Inside this Issue

A1 - Pollution Exclusion Can’t be Applied to Carbon Monoxide Poisoning Caused from Covered Occurrence Under Different Provision of Policy
A2 - Architect/Design-Builder Responsible for Construction Subcontractor’s Site Safety
A3 - Limitation of Liability Clause Enforced to Limit Recovery to only $550,000 of a $9.5 Million Jury Verdict
A4 - Economic Loss Rule Does not Apply to Fraud Claims

Article 1

Pollution Exclusion Can’t be Applied to Carbon Monoxide Poisoning Caused from Covered Occurrence Under Different Provision of Policy

Carbon monoxide was released into a newly constructed home due to incorrect installation of a water heater vent. The commercial general liability (CGL) carrier for the contractor declined to defend and indemnify the contractor against a suit for the homeowner’s injuries. The Supreme Court of Washington State held that although a broad, absolute pollution exclusion in the contractor’s policy was clearly enough written to bar coverage for such pollution, it could not be applied to this situation because “negligent installation” was the proximate cause of the claimed loss, and that was a “covered occurrence” under the policy regardless of whether that covered occurrence happened to cause injuries due to pollution. Zhaoyun Xia v. ProBuilders Specialty Insurance Company RRG, 188 Wash. 2d 171 (2017).

After suing the contractor for her injuries, the homeowner entered into a settlement agreement with the contractor for stipulated damages in the amount of $2million, with a covenant not to execute or enforce the judgment in exchange for assignment of first-party rights to claim against the contractor’s CGL carrier.

Duty to Defend versus the Duty to Indemnify

The court began its analysis by explaining that “the duty to defend is different from and broader than the duty to indemnify,” stating that, “The duty to indemnify exists only if the insurance policy actually covers the insured’s liability, whereas the duty to defend arises when the policy could conceivably cover allegations in a complaint.” (emphasis in original). “Accordingly, an insurer must defend a complaint against its insured until it is clear that the claim is not covered.” Thus, said the court, “If there is any reasonable interpretation of the facts or the law that could result in coverage, the insurer must defend.”

Efficient Proximate Cause was Covered Occurrence

The court stated that under Washington law, the rule of efficient proximate cause provides coverage “where a covered peril sets in motion a causal chain, the last link of which is an uncovered peril.” “If the initial event, the ‘efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.”

The court went on to state, “Like any other covered peril under a general liability insurance policy, an act of negligence may be the efficient proximate cause of a particular loss. Having received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.”

“The [pollution] exclusion cannot eviscerate a covered occurrence merely because an uncovered peril appears later in the causal chain. The efficient proximate cause rule exists to avoid just such a result, ensuring that an insurance policy offering indemnity for a covered peril will provide coverage when a loss is proximately caused by that covered peril.”

If the insurance company wanted to avoid liability for damages resulting from particular acts of negligence, the court stated the carrier could have written specific exclusions stating so. For example, the policy could have excluded “acts of negligence relating to the installation of home fixtures generally or hot water heaters specifically.” But absent such exclusion, there is coverage for the uninsured peril of carbon monoxide poisoning that results from the insured period of negligent installation of the water heater.

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. 9 (Sep 2017).

Article 2

Architect/Design-Builder Responsible for Construction Subcontractor’s Site Safety

On a design-build project where an architect held the prime contract under DBIA forms 530 and 535, it was liable for overall site safety – including that which it had by subcontract expressly delegated to its construction subcontractor. Because the language of the prime agreement imposed safety duties on the prime design-builder, the court held that those duties could not be avoided or delegated down to a subcontractor. Ryan v. TCI Architects/Engineers/Contractors, Inc., 72 N.E. 3d 908 (Indiana 2017).

This case deals with a general contractor. The question was whether it assumed a non-delegable duty of care to keep a worksite safe when it executed the DBIA form contract. Looking at the language of the contract, the court held that the contract demonstrated the design-builder’s intend to assume a duty of care for everyone at the site.

An employee of a sub-subcontractor sustained a workplace injury. The injured individual filed suit against the design-builder to recover for its injuries. The trial court, on the basis that the subcontract agreement between the prime and sub stated that all site safety responsibility was delegated to the subcontractor, granted summary judgment for the design-builder.

This decision was reversed and remanded on appeal, with the appellate court explaining that the prime contractor had expressly agreed by the terms of the prime contract with the project owner to accept site safety responsibility, and this could not subsequently be delegated away. The court explained as follows:

“The language that Ryan points to as affirmatively demonstrating TCI’s intent to assume a duty of care is found in the contract Gander Mountain and TCI entered into—specifically Form 535. Ryan directs our attention to Section 2.8.1 of that form, which provides that “[TCI] recognizes the importance of performing the Work in a safe manner so as to prevent damage, injury or loss to ... all individuals at the Site, whether working or visiting....” Appellant’s App. at 71.

