Top Five Construction Contract Modifications to Comply with Texas Law

To avoid surprises and unanticipated liability on construction projects, the parties should modify contracts consistent with Texas law—or at least be aware of the limitations that are in place due to certain Texas statutes, according to a post on the Porter Hedges Texas Construction Law blog.

Author Amy Wolfshohl discusses the top five  modifications to consider on private commercial construction projects.

Those topics include retainage, indemnity, AI coverage, Texas law, and lien releases.

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Ambiguous Limitation-of-Liability Clause Did Not Clearly Restrict Owner’s Claims

A Mississippi federal court denied a defendant’s motion for partial summary judgment in connection with a limitation-of-liability clause, according to a post on the Constructlaw blog of Pepper Hamilton.

Anthony Finzio writes that the Court also denied the defendant’s motion for reconsideration, concluding that the defendant had not carried its burden as the movant of demonstrating that the limitation-of-liability clause limited the plaintiff’s rights as a matter of law.

The case is DAK Americas Mississippi, Inc. v. Jedson Engineering, Inc. et al.

Read the article.

 

 




ISO Modifies Wrap-Up Exclusion

By Jeffrey J. Vita
Saxe Doernberger & Vita, P.C.

For those contractors and other parties enrolled in wrap-up insurance programs, one nagging issue frustrating risk transfer has been the Designated Operations Wrap-Up Exclusion found on many contractors’ programs. See, for example, ISO CG 21 54 01 96, which provides in relevant parts as follows:

“This insurance does not apply to ‘bodily injury’ or ‘property damage’ arising out of either your ongoing operations or operations included within the ‘products-completed operations hazard’ at the location described in the Schedule of this endorsement,as a consolidated (wrap-up) insurance program has been provided by the prime contractor/project manager or owner of the construction project in which you are involved.”

This exclusionary language creates an obstacle to the parties’ intended risk transfer in situations involving unenrolled trades or offsite exposures. For example, where an unenrolled trade causes a loss and the general contractor, construction manager and/or project owner are sued, the intent of the parties is for the upstream party(ies) to transfer the risk to the unenrolled party via the unenrolled party’s additional insured coverage. The existence of the wrap-up exclusion cited above, or any of the manuscript versions currently in use, however, frustrates this intent as certain courts interpreting the language have held the exclusion applies to the additional insured claim despite the fact that the downstream trade causing the loss is not enrolled in the wrap-up program.

As a result, upstream parties have attempted to remedy this problem by requiring the unenrolled trades to endorse their programs either to modify the wrap-up exclusion such that it does not apply to instances where the named insured (downstream party) is not enrolled in the wrap-up program or to include an exception to the exclusion for a specific project. Alternatively, the downstream party has tried to modify the wrap-up exclusion such that it does not apply to additional insured claims. Finally, upstream parties may be forced to enroll parties in the wrap-up program that they did not initially intend to enroll, in order to avoid any gap in coverage.

ISO has now solved this dilemma by issuing endorsement CG 21 54 12 19 which states that the wrap-up exclusion applies only if you (i.e. downstream party) “are enrolled in a ‘controlled (wrap-up) insurance program’ with respect to the ‘bodily injury’ or ‘property damage’ described…above at such location.” This new language closes a major loophole in the risk transfer scheme utilized in wrap-up insurance programs when dealing with unenrolled trades or offsite exposures.

Any owner in an OCIP or contractor in a CCIP should request that all unenrolled trades and enrolled trades providing offsite coverage utilize this new endorsement on their corporate programs to remedy this potential gap in coverage and reflect the parties’ intended risk transfer.

 

 




Contractual Insurance Requirements: Traps for the Unwary

Every real estate and construction contract contains a list of insurance requirements identifying specific types and amounts of coverage for one or both parties, but too often these requirements are included in a form exhibit that is attached to contracts year after year, project after project, without careful review.

In a new website post, Lyndon Bittle of Carrington Coleman discusses  “traps for the unwary” lurking in construction contract insurance requirements, focusing on the ubiquitous commercial general liability policy.

