Inside This Issue:
- Subcontractor forfeits right to arbitration by filing demand untimely
- Faulty Workmanship Coverage Under CGL Policy
- Architect Required to Review Adequacy of Engineer’s Structural Report
Before Proceeding with its Design Services
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ARTICLE 1
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Subcontractor forfeits right to arbitration by filing demand untimely
By: J. Kent Holland
Where a subcontract required subcontractor to commence arbitration proceedings no later than 30 days following receipt of an adverse decision by the contractor, the failure of the subcontractor to contest a decision within 30 days was fatal to later seeking arbitration.
Holt, a drywall subcontractor, entered into a contract with Choate, the general contractor, to perform drywall installation on a new high-rise building. In the event Holt failed to meet its obligations under the schedule, the contractor was entitled to issue written decisions terminating its employment or supplementing its work with labor and materials the cost of which would be deducted from payment to Holt. The contract further provided that the subcontractor would be conclusively bound by and abide by contractor’s decision unless the subcontractor timely commenced arbitration within 30 days following receipt of notice of a contractor decision, “otherwise, contractor’s decision becomes final and binding .”
On March 20 and again on April 12, the contractor notified the subcontractor that it was in default and must immediately remedy its defective performance or the contractor would hire additional or replacement contractors at the subcontractor’s expense. On May 29 the contractor sent the sub a certified letter informing it of its decision to supplement the sub’s work forces. The contractor thereafter employed additional workers and sent the sub change orders setting forth the amounts to be back-charged to the sub for this work.
It was not until November 5, after the contractor had closed out its prime contract with the project owner, that the sub filed a demand for arbitration. The contractor promptly filed suit in court to stay or stop the arbitration. The trial court agreed with the contractor and granted a stay to the arbitration. In affirming that decision on appeal, the appellate court explained that it found the plain language of the contract places the burden on the subcontractor to timely arbitrate any decision made by the contractor or be bound by it. The court was not impressed with the subcontractor’s argument that the various notices and certified letter did not constitute a “decision” within the meaning of the contract. According to the court, the certified letter was a decision within the plain language of the contract.
The court was equally blunt in finding no merit to the subcontractor’s assertion that the 30-day period to file an arbitration claim was impermissibly short. Relying upon applicable state law, and quoting case precedent, the court stated that parties to a contract may fix upon a shorter period for filing claims than that which is set by the state statute of limitations. Setting a shorter period violates no principle of public policy, said the court, “provided the period fixed not be so unreasonable as to show imposition or undue advantage in some way.” For these reasons, the court held that because the subcontractor failed to avail itself of arbitration within 30 days, it was bound by the adverse contractor decision. Holt & Holt, Inc. v. Choate Construction Company, (2004 Ga. App. LEXIS 1602).
Comment: This case once again demonstrates the importance of knowing and abiding by the time requirements set forth in contracts. When commercial entities agree to contract terms and conditions setting forth various restrictions and limitations on submitting change orders requests, claims, and arbitration demands, the parties must be careful to abide by them. As seen by the decision in this case, unless there is a clear conflict with public policy, courts will not void the contract or re-write its terms.
About the author: Kent Holland is a construction lawyer in Tysons Corner, Virginia, and is risk management consultant for the environmental and design professional liability. He is also publisher of ConstructionRisk.com Report.
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ARTICLE 2
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Faulty Workmanship Coverage Under CGL Policy
By: J. Kent Holland
Costs of ripping out and replacing defective work was held to be potentially covered as property damage under a CGL policy issued by Zurich American Insurance, where employees of the insured contractor caused a leak in steam pipes by improperly unpacking the pipe prior to installation. The contractor claimed that ripping out work of its various subcontractors, including the backfill subcontractor, and the concrete subcontractor, the landscape subcontractor was all work performed on its behalf by subcontractors and, therefore, covered under the policy despite the defective workmanship exclusion that excludes coverage for property damage to “your work.” The trial court ruled the damage was excluded but this was reversed on appeal.
Summary of the Facts
Limbach Company, LLC (Limbach) had a contract with Morse Diesel/Essex to perform mechanical work on a project at Howard University in Washington , D.C. Limbach was responsible for installing a prefabricated, insulated, underground steam line. It subcontracted the production of the steam line to Thermacor Process, Inc. (Thermacor). It subcontracted the excavation and backfilling of the trench for the line to Legacy Builders.
A leak was discovered in the steam line after it was installed. The leak damaged the insulation covering the pipe, the backfill placed around the steam line, and the landscaping in the area surrounding the leak – including concrete walkways. In order to excavate and repair the damaged pipe, Limbach had to remove concrete that was installed by a third party. As a result, Limbach had to hire a company to perform concrete replacement.