The contract also directs TCI to “assume [ ] responsibility for implementing and monitoring all safety precautions and programs related to the performance of the Work.” Id. Furthermore, TCI was to “designate a Safety Representative with the necessary qualifications and experience to supervise the implementation and monitoring of all safety precautions and programs related to the Work.” Id.

The Safety Representative was to “make routine daily inspections of the Site and ... hold weekly safety meetings with [TCI’s] personnel, Subcontractors and others as applicable.” Id. Finally, the contract instructed that TCI and subcontractors *915 “shall comply with all Legal Requirements relating to safety.” Id.

This language, taken as a whole, makes clear that TCI intended to assume the duty of keeping the worksite reasonably safe. First, the language quoted above is found in subparagraph 2.8, whose heading is aptly entitled: “Design-Builder’s Responsibility for Project Safety.” App. at 71. Such a heading is telling of the purpose the section served: to outline the responsibilities TCI was to assume.

By assuming responsibility for implementing and monitoring all safety precautions and programs related to work performance, TCI expressly shouldered the duty of carrying out and periodically supervising the very safety policies that may have prevented worker injury here.

Assumption of responsibility also means that TCI assumed the risk of liability for damages that might have been incurred if any of those safety precautions and programs were to ever fall short of the reasonable standard of care.

Though we stop short of assessing whether TCI’s actions failed to meet the requisite standard—a question better left to the fact finder—we are convinced TCI assumed the duty of care, and thus the risk of potential liability, when it assumed responsibility for implementing and monitoring safety precautions and programs.”

The court also deemed that the prime contract gave the design-builder a “level of control” that satisfies the court’s concerns over imputing liability on a general contractor who “enjoys no control over the means and manner of competing the work.” The design-builder here explicitly agreed that it “shall at all times exercise complete and exclusive control over the means, methods, sequences and techniques of construction.” And it assumed responsibility for “proper performance of the Work of Subcontractors and any acts and omissions in connection with such performance.”

Further, said the court, “charging [the design-builder] with the duty of designating a safety representative to perform inspections and hold safety meetings with contractors further supports [laborer’s] contention that [design-builder] assumed a specific duty to maintain a reasonably safe environment. The safety representative's obligations extended to supervising and implementing the safety precautions and programs imputed on [design-builder], as well as performing safety inspections and holding safety meetings with subcontractors.”

Comment: This decision is somewhat surprising in that the court interpreted the DBIA design-build form as creating a non-delegable safety duty to the prime contractor. The court stated that it applied Indiana’s “four corners” rule in written instrument interpretation and therefore found that subsequent subcontracts had no effect on the design-builder’s assumption of the duty of care. The parties’ intent with regard to the responsibilities assumed by the prime contract can only be ascertained from the “four corners” of the prime contract and cannot be informed by what parties may have included in the language of the subcontracts.

I wonder if the design-builder might have avoided this result by inserting language in the prime agreement expressly stating that it could assign the safety duties to its subcontractors instead of itself assuming all the duties stated in the quoted sections. That might have been enough to satisfy the court by demonstrating the intent that was subsequently expressed by the subcontracts. I don’t know whether this would work, but it can’t hurt to insert such language in the prime agreement as a precaution against a court rendering a decision like the one here.

Article 3

Limitation of Liability Clause Enforced to Limit Recovery to only $550,000 of a $9.5 Million Jury Verdict

Where a housing developer won a jury verdict for more than $9.5 million against a geotechnical engineer, the court applied the limitation of liability (LoL) clause in the geotech’s contract to cap the liability at $550,000. The developer attempted to avoid the LoL by arguing that the geotech’s conduct was willful and wanton. The trial court allowed evidence in that regard, but the jury found the conduct was not willful and wanton. Therefore, the LoL clause withstood the challenge. Taylor Morrison of Colorado, Inc. v. Terracon Consultants, Inc., 2017 WL 2180518, 2017 COA 64 (2017).

Of note was the fact that the court allowed the plaintiff’s expert witness to describe in detail the actions of the geotech it deemed to be at fault, but it excluded testimony by the expert that this conduct was “willful and wanton” because that is “not an engineering concept” but rather a “legal concept” for which an engineer cannot testify.

There was a question of whether the geotech’s deposit of $550,000 into the court registry, and an email to counsel for the developer addressing a “mutual dismissal” constituted a statutory “offer of settlement” that would have allowed the geotech to recover an award of its costs and fees of litigation. The court held it did not.

How to Offset Settlement Amounts from Others

Another issue that was addressed was whether a settlement of other parties with the developer for $592,000 would be deducted from the geotech’s own contribution of $550,000 thereby reducing the geotech’s liability to zero. That is what the trial court did. The appellate court reversed that part of the decision and held that the settlement amount should have been set off against the jury verdict first to ascertain the amount of recovery and then apply the LoL – thus rendering the geotech liable for the $550,000 per its LoL clause.