Many of the traps pop up in connection with making one party an additional insured on the other party’s liability policies, Bittle writes. “One deceptively problematic provision is a requirement that the owner be ‘named an additional insured,’ without further details. That request conveys almost nothing.”

Read the article.

 

 

 




Think Twice About Depreciating Repair Costs in Our State, says the Tennessee Supreme Court

By Andres Avila
Saxe Doernberger & Vita, P.C.

Tennessee’s Supreme Court recently held that an insurer may not withhold repair labor costs as depreciation when the policy definition of actual cash value is found to be ambiguous. Tennessee joins other states like California and Vermont that prohibit the depreciation of repair labor costs in property policies.

In Lammert v. Auto-Owners (Mut.) Ins. Co., No. M201702546SCR23CV, 2019 WL 1592687, the Lammerts and other insureds sought property damage coverage from Auto Owners Insurance for hail damage to a home and other structures they owned in Tennessee.

Auto-Owners Insurance agreed to settle the claims on an actual cash value basis (ACV), which is a method of establishing the value of insured property that must be replaced to determine the indemnity by the insurer. There are multiple methods to calculate ACV. Auto-Owners decided to use the ACV calculation method of deducting depreciation from the cost to repair or replace the damaged property. Depreciation is the decline in value of a property since it was new because of use, age or wear. The rationale behind this method is that an insured should not make a profit by recovering the cost of, for example, a new roof for a damaged roof that was ten years old, and thus depreciation is deducted from the indemnity.

Auto-Owners, however, decided to deduct both the materials and the repair and replace labor costs, as depreciation, when calculating the ACV. Neither of both policies under dispute specifically mentioned that repair labor costs could be depreciated in their ACV definitions. The parties thus disagreed on whether depreciation applies only to the materials or to both materials and repair labor.

One of the policies defined ACV as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss;” while the other did not define ACV but stated that ACV included a deduction for depreciation.

The insureds argued that depreciation should be limited only to the cost of the replacement materials. In their view, the language “depreciation applicable to the damaged property” eliminates labor costs, which are intangible and cannot be depreciated because they do not age or wear out. The insureds also argued that the “prior to the loss” policy language eliminated labor costs because the costs at issue were post-loss repair costs. Auto-Owners contended that neither policy was ambiguous because depreciation of a property is calculated based on the total replacement cost, which includes both labor and materials.

Allowing Auto-Owners to depreciate the cost of labor would leave the insureds with an out of pocket loss inconsistent with the principle of indemnity of insurance to make insureds whole. However, allowing the deduction may in turn cause a windfall to the insureds, also defeating the purpose of indemnity. The Tennessee Supreme Court sided with the policyholders and solved the dilemma by citing to case law from, among others, Oklahoma, Arkansas, Nebraska and Minnesota, as well as regulations in Vermont, California and Mississippi.

The Court noted that Oklahoma uses the “broad evidence” rule to determine ACV. This method, also followed in New York, allows insurers to consider any and every fact and circumstance that logically tends to a correct estimate of the loss.

Accordingly, in Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017, 1020 (Okla. 2002), the Oklahoma Supreme Court ruled that repair labor must be depreciated under the “broad evidence” method.

A decade later, the Arkansas Supreme Court was more persuaded by the dissenters than the majority in Redcorn and concluded that labor was not depreciable because labor does not lose value due to wear and tear over time in Adams v. Cameron Mutual Insurance Co., 2013 Ark. 475, 430 S.W.3d 675 (2013). However, in 2017 the Arkansas legislature abrogated Adams and enacted Arkansas Statute section 23-88-106, which specifically included the cost of labor in its definition of an expense depreciation.

The Tennessee Supreme Court further noted that Nebraska, which also uses the “broad evidence” rule, sided with the Oklahoma Supreme Court majority. It held that property is a combination of materials and labor and thus repair labor costs must also be depreciated from the replacement cost to determine ACV. Henn v. American Family Mutual Insurance Co., 295 Neb. 859, 894 N.W.2d 179 (2017). The court also considered a third approach from Minnesota, which also follows the “broad evidence” rule. In Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 785 (Minn. 2016), the Minnesota Supreme Court held that certain labor costs may be depreciable making it an issue of fact rather than law.

