Inside this Issue

A1 - Insurance Coverage Issues Related to Coronavirus Pandemic
A2 - Fiduciary Duty not Owed by Contractor in Absence of Contract Language Expressly Stating So
A3 - Contractor has no Duty to Inspect for Asbestos Before starting Renovation of Single Family House (under Colorado law)
A4 - Insurance Company not Obligated to pay Damages agreed to by Contractor under Settlement Agreement with Owner where Damages not Allocated between Covered and Non-covered Damages
A5 - Risk and Liability Considerations for Coronavirus Related Services

Article 1

Insurance Coverage Issues Related to Coronavirus Pandemic

By: Greyling Insurance Brokerage & Risk Consulting

In this report, Greyling Insurance Brokerage outlines the insurance coverage applicable to various claims that could arise in connection with coronavirus (COVID-19) and the likelihood of recovery with respect to such claims and coverages. The report concludes that few damages directly incurred by a professional services firm are likely covered under the firm’s typical business insurance policies, but recommends a series of actions to be taken to the potential to claim coverage for damages.

PDF of the full report

This article is published in ConstructionRisk Report, Vol. 22, No. 4 (April 2020).
Copyright 2020, ConstructionRisk, LLC

Article 2

Fiduciary Duty not Owed by Contractor in Absence of Contract Language Expressly Stating So

See similar articles: cost-plus | Fiduciary Duty | lien | punch list | trust and confidence

Alleging shoddy workmanship, fear that its contractor wouldn’t finish the project, and a lack of detailed accounting under the cost-plus contract, the owner made only a partial payment on a draw requested by the contractor. Contractor and its subcontractors filed construction liens and filed suit against homeowner for unpaid fees. The court found the defects were merely punch list type items not entitling the owner to withhold payment and it found the demanded cost accounting details demanded by the owner were not required by the contract. Because the contract didn’t explicitly contain language such as “relationship of trust and confidence,” the court rejected the owner’s assertion that the contractor owed it a fiduciary duty. The owner’s failure to pay constituted a breach of contract entitling the contractor and subs to file and enforce liens for payment. Goes v. Vogler, 304 Neb. 848 (Supreme Ct. Nebraska, 2020).

Quoting at length from the court decision is the best way to present the reasoning of this decision.

“No Special Fiduciary Duty of Builder Under Cost-Plus Contract in the Absence of Agreement.

The Voglers claim that even assuming the parties were subject to a cost-plus contract, a contractor in a cost-plus contract has additional fiduciary duties to a homeowner as a matter of law, and that the district court erred by not explicitly discussing whether Shelton breached these duties and, consequently, the contract. As we noted above, we have stated that the “amount owing the builder should be computed on the basis of the amount actually spent for labor, materials, and supplies which go into and become a part of the finished structure, including the amounts paid to subcontractors.” Robison v. Madsen, 246 Neb. at 27-28, 516 N.W.2d at 598. The Voglers contend that given the law just quoted, it necessarily follows that a contractor must provide prompt, detailed accountings of actual costs incurred before taking progress payments and, furthermore, must inform the homeowner of potential cost overruns. The Voglers overstate the obligations of a contractor in general and, given the contract, in this case in particular. We reject this assignment of error.

Although there is case law to suggest that occasionally a cost-plus arrangement may place additional burdens upon a contractor, this is typically recognized where the contract language provides that “the contractor accepts a ‘relationship of trust and confidence established’ between it and the owner.” 2 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law § 6:81 at 641 (2002). For example, in a Maryland appellate case relied on by the Voglers, the contractor accepted a “ ‘relationship of trust and confidence’ ” with the homeowners and explicitly agreed to further their interests by performing “ ‘the Work ... in the most ... economical manner consistent with’ ” their interests and to “ ‘keep ... full and detail[ed] accounts.’ ” Jones v. J.H. Hiser Constr. Co., 60 Md. App. 671, 676, 484 A.2d 302, 304 (1984). Given these provisions, the court held that there was a relationship of trust and confidence between the parties, i.e., a fiduciary relationship grounded in the explicit language of the contract. Jones v. J.H. Hiser Constr. Co., supra.