Expert Not Permitted to Testify to Legal Opinion

During the trial, the appellate court notes that the developer’s experts “provided detailed testimony describing how [geotech’s] supervision of technicians, soil testing, and review of test results failed to meet the relevant standards of care. These experts were allowed to discuss all relevant facts and opinions on [geotech’s] performance using characterizations within their expertise, even if they were not permitted to testify whether this conduct met the legal standard of ‘willful and wanton conduct.’”

Couldn’t Avoid LoL by Suing Insurance Company

The developer argued that the LoL was not applicable to the extent damages are paid under the geotech’s insurance policy. It argued the trial court erred in rejecting developer’s request to enter a judgment allowing it to pursue the geotech’s insurance carrier. This issue concerning insurance had been previously decided against the developer in earlier litigation involving this matter and the court concluded the issue was not preserved for further litigation in the current dispute.

Comment: The court stated that the LoL clause “capped [geotech’s] total aggregate liability to [developer] at $550,000 for any and all damages or expenses arising out of its services or the contract.” The actual language of the LoL clause was not quoted in the court decision. But it must have met all the requirements that I so often discuss with regard to drafting a strong LoL clause that will be broadly applied. It apparently specifically stated that the cap applied to damages whether alleged to be caused by breach of contract, breach of warranty, negligence, errors or omissions or any other theories.

As a reminder, a clause we typically recommend using reads as follows:

Limitation of Liability

To the fullest extent permitted by law, the total liability, in the aggregate, of Consultant and its officers, directors, partners, employees, agents, and subconsultants, to Client, and anyone claiming through or under Client, for any claims, losses, costs, or damages whatsoever arising out of, resulting from or in any way relating to this Project or Contract, from any cause or causes, including but not limited to tort (including negligence and professional errors and omissions), strict liability, breach of contract, or breach of warranty, shall not exceed the total compensation received by Consultant or $100,000, whichever is greater. The Client may negotiate a higher limitation of liability for an additional fee, which is necessary to compensate for the greater risk assumed by Consultant.

We also recommend that design professionals include a mutual waiver of consequential damages clause in their contracts such as the following:

Mutual Waiver of Consequential Damages

Consultant and Client waive all consequential or special damages, including, but not limited to, loss of use, profits, revenue, business opportunity, or production, for claims, disputes, or other matters arising out of or relating to the Contract or the services provided by Consultant, regardless of whether such claim or dispute is based upon breach of contract, willful misconduct or negligent act or omission of either of them or their employees, agents, subconsultants, or other legal theory, even if the affected party has knowledge of the possibility of such damages. This mutual waiver shall survive termination or completion of this Contract.

Article 4

Economic Loss Rule Does not Apply to Fraud Claims

See similar articles: Defective Work | Economic Loss Doctrine | Economic Loss Rule | Fraud | Misrepresentation

The economic loss rule was applied by a trial court to bar a homeowner in a contractual relationship with a contractor from suing for fraud instead of only for breach of contract. This was reversed on appeal, with the appellate court holding that while claims for negligence are barred by the economic loss rule where a valid contract exists between the litigants, claims for fraud are not barred. The homeowner may, therefore, assert both claims. Bradley Woodcraft, Inc. v. Bodden, 795 S.E. 2d 253 (North Carolina 2016).

In this case, the court stated that the homeowner presented evidence at trial tending to establish that the contractor misrepresented that he was licensed, that he billed her for items that were not delivered, and he promised to perform certain work without any actual intention of doing so.

In explaining the economic loss rule, the court quoted from a decision in the case of “Lord v. Customized Consulting Specialty, Inc., 182 N.C.App. 635, 639, 643 S.E.2d 28, 30–31 (2007) as follows:

Simply stated, the economic loss rule prohibits recovery for purely economic loss in tort, as such claims are instead governed by contract law.... Thus, the rule encourages contracting parties to allocate risks for economic loss themselves, because the promisee has the best opportunity to bargain for coverage of that risk or of faulty workmanship by the promisor. For that reason, a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract, even if that failure to perform was due to the negligent or intentional conduct of that party, when the injury resulting from the breach is damage to the subject matter of the contract. It is the law of contract and not the law of negligence which defines the obligations and remedies of the parties in such a situation.

The court goes on to explain that decisions subsequent to the quoted decision limited the economic loss rule so that it did not apply to all “torts” as might have been suggested but rather only to prohibit negligence actions. No cause of action for negligence will be permitted when the plaintiff has a breach of contract action available. But a fraud action is permitted to proceed. For this reason, the court reversed the trial court decision and sent the case back for retrial on all issues.

Search

Get the Newsletter

Contract Guide for Design Professionals

Recent Newsletters

All Newsletters

Risk Management Workshops

Life Skills Workshop Slides

Contract Clauses – Papers and Articles

Construction Risk Management

ConstructionRisk.com Report (Sep 2017)