Inside this Issue

A1 - Additional Insured Does Not Lose Right to Coverage Based on Named Insured’s Failure to Provide Notice of Claim to Carrier
A2 - Property Owners Can Pursue Negligence Actions Against Contracted Engineer Under Washington State’s ‘Independent Duty Doctrine’ (Variation on ‘Economic Loss Rule’)
A3 - Court Bars Contractor’s Claim Against Commercial Paint Supplier for Negligent Misrepresentation Under Missouri’s ‘Economic Loss Doctrine’
A4 - Dispute Provision in Subcontract was Void Because It prevented Sub from Asserting Lien Rights

Article 1

Additional Insured Does Not Lose Right to Coverage Based on Named Insured’s Failure to Provide Notice of Claim to Carrier

See similar articles: Additional Insured | Insurance Coverage Dispute | Notice Requirements

Where a named insured under the commercial general liability (CGL) policy failed to comply with the claim notice provisions of its policy, the insurance company denied coverage to additional insured entities despite the fact that those entities provided timely notice and documentation of claims against them. A trial court granted the carrier’s declaratory judgment action – declaring there was no coverage due to the Named Insured’s failure to meet the notice provisions of the policy.

This was reversed on appeal, with the appellate court holding although the named insured and additional insureds were under the same policy, only the named insured had a duty to provide notice to the carrier of the “occurrence,” which was bodily injury to a laborer. Nothing in the policy, said the court, made coverage for the additional insureds contingent on the named insured’s compliance with its independent duty under the notice provision. Since the additional insureds complied with their own duty under the notice provision of the policy by giving prompt notice of a claim against them, they were entitled to coverage as additional insureds.

Another issue resolved in favor of the additional insureds was the question of whether the carrier could deny coverage to one of the additional insured entities because that entity was not named in the contract with named insured as one to whom additional insured coverage was owed. In deciding there was coverage the court considered not only the contract but also the work order and the certificate of insurance. The court looked at the totality of the circumstances. Mt. Hawley Insurance Company v. Robinette Demolition, Inc., 994 N.E. 2d 973 (Ill. 2013).

The additional insureds complied with the notice requirements of the policy by providing timely notice of a laborer’s injuries and lawsuit. The carrier argued that the court should consider the notice provisions in light of the policy’s separation of insureds provision, which provided:

“Except with respect to the Limits of Insurance, any rights or duties specially assigned in the Coverage Part to the first Named Insured, this insurance applies: (a) As if each Named Insured were the only Named Insured; and (b) Separately to each insured against whom claim is made or ‘suit’ is brought.’”

By this language, the court states “the insurer recognizes an obligation to additional insureds distinct from its obligation to the named insured.” The carrier, however, argued that for purposes of the policy notice requirements, the first named insured, and the additional insureds are under one policy, and it must then follow that the Named Insured's breach of the notice requirement bars coverage for the additional insureds as well as for itself. But the court rejected that argument, saying that while the Named Insured and the additional insures were under the same policy for purposes of the Named Insured’s duty to notify the carrier of the accident, it was only the Named Insured that had the duty to provide notice of the occurrence.

The court went on to explain, “Moreover, a court ascertains the parties’ intent from the policy language. There is nothing in the notice provision of the policy making coverage for the additional insured contingent on the named insured's compliance with its duty to notify…. Since the defendants [additional insureds] complied with their duty under the notice provision of the policy, they are entitled to coverage as additional insureds.”

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. 16, No. 4 (Apr 2014).

Article 2

Property Owners Can Pursue Negligence Actions Against Contracted Engineer Under Washington State’s ‘Independent Duty Doctrine’ (Variation on ‘Economic Loss Rule’)

See similar articles: Economic Loss | Independent Duty | Misrepresentation | Negligent Misrepresentation | Privity

James N. Rhodes, J.D.
ConstructionRisk, LLC

The Supreme Court of Washington applied the state’s “independent duty doctrine” to allow a professional negligence and a negligent misrepresentation action to move forward by residential property owners against their contracted engineer. The “independent duty doctrine” is a variation in Washington law to the “economic loss” rule applied in most states, both of which generally limits the ability of contractual parties to seek negligence actions against each other for economic losses. The “independent duty doctrine” allows tort actions involving construction contracts to proceed only when the tort duties implicated in the suit arise “independently of the terms of a contract.”

