Inside this Issue

A1 - After Procuring Insurance for Its Developer/General Contractor Client, a Broker Owes No Duty to an Insured Subcontractor under an OCIP to Advise that the Carrier Has Become Insolvent
A2 - Architect Entitled to Recover Damages under Theories of Unjust Enrichment and Quantum Meruit
A3 - Individual Member of LLC is Subject to Personal Liability for His Negligent Acts
A4 - Plaintiff Only Entitled to Damages That It Would Incur if it had Mitigated its Loss

Article 1

After Procuring Insurance for Its Developer/General Contractor Client, a Broker Owes No Duty to an Insured Subcontractor under an OCIP to Advise that the Carrier Has Become Insolvent

See similar articles: Additional Insured | Insurance – Insolvency | Insurance Broker Duty

A project developer engaged an insurance broker to obtain insurance for a new construction project, and the broker placed an Owner Controlled Insurance Program (OCIP) with $25 million of liability coverage for 10 years after completion of the project that later became insolvent. One of the subcontractors on the project contacted the broker and provided all necessary paper to become an insured under the policy and received a “Certificate of Liability Insurance”, identifying the subcontractor as an insured and the Legion Indemnity Company as the insurer. Before the construction was completed, the state insurance department obtained an order of conservation against Legion. The broker immediately advised the primary insured developer of the carrier’s financial condition but did not inform the subcontractor. Shortly after the project was completed, an order of liquidation was entered against the carrier.

Almost seven years later, the project’s homeowner association filed a complaint for construction defects against the developer and all subcontractors. The subcontractor then sued the broker alleging that the broker owed it a duty of reasonable care to procure and maintain the insurance policy in the subcontractor’s favor and negligently breached that duty. In holding that a broker’s duty is only to use reasonable care in procuring the insurance requested by its client, the court found the broker owed no legal duty to notify a certificate holder that a carrier has become insolvent after the policy has been procured. Pacific Rim Mechanical Contractors v. Aon Risk Insurance Services, 203 Cal.App.4h 1278, 138 Cal. Rptr.3d 294 (2012).

In this case, the subcontractor also sued the developer/general contractor with whom it had contracted – alleging breach of contract by failing to provide and maintain insurance as required by the contract. The sub further asserted that the developer breached the contract by “failing to provide the required written notice of a modification or discontinuation of the required coverage.” The trial court found the developer was indeed contractually obligated to notify the subcontractor about the insurance carrier’s insolvency. This was one reason the court gave for why it was unnecessary to impose on the broker a duty to notify the insured subcontractor of the insurance carrier’s post-issuance insolvency.

The appellate court affirmed the trial court decision and explained:

“Insurance brokers owe a limited duty to their clients,” which is only “to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.” Accordingly, an insurance broker does not breach its duty to clients to procure the requested insurance policy unless “(a) the [broker] misrepresents the nature, extent or scope of the coverage being offered or provided ..., (b) there is a request or inquiry by the insured for a particular type or extent of coverage ..., or (c) the [broker] assumes an additional duty by either express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured.”

The court further stated:

[Subcontractor] does not allege that [Broker] failed to use reasonable care in procuring the insurance policy from Legion. Moreover, [Subcontractor] does not allege that [Broker] assumed any additional contractual duties beyond procuring the insurance. Rather, [Subcontractor] is asking this court to create a new legal duty of notification of “Legion's conservation order and insolvency” after the policy is procured, and to apply that retroactively upon [Broker]. As we shall explain, we decline to impose such a new duty.

In finding that there was nothing in public policy to support a conclusion that a broker owes a duty to notify an insured of a carrier’s insolvency, the court explained:

We are further disinclined to retroactively impose on [Broker] (and all other insurance brokers) the duty [Subcontractor] asks us to impose because of considerations of public policy. We agree with [Broker] that imposition of a duty requiring insurance brokers to inform an insured of “any adverse changes in the carrier's financial capability” post-issuance of the insured's policy is properly the function of the Legislature because it would (a) fundamentally alter the nature and corresponding duties of insurance brokers, which would (b) increase the costs of procuring insurance.

For these reasons, the court held in favor of the insurance broker.

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. 14, No. 8 (Aug 2012).

Article 2

Architect Entitled to Recover Damages under Theories of Unjust Enrichment and Quantum Meruit

Damages were awarded by a court to an architect despite the fact that the architect performed design services for a condominium project being developed by his friend, a lawyer, without having a signed contract, and despite the fact that some of the services were performed before the architect was licensed in the particular state. This is the second time that this case was tried, and then appealed by the losing lawyer/developer. According to the final appellate decision, the architect had agreed to be lead architect for the condo project in exchange for twenty-five percent of the profits. Based on oral conversations between the friends, the architect undertook performance with the anticipation of being a partner in the company and that he would eventually have a written contract outlining the profit sharing arrangement.

