Inside this Issue

A1 - Agreement to Indemnify Project Owner for Penalties due to Violations of Americans with Disabilities Act Is Void and Unenforceable
A2 - Connecticut Supreme Court Reaffirms State's Immunity from Statutes of Limitation
A3 - Additional Insureds Are Denied Coverage Where Carrier Rescinds Policy of Contractor That Had been Issued Based on Misrepresentations in the Policy Application Concerning the Nature of Contractor’s Work
A4 - Employee Injured in Trench Collapse Cannot Circumvent Worker’s Compensation Bar Against Suing His Employer Absent Evidence of Intentional Wrong That Created Substantial Certainty of Injury or Death
A5 - Bidder Cannot Sue Architect for Tortious Interference with a Business Expectancy for Recommending that Project Owner Reject Its Low Bid

Article 1

Agreement to Indemnify Project Owner for Penalties due to Violations of Americans with Disabilities Act Is Void and Unenforceable

Where design professionals agree by contract to indemnify a project owner for “any damages arising from any act, omission, or willful misconduct”, that provision cannot be enforced when the damages at issue arise out of violations of the Americans with Disabilities Act (ADA). In the case involving Mandalay Bay Resort (Rolf Jensen & Associates v. Eighth Judicial Court of the State of Nevada, 128 Nev., Advance Opinion 42 (2012)), the court held that permitting indemnification claims would weaken an owner’s incentive to prevent violations of the ADA and therefore would conflict with the ADA’s purpose and intended effects. “Simply put, such claims would allow owners to contractually maneuver themselves into a position where, in essence, they can ignore their nondelegable responsibilities under the ADA.” The court further concluded that “if owners were permitted to pursue indemnification for their own ADA violations, Congress’s goal of preventing discrimination would be frustrated.”

Mandalay argued that permitting indemnification claims would promote ADA compliance by encouraging owners to seek advice from ADA consultants. In rejecting this argument the court stated “Owners are motivated to seek this advice to aid in their duty to construct facilities in compliance with the ADA; indeed that is the very point of seeking such assistance. Mandalay’s suggestion that owners only contract with these consultants in order to obtain indemnification understates the role qualified consultants play in owners’ efforts to meet ADA requirements.”

Facts of the Case

Mandalay Corporation’s contract with Rolf Jensen called for Rolf Jensen to provide consulting services regarding construction of an expansion to the Mandalay Bay Resort and Casino in Las Vegas in compliance with the ADA. After the resort expansion was constructed the U.S. Department of Justice (DOJ) began investigating alleged violations of the ADA arising from a lack of handicap accessibility at the resort. Mandalay entered into a settlement agreement with the DOJ requiring it to bring the resort in ADA compliance, which Mandalay estimated would require $20 million for retrofitting.

Mandalay then sued Rolf Jensen to recover the costs of retrofitting the project. The causes of action included in the complaint were (1) express indemnification, (2) breach of contract, (3) breach of express warranty, and (4) negligent misrepresentation. Rolf Jensen moved for summary judgment on the basis the owner’s claims were preempted by the ADA and were also barred by the economic loss doctrine. The trial court denied the summary judgment motion. Rolf Jensen then filed a writ of mandamus to the Supreme Court of Nevada asking the court to consider its appeal before going through a trial on the merits, and the court agreed to do so, and issued this decision.

The Purpose of the Act

The court stated that ADA has a twofold goal of remedying discrimination against disabled individuals, and also preventing such discrimination from neglect and indifference. Thus, regardless of intent of an owner, when a facility is not constructed to be readily accessible to individuals with disabilities, the owner is liable for unlawful discrimination.

Mandalay’s Indemnification Claim

On appeal, Rolf Jensen argued that indemnification claims such as that by Mandalay are preempted by federal law because they diminish an owner’s incentive to comply with the ADA, thereby frustrating Congress’s goal of preventing disability discrimination. Mandalay countered that its indemnification claim advances the ADA because if owners are able to seek indemnification from ADA consultants they will be more inclined to hire these consultants, with the overall effect of promoting ADA compliance.