The contract between the Voglers and Shelton does not explicitly contain **197 language creating a fiduciary relationship. As a general matter, it has been observed and we agree that “ ‘[i]n any cost-plus contract there is an implicit understanding between the parties that the cost must be reasonable and proper.’ ” Forrest Const. Co., LLC v. Laughlin, 337 S.W.3d 211, 223 (Tenn. App. 2009) (quoting Kerner v. Gilt, 296 So. 2d 428 (La. App. 1974)). However, other than those already required by law and by the parties’ contracts, we decline to impose further fiduciary duties on contractors as a matter of law.”

Comment: Note how important the contract language is to deciding whether the contractor had a fiduciary duty. In the absence of language expressly establishing a a fiduciary duty, the court explains that no such duty typically exists for a contractor. To create such a duty, the court says wording like the following would be needed:

1) “the contractor accepts a relationship of trust and confidence established between it and the owner.”

2) “the contractor agrees to further the interests of the owner by performing the Work in the most economical manner consistent with the owner’s interests and to keep full and detailed accounts.”

When reviewing contracts for design professionals and contractors, it is wise to eliminate wording such as “relationship of trust and confidence.” We advise our clients that this wording may create a fiduciary duty that would not be imposed at common law under normal contract law principles, and that this could very well create uninsurable risks and losses. Several standard form contracts in the construction industry have unwisely incorporated fiduciary wording such as “relationship of trust and confidence.” Whenever we see that, we strike it out and replace it with “good faith and fair dealing.” The reason for this change is that whenever one enters into a contract, the common law will automatically impose a responsibility of “good faith and fair dealing” between the parties, and that is perfectly acceptable.

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 22, No. 4 (April 2020).

Article 3

Contractor has no Duty to Inspect for Asbestos Before starting Renovation of Single Family House (under Colorado law)

See similar articles: Asbestos | Expert Witness | inspection duty | Residential Construction | Standard of Care

Under the Colorado asbestos regulations applicable single family residential construction, a contractor owed no duty to inspect the premises for asbestos before beginning construction. Absent such a duty under the statutes or regulations, the court considered and rejected the owner’s argument (and expert witness testimony) asserting that, under its generally accepted standard of care, the contractor nevertheless owed a duty to inspect for asbestos. The question of whether a defendant owes a duty to act to avoid injury is a question of law to be determined by court, and the trial court is not bound by the expert conclusions of the plaintiff’s expert even where that expert testimony in not contradicted, concluded the court. Ferraro v. Frias Drywall, LLC, 451 P.3d 1255 (Colorado 2019).

The courts reasoning is quoted as follows:

“In 2003, the Department of Public Health and Environment Regulations were amended to comply with a 2001 statutory change to include single-family residential dwellings. Ch. 225, sec. 4, § 25-7-502, 2001 Colo. Sess. Laws 772 (adding “single-family residential dwelling” to “area of public access”); Dep’t of Pub. Health & Env’t Reg. 8, pt. B, § VII.C, 5 Code Colo. Regs. 1001-10 (explaining revision based on 2001 statutory change). A single-family residential dwelling is

any structure or portion of a structure whose primary use is for housing of one family. Residential portions of multi-unit dwellings such as apartment buildings, condominiums, duplexes and triplexes are also considered to be, for the purposes of this Regulation No. 8, single-family residential dwellings; common areas such as hallways, entryways, and boiler rooms are not single-family residential dwellings. (Dep’t of Pub. Health & Env’t Reg. 8, pt. B, § I.B.96, 5 Code Colo. Regs. 1001-10.)

