Lamson, Dugan and Murray, LLP, Attorneys at Law

Insurance Policy Language Really Does Matter

Posted in Insurance coverage

The debate continues on whether a subcontractor’s faulty work constitutes property iStock_000015701146XSmalldamage and an occurrence such that the insurer must cover the claim.  The most recent court to weigh in on this issue is the New Jersey appellate court (one step down from the New Jersey Supreme Court) in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC.

In this case, the condominium association sued the general contractor, who also acted as the developer, and subcontractors for faulty workmanship.  The condominium association also sued the insurer for the general contractor, demanding payment of consequential damages caused by a subcontractor’s faulty work.  The trial court granted summary judgment to the insurer, holding that the subcontractor’s faulty work was not property damage and thus not an occurrence under the Commercial General Liability (CGL) insurance policy, so no coverage.

The appellate court reversed the trial court’s decision, finding that the claims for consequential damages caused by faulty workmanship constituted property damage and an occurrence as defined in the policy.  This was a shift from earlier opinions in New Jersey.

The CGL policy analyzed in this case was the 1986 version of the CGL, while earlier opinions had analyzed the 1973 version.  The 1986 version contains an exception to the “your work” exclusion for work of subcontractors. (I know, confusing)  This means that the exclusion that applies to “your work” is excepted or not applied to subcontractors’ work. The court found that the exception of the subcontractor from the “your work” exclusion meant that the insurance policy must cover the consequential damages caused by the subcontractor’s faulty work.

One question that I have about the underlying project is whether anyone gave any thought to using a 1973 versus a 1986 CGL policy to cover the work.  Did the general contractor’s insurance agent mention that the 1986 policy language may provide broader coverage for the subcontractor’s work?

The same could be true of your projects.  Are you requiring your contractors or subcontractors to provide a certain year of ISO form?  Are you asking for an “additional insured” endorsement for completed operations under CG 20 37? If so, are you demanding a particular year, such as the 2001, 2004 or 2013?  Do you have the infrastructure in place to confirm that the proper form is being provided?

Take Away: Insurance policy language does matter.  And, it changes over the years.  Do you know what your policy provides?  Are you checking to see what policy language your subcontractors are providing?  These are all very important questions and whether you have coverage may be up for debate.

OSHA Delays Enforcement of Confined Spaces Rules

Posted in OSHA

In a recent Trade Release OSHA announced 60-day delay in enforcing the new Confined Spaces in Construction standard.  Here is my earlier blog on the new standard.  Full enforcement will not begin until October 2, 2015.

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLP

During this 60-day temporary enforcement period, OSHA will not issue citations to employers who make good faith efforts to comply with the new standard. Employers must be in compliance with either the training requirements of the new standard or the previous standard. Employers who fail to train their employees consistent with either of these two standards will be cited.

Factors that indicate employers are making good faith efforts to comply include:

  • scheduling training for employees as required by the new standard;
  • ordering the equipment necessary to comply with the new standard; and
  • taking alternative measures to educate and protect employees from confined space hazards.

Take Away: You have 60 more days, but it’s time to get your training on this new standard going to avoid OSHA penalties.

The DOL Claims Most Independent Contractors Are Employees

Posted in Independent Contractor

On July 15, 2015, the Department of Labor issued an Administrator’s Interpretation Craig Martin, Construction Attorney Lamson Dugan & Murray, LLPasserting that most independent contractors are actually employees under the Fair Labor Standards Act.  The DOL claims that the FLSA’s broad definition of employment and “suffer to work” standard under the FLSA requires that most workers be treated as employees.  The certainly appears to be the DOL’s warning shot over the bow and companies using independent contractors should take heed.

The most startling aspect of the Administrative Interpretation is the application of the economic realities test in concluding that workers who are economically dependent on the company, regardless of skill level, are employees under the FLSA’s broad definition of employee

So, what is the Economic Realities Test? Here are the factors considered:

Is the Work an Integral Part of the Employer’s Business? Integral work is just that, important for the business.  The DOL provides an example of a construction related company.  And, yes, I think the DOL intentionally targeted the construction industry.  For a construction company that frames residential homes, carpenters are integral to the company because the company is in the business to frame homes, and carpentry is an integral part of providing that service.  But, the same construction company that contracts with a software developer to create software that assists the company in tracking bids and scheduling projects and crews, is not integral to the construction company’s business.

Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? The worker’s managerial skill will often affect opportunity for profit or loss beyond the current job, such as by leading to additional business from other parties or by reducing the opportunity for future work. For example, a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job.

