Inside This Issue:
- Surety Hit with Substantial Punitive Judgment
- Violation of New York City Ordinance Does Not Constitute Negligence Per Se
- Architect Cannot Sue Construction Manager for Negligence
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Results of Our Request for Reader Feedback
Thanks to all who responded to our request for feedback on how we are doing at issuing a newsletter meeting your needs. The vast majority of responders said to just keep doing what we are doing – that the content and mix of articles is what you want. Most of you prefer receiving it in plain, simple e-mail where you can read the entire text without going to links or websites. Very few felt we should change over to the more professional looking HTML format. A frequent comment was that you prefer content and speed over good looks. So, we will continue sending it in the current e-mail format since that seems to work.
I was surprised to learn how few of you know about or use the website for viewing back issues of the newsletter or searching by subject matter for topics of interest to you. Please try it out. A new feature that will soon be added will be a community discussion board in which you can ask questions and review responses by anyone that chooses to respond to the various issues raised. In addition to our online risk management course for design professionals located our website, we will be adding several other online courses covering topics such as risk management in documentation/communication; design-build risk management; and risk management for construction managers.
The comments received were very encouraging. Some of you wondered why I (Kent Holland) spend the time and effort doing this newsletter, and you expressed hope that I am getting some benefit out of it. Actually, I wish I were getting some financial benefit, but I still haven’t figured out how to make any meaningful money on the internet. This has been strictly a public service. I enjoy researching, writing, speaking and assisting companies in managing their construction risks. Producing this newsletter, with its companion website, is easier than all the writing I have done for law books, law journals, periodicals, and other publications – a partial list of which is maintained on my website. The website is made possible by my 16 year old son, Joel, who is an exceptional webmaster. In exchange for his professional services, I cut the lawn, provide him a car, and might help with college costs – if he stays close to home. You can check out his web design company at http://www.dynamichorizon.com. He also hosts a TV show called “Megahertz Kids” and operates several ventures, including a web-based interview program: http://www.streamingfuture.com, in which kids can learn about career paths by viewing his interviews of top executives of major corporations. This is more than you wanted to know about my kid, but I felt like bragging a little, and since you get to read this for free, I’m entitled to a little editorial license.
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Surety Hit with “A Substantial Punitive Judgment” for
Failing to Settle Subcontractor’s Payment Bond Claim
By: Jerry Katz, Esq.
Katz & Stone, L.L.P.
Sureties play a vital role in public construction projects. As a result, many states have enacted statutory guidelines regulating how insurance companies and sureties administer claims made on their policies or bonds. Massachusetts is one such state that has enacted a legislative framework under which sureties can face substantial punitive damages if they do not fairly investigate and settle valid bond claims. That framework includes Massachusetts’ Little Miller Act (G.L.c. 149 § 29), its claims settlement statute (G.L.c. 176D), and its Consumer and Business Protection Act (G.L.c. 93A).
On September 6, 2001, in R.W. Granger & Sons, Inc. v. J&S Insulation, Inc.; United States Fidelity & Guaranty, SJC-08338 (Mass. 2001), the Massachusetts Supreme Judicial Court unanimously affirmed a trial court’s substantial punitive judgment against a surety that had forced a claimant to litigate a valid bond claim. In reaching its decision, the court made clear that in Massachusetts, sureties who force claimants to litigate bond claims where liability is reasonably clear will be harshly punished for such conduct.
In J&S Insulation, which arose out of construction work performed at Logan International Airport, the surety failed to effectuate settlement of a $203,000.00 payment bond claim even after the bond claimant, an insulation subcontractor, obtained a jury verdict against the project’s general contractor. After the verdict was issued, but before the subcontractor’s request for statutory attorneys’ fees was resolved, the subcontractor demanded the surety pay the undisputed portion of the judgment (principal and interest). The surety, however, ignored the subcontractor’s demand, raised what the court later described as “insincere defenses” and forced the subcontractor to litigate collection of the judgment. The bond claim judgment, which was finally entered some ten months after the jury verdict, included the base claim for the subcontract balance, ($203,867.31), interest ($86,835.02), and the attorneys’ fees ($119,543.50) the subcontractor spent pursuing its claim. The general contractor ultimately paid the entire bond judgment to the subcontractor.
