Lamson, Dugan and Murray, LLP, Attorneys at Law

Construction Contract Language and Insurance Coverage Must Be Consistent

Posted in Insurance coverage

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLPHow often do you review both the additional insured language in the contract and the insurance policy provided by a subcontractor?  My guess is, unless the project has gone off the rails, NEVER.  Well, perhaps you should to make absolutely sure the extent of the subcontractor’s insurance obligations and whether those obligations are being fulfilled.

This point was recently addressed in a recent DRI article analyzing the Deepwater Horizon/BP lawsuit.  My partner, Anne Marie O’Brien, also blogged on this a few months ago.

As you will recall, Transocean’s Deepwater Horizon oil-drilling rig exploded, killing 11 workers, and polluted the Gulf of Mexico.  BP demanded that Transocean’s insurer pay for the loss.  Transocean’s insurer said no, and the litigation ensued, in state court, federal court, and the Texas Supreme Court.  It was quite an odyssey of litigation.

The Contract

Under the contract between BP and Transocean, Transocean was required to name BP as an additional insured in each of Transocean’s insurance policies for liabilities assumed by Transocean under the terms of the drilling contract.  This meant that BP’s additional insured status was limited to the liabilities assumed by Transocean.  Importantly, Transocean’s liabilities were limited to above surface pollution, not subsurface pollution.

The Insurance Policy

Transocean’s insurance policies required the insurance company to pay for Transocean’s losses imposed by law or contract.  In essence, if Transocean assumed liability under the contract with BP, Transocean’s insurer had to pay for the damage.

The Claim

BP wanted Transocean to pay for the underwater pollution.  But, as noted above, Transocean only assumed liability for pollution above the water.

The Outcome

Because BP’s claim was for coverage of underwater pollution, Transocean’s insurer did not have to pay.  Transocean only agreed to cover above surface pollution.

The Takeaway

You need to understand the liabilities you are asking the subcontractor to assume and you need to make sure that the insurance coverage the subcontractor has obtained will cover the assumption of those liabilities.  In sum, read the contract, read the insurance policy, or find an experienced construction attorney that can.

Record Keeping—the Devil’s in the Details

Posted in Construction Litigation

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLPAnother court has found that poor record keeping will prevent recovery on a claim.  The court in Weatherproofing Tech., Inc. v. Alacran Contracting, LLC found that a contractor’s documents were a mess and that no reasonable jury could base a verdict on the contractor’s records.

The underlying project involved the construction of an army training facility.  The total project cost approximated $13 million.  Alacran, the general contractor, subcontracted about $3 million of the work to Weatherproofing Tech.  Alacran paid Weatherproofing $700,000 for its work, even though Weatherproofing submitted invoices of more than $2 million.  Alacran justified its refusal to pay Weatherproofing on the grounds that the parties had agreed to split the profit and loss on the project and the project was out of money.  Not surprisingly, Weatherproofing sued Alacran for the amount owed.

Even though Alacran’s justification for refusing to pay Weatherproofing was suspect from the outset, the real problem with Alacran’s defense was its deplorable recording keeping. The court found:

Alacran’s accounting records were a mess and the expenses reflected in its books were fraught with contradictions that Alacran’s own employees could not explain. 

The records were so bad that the court ruled that Alacran could not introduce any of the underlying documentation of its expenses during trial.

To make matters worse, the parties did not execute a contract.  They instead relied on oral agreements, a Teaming Agreement, a Statement and Acknowledgment and Purchase Order.  These documents detailed the parties’ agreement to prepare their proposal for the bid, describe the initial scope of each company’s responsibilities, and provide that Weatherproofing’s compensation would be one third of the $13 million contract, but lacked any specific duties or obligations of the parties.

Apparently because the documents supporting the relationship lacked specific duties and obligations, Alacran even argued to the court that it had never agreed to pay Weatherproofing’s invoices.  When you have no documents to support your claim, it’s interesting to see the defenses that can be raised.

Take Away: The devil is in the details. If you cannot support your claim, you will not prevail at trial.  It is imperative that proper documentation is created and maintained throughout a project.

Are We Headed for a Worker Shortage?