The Court then turned for guidance to case law from the federal circuit courts of appeals involving the law of Missouri, Kansas and Kentucky. The Tennessee Court found that Missouri and Kentucky lean towards allowing insurers to deduct repair labor costs as depreciation; while Kentucky, on the other hand, leans towards seeing depreciation as an ambiguous term and thus interpreted against insurers, preventing carriers from subtracting repair labor costs as depreciation.

The Tennessee Court then turned to insurance departments’ regulations of the point in California, Vermont and Mississippi. California (Cal. Code Regs. tit. 10, § 2695.9(f)(1) (2019)) and Vermont (Insurance Bulletin No. 184) prohibit the depreciation of repair and replacement labor. On the other hand, the Mississippi Insurance Department Bulletin 2017-8 declared the absence of a statutory prohibition to labor costs depreciation in that state but that insurers should clearly provide for it in the insurance policy if they intended to do so.

Tennessee acknowledges both the “broad evidence” rule and the replacement-cost-less-depreciation method to determine ACV. The Tennessee Supreme Court was persuaded that, since neither of the policies explicitly stated whether labor costs are depreciable when calculating ACV, there was an ambiguity that had to be interpreted against insurers and in favor of insureds.

This decision in Tennessee serves as a warning that, absent policy language stating otherwise, property insurers cannot depreciate repair labor costs when calculating the ACV of a property using the replacement cost less depreciation method in Tennessee.

 

 




Crumbling Concrete Not Covered Under ‘Collapse’ Provision in Homeowner’s Policy

By Kerianne E. Kane
Saxe Doernberger & Vita, P.C.

What do you do when your house falls out from underneath you? Over the last few years, homeowners in northeastern Connecticut have been suing their insurers for denying coverage for claims based on deteriorating foundations in their homes. The lawsuits, which have come to be known as the “crumbling concrete cases,” stem from the use of faulty concrete to pour foundations of approximately 35,000 homes built during the 1980s and 1990s. In order to save their homes, thousands of homeowners have been left with no other choice but to lift their homes off the crumbling foundations, tear out the defective concrete and replace it. The process typically costs between $150,000 to $350,000 per home, and homeowner’s insurers are refusing to cover the costs. As a result, dozens of lawsuits have been filed by Connecticut homeowners in both state and federal court.

Of those cases, three related lawsuits against Allstate Insurance Company were the first to make it to the federal appellate level.[1] The Second Circuit Court of Appeals was tasked with deciding one common issue: whether the “collapse” provision in the Allstate homeowner’s policy affords coverage for gradually deteriorating basement walls that remain standing.

The Allstate policies at issue were “all-risk” policies, meaning they covered “sudden and accidental direct physical losses” to residential properties. While “collapse” losses were generally excluded, the policies did provide coverage for a limited class of “sudden and accidental” collapses, including those caused by “hidden decay,” and/or “defective methods or materials used in construction, repair or renovations.” Covered collapses did not include instances of “settling, cracking, shrinking, bulging or expansion.”

Under Connecticut law, if an insurance policy’s terms are “clear and unambiguous,” then courts will give the terms their ordinary meaning. If the terms are ambiguous, however, courts will construe the language in favor of the insured. The homeowners argued that under Connecticut Supreme Court precedent, the term “collapse” is ambiguous, because it includes not only sudden catastrophe, but also the type of gradual deterioration occurring in the foundations of their homes.

The homeowners principally relied on the Connecticut Supreme Court’s decision in Beach v. Middlesex Mutual Assurance Co.[2] In Beach, the plaintiffs sought coverage from their homeowner’s insurer for a crack in the foundation of their home, caused by a “collapse” within the terms of the policy. The insurer denied that a collapse had occurred and argued that the crack was caused by “settlement of earth movement,” a type of loss excluded under the policy. The homeowners argued that because “collapse” was not defined in the policy, it was ambiguous because it could include both a catastrophic breakdown, as well as a gradual breakdown based on loss of structural strength. The Connecticut Supreme Court agreed, finding that the term “collapse,” left undefined, encompasses “substantial impairment of the structural integrity of a building.” As a result, the court construed the term in favor of the homeowners, noting that if the insurer intended for the definition of “collapse” to be limited to a sudden and complete catastrophe, it had the opportunity to expressly include such a limited definition in the policy.