Other definitions relevant to our analysis are those for “facility” and “facility component.” A facility is “any institutional, commercial, public, industrial, or residential structure, installation, or building (including any structure installation, or building containing condominiums or individual dwelling units operated as a residential cooperative, but excluding residential buildings having four or fewer dwelling units) ....” Id. at Reg. 8, pt. B, § I.B.45 (emphasis added). A facility component is “any part of a facility, including equipment.” Id. at Reg. 8, pt. B, § I.B.46.

Part B, section III of the regulations, entitled “Abatement, Renovation and Demolition Projects,” contains a subsection, III.A, concerning inspections. The district court relied on subsection III.A.1 to find the existence of a duty to inspect single-family residential dwellings. The regulation provides that

[p]rior to any renovation or demolition which may disturb greater than the trigger levels¹ of material identified as a suspect asbestos-containing material pursuant to the EPA “Green Book”, Managing Asbestos in Place, Appendix G (1990), the facility component(s) to be affected by the renovation or demolition shall be inspected to determine if abatement is required.

Id. at Reg. 8, pt. B, § III.A.1 (emphasis added).

Because a “facility component” excludes residential buildings having four or fewer dwelling units, we conclude that this regulation does not create an inspection duty for single-family residential dwellings. Thus, while the regulation creates an inspection duty for facility components, its plain language excludes single-family residences like the Ferraros’ home, contrary to the district court’s ruling.”

Article 4

Insurance Company not Obligated to pay Damages agreed to by Contractor under Settlement Agreement with Owner where Damages not Allocated between Covered and Non-covered Damages

While a declaratory judgment action was pending to decide whether a CGL insurance carrier owed a duty to defend and indemnify a contractor against claims by its client, a marina, for damages arising out of defective work, the contractor and marina entered into what is called a Miller-Shugart settlement agreement, whereby the defendant may agree to permit a claimant to enter judgment against him for a sum collectible only from the insurance policy. After entering into that settlement, litigation was brought against the carrier to collect the settlement amount. Appellate court found that although there was “property damage” and an “occurrence” as defined by the policy, the “your work” exclusion was applicable to at least a portion of the total damages claimed, and the settlement agreement was, therefore, unreasonable and unenforceable because it failed to allocate liability between covered and non-covered losses. King’s Cove Marina, LLC. V. Lambert Commercial Construction, LLC, 937 NW. 2d 458 (Minnesota, 2019).

In this case, the contractor confessed judgment in the marina’s favor in the amount of $2 million. The settlement agreement was expressly limited to damages for work performed by the prime contractor. It did not include any damages attributable to subcontractor work. This means that none of the damages agreed to under the settlement agreement pertained to the concrete work performed by a subcontractor, which contributed to the Marina’s overall claim for $5.2 million.

The type of settlement agreement involved here is what is called in Minnesota, a Miller-Shugart settlement. As explained by the court, “In a Miller-Shugart settlement, the insured, having been denied any coverage for a claim, agrees claimant may enter judgment against him for a sum collectible only from the insurance policy. To be binding on the insurer if policy coverage is found to exist, the settlement amount must be reasonable.” The trial judge determined that the settlement was reasonable and enforceable against the carrier, but this was reversed on appeal for the reasons explained herein.

There was Covered Property Damage

The court explained:

“An independent investigation into the causes of the construction defects at the property concluded that construction deficiencies ‘allow[ed] significant interior moisture laden air to infiltrate into the walls or attics.’ Because the moisture could not dry completely, the trapped moisture in the insulated spaces ‘create[d] several problems, including staining, dripping, degradation of the thermal performance and the effective service life of the insulation system and corrosion of metal components.’ Additionally, the defects potentially caused “undesirable microbial problems such as staining that appeared to be organic growth and odors.’ The investigation also uncovered cracks in the concrete floors as ‘a result of shrinkage during the initial drying process” caused by ‘the omission of control joints and welded wire fabric reinforcement in the concrete.’ We discern no error in the district court’s determination that the marina suffered “property damage” as defined by the terms of the insurance policy.”