As an editorial comment, this argument by Mandalay almost suggests that owners hire ADA consultants more for the purpose of shifting the risk of ADA compliance to them rather than for the purpose of actually accomplishing desired ADA compliance. One would hope this was merely a poorly conceived legal argument and not truly indicative of what most project owners seek to accomplish by retaining consultants. However, based on the number of increasingly onerous design professional contracts I’ve been reading lately, it does seem that some owners are more interested in avoiding their own reasonable risks and responsibilities by shifting them to their designers and contractors via uninsurable indemnification provisions.

In any event the court saw through the argument and concluded: “In today’s commercial construction industry, it is surely an owner such as Mandalay – a highly sophisticated entity with ultimate authority over all construction decisions – who is in the best position to prevent violations of the ADA.” The court also noted that prohibiting indemnification of the owner by the consultant does not relieve the consultant of all responsibility under the ADA since the consultant has liability under the ADA that runs to the disabled individuals rather than to the project owner.

As explained by the court in this decision, citing Equal Rights Center v. Niles Bolton Associates, 602 F.3d 597 (4^th Cir. 2010), “Courts in other jurisdictions have ‘flatly rejected’ the type of indemnification claim brought by Mandalay. Decisions of a number of United States District Courts were also cited for the proposition that this type of indemnification cannot be permitted because it is “antithetical to Congress’s purpose in enacting FHA and ADA” and would “frustrate the achievement of Congress’s purposes in adopting FHA and ADA.” See U.S. v. The Bryan Company, 2012 WL 2051861 (S.D. Miss, 20120, Morgan City v. South Louisiana Electric Co-Op, 31 F.3d 319 (5^th Cir. 1994); Equal Rights Center v. Archstone Smith Trust, 603 F. Supp. 2d 814 (D. Md. 2009); and U.S v. Murphy Development, LLC, 2009 WL 3614829 (M.D. Tenn. 2009)).

In conclusion, the court stated: “We agree with these courts that permitting indemnification claims would weaken owners’ incentive to prevent violations of AFDA and therefore would conflict with the ADA’s purpose and intended effects. Simply put, such claims would allow owners to contractually maneuver themselves into a position where, in essence, they can ignore their nondelegable responsibilities under the ADA.”

Negligence, Breach of Contract and Breach of Warranty Claims Also Preempted

Citing the Niles Bolton decision of the U.S. 4^th Circuit Court, this court concluded that when the relief the owner seeks is recovery of all the losses arising from its violations of the ADA or FHA, such claims are “de facto indemnification claims, and thus preempted.” Other cases cited by the court have held that breach of contract and professional negligence claims are preempted where they are wholly derivative of the owner’s primary liability under the ADA and FHA. In this case, “Rolf Jensen asserts, Mandalay’s claims for breach of contract, breach of express warranty, and negligent misrepresentation are simply a subterfuge for Mandalay’s indemnification claim [and are therefore] preempted by the ADA.”

Mandalay’s claims against Rolf Jensen derive solely from Mandalay’s liability for its admitted violations of the ADA, says the court, which concludes: “While Mandalay argues that its claims have an independent basis, what Mandalay seeks to recover, and what each of its claims are predicated upon, is the cost of retrofitting the Resort as required by its settlement with the DOJ…. Accordingly, we conclude that Mandalay’s claims for breach of contract, breach of express warranty, and negligent misrepresentation are de facto claims for indemnification and thus are preempted by the ADA.”

Comment: When reviewing indemnification provisions of design professional contracts, legal counsel and advisors to the designers seek to limit the indemnification coverage only to those damages caused by the negligence or willful misconduct of the designer. Due to the uncertainty of what is required by laws such as the ADA, designers are advised not to warrant that their services will be in compliance with all laws such as the ADA – but instead represent only that they will comply with the generally accepted standard of care to comply with the laws. Project owners sometimes take issue with designers that decline to provide warranty type language and indemnities for ADA violations, but what this case and others like it suggest, is that owners should cease attempting to shift the risk of ADA noncompliance onto their designers via indemnification clauses, because that is contrary to the Congressional intent to hold owners responsible for their project’s violations of the act.

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. 11 (Dec 2012).

