often look to California law where the Nevada law is silent.
“The majority of jurisdictions that have addressed this issue, including California, have rejected the application of implied warranties to the services of design professionals. See 5 Bruner & O'Connor on Construction Law § 17:24 nn.16-18 (collecting cases). “[T]he well settled rule in California is that where the primary objective of a transaction is to obtain services, the doctrines of implied warranty and strict liability do not apply.” (citation omitted). Stated differently, “those who sell their services for the guidance of others in their economic, financial, and personal affairs are not liable in the absence of negligence or intentional misconduct.” (citation omitted). The rationale is that “[t]hose who hire [experts for their services] are not justified in expecting infallibility, but can expect only reasonable care and competence.”
Contract Risk Management Comment
Unless the design professional contract expressly creates a duty beyond the normal professional standard of care, courts around the country typically follow the principles explained in this decision and hold that design professionals are not liability for warranties but are only required to perform with reasonable care and competence. When our firm reviews a design professional agreement, we often see wording that seems to attempt to create a greater responsibility than this. We therefore, often advise our clients to add a clause to the contract such as the following:
“Consultant shall perform its services consistent with the professional skill and care ordinarily provided by firms practicing in the same or similar locality under the same or similar circumstances (hereinafter the “Standard of Care”). Notwithstanding any clause in this Agreement or any other Agreement to the contrary, nothing shall be construed as imposing on the Consultant any greater obligation than to exercise the Standard of Care.”
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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 25, No. 6 (August 2023).
Copyright 2023, ConstructionRisk, LLC
Article 2
Waiver of Subrogation Clause Enforced
See similar articles: Contract Privity | subrogation waiver | Third Party Rights
Where agreement between a contractor and its client contained an agreement to insured but also a waiver of subrogation, the client and its insurance carrier had no right to file suit against the contractor to recover losses paid to third parties. Court also held that the contractor had no duty to third parties for property damage because they lacked privity of contract. U.S. Automatic Sprinkler Corp. v. Erie Insurance Exchange, 204 N.E.3d 215 (Indiana 2023).
The question before the court was whether commercial tenants could recover their property damages from a contractor who had a contract with one of the tenants to perform work on a sprinkler system, and it is alleged that the work was performed negligently causing the system to flood, causing property damage to all tenants in the building. Only one of the tenants had a contract with the contractor.
The tenant who had the contract with the contractor (we will call it the “Company”) reported the damage to its insurance carrier who paid for the damages as an insured loss. That carrier then sued the contractor under a subrogation theory to recover the damages paid. The other tenants also sued the contractor to recover their damages as well.
In seeking summary judgment to dismiss the lawsuits, the contract argued that all parties were barred from recovery as a matter of law. The trial judge declined to grant summary judgment. This was reversed on appeal, with the court holding that contractor owed no duty of care to the tenants with whom it had no contractual relationship. The court also held that the summary judgment should have been granted against the insurance carrier on the subrogation claim.
The contractor argued that the subrogation waiver contained in its contract precluded the insurance carriers attempt to recover what it had paid in damages from the contractor or its carrier. The appellate court found that the agreement had an unambiguously broad subrogation waiver showing the parties intent to shift all risk of loss – irrespective of its source – to its insurance. This barred the tenant’s carrier, therefore, from recovering against the contractor.
With regard to the suit by all other tenants against the contractor, the court held that because the allegedly negligent work posed a risk only to property and bodily injury, the tenants’ negligence claims failed as a matter of law. In explaining its reasoning, the court stated:
“Like an agreement to insure, a subrogation waiver signifies the contracting parties’ intent to recover damages “through insurance claims, not lawsuits”—but perhaps more explicitly.”
“Overall, when a contract contains an agreement to insure or a waiver of subrogation, the parties demonstrate their intent to avoid liability by allocating it to an insurer….”
“Because the Inspection Agreement contains both an agreement to insure and a waiver of subrogation, the question is not whether Surgery Center agreed to waive its insurer's subrogation rights—it did. Instead, the question is whether these provisions were limited to or conditioned on Surgery Center's damages arising in a particular manner.”
“The agreement to insure provides that Surgery Center “will be responsible for maintaining all liability and property insurance.” This provision, by its plain language, is not conditioned on Surgery Center's loss arising in any particular way. Further, by agreeing to purchase insurance for Automatic Sprinkler's benefit, Surgery Center effectively agreed to waive Automatic Sprinkler's liability in the event of loss (citation omitted). And because “the rights of a subrogated insurer can rise no higher than the rights of its insured,” the agreement to insure forecloses Travelers from pursuing this subrogation action. (citation omitted).”
“We reach the same conclusion based on the plain, unambiguous language of the subrogation waiver. That clause, which immediately precedes the agreement to insure, states, “No insurer or other third party will have any subrogation rights against [Automatic Sprinkler].” This provision captures the understanding that “no” party—including Surgery Center's insurer, Travelers—would have “any” subrogation rights against Automatic Sprinkler. Travelers, however, insists that this waiver applies only to losses sustained through work completed within the scope of the agreement. But, by its plain language, the subrogation waiver is not conditioned on Surgery Center's loss arising in any particular way. Instead, given its use of the word “any,” the waiver unambiguously forecloses the availability of a subrogation action against Automatic Sprinkler irrespective of the circumstances giving rise to the loss.”
Contractor Owed no Duty to the non-contract tenants
Under the applicable common law in the state of Indiana, the court found that:
“Under our common law, the availability of recovery in a negligence claim varies depending on the damages sustained and whether the parties share a contractual relationship (citation omitted). In the context of contractor liability, we traditionally followed the “acceptance rule” to assess whether a contractor could be liable to a third party (citation omitted). Under this rule, which has various exceptions, contractors are generally shielded from third-party liability once the work is completed and then accepted by the owner.”
The court explained that it subsequently adopted what is known as the “foreseeability doctrine” that would allow recovery by a party not in contract for personal injury damages. “But the absence of privity continued to insulate contractors and builders from third-party liability unless the work was so “dangerously defective, inherently dangerous, or imminently dangerous” such that it produced a “risk of imminent personal injury (citation omitted).”
In this case the court stated that first, “the foreseeability doctrine applies when a third party seeks recovery for personal injury that was a foreseeable consequence of a contractor's allegedly negligent work.” And, second, “the doctrine applies when a third party seeks recovery for property damage if personal injury—though not sustained—is a foreseeable consequence of a contractor's allegedly negligent work.”
In the instant case the court stated that the alleged negligence didn’t pose a risk of personal injury to the non-contract tenants, but only endangered their property. The lack of privity of contract, therefore, barred their recovering property damages from the contractor. Importantly, the court explained that:
“Under these circumstances, imposing third-party liability on companies—like Automatic Sprinkler—would force them to “insure against a risk the amount of which they may not know and cannot control.” (citation omitted). We find no reason to reallocate this risk and abandon the privity requirement when, as here, the allegedly negligent work created a risk to only property and the third parties suffered only property damage. We therefore hold that Automatic Sprinkler, as a matter of law, owed no duty to the Non-Contract Tenants.”
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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 25, No. 6 (August 2023).
Copyright 2023, ConstructionRisk, LLC
Connect