Inside this Issue

A1 - Essential to Engage Your Insurance Broker to Review Additional Insured Endorsement Requirements in Contracts
A2 - Indemnification and Defense Obligation Applied to Owner’s First-Party Claim to Require Engineer to Defend Owner Against Run of the Mill Contractor Claim
A3 - Court Affirms that Indemnification Clauses Traditionally Used and Interpreted as Extending Only to Third-Party Claims – Cannot be Used for First Party Damages from Breach of Contract
A4 - Government Can’t Use Contract’s General Disclaimer of Reliance on Site Information to Deny Differing Site Condition Claim (Metcalf v. U.S. precedent)

Article 1

Essential to Engage Your Insurance Broker to Review Additional Insured Endorsement Requirements in Contracts

By: Michael Herlihy, ARM, CRIS – Ames & Gough

As discussed in the April, May and June editions of Construction Risk.com Reporter, the New York Supreme Court ruling in Gilbane Building Co./TDS Construction Corp. vs. St. Paul Fire and Marine Insurance/Liberty Insurance points out the need for design and construction professionals to involve their insurance brokers when agreeing to additional insured as well as other requirements in construction contract insurance clauses. Failure to do so might put the designer or contractor at risk of being in breach of the contract.

Additional insured endorsements may be one of the most litigated endorsements in commercial general liability insurance policies. Over the years, insurers have regularly changed the additional insured endorsement wording, making them more restrictive, in response to court rulings which interpreted the original endorsements as providing coverage broader than what insurers may have intended. However, by changing the endorsement wording, some of the restrictive language in use by insurers today is not sufficient enough to allow designers and contractors to meet contractual additional insured requirements.

In the Gilbane case, a contractor hired for a project by the State University of New York was required by contract to name the construction manager as an additional insured under the contractor’s insurance policies. The endorsement wording used by the insurer for this contractor limited the additional insured status to “any person or organization with whom you have agreed to add as Additional Insured by a written contract…” Since the construction manager, Gilbane/TDS was not a signatory to the contract, there was no written agreement between the contractor and Gilbane/TDS. When Gilbane/TDS sought coverage as an additional insured under the contractor’s CGL policy for a claim made against it arising from the contractor’s services, the CGL insurer denied coverage based upon the restriction in the endorsement that there needed to be a written contract between the named insured and additional insured. When challenged in court, the NY Supreme Court ruled in favor of the CGL insurer’s interpretation. This problem could have been avoided if the contractor was aware of the limitations of the endorsement on their policy and had requested an endorsement from its CGL insurer specifically naming Gilbane/TDS as an additional insured.

The standard Insurance Service Office (ISO) blanket additional insured endorsements in use today tend to limit who is an additional insured to “any person or organization for whom you (the named insured) are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured…” (See ISO CG 2033 04/13).

Recognizing that these standard additional insured endorsements are not sufficient to meet additional insured requirements frequently found in today’s construction agreements, many of the CGL insurers who specialize in coverage for design professionals as well as contractors have developed their own endorsements that don’t limit the additional insured status to only those parties with whom the named insured has a written contract or for whom the named insured may be performing operations.

One such example reads: “Who is an Insured: Any person or organization that you (the named insured) agree in a written contract requiring insurance to include as an additional insured…” In this endorsement there is no limitation that the named insured must be performing operations for the additional insured nor is there a requirement that the named insured and additional insured must have a written agreement between them. Other insurers regularly use additional insured endorsements intended to schedule specific entities as additional insured, but in the schedule they describe the additional insured as “any person or organization whom you become obligated to include as an additional insured as a result of any contract or agreement you have entered into.” Again, using this approach, there is no limitation that the named insured must be performing operations for the additional insured or that the named insured and additional insured have a written agreement between them.

Frequently construction contracts may also require specific edition dates of the ISO additional insured endorsements be used; such as ISO CG 2010 11/1985 edition or ISO CG 2033 07/2004 edition. At least two major CGL insurers for design professionals and contractors now have blanket additional insured endorsements that automatically provide coverage as broad as the specific edition dates being required by such contracts, so long as the edition dates are on or after 1985.

It is important that designers and contractors check with their insurance brokers to find out what blanket additional insured endorsements are on their commercial general liability policies. If the designer’s or contractor’s CGL insurer is using the more restrictive wording that does not necessarily mean that the insurer will be unwilling to add other parties to the policy as additional insured. It may be that the insurer requires additional information on all other parties to assess what risk, if any, there may be to adding the party using a specific additional insured endorsement. Depending upon the additional insured party’s role on the project, there may be an additional cost to add that party as an additional insured.

Regardless, designers and contractors need to seek the expert advice of their insurance brokers on all contracts to ensure that they can meet contractual insurance requirements.