Limbach filed a claim with it commercial general liability (CGL) carrier, Zurich American Insurance, for the costs of replacing the damaged steam line and repairing the work damaged by the leak. This included the cost of repairing the backfill, the cost of replacing the steam pipe, the cost of repairing the landscaping, the cost of replacing the concrete, and the cost of a temporary steam boiler. Zurich agreed only to cover the cost of the temporary steam boiler and part of the cost of the landscaping. The balance of the claims were denied by Zurich on the basis of policy exclusions.
Relevant Insurance Policy Language
The Zurich policy provided that Zurich “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The policy applied to completed operations, as defined by the policy under “products-completed operations hazard.” This terms was defined in the policy as follows:
“ Products completed operations hazard: (a) Includes all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work’ ….”
The definition of “your work” is “work or operations performed by you or on your behalf” and includes “materials, parts or equipment furnished in connection with such work or operations.”
Exclusions to the policy included what is known as the “your work” exclusion. This excludes “’Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”
An exception to this exclusion provides: “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. Making this exception key to its argument for coverage, Limbach argued that its insurance claim covers the cost of repair or replacing damaged work performed by subcontractors and third parties. Thus, Limbach argued that the damaged work was not excluded from coverage.
Choice of Law.
As in initial matter it is important to note that although the project was in Washington, D.C. and the court that decided the case was located in Virginia, the law the Court applied was applied was the law of the State of Pennsylvania because that is where the insurance policy was delivered.
Backfill Claim: The parties agreed that the backfill was damaged by the leak. The backfill work had been performed by a subcontractor. Zurich maintained that the “your work” exclusion precluded coverage for the damage to the backfill because it was performed on the insured’s behalf. As work performed “on your behalf” Zurich argued this made it subject to the exclusion. The court rejected Zurich ’s argument because, “The exclusion specifically states that it ‘does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.’” In reaching that conclusion, the court reviewed the history of the Insurance Services office (ISO) exclusion on which this policy was based. The court quoted a decision from a Pennsylvania court that had analyzed the same exclusion and reached a “holding that the ‘unambiguous terms’ of the ‘your work’ exclusion do not eliminate coverage for harm done to a subcontractor’s work.”
In the present case, the court concluded that since the backfill was performed on Limbach’s behalf by a subcontractor, the “your work” exclusion does not preclude coverage for the cost of repair to the damaged backfill and that “to hold otherwise would be to ignore the unambiguous terms of the exclusion’s exception for work performed by a subcontractor.
The damaged pipe. With regard to the damaged pipe, Limbach argued that the damage was not excluded from coverage because the pipe was manufactured by a subcontractor, Thermacor. The lower court determined that Thermacor was a “materialman” rather than a subcontractor, and that the damaged steam pipe was therefore excluded from coverage by the “your work” exclusion. Again the appellate court disagreed. The court found that Thermacor’s role was highly distinguishable from that of a supplier because it had custom manufactured the steam pipe in accordance with shop drawings and project specification for this particular project, and one of Thermacor’s representative visited the work site, reviewed the installation drawings with Limbach, and provided specific instruction regarding the installation of the pipe.
Replacing concrete and repairing damaged landscaping
The lower court applied the “your work’ exclusion to preclude coverage for Limbach’s costs of replacing the concrete and repairing the damaged landscaping that resulted from removing the damaged pipe. The appellate court reversed this and held that the exclusion does not exclude coverage for damage to a third party’s work. “Since the landscaping and concrete work were performed by third parties, the “your work” exclusion does not preclude coverage for the costs of repairing and replacing the landscaping and concrete.”
For these reasons, the appellate court reversed and remanded the district court’s award of summary judgment that had been granted to Zurich . Limbach Company, LLC v. Zurich North American (CA-03-685-A, 4th Cir. U.S. Ct. App., Jan 2005).
Commentary. This decision may have been decided differently by another court applying the law of a different state. When underwriting and pricing insurance policies, it is important for insurance carriers to consider differences in how courts in various states interpret the sample language to reach very different results. It is important to consider where the insured will be performing its work and what state’s law will apply. Many companies include a choice of law provision in the policy itself dictating that disputes between insureds and the insurance company will be decided in a particular jurisdiction and will apply the law of that jurisdiction. The decision in this case does not explain whether the policy included such a provision. One might conclude that when the court says the policy was “delivered” in Pennsylvania , it is also saying that it was issued pursuant to the law and regulations of Pennsylvania applicable to policies issued in that state.
Insured firms, such as construction companies, may also benefit from understanding differences in how the law of different states may affect the interpretation of both their insurance policy and their construction contract. It is interesting to compare court decisions that reach opposite conclusions concerning the intent of policy language. For a lengthy journal article analyzing in some detail issues and decisions surrounding coverage for construction defects, see John Lennes & Kent Holland, Insurance for Construction Defects, re-printed in Construction Risk Management Law and Case Notes, available at Amazone.com.