As a result of the surety’s dilatory conduct, the subcontractor asserted a claim against the surety for unfair and deceptive insurance practices. The trial court agreed with the subcontractor and found that the surety’s “cavalier” attitude toward its legal obligations “manifestly” violated the Massachusetts statues in question. In rendering its decision on the unfair practices claim, the trial court found it particularly egregious that the surety could not explain why it waited more than four months to respond to the subcontractor’s original demand, or why its only offer to settle the claim ($230,000.00 of $373,206.17) was “wholly inadequate” in light of the damages known to be due the subcontractor at the time of the offer. Pursuant to the Consumer and Business Protection Act (the “Act”), the surety was found liable for twice the amount of the underlying bond judgment plus interest and the attorneys’ fees the subcontractor spent to recover the punitive damages award. Accordingly, the judgment against the surety arising out of the original $203,000.00 bond claim totaled $966,284.94 after the application of the Act. The surety appealed.
On appeal, the surety argued that since the underlying bond judgment had been fully paid, it was not liable for any amount at all. Alternatively, the surety argued that at the very least it was entitled to reduce the punitive damages judgment by $410,245.83 as a “credit” for the amount the subcontractor had already been paid directly by the general contractor.
The Massachusetts Supreme Judicial Court, however, rejected the surety’s arguments and affirmed “in all respects” the trial court judgment. The court noted that the surety’s “unreasonable settlement practices” clearly denied the subcontractor prompt recovery of the money it was owed, a direct violation of the law. In addition, the court rejected the surety’s argument that it was entitled to reduction of its punitive damages liability by a “credit” for the amount paid by the surety’s principal. In rejecting this argument, the court stated that the insurance practice statutes were expressly designed to deter unfair and deceptive acts or practices by imposing an “in terrorem” sanction on defendants who violate the statute. The court stated that allowing the surety a credit against its punitive damage liability would undermine the plain language of, and legislative intent behind the applicable statutory framework.
The J&S decision represents an important victory for bond claimants in Massachusetts and provides significant incentive for sureties in that state to take an active role in assuring that proper claims are promptly and fairly resolved. Bond claimants and sureties alike would be well-advised to familiarize themselves with the applicable claims settlement and insurance practices statutes and how these statutes may impact their rights and obligations.
About the Author: Katz & Stone represented the bond claimant in the appeal before the Massachusetts Supreme Judicial Court. For further information contact Katz & Stone at 8230 Leesburg Pike, Vienna, VA 22182; 703-761-3000; http://www.katzandstone.com. Jerry Katz is a nationally recognized attorney whose practice emphasizes construction law. He is a prolific writer and frequent speaker on matters of construction law, construction risk management, risk transfer, insurance, and numerous related subjects.
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ARTHUR ANDERSEN – Andersen’s construction professionals provide expertise
to clients involved in all aspects of construction contract claims, including claims avoidance procedures, investigations, contract compliance reviews, schedule delay analysis, and contract cost audits, among other services. For more information, contact Ben Nolan, PE, the principal in charge of Andersen’s construction risk management practice at 703-962-3579.
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ON-LINE CONTINUING EDUCATION –ConstructionRisk.com is now offering an online continuing education course (with 3 AIA learning units), created by Kent Holland. It is titled: Risk Management for the Design Professional: Contract Terms and Conditions. Other online courses will soon be offered as well.
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Violation of New York City Ordinance
Does Not Constitute Negligence Per Se
By: J. Kent Holland, Jr., Esq.
An individual who was injured when he fell from bleachers that were not protected by handrails sued the City of New York and others for negligence based on an alleged violation of a city building code. A trial court found that the violation constituted negligence per se. This was reversed on appeal, with the appellate court holding that although the code violation constituted evidence of potential negligence it did not automatically require a finding of negligence.
In explaining its reasoning, the court found that although New York City was free to enact building codes, such codes must be recognized as distinct from State statutes for purposes of establishing negligence. Under New York law, the court stated, “As a rule, violation of a State statute that imposes a specific duty constitutes negligence per se, or may even create absolute liability. By contrast, violation of a municipal ordinance constitutes only evidence of negligence.” Even when a section of the Administrative Code has the force of statute with respect to its application, this does not determine its tort consequences. In this particular case, the court found that in the absence of a violation of a duty statutorily imposed by the State, it was unwarranted to reach negligence per se finding. Kevin Elliott v. City of New York, 95 N.Y. 2d 730; 747 N.W.2d 760 (2001).