About the author: Michael Herlihy is Executive Vice President & Partner with Ames & Gough, Inc.; Specialty Insurance Brokerage & Risk Management Consulting.

859 Willard Street, Suite 320
Quincy, MA. 02169
Phone: 617-328-6555
mherlihy@amesgough.com
www.amesgough.com

This article is published in ConstructionRisk.com Report, Vol. 19, No. 7 (July 2017).

Article 2

Indemnification and Defense Obligation Applied to Owner’s First-Party Claim to Require Engineer to Defend Owner Against Run of the Mill Contractor Claim

See similar articles: AECOM | duty to defend | First Party Claim | Indemnification clause | Third-party Claim

By: J. Kent Holland, Jr.

A recent court decision requiring an engineer to indemnify and defend its client, a project owner, against a routine contractor claim is a wakeup call to further clamp down on indemnification language so that only those damages resulting from tort claims against the indemnitee based on the negligence of the design professional will be indemnified, and that there will be no duty whatsoever to defend such claims. In the case of Penta Corporation v. Town of Newport v. AECOM Technical Services, Inc., No. 212-2015-CV-00-011 (Merrimack, New Hampshire Superior Court, 2016), the trial court held that the engineer owed its client, the town, a defense against a contractor suit that alleged that the plans and specifications prepared by the engineer and provided by the town to the contractor for bidding and construction were defective. It was a routine breach of contract claim by the contractor against the project owner, but the court concluded the indemnification agreement in the engineer’s agreement with the town was broad enough to obligate it to defend the town against the contractor’s claim.

Read Entire Article in my Guest Essay on the aeProNet website, here.

This article is published in ConstructionRisk.com Report, Vol. 19, No. 7 (July 2017).

Article 3

Court Affirms that Indemnification Clauses Traditionally Used and Interpreted as Extending Only to Third-Party Claims – Cannot be Used for First Party Damages from Breach of Contract

By: J. Kent Holland, Jr.

The U.S. Court of Appeals for the District of Columbia affirmed a U.S. District Court decision that granted summary judgment to an engineer, holding that the statute of limitations had run on a breach of contract action, and the indemnification clause at issue did not cover first-party claims. The court stated, “Unquestionably, indemnification clauses have traditionally been used and interpreted as extending only to third-party claims [ ]. In the initial Agreement, the terms ‘claim, judgment, lawsuit, damage, liability, and costs and expenses,’ must be interpreted in light of the traditional function. Furthermore, the D.C. Court of Appeals has advocated for strict construction of indemnification clauses to avoid covering ‘any obligations which the parties never intended to assume.’” Hensel Phelps Construction Co. v. Cooper Carry Inc., (U.S. Court of Appeals, District of Columbia, No. 16-7128 (June 30, 2017). James F. Lee, Jr. and Jonathan C. Shoemaker, of the Lee & McShane, PC law firm, wrote the brief for the appellee, engineer in this appeal in which Mr. Shoemaker argued the cause for the engineer.

Initial design work was done under an engineering contract to Marriott Hotels, which subsequently assigned its development rights to HQ Hotels – which then entered into a design-build contract with Hensel Phelps. Marriott assigned its initial engineering agreement to Hensel Phelps.

After three phases of a hotel project were completed, and the fourth phase was underway, the engineer was informed by the District of Columbia that its designs did not comply with the applicable fire codes. The design-builder claimed it cost over $4 million in design alterations to remedy the alleged errors, and that it incurred additional costs over the next three years as it discovered additional design defects.

When did the breach of contract action accrue?

Under D.C. law, parties have three years to file a breach of contract claim “from the time the right to maintain the actions accrues.” The court explained that the term “accrue” is not defined, but “actions usually accrue when they come into existence,” and that is the “at the time of breach.”

What the court is saying is that the design-builder could not wait until substantial completion of the project before filing its breach of contract claim. The contractor agued that the Project is governed by a unitary construction contact, under which courts typically interpret first breach as occurring upon “substantial completion” of the Project. Because substantial completion didn’t occur until 2014, the contractor argued that the claim was not time-barred. The court disagreed. It concluded that the terms of the Agreement that was assigned to the contractor, dispute-resolution procedures for breach of contract could have been initiated as early as March 20122 when the fire safety code violations were first discovered. In addition, the Agreement “required” the parties to proceed to court if dispute resolution failed.

The initial Agreement expressly contemplated the possibility of litigation before its completion. The court thus concluded, “Hensel Phelps had the right to begin dispute-resolution procedures in March of 2011 and to bring a lawsuit in court if and when those proceedings failed. We must hold Hensel Phelps to its bargain. Because it filed its complaint more than three years after the action accrued, its breach-of-contract claim is time-barred.”

