Inside this Issue

A1 - CGL Coverage for Consequential Damages to Condo Resulting from Rain Intrusion Allegedly Caused by Subcontractor’s Work
A2 - Indemnification Clause Required Indemnification Only for Damages Caused by Indemnitor
A3 - Undocumented Immigrant Entitled to Access to Court to Pursue Personal Injury Action against Contractor
A4 - Construction Manager is not Additional Insured under Contractor’s CGL policy Despite Owner/Prime Contract Requiring Contractor to Name CM as Additional Insured
A5 - Engineer has no Affirmative Duty to Supervise Jobsite Safety Absent Contract Language or Conduct

Article 1

CGL Coverage for Consequential Damages to Condo Resulting from Rain Intrusion Allegedly Caused by Subcontractor’s Work

See similar articles: Accident | Insurance Dispute | Occurrence | Subcontractor Exception | Your Work Exclusion

A condominium complex sustained consequential damages resulting from rainwater infiltration from roof leaks and leaking windows, due to alleged defective work of a construction subcontractor. The condo association filed suit against the prime contractor, among others, to recover its losses. The contractor tendered the claim to its commercial general liability (CGL) carrier to defend. The carrier refused to do so – arguing that there was no “property damage” or “occurrence” as required by the policies to trigger policy. The Supreme Court of New Jersey held that consequential damages caused by the subcontract’s work was an “occurrence” caused by an “accident” and was within the subcontractor exception to the “your work exclusion” of the GCL policy, and therefore covered by the policy. Cypress Point Condominium Association v. Adria Towers, LLC, 226 N.J. 403 (2016).

In this case the condo association alleged that water infiltration occurred after the project was completed and caused mold growth and other damage to the competed common areas and individual units. The case does not discuss whether a pollution exclusion might have been applied to deny damages allegedly resulting from the mold. But the court stated that the post-construction consequential damages resulted in loss of use of the affected areas and this qualifies as “physical injury to tangible property…” and were covered by “property damage” under the terms of the policy.

The next issue for the court to determine was whether the property damage resulted from an “occurrence” which is defined in the policy as an “accident.” Since there is not a definition of the word “accident” in the policy, the court looked to the Merriam-Webster dictionary definition of “accident” as “an unforeseen and unplanned event or circumstance.” The court also looked to a leading treatise on New Jersey insurance law that tracks substantially the same language as the dictionary definition. Based on those guidance principles, the court found that the term “accident” in the policies “encompasses unintended and unexpected harm caused by negligent conduct.”

The insurers here asserted that damage to an insured’s work caused by a subcontractor’s faulty workmanship is foreseeable to the insured developer because damage to any portion of the completed project is normal, predictable risk of doing business. “Thus, in the insurers’ view, a developer's failure to ensure that a subcontractor's work is sound results in a breach of contract, not a covered ‘accident’ (or ‘occurrence’) under the terms of the policies. We disagree.”

For its final point, the court having determined that the claims were covered under the policies’ general insuring agreement, the court analyzed whether the “your work” exclusion might nevertheless bar coverage. This exclusion precludes coverage for “property damage to your work arising out of it or any part of it.” But an important exception to that exclusion states that the 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.” Because the work in this case was performed by a subcontractor, the exclusion became inapplicable. In conclusion, the court held that there was coverage under the policy for the damages alleged by the condo.

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. 19, No. 4 (April 2017).

Article 2

Indemnification Clause Required Indemnification Only for Damages Caused by Indemnitor

See similar articles: Contract Interpretation | Indemnification clause | indemnity

Where a subcontracted laborer brought personal injury action against a general contractor (GC), the GC filed suit against subcontractor to require it to indemnify it for any damages awarded against it. The laborer alleged he was injured from toxic fumes while performing excavation work. The GC filed a motion for summary judgment on its contractual indemnification claim, which motion was denied because the court concluded it was premature to decide it before discovery was completed and a determination could be made as to whether the subcontractor caused the damages. This was based on an indemnification clause that required the subcontractor to indemnify the GC “against all claims, damages, losses and expenses … caused by, arising out of, in connection with, or resulting from the performance of the Subcontractor's Work under this Subcontract, where any such claim … [is attributable to bodily injury or property damage] and is caused by or arises in whole or in part, from any negligent or non-negligent act or omission of the Subcontractor….”

The court concluded that the words “caused by” subcontractor in the second half of the indemnity provision mean that the subcontractor is only obligated to indemnify if it caused the damages, but that if that is not the clear intent then the clause must at most be found ambiguous as to whether the subcontractor must indemnify the GC for the GC’s own negligence. The court agreed that a decision concerning indemnification would have to await completion of discovery at the earliest. Parker v. John Moriarty & Associates v. Strittmatter Metro, LLC, 2016 WL 2992049 (U.S. D.C. District of Columbia, 2016).