Posted in Construction Economy

A recent Wall Street Journal article, Worker Shortage Hammers Builders, noted that Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLPconstruction industry employers are facing a tight labor market.

U.S. builders shed more than 2 million jobs during and after the housing bust. Now they say they can’t find enough carpenters, electricians, plumbers and other craftsmen for a growing pipeline of work.

That is certainly consistent with everything that I’ve heard and read about construction companies in the Midwest.  Unfortunately, it seems as though the problem is only going to get worse.

The WSJ article made two interesting observations.  First, the shortage of labor is forcing construction companies to think differently about how they are doing the work. For example, an electrical contractor now pre-manufactures substantial portions of the electrical system on the shop floor and then the electrician in the field puts the puzzle together on site.

The article also noted that wages in commercial construction were up 3.3% versus 2.2% for all private sector employees.  And, in non-union shops, craft workers are expected to see their biggest pay raise since 2008.

Summer is a busy time for construction. Let’s hope we can find enough qualified employees to keep the project running on time and on budget.

The Problem with One Year Warranties

Posted in Construction Contracts

iStock_000048484334_FullContractors often ask if they should include a one year warranty in their subcontracts.  I tell them that they can, but it may be more effective to include a one-year correction period.  If a contractor does include a warranty in the contract, it may actually extend the time in which a contractor may be sued. I recommend instead a Correction Period.

Typical Construction Warranties

Form construction contracts, like the AIA forms, often times contain warranty language.  The AIA A201, General Conditions, contains a warranty section that covers materials, but it does not address how long the work is warranted:

3.5 WARRANTY

The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit.

Instead, the AIA A201, section 13.7, limits the time by which claims must be brought to 10 years or the applicable statute of limitations.

13.7 TIME LIMITS ON CLAIMS

The Owner and Contractor shall commence all claims and causes of action, whether in contract, tort, breach of warranty or otherwise, against the other arising out of or related to the Contract in accordance with the requirements of the final dispute resolution method selected in the Agreement within the time period specified by applicable law, but in any case not more than 10 years after the date of Substantial Completion of the Work.

The Correction Period

Instead of providing a warranty, consider a Correction Period.  You can set a time from during which you will return to the project to correct any problems.  The AIA A201 contains a correction provision which requires the contractor to correct work that was not done in accordance with the contract.

12.2.2 AFTER SUBSTANTIAL COMPLETION

12.2.2.1 In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work . . . any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so

The Dangers of an Extended Warranty

In Nebraska, the basic statute of limitations on construction projects is four years.  But, when a contractor provides a warranty, the statute of limitations may not begin to run until the warranty has expired.  So, if a contractor offers a one year warranty, the owner may have 5 years in which to sue, not four years as provided by statute of limitations.

Take Away: Perhaps you should consider whether to include a warranty in your contract.  Would it be better to include a call back correction period and simply warrant that the work will be done in accordance with the plans?

Do Engineers Owe a Duty to Third Parties?

Posted in Engineers and Architects Regulation Act

A Texas Court of Appeals, in USA Walnut Creek, DST v. Terracon Consultants, Inc., recently ruled that an engineer owed a duty to the buyer of an apartment complex, even though the engineer had no contractual relationship with the buyer.  This is an expansion of the duty professionals owe on construction projects and could signal a change in the law.

In the case, Walnut Creek purchased a three year old apartment complex.  A few years after taking possession, Walnut Creek noticed problems with the apartments, including cracking foundations, walls, breaking windows, and out of square door frames.  Walnut Creek sued the developer and general contractor, alleging construction defects.  The developer claimed that the engineer, Terracon, was at fault and Walnut Creek added Terracon to the lawsuit, asserting that Terracon was negligent in performing engineering services during construction.  Terracon asked the court to dismiss the claim, arguing that it did not owe a duty to Walnut Creek.  Walnut Creek in turn argued that engineers do owe a duty to subsequent owners.  The trial court dismissed the case against the engineer and Walnut Creek appealed.

The appellate court reversed the trial court, finding that the engineer did owe a duty to subsequent purchasers.  The court seemed persuaded by the allegations that the engineer actually created the construction defects which were the basis for the litigation.

Ultimately, the court ruled that the engineer did have a duty to the subsequent buyer and the lawsuit against the engineer could proceed.

