Inside this Issue

A1 - Contribution Claim by Contractor’s Insurance Carrier against Architect as a Joint Tortfeasor
A2 - Payments by Prime Contractor to Subcontractor in Contravention to Assignment Agreement Requiring Payment to Bank, Entitles Bank to Recover on Every Misdirected Check Even Though Significantly Exceeding Actual Damages
A3 - Statute of Limitations for Filing Equitable Indemnity Claim Accrues Only When Party Seeking Indemnity Has Been Served a Complaint Giving Rise to the Indemnity Claim
A4 - Contractor’s CGL Insurance Carrier Must Pay Attorney’s Fees Awarded to Plaintiff against Insured Despite No Coverage for the Compensatory Damages that Were Awarded

Article 1

Contribution Claim by Contractor’s Insurance Carrier against Architect as a Joint Tortfeasor

See similar articles: Consolidation | Contribution | Joinder | Joint Tortfeasors | Subrogation

Where a general contractor settled a defective construction claim with the project owner during arbitration, the insurance carrier for the contractor subsequently filed a contribution and indemnity law suit against the engineering firm that had been under separate contract with the owner, alleging that the Owner’s damages were a single injury that resulted from the negligence of the engineer and the work of the contractor, who must legally be deemed joint tortfeasors. An appellate court held that summary judgment was improperly granted to the engineer by the trial court, and that the matter must go to a jury because facts alleged were adequate to support claims that the engineer provided insufficient information in the construction drawings, provided inadequate designs, and failed to provide adequate construction administration. Zurich American Insurance v. Heard, 740 S.E.2d 429 (Georgia, 2013).

In this case, the Owner initially filed claims against both the contractor and the architect in an arbitration demand. The contractor objected to having the claims against itself and the architect joined in a single arbitration, and filed a motion to sever the claims based on contract language that stated, “No arbitration arising out of or relating to the Contract shall include, by consolidation or joinder or in any other manner, the Architect … except by specific reference to the Agreement and signed by the Architect, Owner, Contractor and any other person or entity sought to be joined.” After the architect was dismissed from the arbitration, the Owner filed suit against the Architect in state court and continued its action against the contractor in arbitration.

Before conclusion of the arbitration proceedings, the contractor reached settlement with the owner for several million dollars. Before trial in the state court, the architect reached settlement with the owner for about $100,000.

The contractor’s insurance carrier covered part of the loss of the contractor and then filed suit against the Architect to recover damages it believed the Architect was liable for as a joint tortfeasor with the contractor. Under the law of the state of Georgia, joint liability and the right of contribution do not exist between settling joint tortfeasors when damages have been apportioned between the parties by a trier of fact such as a jury. But where, as in this case, there has been no apportionment of damages by a trier of fact, there can be a contribution action such as the one filed by the insurance carrier herein.

Comment: This case is interesting in that it touches on several issues that parties should consider when executing their contracts and when later settling claims. The contract here did not allow joinder and consolidation of claims against different parties in the same arbitration by the Owner unless everyone agreed. That is consistent with current provisions of the AIA form contract documents. There are certainly advantages and disadvantages to having the claims joined into a single proceeding. It is something to think about when negotiating the contract. With regard to the causes of action in the contribution action against the architect, the summary judgment was reversed and the matter now must go back to trial on the merits.

If the contractor had attempted to make a claim directly against the Architect for breach of a contractual duty (with third party beneficiary rights) or breach of an independent duty of care, those claims may have been dismissed due to lack of privity of contract and possible application of the economic loss doctrine. But if the Owner recovers damages against the contractor, that are also attributably to a joint tortfeasor (Architect), the contractor’s insurance carrier could prevail in recovering contribution against the Architect for the joint tortfeasors share of the damages.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 15, No. 8 (Aug 2013).

Article 2

Payments by Prime Contractor to Subcontractor in Contravention to Assignment Agreement Requiring Payment to Bank, Entitles Bank to Recover on Every Misdirected Check Even Though Significantly Exceeding Actual Damages

See similar articles: Assignment Agreements | Assignment of Payment | Damages | Payment | UCC

A bank was found entitled to recover the full value of all payments from a prime contractor that were misdirected to the subcontractor, where the prime contractor had acknowledged the subcontractor’s assignment agreement with the bank and had agreed to make payments directly to the bank instead of to the subcontractor. The subcontractor had assigned its accounts receivable on the project to the Bank as security for a line of credit it maintained with the Bank. Apparently someone in the accounting department of the prime contractor had not noted the assignment agreement when making payment to the sub. In a lawsuit against the prime contractor, the court held that the Bank was not limited to recovering only its actual damages for the breach of contract but was entitled, under the uniform commercial code (UCC) statute, to recover the full amount of all the checks that were misdirected.

The prime contractor argued that the actual damages should be the bank’s recovery rather than the total value of the wrongfully misdirected payments. The court found that where an account debtor (prime contractor) receives notification of an assignment but nonetheless pays only the assignor (subcontractor), the account debtor remains obligated in full under the contract, and upon the assignor’s default, the assignee may enforce the account debtor’s contractual obligations to the full amount even it that far exceeds the actual damages of the bank. Reading Co-Operative Bank, 984 N.E.2d 776 (Mass. 2013).

In rejecting the prime contractor’s argument, the court explained its reasoning as follows:

Here, the UCC provides a coherent and comprehensive scheme under which an account debtor remains fully obligated on a contract when it wrongfully misdirects payments. See G.L. c. 106, § 9–405 (a ). Application of the common-law measure of damages advanced by [Contractor] would undermine this scheme by effectively forgiving a portion of an account debtor's outstanding contractual obligation whenever such obligation exceeds the assignee's actual damages.