In its analysis of the arguments, the court stated,

“In the District of Columbia, parties are free to enter into indemnification contracts.” [citation omitted] “An indemnity provision, however, ‘should not be construed to permit an indemnitee to recover for his [or her] own negligence unless the court is firmly convinced that such an interpretation reflects the intention of the parties.’” [citation omitted]. “If a party ‘expects to shift responsibility for its negligence ... the mutual intention of the parties to this effect should appear with clarity from the face of the contract.’ ” “The question then is whether [a] contract provision clearly reflects such a purpose.” (emphasis added). “Thus, if the alleged intention to provide this type of protection for the indemnitee is at all ambiguous, this standard is not satisfied.”

The court here concluded that the indemnity provision requires both that the loss arise out of the subcontractors work under the subcontractor agreement and also that the loss be “caused by or arise in whole or in part” by some act or omission of the subcontractor.” At best, the court concludes that the contract provision is ambiguous as to whether it obligates the subcontractor to indemnify the GC if the damages were caused by negligence of the GC as alleged in the underlying complaint in the matter.

Article 3

Undocumented Immigrant Entitled to Access to Court to Pursue Personal Injury Action against Contractor

See similar articles: Illegal Aliens | Jobsite Safety | Summary Judgment | Undocumented Immigrants | Yates

Where summary judgment had been granted against an undocumented immigrant from bringing a negligence claim against his employer, the state supreme court reversed that decision and held that the courts of the state are open to every person of the state regardless of whether they are “illegal aliens.” The court below had relied upon case law holding that “if a plaintiff cannot open his case without showing that he has broken the law, a court will not aid him.” In concluding that this must not be applied in the instant case, the supreme court stated that unlike the cited case, the plaintiff’s conduct here was not the contributing cause of his alleged injury. The court went on to quote the state constitution that provides:

“All court shall be open; and every person for an injury done him in his lands, goods, person, or reputation, shall have remedy by due course of law, and right and justice shall be administered without sale, denial, or delay…. No person shall be debarred from prosecuting or defending any civil cause for or against him or herself, before any tribunal in the state, by him or herself, or counsel, or both.” McKean v. Yates Engineering Corp., 200 So. 3d 431 (2016).

“Thus,” concluded the court, “the Mississippi Constitution does not limit access to our courts and leaves open for every person a remedy for injury done to his person.” The court went on to cite favorably case law from other states such as:

New Hampshire - “[A] well established body of law holds that illegal aliens have rights of access to the courts and are eligible to sue therein to enforce contracts and redress civil wrongs such as negligently inflicted personal injuries.”

New Jersey - “Surely, the effect on the worker of his injury has nothing to do with his citizenship or immigration status. If his capacity to work has been diminished, that disability will continue whether his future employment is in this country or elsewhere.”

Wisconsin - “It cannot be seriously argued that people enter this country illegally so they can recover for an injury that will be inflicted upon them later.”

New York – “Even the most hopeless outcast is entitled to protection against unlawful injury to his person.”

The court, quoted from a New Jersey decision that stated, “Potential employers may well be encouraged to employ such aliens if they become aware of the alien’s inability to lodge claims against them for wages or on account of injuries sustained.”

Article 4

Construction Manager is not Additional Insured under Contractor’s CGL policy Despite Owner/Prime Contract Requiring Contractor to Name CM as Additional Insured

A construction contract between a contractor and project owner required the contractor to name the construction manager (CM) as an additional insured under its commercial general liability (CGL) policy. A sample additional insured endorsement with the CM’s name typed in was even provided with the contract. The CM was under a separate contract with the owner, however, and had no contractual privity with the construction contractor. When a claim was subsequently made against the CM based on alleged negligence of the contractor that caused adjacent buildings to sink due to faulty excavation and foundation work of the contractor, the CM tendered the defense of the claim to the contractor’s insurance carrier, Liberty Insurance Underwriters. The insurance carrier denied coverage, however, asserting that the terms of the additional insured endorsement extended coverage only to entities “with whom” the named insured had a written contract. An appellate court agreed with the carrier, holding that coverage is not for those “FOR whom” a contractor has agreed in a project owner contract to provide coverage, but instead covers “only those that have written contracts directly with the named insured”. Gilbane Bldg. Co./TDS Construction Corp. v. St. Paul Fire and Marine Insurance and Liberty Insurance, 38 N.Y.S. 3d, 143 A.D.3d 146 (2016).

Comment: Contracts between project owners and their contractors often include a requirement that the design professionals or construction managers be made additional insureds under the contractor’s CGL policy. If the additional insured endorsement has language like that cited in this decision, the additional insured status will only exist if the additional insured signs some type of written agreement with the named insured contractor whereby the contractor obligates itself to the actual additional insured to provide that coverage. It is not explained in this decision whether the certificate of insurance showing the CM as an additional insured was actually issued. Even if it was, however, the certificate could not change the effect of the endorsement language and could not obligate the carrier to provide such insurance that is otherwise not encompassed within the endorsement.