— Risk Management Note — Just as a violation of a local building code may not constitute negligence per se with automatic liability, proof of compliance with a local building code may not prove that parties were not negligent. If, for example, a building code requires a minimum spacing of six inches between rails on balcony banisters, an architect might argue that designing within those code requirements proves that it met the standard of care and could not be found negligent. This might be true. But how a court rules will likely depend upon the facts of the case. If, for example, the banister was located in a high traffic area where infants or small children might fall through, it is conceivable that an expert witnesses would testify that the architect should have met a higher standard of care than what was established by the local code. This would be based upon what the expert testified ordinarily would be done by architects on similar projects under similar circumstances at the time this project was designed. That expert would have to present evidence that other architects designed smaller width rails for such projects. In defending itself, the architect and its insurance carrier would need to present expert witness testimony showing that the generally accepted standard was to design the width at six inches. The local building code would then be used as one source of evidence to support that standard of care – but might not necessarily prove the case.
Please note that creating a claim hypothetical is risky business, particularly for a risk management consultant to an insurance company. I disclaim in advance any knowledge of whether this hypothetical resembles any actual or potential claim situations, and deny any intent to render an opinion on any actual or potential claim.
About the Author: Mr. Holland is a construction lawyer. He is a risk management consultant for Zurich North America Insurance and an Of-Counsel with the law firm of Wickwire Gavin, P.C. For more information please see the “about us” section of this website.
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For more information go to http://www.globalconstruct.net/static_about.phtml or call Ben Nolan of Arthur Andersen at 703-962-3579.
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Architect Cannot Sue Construction Manager for Negligence
Where the project architect sued the construction manager (CM), asserting that that the CM negligently performance its services and thereby impacted the architect’s services, costs, fees, and profits, the court held that the contract between the CM and owner did not create a duty of the CM to the architect, and that the architect no third party rights against the CM under the contract.
Courts sometimes impose a duty to protect against pure economic loss even in the absence of a contract between parties if the injured party is an intended beneficiary of a contract between the defendant and another party such as an owner. Here, however, the court found that the contract between the project owner and the CM specifically excluded third party beneficiaries and stated that no third parties would have any rights under the contract. Moreover, the court was impressed by the fact that the very purpose of the CM was to assist the school in retaining and negotiating with other contractors, including architects. They were expected to review the architect’s cost estimates and designs. Having such a duty to the school, “any duty to Architect would represent a potential conflict of loyalty….”
If the architect was concerned about protecting itself against losses that the CM might cause, it could have added provisions to its contract with the owner to give it such protection. Another claim by the architect that was rejected by the court was that the CM owed a duty to indemnify the architect for losses it sustained. The contract between the CM and owner stated that the CM would indemnify the owner and its “officers, agents, representatives, and employees.” The owner settled a claim against the CM and chose not to require the CM to indemnify its agents and representatives. In arguing its right to be indemnified by the CM, the architect asserted that it had an independent right to enforce the indemnity requirement in the Owner-CM contract.
Several reasons for rejecting this argument were given by the court. Although it agreed that the CM could be required to indemnify agents and representatives of the owner, the court concluded that the owner had the exclusive right to decide whether to enforce the provision. This was supported by the clause stating that no third-party beneficiary rights were intended under the contract. If the architect wanted the right to independently enforce the indemnity provision against the CM, the court says it should have included such language in the contract. Ratcliff Architects v. Vanir Construction Management, Inc., 106 Cal. Rptr. 2d 1 (2001).
—–Risk Management Note—– This case demonstrates the difficulties that one professional has in suing another professional for damages alleged to arise out of contracts with owners on construction projects. Generally, a party will submit a claim directly to the owner for its damages (or possibly sue the owner), whether the damages are caused by the owner or some other party for whom the owner is responsible. What this court is saying is that if an architect wants to have recourse directly against a third party such as a construction manager or contractor, it must clearly make itself a named third-party beneficiary under that third party’s contract with the owner. For more examples of cases prohibiting negligence suits arising out of breaches of other parties’ contracts, see the cases discussed in previous issues of this newsletter in the subject index under “economic loss.” https://www.constructionrisk.com/articles.
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DISCLAIMER
This newsletter is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law. Further, the content and comments in this newsletter are provided for educational purposes and for general distribution, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.
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Copyright 2001, ConstructionRisk.com, LLC
Editor: J. Kent Holland, Jr., Esq.
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