The Second Circuit Court of Appeals was not persuaded, however, that Beach was controlling, and found that the policy at issue in Beach was easily distinguishable from the Allstate policies, which included qualifying terms to define covered collapses as “entire,” “sudden” and “accidental.” The Court of Appeals explained that by including these terms, it was expressly clear that Allstate intended for covered collapses to be limited to abrupt, unexpected collapses. As a result, the Court concluded that the damages sustained by the homeowners were not covered under the policies, because not only was the gradual erosion and cracking of the foundations not “sudden” or “accidental,” but “cracking” was expressly excluded from the definition of collapse.

These decisions are a perfect example of the significance of policy terms and definitions, which can vary greatly from one insurance carrier to the next, and the impact that they can have on potential claims. The likelihood of success for the countless crumbling concrete cases still pending in Connecticut courts will largely depend on the specific terms of each policy, and the manner in which terms like “collapse” are defined or otherwise qualified.

____________________________________________________________________________________________________
1 The three cases are Valls v. Allstate Insurance Co., 919 F.3d 739 (2d Cir. 2019); Carlson v. Allstate Insurance Co., Case No. 17-3501, 2019 WL 1466935 (2d Cir. April 2, 2019); and Lees v. Allstate Insurance Co., Case No. 18-007, 2019 WL 1466939 (2nd Cir. April 2, 2019).
2 Beach v. Middlesex Mutual Assurance Co., 205 Conn. 246, 532 A.2d 1297 (1987).
3 Valls, supra, at 744 (quoting Beach v. Middlesex, 205 Conn. at 253).




Call-Back Periods in Call-Back Warranties: Confusion on Other Warranties in Construction Contracts

ConstructionAmanda Garza of Porter Hedges, writing in the firm’s Texas Construction Law blog, explains the use of a “call-back warranty.”

“A call-back warranty establishes a period of time after the substantial completion of a project within which an owner can call upon a contractor to correct nonconforming work. The length of the ‘call-back period’ is typically one year but is ultimately determined by the language in the call-back warranty.”

She explains that the rights and obligations expire at the end of the call-back period, which can lead to some confusion about the effect on other warranties in the contract.

Read the article.

 

 




The Importance of a Mediation Provision in Construction Contracts

Mark A. Cobb of Cobb Law Group writes that whenever he’s negotiating construction contracts on behalf of a client or discussing a construction collection matter with a potential client, the conversation inevitably includes a discussion of the construction contract’s dispute resolution clause.

In an article in the Georgia Construction, Bond & Lien Law Blog, he discusses several of the questions that can arise; e.g., What is a dispute resolution clause and why is it important? What types of construction contracts should include the clause? What are construction arbitration and mediation?

He also offers an example of a mandatory mediation provision.

Read the article.

 

 




What Not to Do: Construction Contractor Charged With Lying to OSHA

A post in the Seyfarth Shaw Workplace Safety and Environmental Law Alert Blog discusses the case of a construction contractor facing a perjury charge after he allegedly testified that he did not twice order employees to work on a roof. They fell through the roof both times.

During the investigation, OSHA discovered text messages indicating that the contractor had indeed issued the orders.

The case provides two important lessons, according to the authors of the post: Don’t lie under oath, especially when there exists discoverable evidence to the contrary, and be properly prepared and familiar with all relevant facts before providing testimony or statements during an investigation.

The contractor faces a potential penalty of five years in a prison and a $250,000 fine, if convicted.

Read the article.

 

 




Parties Must Proceed to Arbitration Despite Unavailability of Arbitration Forum Specifically Named in the Contract

An Ohio appellate court has addressed an issue that arose when an arbitrator specified in a contract is no longer available.