Why You Should Care: Courts are split on whether an engineer owes a duty to anyone other than the entity or person with whom it was contracted.  Nebraska and Iowa courts have generally held that engineers may not be sued by subsequent purchasers because the engineer does not owe a duty to the subsequent purchasers.  But, the Walnut Creek case may signal a change in court opinions.

This is an issue that we will monitor, much like the definition of an occurrence in a CGL policy.

New OSHA Regulations on Confined Spaces in Construction

Posted in OSHA

Craig Martin, Construction Attorney Lamson Dugan & Murray, LLP

On May 1, OSHA announced its final rules for construction workers in confined spaces.  The Final Rules, which will take effect August 3, 2015, will require more comprehensive training , with the goal of providing construction workers the same or similar protections as employees in manufacturing and general industry.

The final rule will cover confined spaces such as:

  • Crawl spaces
  • Manholes
  • Tanks
  • Sewers

The final rule will require the following:

  • Confined spaces must be large enough for an employee to enter and have a means of exiting.
  • The air in confined spaces must be tested  before workers enter them to ensure that the air is safe.
  • Construction workers must share safety information with others when they are going to work in enclosed/confined spaces.
  • Hazards associated with confined spaces must be continuously monitored and abated to the extent possible.

The new rule also contains detailed coordination requirements for all parties working on a job site.  Specifically, property owners and managers (“host employers”) have the obligation to provide information about permit-required confined spaces at its location to the general contractors (“controlling contractors”).  General Contractors, in turn, are required to share that information with subcontractors (“entry employers”).

Construction companies will have to begin the training process soon in order to get ahead of this new rule.  The training should focus on permit-required areas and the dangers of attempting rescues in permit-required areas.  OSHA has made available Confined Spaces in Construction Compliance Assistance Materials, on topics such as:

Take Away: Construction companies will have to train their employees on the new Confined Spaces Regulations and the sooner you start the better.

Suspend the Work, but Don’t Get Fired

Posted in Construction Contracts, Uncategorized

gettingpaidGetting paid for your work is often times one of the hardest parts of a project.  If you find yourself working without getting paid, it’s easy to think, “I’ll just stop working until I get paid.”  While the law may support you in that decision, the contract may not and you may be found in breach of the contract if you walk off the job.

Nebraska Law

Nebraska courts have held that a contractor or subcontractor may stop working on a project if the owner or upstream contractor is in material breach. This, of course, raises the question of “What is a material breach?”  The facts of the particular circumstance will control.  But, the risk is significant.  If the unpaid contractor is wrong, in that the breach is not material, he will face the claim by the upstream party for all costs necessary to finish the contractor’s work.  If the upstream party is in material breach, he will face a claim for profit on the remaining portion of the project.

Nebraska’s Prompt Pay Act

Nebraska’s Prompt Pay Act requires a contractor to pay downstream contractors within 30 days of receipt of payment from the Owner.  Section 45-1203 Neb. Rev. Stat.  The Prompt Pay Act does not specifically authorize termination for failure to pay.  Instead, section 45-1205 allows for interest to be charged if a contractor is not paid.

Typical Contract Language

The AIA A201, General Conditions, allows the contractor to terminate the project if payment is not made.  Section 14.1.1.3 provides:

The Contractor may terminate the Contract if the Work is stopped for a period of 30 consecutive days through no act or fault of the Contractor or a Subcontractor, Sub-subcontractor or their agents or employees or any other persons or entities performing portions of the Work under direct or indirect contract with the Contractor, for any of the following reasons:

. . .

 

.3       Because the Architect has not issued a Certificate for Payment and has not notified the Contractor of the reason for withholding certification as provided in Section 9.4.1, or because the Owner has not made payment on a Certificate for Payment within the time stated in the Contract Documents;

 

But, the contractor must provide written notice to the owner and architect if it intends to terminate.  The notice provision, section 14.1.3 provides:

If one of the reasons described in Section 14.1.1 or 14.1.2 exists, the Contractor may, upon seven days’ written notice to the Owner and Architect, terminate the Contract and recover from the Owner payment for Work executed, including reasonable overhead and profit, costs incurred by reason of such termination, and damages.