About the author: Kent Holland is a construction lawyer in Tysons Corner, Virginia, and is a risk management consultant for the environmental and design professional liability. He is also publisher of ConstructionRisk.com Report.
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ARTICLE 3
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Architect Required to Review Adequacy of Engineer’s Structural Report
Before Proceeding with its Design Services
J. Kent Holland
A material factual dispute existed regarding whether an architect met the requisite standard of care in reviewing an engineering report prior to its client’s purchase of property and prior to the architect proceeding with plans for renovation of the building. Contractual language stating that the architect could rely on independent reports prepared for the owner by other firms did not relieve the architect of its responsibility to exercise reasonable care to review the engineering report and request additional inspection if it deemed it necessary for conducting its services.
A purchaser, Kerry, retained an architect, Angus-Young, to study potential sites for a business facility. The architect noted that the “structural stability of the ‘over the river’ building was unknown at this time,” and consequently recommended that Kerry obtain further inspection by a structural engineer. Kerry obtained such an inspection by Rust Environment & Infrastructure, which later became Earth Tech Environment & Infrastructure.
Based upon visual inspection, Rust found the building to be in good structural condition. Its report concluded that “at this time, the piers and caissons are not considered a significant safety concern. Kerry went forward with the purchase of the building and a retained Angus-Young to do the architectural services for renovating the building. As work began, the flooring was removed and it was discovered that one corner of the building was three and three-quarters inches lower than the rest of the floor.
Further engineering by another firm determined that the reason for the problem was that the building rested on timber piles below the water line instead of on concrete piles and caisson as had been thought. Much time and expense were involved in repairing the foundation before renovation could begin, and Kerry sought to recover that cost from Angus-Young and from Rust Environment because it asserts it wouldn’t have purchased the property and incurred the additional cost if the true condition had been reported beforehand.
Kerry’s theory against the Architect was that it breached its contract, committed negligence and made negligent misrepresentations by failing to properly review the Rust report and failing to properly determine the renovation project requirements and costs. Rust also filed a cross-claim against Angus-Young, for contribution and indemnification in the event it lost to Kerry. The trial judge ruled that Angus-Young was contractually entitled to rely on the Rust report which had been independently obtained by Kerry and furnished to Angus-Young, and it therefore granted summary judgment to the architect.
This was reversed on appeal, with the appellate court finding that the contract language did not absolve Angus-Young “from its duty to exercise ‘due architectural care’ in performing services for Kerry—that the duty pre-existed the parties’ contract and attached itself to all of the activities Angus-Young performed in fulfilling its contract with Kerry relating to the renovation project.”
The architect contended the scope of its services was limited and that evaluation of the adequacy of the Rust report was not within its scope of services. It also argued that the list of “optional additional services” that Kerry did not opt for must be considered in limiting the scope. Included in these optional services that Angus-Young was not required to perform were “providing planning surveys, site evaluations or comparative studies of prospective sites,” “providing services to investigate existing conditions or facilities,” “providing services to verify the accuracy of drawings or other information furnished by the Owner,” and “providing services in connection with the work of … separate consultants retained by the Owner.”
The contract also specifically required Kerry, and not Angus-Young, to furnish “surveys describing physical characteristics…” And, finally, the contract provided that as to “services, information, surveys and reports” furnished by Kerry, Angus-Young was “entitled to rely upon the accuracy and completeness thereof.”
Based on the above-quoted provisions of the contract, Angus-Young argued it had no responsibility to perform its own investigation and that it accept the Rust report as furnished to it by Kerry without further inquiry or investigation. The court rejected this argument. It found that Kerry wasn’t arguing that Angus-Young was required to do its own structural inspection but rather that Angus-Young was required to exercise due care so as to recognize the inadequacy of the Rust report to serve as a basis for its preparation of architectural plans for the renovation of the building. In particular, Kerry argued that because the Rust report didn’t say anything about the foundation below the water line and was also silent as to whether underwater features had been inspected, Angus-Young was required by the standard of care to call for a more detailed inspection before beginning to perform its own services.
The court particularly keyed in on language in the contract that permitted Angus-Young to retain consultants to assist it in performing its duties. It further focused on language of the contract that obligated Kerry to “furnish the services of other consultants when such services are reasonably required by the scope of the Project and are requested by the Architect.” The fact that Angus-Young did not request additional services here was deemed important by the court.
For these reasons, the court reversed the summary judgment and remanded the case to the trial court for trial on the merits of the complaint. Kerry Inc. v. Angus-Young Associates, Inc., 694 N.W.2d. 407 ( Wis. App., 2005)
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ABOUT THIS NEWSLETTER & A DISCLAIMER
This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for the Environmental and Design Professional Liability. The Report 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 only, 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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Publisher & Editor: J. Kent Holland, Jr., Esq.
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