This decision should be cause for concern by risk managers and insurance brokers whom might otherwise assume that under circumstances like those presented herein, a court would find coverage for the CM as an additional insured. It could affect the advice that insurance professionals give their clients.

As explained by the court,

“The principal issue in this appeal is the interpretation of the additional insurance endorsement in the policy which provides that an additional insured is “any person or organization with whom you [the insured] have agreed to add as an additional insured by written contract.” Trial courts have arrived at conflicting interpretations of a similarly worded additional insured clause as to whether coverage is extended not only to those “with whom” the insured agreed, but also to those “for whom” the insured agreed to provide coverage. We hold that the subject additional insured clause covers only those that have written contracts directly with the named insured.”

In this case the joint venture was retained by the State University of New York to provide construction management (CM) services in connection with a project. Per the CM agreement, any prime contractor that the University separately entered into contract with would be required to name the CM manager as an additional insured under the contractor’s insurance policies. A construction company thereafter entered into a private agreement with the university and agreed to procure commercial general liability (CGL) Insurance with an endorsement naming the CM as an additional insured. The owner provided a sample certificate of insurance and it showed the CM as one of the additional insureds to be listed.

Thereafter, the prime contractor obtained the CGL policy that included the following definition of additional insured:

“WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by a written contract but only respect to liability arising out of your operations or promises owned by or rented to you.”

When a claim was later made against the CM, it sought to have the CGL carrier defend it as an additional insured. The carrier declined to do so, arguing that the CM was not an additional insured because it had not entered into a contract with the prime contractor whereby the prime contractor promised the CM to name it as an additional insured.

When the CM sued the carrier for failing to defend it as an additional insured, the carrier filed a motion for declaratory judgment which was granted by the trial court because the court found that the policy “required only a written contract to which Sampson is a party” and that this requirement was met by Samson’s written contract with the University, which obligated it to procure insurance naming the CM as an additional insured.

In reversing that decision, the appellate court stated,

“In this case, the ‘Additional Insured—By Written Contract’ clause of the CGL policy provides additional insured coverage to ‘any person or organization with whom you [Samson] have agreed to add as an additional insured by written contract.’ Contrary to Supreme Court’s determination, and consistent with our prior decision [ citations omitted] we find that the language in the “Additional Insured—By Written Contract” clause of the Liberty policy clearly and unambiguously requires that the named insured execute a contract with the party seeking coverage as an additional insured. Since there is no dispute that Samson did not enter into a written contract with the JV, Samson’s agreement in its contract with DASNY to procure coverage for the JV is insufficient to afford the JV coverage as an additional insured under the Liberty policy.”

As seen by the court, the language in the prime construction contract, including the sample certificate of insurance, may indeed show that it was intended that the prime contractor make the ECM an additional insured but all this would do for the CM in this case is create a potential claim against the prime contractor for breach of the contract insurance provisions. It would not mean that the policy that was issued by the carrier could be judicially rewritten to cover the CM.

Article 5

Engineer has no Affirmative Duty to Supervise Jobsite Safety Absent Contract Language or Conduct

See similar articles: Affirmative Duty | Jobsite Safety

The Supreme Court of Mississippi affirmed a decision that we reported on last year in the case of McKean v. Yates Engineering, affirming that where a subcontractor’s employee was injured when scaffolding collapsed, the engineer working for the prime contractor was not responsible for those injuries where it had no supervisory duty to inspect the scaffolding before concrete was poured, and no other supervisory duties. The lower court of appeals had applied a seven-factor test to determine whether the engineer had such a duty outside the provisions of the contract. The court affirmed its previous holding that for an architect to have an affirmative duty to warn of dangerous conditions, the architect must “by contract or conduct” take on the responsibility to maintain the safety of the construction project. The court further stated that if the architect takes on a duty to supervise, “The supervision of safety is encompassed in the duty to supervise, and no separate agreement to supervise safety is necessary where the architect is supervising the details of every other aspect of the project.” The key for the design professional, therefore, is not to contractually agree to supervise the work of the contractors and then to be avoid falling within the pit of the seven factors. McKean v. Yates Engineering Corp., 200 So. 3d 431 (Mississippi 2016).

The seven factors identified by the court to determine whether supervisory powers go beyond the provisions of the contract include:

1) Actual supervision and control of the work;

2) Retention of the right to supervise and control;

3) Constant participation in ongoing activities at the construction site;

4) Supervision and coordination of subcontract doors;

5) Assumption of responsibilities for safety practices;

6) Authority to issue change orders; and

7) The right to stop the work.

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ConstructionRisk.com Report (April 2017)