Pepper Hamilton’s Constructlaw blog covers the case in which a homeowner sued a contractor, alleging unjust enrichment and fraud. The contractor moved to compel arbitration under the agreement arbitration provision. But the specified arbitrator, the Ohio Arbitration and Mediation Center, appeared to be defunct.

“Because it was still possible to arbitrate the issues, the Court determined the agreement was not unenforceable due to impossibility,” writes Ryan R. Deroo. “The Court explained that this conclusion was consistent with the intent of the parties as they agreed to arbitrate disputes, and a change in forum should not override the fundamental purpose of the arbitration provision.”

The appellate court directed the trial court to appoint another arbitrator.

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Construction Arbitration: The Pros and Cons

Building constructionIt’s an unfortunate fact that many construction projects end in disputes, driving the parties into some form of dispute resolution, writes Jason T. Strickland, a litigator with Ward and Smith.

Many of these construction disputes are resolved through arbitration, he writes in a web post.

His article explains how arbitration is different, the major differences between arbitration and lawsuits, court involvement in the arbitration process, avoiding unfavorable local law, and third-party administration of arbitration.

Read the article.

 

 

 




Eliminating the Surprise Factor from Construction Contracts: Tips for Owners and Developers

Construction design planningOn construction projects, owners and developers often are familiar with standard contract language and provisions, but the industry is continually evolving, according to a paper published by Zetlin & De Chiara LLP.

The paper discusses 10 key contract provisions and tips to help parties avoid pitfalls.

Those areas include scope of work, compliance with schedule, meeting the owner’s target for the budget, contingency, changes in the work, indemnification, insurance, dispute resolution, general conditions, and subcontract issues.

Read the article.

 

 




Top AIA A201 Construction Contract Changes: A Handy Cheat-Sheet

ConstructionIn a post at Construction Law Musings, Melissa Dewey Brumback writes about updates to the American Institute of Architects standard form contract documents.

Dewey, a construction law attorney with Ragsdale Liggett in Raleigh, North Carolina, discusses the top 10 changes.

Those changes include differing site conditions, owner’s right to carry out the work, direct communication between the owner and contractor, contractor’s means and methods, notice provisions, notice related to evidence of owner’s financial arrangements, liquidated damages, dates of commencement and substantial completion, termination for convenience, digital data, and insurance

Read the article.

 

 

 




Pay IF Paid: It Means What it Says

Construction dollar sign“Pay when paid” clauses are common in the construction industry, according to Bradley Arant Boult Cummings, but courts generally disfavor conditions precedent (an event that must occur before another party’s performance is due) and will not observe their existence unless they are unambiguously laid out in the contract.

The article, published by JD Supra, states that “subcontractors and general contractors should be aware that if language in a contract clearly establishes that the prime contractor is only obligated to pay the subcontractor if the owner pays the prime contractor for that work, and the contract states that the subcontractor is taking the risk of the owner’s potential insolvency, then courts are likely to enforce the contract as written—condition precedent and all. This language establishes what is known as a pay if paid clause.”

Read the article.

 

 

 




The Storm After the Storm: Restoration Contracts

An article in Gray Reed & McGraw’s Texas Construction Law Blog offers some steps cleaning and restoration professionals can take in an effort to minimize the damage from a payment dispute with a client after a natural disaster.

Authors Russell Jumper and Tim Fandrey point out the importance of having a form agreement specific to natural disaster mitigation and remediation ahead of time.

Other points discussed in the article are the agreed scope of the project, making sure insurance proceeds go to the contractor, keeping the client or insurer from taking an estimate to a competitor, and being prepared for litigation.

Read the article.

 

 

 




Claim of Fraudulent Inducement of a Construction Contract Does Not Invalidate Arbitration Clause

Pepper Hamilton LLP’s Constructlaw blog discusses an Ohio case in which a plaintiff sued a building company and attempted to have the arbitration clause in a construction contract declared unenforceable.

The contract identified the builder in the case by a name that was a fictitious name for a similarly named company and was not registered with the Ohio secretary of state, writes Emily D. Anderson. The trial court denied plaintiffs’ motion to invalidate the arbitration clause.