***

In view of art. 9's comprehensive scheme for recovery and distribution of funds due pursuant to an assignment and notification thereof, we conclude that art. 9 displaces the common law on the question of the measure of a secured creditor's recovery under G.L. c. 106, § 9–405. Where an account debtor receives notification of an assignment but nonetheless makes payments to the assignor, it remains obligated in full under the operative contract. G.L. c. 106, § 9–405 (a ). Accordingly, the proper measure of the assignee's recovery under G.L. c. 106, § 9–405, is the total value of all payments wrongfully misdirected. Here, the jury found [Contractor] liable under art. 9 for wrongful misdirection of ten checks totaling $3,015,000.49. The judge properly entered judgment against Suffolk in this amount.

***

There is no question that application of art. 9 on these facts leads to a harsh result, because [Contractor] is obligated to pay the bank nearly six times the bank's actual loss as determined by the jury. However, the result is neither illogical nor absurd; the Legislature has ensured against a windfall to assignees like the bank by mandating that they disburse recovered funds in excess of their actual losses plus reasonable expenses of collection and enforcement.

Because the assignee Bank’s actual damages are not relevant to the amount of the sum the prime contractor as account debtor must pay under the UCC statute, and because the secured creditor’s rights and remedies are cumulative and may be exercised simultaneously, the court concluded that the common-law doctrine of mitigation of damages does not apply to claims brought by the Bank under UCC.

Comment: This case certainly demonstrates the grave importance of maintaining accounting and documentation systems that flag special requirements concerning making payments to subcontractors and suppliers – and being sure that all appropriate accounting personnel are informed. As seen in this case, the consequences of inadvertently misdirecting payments is just too great not to exercise extreme caution.

Article 3

Statute of Limitations for Filing Equitable Indemnity Claim Accrues Only When Party Seeking Indemnity Has Been Served a Complaint Giving Rise to the Indemnity Claim

See similar articles: Equitable Indemnification | Homeowner Suits | Statute of Limitations

A homeowner association sued a contractor, alleging numerous construction defects and code violations. Two years later, the association filed an amended complaint adding a new allegation that the contractor installed defective plumbing and sewer systems. Based on the amended complaint, the contractor sought to file a complaint against the City of San Diego for equitable indemnification and contribution for its potential losses in the homeowner suit. The city argued that the accrual of the one year statute of limitations period began when the original homeowner suit was filed two years earlier. The court rejected the city’s argument and held that, only when the homeowner complaint was amended to add allegations concerning plumbing, did the contractor’s action against the city accrue. Centex Homes v. Superior Court of San Diego, 214 Cal.App.4^th 1090 (2013).

The court held in favor of the contractor, finding that the action was not time barred. This is because the relevant code stated, “The date upon which a cause of action for equitable indemnity or partial equitable indemnity accrues shall be the date upon which a defendant is served with the complaint giving rise to the defendant’s claim for equitable indemnity or partial indemnity against the public entity.” In this case, the court found that the original complaint said nothing about plumbing or sewer system defects. It was only with the amended complaint that these allegations arose and that the contractor knew of a basis for making an indemnity claim against the city based on its belief that crystallization in the pipes was the result of hydrochloric gasses emitting from the City’s sewer system.

Article 4

Contractor’s CGL Insurance Carrier Must Pay Attorney’s Fees Awarded to Plaintiff against Insured Despite No Coverage for the Compensatory Damages that Were Awarded

In a very strange (and I believe wrongly decided case), the Supreme Court of Idaho held that where a contractor was defended by its commercial general liability (CGL) carrier, and was found liable for breach of an implied warranty of workmanship in performing the work promised under its contract, the carrier was required to cover the attorney’s fees awarded to the homeowner against the contractor despite the fact that none of the underlying compensable damages were themselves covered by the policy. The reason there was no coverage for the defective workmanship, according to the court, was that no tort allegations were made, and there was no bodily injury or property damage. But how the court concluded that the plaintiff’s attorney’s fees that were awarded against the contractor are covered by insurance is worth reading.

Plaintiff’s attorney’s fees were treated by the court as if they were costs incurred to defend the contractor against the suit. After explaining the difference in a duty to defend the insured and a duty to indemnify for damages awarded against an insured, the court concluded that the attorney’s fees were covered under the supplementary payments provision of the policy which provide:

“We will pay, with respect to any claim we investigate or settle, or any “suit” against an insured we defend: “a. All expenses we incur…. e. All costs taxed against the insured in the ‘suit.’”

Having reached the correct result on the question of whether there was coverage under the policy for the damages awarded to the homeowner for defective workmanship because there was no accident resulting in bodily injury or property damage, the court proceeded to misinterpret the contractual liability exclusion in the policy as being the basis for its decision. The court concluded that, under a CGL policy, BI and PD damages are “generally covered under the insurance policy unless the injury is expected, intended, or unless liability results from contract”. Employers Mutual Casualty Company v. Donnelly and Rimar Construction, 300 P.3d 31 (Idaho 2013).

In explaining its reasoning with regard to the attorneys fees, the court stated:

Under the plain language of the contract, [contractor’s] policy states that damages only need to be ‘alleged’ to trigger coverage, they do not need to be proven. Since [the homeowners] clearly alleged damages that implicate the applicable provisions of the policy [carrier] is obligated to pay ‘[a]ll costs taxed against the insured in the ‘suit.’ ”

As applied by the court, the policy wording that reads “all costs taxed against the insured” means a carrier must pay not only the attorneys fees incurred in defending the insured contractor, but also the attorneys fees that a jury awards to the plaintiff against the contractor. The key is what is the meaning of “taxed against?”

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ConstructionRisk.com Report (August 2013)