Inside this Issue

A1 - Insurer of Hotel’s Second Owner Can Pursue Negligence Action Against Original Owner’s Builder for Contractor Owed Duty to Subsequent Property Purchaser for Code Despite Lack of Privity of Contract
A2 - On a Design-build Procurement, a Bidder was Rejected because One of its Key Personnel Participated in the Earlier Preparation of the Bridging Documents
A3 - CGL Policy May Cover Damage to the Insured Contractor’s Own Work and Breach of Warranty is a Potentially Covered Occurrence
A4 - Differing Site Conditions Claim Rejected Because State Had no Duty to Disclose Superior Knowledge, Plus the Contractor Did Not Document Damages but Attempted to Rely on Total Cost Claim

Article 1

Insurer of Hotel’s Second Owner Can Pursue Negligence Action Against Original Owner’s Builder for Contractor Owed Duty to Subsequent Property Purchaser for Code Despite Lack of Privity of Contract

See similar articles: Contract Privity | Duty of Care | Economic Loss Doctrine | Negligence | Privity

By James Rhodes & Kent Holland

A federal district court in Pennsylvania ruled that the insurer of a hotel’s second owner could advance a negligence action against the general contractor for alleged code violations that may have contributed to a fire. Ultimately, the court found that the factors weighed “somewhat tenuously” towards finding a duty owed from the builders to the subsequent purchasers and its insurer. The court noted that “[t]hough there is no direct relationship between the parties, a contractor is certainly aware that a commercial building is likely to have multiple owners and negligent building practices will affect subsequent purchasers.” The court went on to state, “the public interest lies in imposing a duty on those who are negligent in following required building codes.” In finding that a duty of care was owed, the court allowed further fact-finding to proceed to determine if the codes were violated and the degree to which these violations contributed to the fire. Amco Ins. Co. v. Emery & Assocs., 926 F. Supp. 2d 634 (W.D. Pa. 2013).

A group of developers had hired Emery, a general contractor, to build a Comfort Inn in East Franklin Township, Pennsylvania that was completed in 1996. The developers sold the hotel in 2001 to a second owner, Star Hotels, Inc. The hotel sustained significant damage in a fire in 2008, which resulted in a payment of over 4 million dollars to the second owner by its insurance company, AMCO. The insurance company then attempted to bring a lawsuit against the general contractor to recoup its payments, claiming that a failure to build the hotel in compliance with state and local codes contributed to the fire. Applying Pennsylvania law, a federal judge found that the negligence action could continue because the court found a “common law” duty of the builders to the second owner and its insurer for the foreseeable consequences of negligent construction.

The insurance company bringing the lawsuit argued that the builders failed to follow various building codes, such as for the use of fire retardant wood for the structure, placement of automatic sprinklers in the attic, and minimum spacing for draft stops. They argued that these code violations allowed the fire to spread, contributing to the substantial property damage. The builders sought dismissal of the lawsuit on two bases. First, they argued that they owed no legal duty to the second owners of the hotel and its insurer, neither of whom they had a contractual relationship with. Second, the builders challenged the code violations and questioned whether the alleged violations actually contributed to the fire.

The court focused on the first issue, assessing whether any legal duty was owed from the builders to the second owners and its insurer. Under the fundamentals of a common-law negligence action, a plaintiff must first show that the defendant owed the plaintiff a “duty of care,” which the court described as “some relationship” between the parties that “gives rise to the obligation of certain conduct.” While a surgeon clearly owes a duty of care to a patient, instances where the plaintiff and defendant have had little to no interaction presents a more difficult situation. The court discussed various factors that courts have historically used to determine if a duty of care exists, noting that it is a malleable legal concept made up of competing public policy concerns.

This article is published in ConstructionRisk.com Report, Vol. 16, No. 1 (Jan 2014).

Article 2

On a Design-build Procurement, a Bidder was Rejected because One of its Key Personnel Participated in the Earlier Preparation of the Bridging Documents

See similar articles: Bid Protest | Bridging Documents | Conflict of Interest | Design-Build

The New Jersey Schools Development Authority rejected, as nonresponsive, a bidder’s technical proposal on a design-build contract for a new school because a key team member of the bidder (the Project Architect) was involved in the previous development of the design bridging documents. The bidder touted this fact in its proposal by stating: “[this] involvement allows the SSP team to utilize the most up-to-date information regarding the Project’s design as he was responsible for preparing the bridging documents … while employed with the Authority.” The Authority disqualified the individual because of his previous involvement and thus precluded his involvement as the proposed project architect for the design-builder. Substitution of this key individual was not permitted, since, the Authority concluded, “neither the RFP, nor applicable laws government procurement of professional services, permit [Offeror’s] identification of a substitute Project Architect after the deadline for submission of Technical Proposals and Price Proposals.” Patock Construction Co. v. New Jersey Schools Development Authority (N.J. Superior Ct., App. Div., January 2010 – unpublished decision).

