Inside this Issue

A1 - Contract Clauses for Dealing with Costs from New Laws and Actions Regarding Tariffs and Deportation
A2 - Only General Contractor (and not Project Owner) had Additional Insured Status Under a Subcontractor’s CGL Policy
A3 - Owner’s Standard of Care Expert Failed to Identify the Standard of Care and Failed to Explain How Designer Violated the Standard

Article 1

Contract Clauses for Dealing with Costs from New Laws and Actions Regarding Tariffs and Deportation

See similar articles: contract clause | deportation | immigration | tariffs

A clause I reviewed in a recent contract protects the design-builder against having to incur cost overruns due to changes in (1) laws, (2) new tariffs that increase prices for materials, and (3) labor shortages due to deportation of undocumented workers).

“A Change may include, without limitation, any of the following events occurring after the establishment of the Contract Price, CGMP or GMP (as applicable) and provided that such events are not within a Design-Builder Responsible Party’s reasonable control and could not have been avoided by a Design-Builder Responsible Party or mitigated through the exercise of reasonable skill and care: (i) a change in Applicable Law as set forth in Section 1.4 of the Agreement, (ii) the implementation or proposed implementation of new tariffs or modification of existing tariffs that increase Design-Builder’s cost of materials and equipment, or (iii) regional labor escalation or shortages that cannot be reasonably foreseen and estimated at the establishment of the Contract Price, CGMP or GMP.”

COMMENT: I believe projects are going to cost more and take longer to construct due to the changes being enacted by the new Presidential Administration. Guaranteed Maximum Price (GMP) contracts should be revised to reflect that the contractor may be unable to meet the GMP if supply prices skyrocket due to new tariffs. Immigrant labor on construction projects is vital to the projects. If there is a "mass deportation" as proposed, contractors need to be protected against delays caused by the loss of their workers.

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. 27, No. 1 (Jan 2025).

Article 2

Only General Contractor (and not Project Owner) had Additional Insured Status Under a Subcontractor’s CGL Policy

See similar articles: Additional Insured | CGL policy

Project owner entered into a general construction contract with a GC for construction services. The GC then entered into a subcontract requiring the subcontractor to indemnify and hold harmless the GC and the Owner, and also required the subcontractor to maintain a CGL policy naming the GC, the Owner and other noncontractor entities as additional insureds under the policy.

When a subcontractor’s employee was injured on the job, he sued the GC, project owner and other noncontractor entities. The CGL carrier refused to defend and indemnify any of the noncontractor entities. Those entities then sued the carrier, and the trial court denied the carrier’s motion for summary judgment to dismiss the suit. On appeal, this was reversed with the court holding that only the GC who was in contract with the subcontractor was an additional insured. New York City Housing Authority v. Harleysville Worcester Insurance Company, 226 A.D. 3d 804 (2024).

The insurance carrier established its prima facie entitlement to judgment as a matter of law dismissing the noncontractor plaintiff’s complaint. It was not obligated to defend and indemnify the noncontractor plaintiffs as additional insureds in the underlying action. The court explained that:

“[W]hether a third party is an additional insured under a policy is determined ‘from the intention of the parties to the policy, as determined from the four corners of the policy itself’ [citations omitted]. Here, the plaintiffs were not named insureds on the policy issued to the subcontractor by Harleysville, nor were they listed as additional insureds thereon….

Furthermore, the noncontractor plaintiffs do not qualify as additional insureds under an endorsement to the policy entitled “ADDITIONAL INSURED—OWNERS, LESSEES OR CONTRACTORS—AUTOMATIC STATUS WHEN REQUIRED IN CONSTRUCTION AGREEMENT WITH YOU—ONGOING OPERATIONS,” which provides, in relevant part, that “Who Is An Insured is amended to include as an insured any person or organization for whom you are performing operations only as specified under a written contract . . . that requires that such person or organization be added as an additional insured on your policy.”

This policy language is properly interpreted to require privity of contract between the named insured and the party seeking additional insured status. As only the general contractor contracted directly with the named insured, i.e., the subcontractor, only the general contractor qualifies for additional insured status under the terms of the policy.

The court further concluded that:

Language in the subcontract incorporating the terms of the prime contract between the general contractor and [Owner], which lists [Owner], as the owner and requires the general contractor to add the owner as an additional insured under its policy, is insufficient to confer additional insured status on [Owner] with respect to the subcontractor's policy.

Risk Management Comments:

The endorsement to the CGL only makes the party with whom the Insured is contracting with an additional insured. Any other entity that the Insured wants to have included as an additional insured needs to be expressly added to the policy as an additional insured by a separate endorsement.

NOTE: This New York court decision explains an important aspect of New York law with regard to the principles of flow down clauses via incorporation by reference of prime contract provisions. As explained by the court:

Moreover, “incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference into a subcontract, bind a subcontractor only as to prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor”

Because of this interpretation of New York law, it is advisable to specify the specific prime contract clauses that parties intend to be flowed down into subcontracts if they intend to flow down provisions other than those relating to scope, quality, character and manner of the work to be performed by the subcontractor.

Article 3

Owner’s Standard of Care Expert Failed to Identify the Standard of Care and Failed to Explain How Designer Violated the Standard

See similar articles: Expert Witness | Standard of Care

Trial court granted summary judgment for architect because project owner’s expert witness failed to define the standard of care and state how the architect failed to meet the standard. The Owner’s complaint alleged that the architect failed to provide services with “professional care” in connection with installation of elevators. The Owner argued that the architect breached its duty by specifying limited use elevators that couldn’t meet the performance requirements for the project. Although the Owner retained a properly qualified expert, the expert’s opinion report disclosed opinions related to the architect’s performance but never once referenced the architect’s standard of care or explained how the architect failed to conform to the standard of care.

The court concluded that the Owner couldn’t establish a standard of care “by merely presenting expert testimony which offers an opinion as to correct procedure or which suggests, without more, that the witness would have conducted himself differently than [the architect]. A standard of care expert must base his opinion on ‘recognized standards of competency in his profession'.” In contrast to that expert’s opinion, the architect presented four expert witnesses who expressly and repeatedly tied their opinions to the standard of care – and concluded that the architect did not violate the standard of care. For these reasons, the appellate court sustained the trial court’s conclusion that the Owner’s expert failed to offer an opinion on the breach of the standard of care. Adrian Smith + Gordon Hill Architecture, LLP v. Chicago Shakespeare Theater, 2024 Il App (1^st) 230133.

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