Indemnification is for Third-Party Claims Only

The design-builder argued that the initial Agreement’s indemnification clause used broad and expansive language and contained no limitation confining its scope only to third-party claims. The clause provided that the Engineer would indemnify Marriott:

“[t]o the fullest extent permitted by law, … from and against any claim, judgment, lawsuit, damage, liability, and costs and expenses, including reasonable attorneys’ fees, as a result of, in connection with, or as a consequence of [Engineer’s] performance of the Services under this Agreement…..”

The court stated that indemnification clauses must be interpreted by looking to the objective language as the expression of the parties' intent. This objective analysis must, however, consider the context in which the words are used. “Contextual analysis allows courts to ‘determine what a reasonable person in the position of the parties would have thought the disputed language mean’ a well as to determine if, ‘in context, it is evident that the terms used have a technical or specialized meaning.’”

As noted at the beginning of this case note, the court concluded that in the context of the language of this contract, there was no clear and unequivocal intent to include first-party claims as part of the indemnification obligation.

Comment: The court’s holding that indemnification is for only for third-party claims unless expressly stated to include first-party claims as well, is consistent with the historical purpose of indemnification. There was a time when the indemnification clauses in most contracts stated that indemnification was only for “bodily injury” and “property damage claims”. Those causes of action denote that third-party claims have been made against the Indemnitee. Many contracts today omit the “bodily injury” wording and speak in more general terms of indemnity for all claims, law suits, causes of action, demands, damages, losses and costs, etc. Even with that wording, as the court noted in this case, it is not clear that the intent is to do anything other than indemnify against third-party claims and those damages and costs that arise out of third-party claims.

There are court decisions, however, such as the Penta Coporation v. Town of Newport v AECOM, case (New Hampshire Superior Court, 2016) that have found indemnification was owed for first-party claims, even though the language of the contract was not much different from that addressed by the court here. To avoid that risk, we routinely edit the indemnification clauses to state that indemnity is only for damages arising out of “third party tort claims.” For more about the AECOM decision and our comments on it, visit my indemnification article at the ae ProNet website.

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. 7 (July 2017). Copyright 2017, ConstructionRisk, LLC

Article 4

Government Can’t Use Contract’s General Disclaimer of Reliance on Site Information to Deny Differing Site Condition Claim (Metcalf v. U.S. precedent)

By: J. kent Holland, Jr.

The U.S. Army denied a differing site condition claim of its contract that allegedly encountered subsurface rock conditions as well as ground water conditions, differing materially from what was represented in a geotechnical report provided to bidders. In response to the contractor’s lawsuit alleging differing site conditions, superior knowledge, breach of good faith and fair dealing, and misrepresentation, the government filed a motion to dismiss. The U.S. Court of Federal Claims denied the government’s motion, stating that it found all of the government’s arguments to be unpersuasive, particularly the arguments how the geotechnical was to be used and relied upon by the contractor. It also rejected the Army’s argument that general language in the contract regarding site conditions was exculpatory and eliminated the contractor’s differing site condition claim. The language in question stated, “variations may exist in the subsurface between boring locations” and that contractors should “review the geotechnical information provided, assess if any additional subsurface information is required, and develop a plan … to … perform laboratory or field testing, and install and monitor [ ] piezometers.” ASI Constructors, Inc. v. Untied States, 129 Fed.Cl. 707 (2016).

With the request for proposals, the U.S. Army Corps of engineers (USACE) included project specifications and a 212 page geotechnical report describing the site conditions and results of geotechnical testing conducted by the Corps and various contractors. The report stated its purpose was to “share insights into the site geology, water table information, [and] select laboratory and field instrumentation and field data considered relevant to the design of the new shoring system at the site of the weir.”

In its suit, the contractor alleged that its proposal was based on the assumption that the geotechnical information in the report represented actual site conditions. What it actually encountered was highly fractured rock, and excessive ground water flow, both of which it asserted were materially different from the conditions shown in the report.

The government sought dismissal of the suit on the grounds that the contract documents didn't affirmatively represent that the rock was not pervasively fissured and that the water table at the site didn’t have active water flowing into it. “It also argued that certain caveats and disclaimers contained in eh contract documents precluded ASIA from relying upon representations in the [ ] Report as a basis for its DSC claims.” This argument was rejected by the court as a basis for a motion to dismiss, with the court explaining:

“The government’s arguments are unpersuasive. While the interpretation of a contract involves a question of law, ‘the question of what meaning should be given by a court to the words of the contract[ ] may sometimes involve questions of material fact and not present a pure question of law.’” [citations omitted]. In this case, the primary contract document upon which ASI relies for its DSC claims is the 212–page ERDC Report entitled “Summary and Interpretation of Select Laboratory and Field Test Results in Support of a Temporary Shoring System at the Weir of the Canton Dam Auxiliary Spillway.” The ERDC Report contains highly technical descriptions of site conditions and numerous tables, graphs, and drawings that present the results of geophysical tests conducted by the Corps and various contractors. Interpreting the text and the test results set forth in the ERDC Report manifestly involves more than legal analysis; as described below, it requires factual determinations for which expert testimony would likely be needed. Such determinations cannot be made in the context of a motion to dismiss.”