The Offer protested the Authority’s decision, and in response the Authority granted an informal hearing and reviewed the issues and issued a second written decision – still rejecting the Offeror’s proposal as being nonresponsive because of the substantial involvement of its project architect in the preparation of the bridging documents. In its second decision the Authority explained that the individual’s involvement as a Key Team Member did not specifically disqualify his firm as the design consultant, but nevertheless, the design-builder could not cure the deficiency by substituting another Project Architect because that “would be ‘manifestly unfair’ to the other bidders, and render the procurement process ‘unwieldy, untimely and difficult, in not impossible, to manage.’” The court affirmed the Authority’s decision.

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. 16, No. 1 (Jan 2014).

Article 3

CGL Policy May Cover Damage to the Insured Contractor’s Own Work and Breach of Warranty is a Potentially Covered Occurrence

See similar articles: Breach of Warranty | CGL insurance | Fraud | Insurance Coverage Disputes | Occurrence

A question often arises whether there is insurance coverage under a commercial general liability (CGL) policy for damage the insured contractor’s own work. Many states require that there is no insurable “occurrence” under a CGL policy unless there has been damage to property or work of someone other than the “insured.” In Taylor Morrison Services, Inc. v. HDI-Gerling America Insurance, 746 S.E.2d 587 (2013), the Georgia Supreme Court held (1) damage to work of the insured can constitute an “occurrence;” (2) Liabilities based on Fraud are not covered as an occurrence; and (3) Breach of warranty could potentially create a covered occurrence.

The typical standard CGL policy language was at play in this case. The policy covered damages arising out of bodily injuries or property damage caused by an “occurrence,” which is defined as “an accident....”

Taylor-Morrison is a homebuilder. It was sued by homeowners alleging that concrete foundations of their homes were improperly constructed by virtue of the fact that the builder failed to lay four inches of gravel beneath the foundations; failed to use adequate moisture barriers under the concrete slab; and used too high a water-to-cement ratio. Due to these defects, the homeowners alleged that the foundations were failing and this caused physical damage to the homes including “water intrusion, cracks in the floors and driveways, and warped and buckling flooring.” They also asserted that the builder misrepresented or concealed from them material information about the construction of the foundations.

The carrier filed suit against the insured contractor for declaratory judgment, asserting that the claims did not involve potential liabilities for which there could be coverage under the CGL policy. The trial court awarded summary judgment to the carrier, finding no coverage because there was no “occurrence”, because it found there can be no occurrence when the only “property damage” alleged is damage to the work of the insured. Georgia law was applied by the court although the work was performed in California. The court does not say so, but this must have been based on a contract clause specifying the applicability of Georgia law.

Summary judgment was reversed on appeal. With the state supreme court holding that “An ‘occurrence,’ as the term is used in a standard CGL policy, does not require damages to the property or work on someone other than the insured.” In so holding, the court insisted that “Nothing about our holding is inconsistent with the settled notion that CGL coverage is intended to insure against liabilities to third parties for injury to property or person, but not mere liabilities for the repair or correction of the faulty workmanship of the insured.” Expanding on this, the court explains that an “occurrence” alone is not enough to give rise to coverage, but there also must be “bodily injury” or “property damage” as a result of the “occurrence” that the insured must pay to a third party. Instead of arguing that there was no occurrence here, the court suggests the better argument by the carrier would be to focus on other policy provisions such as exclusions. The carrier did not argue exclusions, including business risk exclusions were applicable, however. Focusing only on the insuring agreement of the policy turned out to be the wrong argument for this carrier.

In rejecting the carrier’s argument that an occurrence requires damages to something other than the work of the insured, the court cited a “strong recent trend in the case law [that] interprets the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship.” The court stated:

“’[M]ost federal circuit and state supreme court cases [now] line up in favor of finding an occurrence in [the context of a claim by homeowners against an insured-homebuilder for damage to nondefective portions of a home resulting from the defective construction of another portion of the home].’ Indeed, we find a number of recent decisions in our sister states that construe “occurrence” without reference to the identity of the person whose property or work is damaged thereby.”

Based on case law from around the country, the court went on to hold that damage to work other than the insured’s own work is not necessary in Georgia to find an insurable “occurrence” under the standard CGL policy.