The court found that a negligent misrepresentation count could proceed because the duty of the engineer to avoid misrepresentations that would induce the property owners into a contract arose independently of the contract itself. For the professional negligence count, the court stated that further fact finding was needed to determine if any professional duties of care arose independent of the terms of the contract, but rejected the defendant’s attempt to summarily dismiss the claim based on the contractual relationship. Donatelli v. D.R. Strong Consulting Engineers, Inc., 179 Wash. 2d 84, 312 P.3d 620 (Wash. 2013)

Steve and Karen Donatelli sought to develop two homes on property that they owned in King County, Washington. They allege that an engineering company, D.R. Strong, orally agreed to prepare the reports and other actions to obtain the necessary county permits and approvals. The engineers allegedly represented that they could complete the project within a year and a half. Shortly after receiving preliminary approval in October 2002, the engineer and the owners entered into a written contract for $33,150 for various phases of engineering services. However, over the next five years, the engineers took a more direct managerial role over the project that was not encompassed in the written contract, and charged around $120,000 to the owners.

The owners were surprised to learn in October 2007 that the preliminary approval for the project had expired. The owners allege that the engineers apologized and said they “screwed up” and would “make everything right.” However, the owners suffered financial losses and lost the property in foreclosure before they could obtain new county approvals. The owners sued the engineers on several bases, including breach of contract, negligent misrepresentation, and professional negligence.

The engineers sought summary judgment on the two negligence claims at the trial court, arguing that these tort claims were barred because of their contractual relationship. Generally speaking, the “economic loss rule” draws a line between contract law and tort law by preventing a party from pursuing a negligence action against another contractual party for a purely economic loss. The rationale behind the rule is that the contractual relationship gave the parties the opportunity to allocate the risks of economic loss, making an overlapping tort action inappropriate. Stemming from a 2010 Washington Supreme Court decision, the state modified the traditional economic loss rule, now calling it the “independent duty doctrine.” Under the “independent duty doctrine” tort actions involving construction contracts can only proceed when the tort duties implicated in the suit arise “independently of the terms of a contract.”

The trial court denied summary judgment on the two negligence claims, finding that the owners’ claims were not barred by the independent duty doctrine. On appeal, the Washington Court of Appeals agreed with the trial court. On appeal a second time, the state’s supreme court addressed whether each of the two negligence claims were barred by the doctrine.

The state supreme court agreed with the trial and appeals courts that the negligent misrepresentation claim was not barred by the independent duty doctrine. The court discussed that under the traditional economic loss rule, negligent misrepresentation claims for economic damages were generally barred. But the court explained that under its independent duty doctrine, the duty to avoid negligent misrepresentations that would induce the other party into a contract can arise independently of the contract itself, as was the case here.

However, the court noted that this duty would not necessary arise independently of the contract in all cases, as some jurisdictions have found. For example, a contract could specifically implicate a contractual duty and remedy for such a misrepresentation that would bar the tort action. But here the court found that the engineers clearly had a duty to avoid negligent misrepresentations independent of the contract.

For the professional negligence count, the court agreed with the lower courts that the engineers’ summary judgment request should be denied, but stated that further fact finding was needed to see if the claim was barred by the independent duty doctrine. The court explained that the record needed to be better developed to understand the scope of the engineers’ professional obligations to the owners, regardless of whether the claim was brought as a breach of contract or a breach of a duty of care in tort.

The scope of the engineers’ obligations was particularly unclear on the record because the parties appeared to have agreed for the engineers to take a much more central role in the project than described in the written contract. The court reiterated the principle that “design professionals also owe duties to their clients and the public to act with reasonable care, which can sometimes give rise to a tort duty independent of the contract.” In deciding to remand the case to the trial court, the court explained that, “to determine whether a duty arises independently of the contract, we must first know what duties have been assumed by the parties within the contract.”

Article 3

Court Bars Contractor’s Claim Against Commercial Paint Supplier for Negligent Misrepresentation Under Missouri’s ‘Economic Loss Doctrine’

See similar articles: Economic Loss Doctrine | Negligent Misrepresentation

James N. Rhodes, J.D.
ConstructionRisk, LLC

A painting contractor attempted to bring an action against a commercial paint supplier for losses because the supplier’s improper product recommendation caused the contractor to have to remove the paint and reperform the work. The contractor’s losses were only “economic” because the damages were to the diminished value of the paint purchased, not personal injury or damage to other property. Applying Missouri law, the federal appeals court held that the “economic loss doctrine” barred the claim because the plaintiff’s remedies for economic losses in a commercial transaction were properly under applicable contract and warranty law, as opposed to tort law. The plaintiff’s attempt to avoid the effect of the “economic loss doctrine” by bringing the case under the legal theory of “negligent misrepresentation,” as opposed to a product defect claim, was ineffective. Dannix Painting, LLC v. Sherwin-Williams Co., 732 F.3d 902 (8th Cir. 2013).