Article 2

Connecticut Supreme Court Reaffirms State's Immunity from Statutes of Limitation

See similar articles: Sovereign Immunity | Statute of Limitations

Timothy Fisher, Esq.; McCarter & English -- In a decision followed closely by the construction industry, Connecticut's Supreme Court has issued a unanimous decision confirming a long-standing rule that statutes of limitations do not run against the State.

The ruling came in the lawsuit brought by McCarter & English working closely with the Attorney General's office on behalf of the State of Connecticut against the contractors and designers responsible for over $18 million in defects at the law library building of the UConn Law School. State of Connecticut v. Lombardo Brothers Mason Contractors, Inc., 307 Conn. 412, 2012 WL 5382217 (Conn.). The building was designed in 1992, and built starting in 1994, reaching substantial completion in 1996. While it exhibited leaks from early on, it was not until 2004 that the State concluded that there were serious flaws in the building's envelope and structure. Corrective work commenced in 2007, revealing widespread defects in concealed work, including the omission of half of the building's reinforcing bars in its structural wall.

The State commenced suit in 2008, twelve years after substantial completion. The State had postponed legal action largely in reliance on the doctrine that time periods do not run against the State. The rule is related to but separate from the doctrine of sovereign immunity, and has traditionally exempted the State from statutes of limitations, statutes of repose, laches, or any other time period generally applicable to private litigants. The rule is of ancient origin, reflecting both policy considerations regarding protection of the State's fiscal condition, and the concept that the rules issued by the sovereign do not bind the sovereign itself unless explicitly stated.

The twenty-eight defendants moved to dismiss the case on multiple grounds related to the passage of time. While the trial court agreed with the defendants, the Supreme Court reversed. In doing so it spelled out the scope of the State's protection and the statutory language that would be needed for any time-based defenses to run against the State. Among the elements of the case's holdings were: the doctrine (often referred to by its Latin name nullum tempus occurrit regi) has always been the rule in Connecticut, as it is in most states, as part of the common law carried over from English legal traditions; the rule has never been abrogated in Connecticut, and the Legislature's silence in the face of past court decisions can be interpreted as a willingness to let the rule continue; limitation periods intended to protect classes of defendants are inapplicable to the State unless the State is explicitly identified as one of the parties to be barred after the passage of time; and there is no difference between statutes of limitations and statutes of repose for purposes of the rule.

The Supreme Court identified only two situations where a time period would run against the State. The first is when the statute explicitly names the State as a party against which the time runs (or the language of the statute allows for no other possible interpretation). The second is where the State's claim is based on a statute (not the common law) that itself includes a time limitation as inherent in the rights established by the statute.

The Court also struck down a defense offered by one of the defendants based on a specifically negotiated limitations period in its contract. The construction management contract between the State and Gilbane Building Company provided that any claim by the State against Gilbane had to be brought within the time period (seven years) applicable to design professionals. The Supreme Court held that the nullum tempus doctrine can be waived only by the Legislature itself, and so a contract provision to that effect negotiated by a State officer was not binding on the State.

While the case related to a State of Connecticut project, the decision will also affect claims by political subdivisions of the State. Many of the authorities relied on in the decision apply to towns or other public agencies. Further caselaw may develop the full extent of the protection available to towns, regional districts, and other governmental entities.

This ruling also has importance nationwide. Only a few states have abrogated the doctrine underlying this decision. It continues to have vitality in most jurisdictions, and Connecticut's decision is only the latest to reaffirm that the rule continues to this day. For contractors and designers, it heightens the need for diligence regarding the quality of work on public projects, as defects discovered years after completion can still lead to legal exposure. It also stands as a warning that document retention programs should take account of the extended time periods applicable to claims by state governments.

Timothy S. Fisher, Esq.
The McCarter & English Construction Practice Group
860.275.6775
tfisher@mccarter.com

This article is published in ConstructionRisk.com Report, Vol. 14, No. 11 (Dec 2012).