In a nutshell, a contractor will have to submit a pay application to the architect, continue working at least 30 days after the pay application should have been paid, and then work another seven (7) days after providing written notice of its intent to terminate.

Take Away: Terminating a contract for failure to pay is risky. The contract may provide a contractor with the opportunity to terminate the contract, but you must follow every step of the contract to avoid a claim of breach by the upstream contractor.

Indemnity Clauses—What do they mean, and what should you be looking for?

Posted in Construction Contracts

It seems that every construction contract now-a-days, contains an indemnity clause.  Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLPContractors should be reviewing these indemnity clauses very carefully to understand the potential scope of an indemnity obligation and your opportunity to negotiate changes.

What is an indemnity Clause?

An indemnity clause transfers risk from one party to another.  When a contractor signs an indemnity agreement, it is agreeing to pay for damages for which another party could be liable.

What is a Typical Indemnity Clause?

The AIA A-201 contains a common indemnity clause:

3.18.1 To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.

 What are the Key Provisions to an Indemnity Clause?

  • Scope: “indemnify and hold harmless from and against claims, damages, losses and expenses, including attorneys’ fees”—this language may make the contractor responsible to pay for all damages arising out of the incident.
  • Basis: “provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself)”—this language limits the situations covered to which indemnity applies, in essence eliminating claims to replace the contractor’s work itself. This limitation is intended to follow applicable insurance coverage.
  • Limit: “but only to the extent caused by the negligent acts or omissions of the Contractor, . . . regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified” This language limits the indemnity obligation to the negligent acts of the contractor, but also makes clear that negligence by a party indemnified will not eliminate the contractor’s indemnity obligation. In essence, if the contractor and the party indemnified are both negligent, the contractor will still have to indemnify the other party.

Negotiating Changes to Indemnity Clauses

Knowing full well that some upstream contractors may not negotiate indemnity obligations, here are some negotiating tips.

  • Make the Indemnity Obligation Mutual.
    • Contractor will indemnify [upstream contractor] for all claims, but only to the extent caused by its negligence. [Upstream Contractor] will indemnify Contractor for all claims, but only to the extent caused by its negligence.
  • Limit Indemnity to Insurance Limits.
    • Contractor’s liability under this provision shall not exceed the limits of insurance coverage required to be carried by the Contractor.
    • Limit Indemnity to Actual Insurance Coverage.
      • Contractor’s liability under this provision shall not exceed the amount of insurance coverage actually paid by insurer.
    • Limit Bodily Injury Claims to Workers’ Compensation
      • Contractor’s liability for bodily injury claims shall be limited to the amount payable by or for the Contractor under applicable workers’ compensation act.

Take Away: Understanding indemnity clauses is crucial to limiting your liability under these clauses. Having a better understanding of these clauses may allow you to better negotiate a limit to your potential liability.

Construction Litigation—Battles on Many Fronts

Posted in Construction Litigation

Millennium_3D_Chess_init_configWhen you are involved in construction litigation, you have battles on several fronts, including those against subcontractors, owners, insurers and the court.  Shoring up your defenses on each of these fronts is imperative, or you may lose the battle or, worse yet, the war.

A recent opinion out of the Eleventh Circuit Court of Appeals (overseeing federal courts in Alabama, Florida and Georgia) Carithers v. Mid-Continent Casualty Company, illustrates the various battle fronts involved in a construction case.  In this case, the Carithers (Home Owner) sued their homebuilder, Cronk Duch Miller & Associates (Contractor) in state court after discovering multiple defects with their home.

Battle Front #1—Claim Against Contractor

The Contractor and Home Owner entered into a consent judgment for approximately $90,000.00 and the Contractor assigned its claim against its insurer to the Home Owner.  It is unlikely that the Contractor paid the $90,000.00 judgment.  The Home Owner likely agreed not to collect on the $90,000.00 in exchange for the chance to pursue the Contractor’s claim against its insurer.

Scorecard:  Home Owner wins hollow victory against Contractor, but gets a chance to pursue the Contractor’s Insurer.

Battle Front #2—Where Are You Litigating?