There was an insured “Occurrence”

“United Fire argues that the property damage arose as a result of Lambert’s failure to perform its work completely and properly. Lambert acknowledged that it did not finish certain aspects of the construction work, including work related to the window trim. United Fire argues that Lambert’s failure to complete its work does not constitute an “accident,” and therefore cannot be an “occurrence.” Minnesota courts define the term “accident” under a commercial general liability policy as an “unexpected, unforeseen or undesigned happening or consequence.” (citations omitted).

The district court’s opinion was informed by the Remodeling Dimensions case, which held that moisture damage resulting from “continuous or repeated exposure” to water intrusion into a building constitutes an “occurrence” under a commercial general-liability insurance policy similar to the policy at issue here. 819 N.W.2d at 611. Applying Remodeling Dimensions to undisputed facts of this case, the district court found that the “occurrences” at the marina’s main building “were the result of ‘continuous or repeated exposure to substantially the same general harmful conditions.’ ” The district court rejected United Fire’s argument that the damages were caused by Lambert’s “intentional deviation” from the construction plans, noting that there was no evidence that Lambert intended to cause harm or property damage to the marina’s main building.

***

The district court determined that “[a]s it is undisputed that Lambert did not intend to cause property damage to the building, there are ‘occurrences’ as defined by the policy.” Because the district court found that there were “occurrences” resulting in “property damage,” it concluded that United Fire’s insurance policy provided coverage for the marina’s damages. We discern no error in this determination.”

The “Your Work” Exclusion

Exclusion L of the CGL policy excludes coverage for damages associated with the contractor’s work. This provision excludes coverage for:

“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”

This 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.

Comment: Thus, any costs associated with repairing or replacing the contractor’s work are barred by exclusion L. But there is an exception to this exclusion for damages resulting from work performed by a subcontractor. The exception reads as follows: “[t]his 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.”

The Problem with the Settlement Agreement

“It is uncontested that Lambert’s work included supplying and installing the exterior metal roof and metal wall paneling, as well as supplying the metal insulation, vapor barrier, steel girders, and wood flooring. Lambert also framed window openings and installed trim materials around exterior windows. The record establishes that Lambert—rather than its subcontractors—performed this work. Further, the Miller-Shugart settlement agreement states that “Lambert performed all Roofing and Siding work and operations on the project,” and the “[t]otal cost of repair damages related to the Roofing and Siding work by Lambert, as opposed to work and operations by any other defendants, is determined by taking the Roof and Siding damage amounts plus a proportionate share of the general damages.” As it is uncontested that the marina’s claimed damages arose at least in part out of Lambert’s work, any damages associated with repairing Lambert’s work are excluded from insurance coverage under the plain language of exclusion l. See Corn Plus Coop., 516 F.3d at 680. The district court erred by failing to apply exclusion l to bar coverage for this aspect of the marina’s claims.”

The appellate court found the settlement agreement specifically excluded damages from the concrete work performed by the only subcontractor on the job. That means the subcontractor exception to exclusion L doesn’t apply to the claims at issue in the settlement agreement. In addition, the district court didn’t distinguish between damages directly caused by the contractor’s work versus those damages arising from the contractor’s work that were not part of the scope of work the contractor was hired to perform.

In conclusion, the appellate court held that the district erred by failing to apply the “your work” exclusion to at least some of the marina’s claims and damages, and found that since the settlement agreement didn’t distinguish between covered and non-covered damages, it couldn’t be enforced against the insurance carrier.

Article 5

Risk and Liability Considerations for Coronavirus Related Services

By: Greyling Insurance Brokerage & Risk Consulting

Before a professional consulting firm agrees to assist its client with issues related to the COVID-19 crisis, a key question to answer is whether the firm will be insured for such services. This report by Greyling Insurance Brokerage addresses various insurance policies that need to be reviewed and considered.

PDF of the full report

This article is published in ConstructionRisk Report, Vol. 22, No. 4 (April 2020).
Copyright 2020, ConstructionRisk, LLC

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