The court further explained the government’s argument that the Report merely provided qualified speculation concerning site conditions that could not be relied upon by bidders. “The government argues that the statements in the ERDC Report which ASI cites in its complaint employ words such as “speculate” and “suggest,” which are not sufficiently “affirmative” or “unqualified” to serve as the basis for a DSC claim. See Def.’s Mot. at 7–10. It contends that the statements “merely provided qualified speculation based on the limited data available.” Id. at 7. In addition, the government cites the following clause, contained in the contract’s “soil and rock anchors” specification, which it claims “expressly precludes ASI from asserting a differing site condition claim based on rock fissures”: A foundation investigation has been made at the site by the Government and data is presented on the foundation exploration drawings. Subsurface soil data logs are shown on the drawings. While the foundation information is representative of subsurface conditions at the respective locations, local variations in the characteristics of the subsurface materials may be anticipated. Local variations which may be encountered include, but are not limited to, classification and thickness of rock strata, fractures, and other discontinuities in the rock structure, and variation in the soil classifications. Such variations will not be considered as differing materially within the purview of the CONTRACT CLAUSES, paragraph Differing Site Conditions.

The court found the argument unpersuasive because the contractor was not relying upon particular passages of the Report in isolation as the basis for its claim but rather that the Report “as a whole, including the extensive test result data it contains, supplied such representations.”

The court also rejected the government's argument that ground water information contained in the Report could not be relied upon by bidders because of statements in the report that “additional groundwater studies should be conducted to confirm whether the Dog Creek Shale has the capacity to transmit ground water in the vicinity of the weir excavation.” This argument was premature, said the court, to consider in motion for dismissal.

“Finally, the Court also declines to dismiss ASI’s DSC claims based on certain general language regarding site conditions that is included in the contract documents. In particular, the government cites Section 02 00 00 of the contract, which states that “variations may exist in the subsurface between boring locations” and that contractors should “review the geotechnical information provided, assess if any additional subsurface information is required, and develop a plan ... to ... perform laboratory or field testing, and install and monitor[ ] piezometers.” Def.’s Mot. at 7–8 (quoting Def.’s Mot. App. at DA010).

It is well-established that, assuming contract documents make affirmative representations about site conditions, “broad exculpatory clauses ... do not relieve the defendant of liability for changed conditions.” United Contractors v. United States, 177 Ct.Cl. 151, 165–66, 368 F.2d 585 (1966) (internal quotation omitted); see also Woodcrest Constr. Co. v. United States, 408 F.2d 406, 410 (Ct. Cl. 1969) (“[G]eneral portions of the specifications should not lightly be read to override the Changed Conditions clause.”). Further, to the extent that the contract documents suggest—as they appear to do here—that additional testing should be performed “by the contractor” after a contract is awarded, “the natural meaning” of such a clause is that, “while [a contractor] would investigate conditions once the work began, it did not bear the risk of significant errors in the pre-contract assertions by the government about the subsurface site conditions.” Metcalf Constr. Co. v. United States, 742 F.3d 984, 996 (Fed. Cir. 2014).”

On the Superior Knowledge Claim, in denying the government’s motion to dismiss, the court stated to survive a motion to dismiss, ASI need not allege facts sufficient to show that the contract specifications misled it. Rather, said the court, “it is sufficient that it allege facts that show that the specifications “did not put it on notice to inquire” about the conditions at issue. But, more to the point, the question of what information was supplied to ASI in the contract documents, and whether it was misleading, again depends upon how the ERDC Report and its findings are interpreted. Thus, for the same reasons that the Court found it inappropriate to address the ERDC Report’s interpretation in the context of a motion to dismiss the DSC claims, it also declines to do so in considering whether to dismiss ASI’s superior knowledge claims.”

Comment: This decision is important for how it frames the issue of a bidder’s right to rely upon information contained in geotechnical reports and other documents provided by the government with the bidding documents. Citing the important decision in the case of Metcalf Construction v. U.S., the court once again has explained that it will not accept general caveat language in geotechnical reports, or general disclaimer in a contract concerning site conditions to be a basis for denying a differing site condition claim. The differing site condition provision of a federal contract accomplishes the important purpose of saving the government costs by eliminating the necessity of bidders to include large contingencies in their bids for potential differing site conditions. By compensating a contractor when it actually encounters conditions materially different from what was indicated in the contract documents, the contractors are treated fairly and the government saves money in its overall federal procurement program.

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. 7 (July 2017). Copyright 2017, ConstructionRisk, LLC

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