A commercial painting contractor, Dannix Painting, LLC, was contracted to paint buildings at an Air Force base in Florida. The contractor attempted to use two different types of Sherman-Williams paint, but ran into problems with each type. A Sherwin-Williams representative then recommended the contractor to use a third variety, which the contractor subsequently used on interior and exterior surfaces at the Air Force base. The contractor alleges that the paint “delaminated,” in that it did not properly adhere to the surfaces that it was used on. The contractor sued Sherwin-Williams in Missouri state court alleging that it suffered a financial loss because it had to strip the defective paint and reperform the work with a different product. The case was subsequently removed to federal district court, applying Missouri law.

The basis for the contractor’s suit was the alleged “negligent misrepresentation” by Sherwin-Williams in recommending the third product, i.e. that Sherwin-Williams “failed to exercise reasonable care or competence in investigating the accuracy of its recommendation” of the product. Sherwin-Williams moved to dismiss the case, arguing that the negligent misrepresentation cause of action was barred by the “economic loss doctrine” under Missouri law. The district court agreed that the action was barred, and the contractor appealed the decision to U.S. Court of Appeals for the Eighth Circuit.

To understand the “economic loss doctrine,” one must first consider what an “economic” or “commercial” loss is, in comparison to the typical damages for injury or property damage sought in a negligence action. The court explained that “[d]istinguished from harm to person or damage to property, economic or commercial loss includes cost of repair and replacement of defective property which is the subject of the transaction, as well as commercial loss for inadequate value and consequent loss of profits or use.” The economic loss doctrine prohibits a buyer “from seeking to recover in tort for economic losses that are contractual in nature.” Summing it up, the court stated that “in essence, the economic loss, or commercial loss, doctrine denies a remedy in tort to a party whose complaint is rooted in disappointed contractual or commercial expectations.” The doctrine is said to protect the integrity of the commercial bargaining process, preventing tort law “from altering the allocation of costs and risks negotiated by the parties.”

The court noted that Missouri has few exceptions to the economic loss doctrine, such as professional negligence and breach of fiduciary duties. However, the court stated that under Missouri law, “remedies for economic loss sustained by reason of damage or to defects in products sold are limited to those under the warranty provisions of the [Uniform Commercial Code].”

The contractor argued that it was not making a direct product defect claim for economic loss, which it concedes would be barred; instead, the contractor points to Sherwin-Williams’ flawed recommendation, rather than the product itself, as the source of its economic loss. The court noted that plaintiffs in other states have also attempted to bypass the traditional application of the economic loss doctrine by styling their claims as “negligent misrepresentation,” as opposed to negligence or strict liability for a defective product. But the appeals court upheld the district court’s dismissal because it found no authority in Missouri law to extend the exceptions of the economic loss doctrine to include negligent misrepresentation.

Several states have significantly modified or weakened the economic loss doctrine in recent years, and one should be cognizant of the rule’s application in your state. In states that apply the traditional rule, plaintiffs have sought ways to avoid the sometimes harsh effects, such as using the theory of negligent misrepresentation. However, here the court held that the economic loss doctrine bars negligent misrepresentation claims between commercial parties under Missouri law.

Article 4

Dispute Provision in Subcontract was Void Because It prevented Sub from Asserting Lien Rights

See similar articles: Dispute Provisions | Liens

Where a subcontract provided that the contractor was “the sole arbiter of all claims, disputes, and questions of any nature whatsoever arising out of the … subcontract,” the dispute clause was found to be void where the contractor attempted to use its authority under the contract to deny a subcontractor payment claim that could otherwise be enforced by a mechanics lien. The subcontractor filed suit to enforce a mechanics lien, and the prime contractor moved to dismiss the complaint based upon the subcontractor’s alleged failure to meet certain terms of the subcontract and conditions precedent to filing claims, and based upon the alleged finality of the dispute under the disputes clause.

The trial court (and appellate court) found that the dispute provision purporting to give the prime contractor the right to act as sole arbiter of all claims went too far by preventing a subcontractor from asserting a claim pursuant to its legal rights under the Lien Law and the State Finance Law. American Architectural, Inc. v. Marino, 109 A.D.3d 773 (N.Y. 2013).

According to the trial court, vesting such power to the prime contractor, “violates the principles of trusteeship as reflected in the Len Law by creating an inherent conflict between [contractor's] duty to the trust beneficiaries and its own self interest….” In affirming the decision, the appellate court quoted from the state Lien Law that provides: “any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waive, shall be void as against public policy and wholly unenforceable.”

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 (April 2014)