Article 3

Additional Insureds Are Denied Coverage Where Carrier Rescinds Policy of Contractor That Had been Issued Based on Misrepresentations in the Policy Application Concerning the Nature of Contractor’s Work

See similar articles: Additional Insured | Insurance Coverage Dispute | Misrepresentation | Tower Cranes

When a tower crane collapsed in New York City, killing seven people, injuring dozens more, and damaging several buildings, the contractor that was operating the crane was denied coverage by it’s excess liability carrier for several distinct reasons. The first reason given was that a residential exclusion in the policy barred coverage – and the building on which the crane was being used was a mixed-use condominium, office and retail tower. The carrier could prevail on that issue at trial but the court held this to be a fact question for a jury to determine whether a “mixed-use” building constitutes “residential construction activities” as defined and excluded by the policy. Admiral Insurance Co. v. Joy Contractors, Inc., et al, 19 NY 3d 448, 972 N.E. 2d 103 (2012). On the question of whether false statements in the application would, as a matter of law, justify rescission of the policy such that it would provide no coverage to the owners, developers, and others that were “additional insureds” under the policy, the court held in favor of the carrier, finding no coverage and permitting the policy to be rescinded for the reasons asserted by the carrier, which the court described as follows:

“These causes of [declaratory judgment action by the carrier] requested rescission of the excess policy or, in the alternative, its reformation to conform retroactively with such terms as might have been offered if [contractor] had responded accurately to the questions and inquiries posed to it by [excess carrier] during the underwriting process; a declaration that the excess policy was void, consistent with the policy condition providing for this in the event of fraud and/or misrepresentation by [contractor] relating to the policy; and a declaration that the claims arising from the crane accident were not within the scope of coverage by the CGL and excess policies.”

The additional insureds in this case essentially argued that they were entitled to rely upon there being coverage for them as additional insureds under the CGL and excess regardless of the insurance application representations or whether the work performed by the contractor differed from what was represented to the carrier.

In its application, the contractor represented that it specialized in drywall installation, did not carry out exterior work, and performed no work at a level above two stories in height from grade other than drywall interior work. The carrier’s suit, however, maintains that the contractor was actually the structural concrete contractor, performing work on the building’s entire exterior with the tower crane. Based on that, the court says,

“[Carrier] evaluated the risk of, and collected a premium for, providing excess insurance for interior drywall installation, not the obviously much greater risk presented by exterior construction work with a tower crane at a height many stories above grade. And as [Carrier] puts it, the only additional insureds it could have contemplated would [have been] entities associated with projects on which [Contractor] was performing interior drywall work and . . . the risk associated with them would [have been] limited to liability caused by acts or omissions of [Contractor] in performing drywall work.”

Taking issue with the trial court for granting the carrier’s motion to rescind coverage only as it concerns the Insured Contractor but not as to the additional insureds, the appellate court commented:

“As [Carrier] points out, the lower courts’ decisions dismissing its sixth cause of action seeking rescission as against all defendants except [Contractor] illogically ‘leaves in place [the excess policy] to be enforced by parties event if [this policy] ultimately is rescinded. In effect, these other parties [would be] permitted to rely on the terms of a policy that . . . may be deemed never to have existed to create coverage’ in the first place. In short, ‘additional’ insureds, by definition, must exist in addition to something; namely, the name insureds in a valid existing policy.”

The other bases argued by the carrier as justification for denying coverage, i.e., reformation or declarations based on the express policy condition regarding fraud and misrepresentation, or the scope of coverage properly afforded under the policy, were also reviewed favorably by the court, holding that the claims related to the contractor’s alleged misrepresentations in its application for insurance “are properly interposed against” the contractor and the owner/developer additional insureds.

Comment: Additional insureds generally obtain only a standard “certificate of insurance” that lists the amount of insurance maintained by the contractor, the names of the carriers whom it is maintained, and that shows specific entities as “additional insureds.” Generally speaking, the additional insureds do no ask for and do not obtain copies of the actual insurance policies – although it seems that more of them have been asking for copies of the policy recently. Perhaps the fear of loss of additional insured coverage, as occurred in this case, is the reason some entities are asking for copies of the policies. But even if the additional insureds in this case had obtained copies of the policies, they would have had no way of knowing that the “named” insured contractor had made material misrepresentations in its application (as alleged here) which would become the basis of rescinding the coverage both as the named insured and the additional insureds. Obtaining the policy, however, would have at least shown that there was a residential exclusion that might ultimately deprive the additional insureds of coverage under the policy for this particular building.