How Does the Worker’s Relative Investment Compare to the Employer’s Investment? Comparing the nature and extent of the investments of the employer and the worker is important in determining whether the worker is an independent contractor in business for himself. The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business. An independent contractor typically makes investments that support a business as a business beyond any particular job. The investment of a true independent contractor might, for example, further the business’s capacity to expand, reduce its cost structure, or extend the reach of the independent contractor’s market.

Does the Work Performed Require Special Skill and Initiative? A worker’s business skills, judgment, and initiative, not his technical skills, will aid in determining whether the worker is economically independent.  Again with the construction example, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

Is the Relationship between the Worker and the Employer Permanent or Indefinite?  Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.

What is the Nature and Degree of the Employer’s Control?  The employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.

Take Away: The construction industry was targeted with two examples of what makes a worker an employee.  Clearly, the DOL is looking at the construction industry for misclassification abuses.  But, look at the Special Skills example.  If you are hiring independent contractors that are active in the marketplace, doing work for other contractors, controlling their own shop, you stand a good chance of prevailing against any claims that he is an employee, not an independent contractor.   But, if you are the only source of business for that contractor, you should examine that situation closely.

Hire the Right Professional for the Job

Posted in Construction Law
IMG_1141

The Deck–not quite done

I had the pleasure of spending the 4th of July weekend working on a friend’s deck. Fortunately for her, and for my son and me, it was not a big project.  It just involved replacing the decking, steps and railings.  An old adage was reinforced for me this weekend–it’s better to have someone that knows what he’s doing handle some projects, than someone who dabbles in it.

I have no doubt this project took my son and I a lot longer than an experienced deck builder.  I also know that our finished product, while tolerable, is nowhere near the quality of experienced craftsmen.  Can we measure a board and cut it to length? Most of the time.  But, can we miter an edge, notch a post, or rip a board?  Not very well.  These are the kinds of skills that are achieved after training and hours of experience.

The same is true for your construction business.  I hear stories all the time about construction professionals reviewing and redrafting contract terms, drafting settlement agreements, and handling their own tax audits.  But, have you had the proper training and years of experience for the project.  Or is it more like me behind the saw—hoping that the board fits?

The problem with construction contracts, settlement agreements and even audits, is that you can’t go out and buy another board.  You are stuck with the deal you struck.

Take Away: Give some thought to your construction company’s operations.  Are there areas where you would be better served by hiring the right professional for the job?

Thank Your Founding Fathers for Mechanic’s Liens

Posted in Lien Rights

Yep, our founding fathers, Thomas Jefferson and James Madison specifically, Craig Martin, Construction Attorney Lamson Dugan & Murray LLPwere responsible for proposing the first mechanic’s lien laws in the United States.  Mechanic’s liens were not a new concept when the first law was passed in the United States; France, Spain and other countries already had them.  But, in England, where landownership was limited to the upper classes, the concept of giving a tradesman an interest in the land for his labors was a truly foreign concept.

The Early Years—Pre Mechanic Lien

In the 1700s, there was no right to a mechanic’s lien.  The possession of land was never deemed to be changed by its improvement and the laborer or material supplier was held to have acquired no right of lien in the property.  The only remedy the laborer or material supplier had was to bring an action against the land owner. If the laborer or material supplier obtained a judgment, he would acquire the lien of a judgment creditor.  A Treatise on the law of Mechanics’ Liens on Real and Person Property, 1893.

The Need to Protect Tradesmen

Maryland’s state legislature understood that developing land in and around the City of Washington, Maryland, which would eventually become Washington D.C., would remain difficult if laborers and material suppliers were not allowed to protect their interest, short of filing a lawsuit and obtaining a judgment.  In 1791, during a meeting attended by both Thomas Jefferson and James Madison, the Maryland General Assembly was urged to pass an act securing to master-builders a lien on the houses erected and land occupied.  Maryland’s Mechanic’s lien was passed later that year.  Pennsylvania passed its own Mechanic’s lien act in 1803.

Evolution of Mechanic’s Liens Laws

These first statutes only protected the principal contractor on original construction.  The laws were amended to aid subcontractors after they complained about principal contractors refusing to pay them for their work.  The scope of the lien laws was eventually expanded to cover repairs to real property.

Why It’s Called  a Mechanic’s Lien

Fun fact: When these laws were originally passed, the term “mechanic” referred to anyone who performed work with their hands or was skilled in the use of tools.  Thanks to Z-Lien Construction Payment Blog.

Take Away:  As we celebrate our Nation’s independence this July 4th, don’t forget to thank our founding fathers for pushing for mechanic’s lien laws to foster the growth of our country.

Happy and Safe 4th of July.

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.