The Home Owner files suit against the Contractor’s insurer, Mid-Continent Casualty Company (Insurance Company), in state court.  The Insurance Company removes the case to federal court.  This is not a big deal, but you are no longer in front of your local district judge, but the federal judge.  If you were litigating near your home office, say in North Platte, you would not be litigating in Lincoln or Omaha.

Scorecard:  No winner here, just litigating in a different court.

Battle Front # 3—Claim Against Insurance Company, Part I

The Home Owner filed suit in 2010, over 4 years after the home was completed.  The Home Owner claimed that there was dry rot in the framing, electrical problems, and improperly installed brick and tile.  The Home Owner claimed that he did not discover the defective construction until 2010.

The Insurance Company insured the Contractor from 2005 through 2008.  The Insurance Company claimed that it had no duty to defend the Contactor because the property damage “occurred” after the policy period ended.  In essence, the Insurance Company claimed that the defective construction did not occur until it was discovered, and because it was discovered after the insurance ended, there was no duty to defend the Contractor.

The Court disagreed and required the Insurance Company to defend.

Scorecard:  Home Owner wins, and insurer must defend claim against Contractor.  Importantly, this does not put money in the Home Owner’s pocket.

Battle Front #4—Claim Against Insurance Company, Part II

The Insurance Company also argued that it did not have to pay the Home Owner because the claim “occurred” after the Contractor’s insurance coverage ended.  The Court again disagreed, finding that the Insurance Company must pay the claim against the Contractor arising out of defective construction.

Scorecard:  Win for Home Owner, but still no dollars in Home Owner’s pocket.

Battle Front #5—Damages

The Home Owner wants to be paid for the damage to his home.  The Insurance Company argues that the “Your Work” exclusion limits its obligation to pay for damage to the house.  In essence, the insurance company argues that the defective work performed by the subcontractors, which did not damage anything else in the house, is not covered.  There is only coverage, and an obligation to pay, when the subcontractor’s work caused damage to parts of the house beyond the subcontractor’s work.  For example, the brick on the house was improperly installed and a sealant was improperly applied, requiring the brick to be replaced.  The court found in favor of the Insurance Company because the brick subcontractor’s work did not damage any other part of the house.

Scorecard:  The Home Owner won some portions of its claim, but not all.

Take Away: There are challenges to a construction claim at every turn.  You not only have to marshal the resources to fight the battle, but you need sound counsel in pursuing each of the claims.  Having experienced construction counsel on your side is crucial to victory.

Ambush Elections are Here—Are You Ready?

Posted in Unioin Campaign

On April 14, 2015, the National Labor Relations Board’s new election rule went into effect. The new rule, which shortens the time frame for union elections, will make it easier for unions to organize.  Employers must get prepared now, not when they hear about an election.  As the NLRB Members who dissented from the final rule noted:

The Final Rule has become the Mount Everest of regulations: Massive in scale and unforgiving in its effect. Very few people will have the endurance to read the Final Rule in its entirety.

Here are some highlights of the new rule:

  • Within 2 business days after service of the Notice of the Pre-Election Hearing, the employer must post a Notice of Petition for Election. The employer must also distribute the notice via e-mail if the employer customarily communicates with employees via e-mail.
  • A Pre-Election hearing will be scheduled within 8 days from the Notice.
  • The employer must file a Statement of Position (new form) within 7 days of the Notice of Petition identifying any issues it wishes to litigate at the hearing.  Any issues not raised are waived.
  • The employer must provide a list of employees, including detailed contact information. And, if the employer believes that the classification unit is inappropriate, a separate list of all individuals the employer claims should be added or excluded in the proposed unit must be provided.
  • The voter list must be filed with the NLRB and the union.
  • After the hearing, objections must be filed within seven days after the tally of ballots and must specify the reason for each objection along with a written offer of proof identifying the witness(es) who would testify in support of each objection and what they would say if they provided testimony.

For those of you not familiar with litigation, this is like going to trial within 10 days of being served with a lawsuit.  You have to be prepared well ahead of any organizing activity to effectively defend against the organizing efforts.

For those of you that want to read more, here are a few links to information about the new rule that the NLRB issued:

Take Away: Union organizing is a real threat to every merit shop.  Now is the time to get prepared for an election campaign–well before the campaign begins.