In reliance on sharing profits, the architect incurred out-of-pocket costs without seeking reimbursement and it also did not keep track of time as it would have done if charging a normal fee for services. Subsequently, the lawyer misrepresented Idaho law by telling the architect he could not legally be an owner of the company because he was not a fifty percent contributor. No written agreement was ever reached for any other form of payment. Ultimately, the architect was terminated for default, on what the court apparently concluded were spurious grounds. The project was then completed by a contractor using the architect’s uncompleted designs.

The lawyer sold the condominium project for a profit of over $2 million and attempted to share no profits with the architect, or pay any fee, or even reimburse him his out-of-pocket costs.

It is clear from the various decisions in this case, that the courts were not pleased with the mistreatment of the architect. The final decision held that for all services performed after the architect finally obtained its state license, he could recover on a quantum meruit basis. Although the architect worked on its plans before having its state license it did not provide the plans to his friend until one day after his license was issued by the state. No fee was awarded to the architect for services performed before obtaining the license, but the court did allow the architect to recover on the basis of “unjust enrichment” his out-of-pocket expenses that were incurred prior to having the license. Attorneys fees were also awarded to the architect as the prevailing party for both the trial court and appellate court proceedings. Farrell v. Whiteman, 268 P.3d 458 (Idaho 2012).

Comment: This case reiterates a couple points to remember, including (1) Choose your friends and clients wisely; (2) Get a written contract before starting work; (3) Make sure you are licensed in the state before starting services; (4) Beware of working for friends; and (5) Get legal counsel to assist you when entering into a deal with a lawyer.

Article 3

Individual Member of LLC is Subject to Personal Liability for His Negligent Acts

See similar articles: Limited Liability Company | LLC | Piercing Corporate Veil

A member of a limited liability company can be held personally liable for his negligent acts that were committed in furtherance of the company’s construction business. The LLC entered into a contract to build a small condominium project. The sole owners of the LLC were a husband (Mr. Allen) and his wife. Due to dozens of problems with the quality of the construction, the project came to a halt and the contractor “left the project”. The developer subsequently filed suit and was awarded judgment against the LLC and Mr. Allen personally, for negligence. On appeal, the court rejected Mr. Allen’s argument that under state law the LLC shielded him from personal liability for ordinary negligence he committed while working for the LLC. The court said the majority view of states that have examined similar LLC statutory language have concluded that a member is always liable for his own torts and cannot rely on the status as a member of an LLC as a shield. “In sum, we conclude that [the LLC] only protects non-tortfeasor members from vicarious liability and does not insulate the torfeasor himself from personal liability for his actions.” 16 Jade Street v. R. Design Construction, LLC, 2012 WL 1111466 (S.C. 2012).

Article 4

Plaintiff Only Entitled to Damages That It Would Incur if it had Mitigated its Loss

See similar articles: Damages | Mitigation of Damages

Where a developer purchased property in reliance on an architect’s erroneous advice and incorrect plans that six new floors could be added to an existing building consistent with the applicable zoning laws, it could only recover damages actually incurred as a proximate result of the advice (that being the difference in what it paid for the building and what it could sell it for once it learned of the error) and it could not recover additional costs for holding onto the building and attempting to devise a different design and use for it.

In Assouline Ritz, LLC v. Edward I. Mills & Associates, Architects, 937 N.Y.S. 2d 11 (2012), the architect did not dispute that it made a mistake in giving its advice to its client, but it argued that the client failed to attempt to see the property after learning of the zoning problem, thereby failing to take reasonable steps to mitigate the loss. The plaintiffs argued that they were entitled to recover all costs incurred in pursuing an alternative plan they chose for developing the building that would have involved tearing down the existing structure and constructing a new luxury building in its place. The court concluded “The plaintiff’s decision to continue to hold the property and to pursue an alternative plan for redeveloping cannot be deemed an attempt to mitigate the damages.... Rather this course of action represents an attempt to realize the anticipated benefit of the original plan through other means. The expense plaintiffs voluntarily incurred in continuing to pursue redevelopment after they learned of EIM’s error cannot be deemed to have been proximately caused by EIM’s negligence.”

For these reasons, the court held that the plaintiffs would be entitled to recover only the cost of purchasing and owning the building through the time they learned that the advice was erroneous “and thereafter until sufficient time had passed for them to sell the property to mitigate their damages, less the amount they would have realized in the sale.”

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ConstructionRisk.com Report (Aug 2012)