The second part of the decision of this court addressed the question of whether Georgia law requires that the claims being defended not be for breach of contract, fraud, or breach of warranty from the failure to disclose material information. “Occurrence” is defined in the policy as an “accident,” but the court notes that the word “accident” is not itself defined. So the court looked to what it considered the “usual and common meaning of ‘accident.’” It concluded that the term conveys nothing about the nature or extent of the injuries caused by the unexpected happening, and conveys nothing about the nature of the legal theory of liability other than if the theory is absolutely and necessarily inconsistent with the notion of an ‘accident’ … a claim premised upon such a theory of liability could not possibly involve an ‘occurrence.’

Having said that, the court explained, “Fraud claims generally are such claims.” In other words, fraud claims are not covered as an “accident.” In most cases, the court says that for an occurrence to exist, “the claims must be for something other than fraud….”

Turning finally to the question of whether breach of warranty is covered, the court said, “this is a different story.” As seen by the court the making of an express warranty is an intentional act, but “the breach of a warranty may not be.” Even though the breach of warranty could be intentional, it is not necessarily so. Warranty law imposes strict liability regardless of intent or culpability if the warranty is breached. Faulty workmanship may cause the work to amount to a breach of warranty for that work. The court says that since faulty workmanship can constitute an “occurrence” the “occurrence” might be found in the context of a claim for breach of warranty. But having said that, the court went on to explain:

“[E]ven a breach of warranty that involves an ‘occurrence’’ will not necessarily –or even usually—give rise to coverage under a standard CGL policy.” This is because “property damage” may be found only when the faulty workmanship causes physical injury to, or loss of use of, nondefective property or work. “As such, it generally will only be a breach of warranty of nondefective property from which coverage might arise, as liability for breach of the warranty of the defective property would not involve ‘damages because of’ ‘property damage’ to the nondefective property.” Despite having said that, however, the court wrapped up its decision by holding that “For an ‘occurrence’ to exist for purposes of a standard CGL policy, it is not always necessary that the claim be for something other than breach of warranty.”

Article 4

Differing Site Conditions Claim Rejected Because State Had no Duty to Disclose Superior Knowledge, Plus the Contractor Did Not Document Damages but Attempted to Rely on Total Cost Claim

On a contract for a renovation and asbestos removal in a state office building, the contractor claimed there was a differing site condition making asbestos removal more difficult than anticipated. The Supreme Court of Alaska held that the contractor could have performed its own site investigation to determine the conditions and could not argue that the state had failed to disclose superior knowledge, but that even if a differing site condition could have been proved, the contractor was barred from recovery because it failed to comply with express provisions of the contract requiring it to keep records of all damages. North Pacific Erectors, Inc. v. State of Alaska, 2013 WL 4768380 (Alaska 2013).

Details of the Case

The state’s bid solicitation notified potential bidders that they were responsible for investigating the project site. By submitting a bid, the contractor represented that it had “visited and carefully examined the site and is satisfied as to the conditions to be encountered in performing the Work.” The contractor and its subcontractor didn’t visit the job site or participate in the prebid meeting before bidding on the contract.

After the subcontractor began work it made a note in its daily report about “dimple deck surface and describe the cleaning process for ‘indentations’ and ‘protrusions’ in the pan deck that ‘cost us considerable time.’” Although the workers had to use toothbrushes to clean asbestos from the bumpy surfaces, the daily report did not contain any time estimate for the additional cleaning efforts. The subcontractor notified the prime about the pan deck problem, and the prime transmitted the information to the state, requesting additional compensation. The request was denied and the prime filed a claim under the contract’s differing site conditions clause.

Differing Site Conditions

The initial dispute was heard and decided by an administrative hearing officer. He found that the daily report note about the additional work was the only entry made in the daily reports relating to the embossed deck pan and extra work required. But he concluded there was a differing site condition that entitled the contractor to additional compensation even though the sub “did not segregate its labor costs,” and its “exert utilized a method of requesting damages [total cost method] which is prohibited by contract.” The hearing officer declined to enforce the contract limitations because he found the Department should have disclosed the condition of the deck pan surface to all bidders. The Department’s Deputy Commissioner reviewed and rejected the hearing officer decision as being at variance with the law and concluded that the contractor was entitled to no relief. The key reason given by the Deputy Commissioner was that to prevail on a differing site condition claim, the contractor had “the heavy burden” of showing that “it could not have anticipated the condition from site inspection, reasonable investigation, or general experience.”