The appellate court agreed with the trial court, observing that the builder did not initiate the action but was merely defending it.

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Defense Scores Arbitration Win in Long-Running Construction Defect Fight in Texas

A decade-long construction defect battle involving a South Padre Island, Texas, luxury condominium complex damaged during Hurricane Dolly has been resolved in a take-nothing defense win secured by attorneys of the West Mermis law firm for the general contractor, G.T. Leach Builders.

The condominium developer, Sapphire, initially sued its insurance brokers for negligence for allowing the builder’s risk insurance policy to expire, leading to claims for extensive damage to the Sapphire condominium project from the 2008 storm. Nearly three years later, G.T. Leach and several of its subcontractors were added to the $30 million lawsuit.

In a release, the firm said G.T. Leach sought to enforce the arbitration provision of its contract, with appeals ultimately progressing to the Texas Supreme Court. The company was represented by attorneys from Houston-based West Mermis, which routinely handles construction and contract disputes, products liability and general business matters.

The release continues:

The Texas Supreme Court’s decision in G.T. Leach Builders, LLC vs. Sapphire VP LP, 458 S.W.3d 502 (Tex. 2015), which sent the dispute to arbitration, stands as a landmark opinion now routinely cited in similar cases.

After settling with all other parties, Sapphire entered into arbitration with G.T. Leach in 2017. During the proceedings, the defense team, led by West Mermis name partner Lawrence J. West, provided evidence refuting multiple breach of contract claims and challenging factual allegations.

“Despite claims to the contrary, the Sapphire project had not been completed when Dolly made shore. It was imperative to show the arbitrator that our client acted reasonably and responsibly,” said Mr. West. “It was an exceptionally complex case that had endured a number of detours, but we are pleased to have secured the decisive win G.T. Leach deserved and that this chapter can finally be closed.”

Also representing G.T. Leach were West Mermis attorneys Justin W. Safady and Stephen A. Dwyer.

 

 




Defend, Indemnify, Hold Harmless – What This Contract Language Means for A/E Professionals

J. Brandon Sieg of Vandeventer Black LLP addresses the question of what is meant when a contract requires an architect or engineer to “defend, indemnify, and hold harmless” the project owner for specific (or not so specific) types of claims that might arise in the future.

Regarding duty to defend, he explains that: “If you agree to similar language in your design contract, then you are agreeing to hire the project owner’s lawyer to defend a lawsuit filed against the project owner.”

He also covers responsibilities that go with indemnification and “hold harmless.”

Read the article.

 

 

 




How to Build a Solid Contractual Risk-Transfer Program

Liability risk managementThe use of subcontractors helps to ensure construction projects are completed in a timely and efficient manner, but it also creates a wide range of contractual risks, cautions Tommy Williams, USI Uniondale vice president, in an article for Property Casualty 3600.

“Without a properly structured risk-transfer program, a general contractor (GC), owner or property manager would assume financial responsibility unnecessarily for losses caused by a third party, who is contractually obligated to control or prevent those losses. The financial impact could be significant — more so in certain jurisdictions,” he explains.

His article discusses the basics of contractual risk transfer, common subcontractor policy exclusions, and the need for expert advice.

Read the article.

 

 

 




Should I Have an Arbitration Clause in My Construction Contract?

Although it is typical for AIA form contracts to contain arbitration clauses, as a contractor you should consider whether you should have an arbitration clause in your construction agreement, advises Paul W. Norris of Stark & Stark.

In an article posted on the New Jersey Law Blog, Norris explains “there are numerous factors to consider in determining whether mandatory arbitration is the preferred dispute resolution mechanism, or whether the state court system is preferred. Although arbitration may have some advantages, there are also disadvantages which must be considered rather than simply adopting the AIA form.”

He discusses the cost of the arbitration proceeding, judge or jury vs. an arbitrator, discovery during an arbitration process vs. the state court process, timeliness of the proceeding, judgments, and appeals from arbitration of a state court.

Read the article.

 

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