The Deputy Commissioner concluded that “[here], in spite of the State’s admonitions, [Contractor] did not conduct a site investigation” and is therefore “charged with the knowledge a reasonable investigation would have revealed.” According to the Deputy Commissioner, “a reasonable investigation should have at least entailed a request for photos or other information on the pan deck. The deputy commissioner also point out that [Contractor] could have obtained information from the five previous subcontractors that had performed asbestos removal for the department. The agency concluded that ‘reasonable investigation would have revealed the exposed pan deck and its embossing.’ Thus, [Contractor's] own failure to reasonably anticipate the condition caused the ‘unplanned expense and delay.’”

The Deputy Commissioner also concluded that the contractor failed to demonstrate that the pan deck surface was outside the norm of what could be expected by a contractor. Finally, the Deputy Commissioner concluded the Department’s staff experience with pan decks was limited and they had no reason to believe the pan deck surface was unique. Therefore, they lacked superior knowledge that had to be revealed to the contractor. The deputy commissioner found that because the contractor could have acquired the relevant information on the pan deck through an independent investigation, it failed to show that the Department had breached a duty to disclose. This was affirmed on appeal by the state supreme court for the reasons explained below.

The court concluded that the Department did not occupy such “uniquely favored a position with regard to the information at issue that no ordinary bidder in the plaintiff’s position could reasonably acquire that information without resort to the State.” The test used by the court for imposing on the State a duty to disclose information in its possession was first explained in the decision of Morrison-Knudsen v. State as follows:

“Did the state occupy so uniquely-favored a position with regard to the information at issue that no ordinary bidder in the plaintiff’s position could reasonably acquire that information without resort to the State? Where resort to the state is the only reasonable avenue for acquiring the information, the state must disclose it, and may not claim as a defense either the contractor's failure to make an independent request or exculpatory language in the contract documents.”

In this case, the court concluded that although the Department had some control over the information concerning the building, it did not have absolute control over the relevant information. The court found that the contractor could have reasonably acquired the information without resorting to the Department, just as other bidders had done. “Accordingly, we hold that the State had no duty to disclose information regarding the pan deck surface.”

In addition, the court agreed with the state that the contractor's failure to comply with the contractual records requirement and damages provision bars recovery for the differing site condition claim. The contract expressly required the contractor “to keep an accurate and detailed record which will indicate the actual ‘cost of the work’ done under the alleged differing site condition” and provided that “failure to keep such a record shall be a bar to any recovery….” The contract also required that for additional compensation claims, the contractor “must immediately begin keeping complete, accurate, and detailed specific daily records concerning every detail of the potential claim including actual costs incurred.” The court stated that under the contract “total cost, modified total cost or jury verdict forms of presentation of damage claims are not permissible to show damages.” The contract event stated that “labor inefficiencies must be shown to actually have occurred and can be prevent solely based on job records.”

Based on all the above, the court concluded, “the parties contracted to require detailed records for differing site condition claims and to establish the actual cost method as the only permissible method to calculate damages” and that “failure to comply with these provisions in the contract bars recovery for the differing site condition claim.” In strictly applying the contract requirements against the contractor, the court also explained that the state law was consistent with the contract requirements in that “the preferred method is the actual cost method, ‘in which each element of extra expense incurred because of the [alleged breach] is added up for a total claimed amount.’”

In emphasizing the need for actual cost documentation of damages, the court stated, “Courts prefer the actual cost method because it provides the court with a record of discrete additional costs, guaranteeing that the final amount of the adjustment will be equitable and reliable.” The court further stated that its conclusion is supported by federal decisions and cited Joseph Pickard’s Sons Co. v. United States that, to rely on the jury verdict method, a contractor must show “a justifiable inability to substantiate the amount of his resultant injury by direct and specific proof.” Failure to produce records of actual costs was found to be inexcusable and fatally defective in the case of Joseph Pickard’s Sons and is likewise found to be fatally defective by the Supreme Court of Alaska in this case.

Comment

This case shows the importance of complying with the requirements of the contract (particularly those concerning filing claims and documenting damages. It is also instructive as to the general requirements for proving entitlement to relief for differing site conditions and the significance of contract language that may impose duties upon a bidder to conduct its own independent site investigations before bidding. Finally, the disdain for total cost or jury verdict damage claims is clearly emphasized in this decision. Thus, even in the absence of contract language specifying that detailed documentation be maintained to prove actual damages, it is likely that the court here would have rejected the contractor’s claim, because relying on total cost or jury verdict damages instead of producing “records of actual costs was inexcusable and fatally defective.”

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ConstructionRisk.com Report (January 2014)