In light of the holding in this case, one might reasonably wonder (1) what, if anything, an insurance agent or broker might need to do when reviewing insurance applications that are being submitted by their clients to insurance carriers; and (2) what is the extent of due diligence someone needs to do when asking to be an addition insured to determine that the coverage will actually be there when needed.

My own view is that the situation and outcome described in this case are so unusual that significant change in the way additional insured status is requested and demonstrated is not necessary. Specifically, I will continue to maintain that obtaining the certificate of insurance is sufficient and that it is not necessary to request the actual insurance policies from the named insureds.

Article 4

Employee Injured in Trench Collapse Cannot Circumvent Worker’s Compensation Bar Against Suing His Employer Absent Evidence of Intentional Wrong That Created Substantial Certainty of Injury or Death

See similar articles: Jobsite Safety | OSHA | Workers compensation

Where an employee of a contractor was injured in the collapse of an unshored 25 foot deep trench, he filed suit against his employer – asserting that the exclusive remedy of the workers’ compensation act did not bar the suit due to the exception that is granted under the law for injuries resulting from an employer’s “intentional wrong.” The Supreme Court of New Jersey determined that the circumstances in this case demonstrated poor judgment and was an exceptional wrong, but not an “intentional wrong” within the meaning of that term under the statutory exception to the exclusive remedy of the workers’ compensation statute. There must be a showing of actual intent to wrong and substantial certainty that the wrong would lead to injury or death of the employee. In this case none of the facts of the situation provided what the court considered to be “objectively reasonable basis for expecting that a cave-in almost certainly would occur during the brief time plaintiff was sent into the trench.” Even if the employer were judged reckless or guilty of gross negligence based on the evidence presented, the court held the worker did not satisfy the “conduct prong of the substantial-certainty test” required to get out from under the workers’ compensation act exclusive remedy. Van Dunk v. Reckson Associates Realty Corp., et al., 45 A. 965 (NJ 2012).

The U.S. Occupational Safety and Health Administration (OSHA) conducted an investigation and found that the “non-compliance [with OSHA standards] was not an accident or negligence,” but concluded that the employer committed a “willful violation” and assessed a fine of $49,000. The employer did contest the violation but negotiated down the fine to the amount of $24,500.

In its lawsuit against the employer the worker argued that although an issuance of an OSHA willful violation citation does not automatically establish an intentional wrong as defined by the New Jersey workers’ compensation act, “many of the elements underlying a willful violation also support the finding of an intentional wrong.” Based on a litany of risk factors, the plaintiff asserted that the employer knew that a trench collapse could happen, even if he did not know precisely when it would happen. He further argued that the employer was improperly motivated by his desire to keep costs down and finish the work quickly at the expense of employee safety. As stated by the court, “According to plaintiff [the employer’s] decision not to employ protective systems was a deliberate disregard of OSHA regulations that placed employees in a dangerous position. Thus, Plaintiff asserts that his injury was more than an incidental risk of the job . . . .”

In rebuttal to the plaintiff’s argument, the employer argued that case law precedent did not support a finding that the actions here constituted an “intentional wrong” and that to permit the plaintiff to avoid the exclusive remedy of the workers’ compensation statute and sue his employer would allow for injured parties to pursue independent tort actions based on the possibility of injury, rather than a near certainty. The plaintiff also asserted that a willful OSHA violation should be given great weight in determining that an intentional wrong was committed.

After reviewing the facts and a number of important case precedents, the court here determined “We decline to find that every willful OSHA violation constitutes an intentional wrong for purposes of the Act. To do so would produce detrimental consequences, such as encouraging employers to dispute OSHA violations rather than negotiate a penalty and move on, having corrected and been penalized for the error. . . .” The court then went on to review whether the totality of the conduct shown by the circumstances of the accident evidences an “intentional wrong.”

In doing its review, the court said, “We approach consideration of the conduct prong with some caution. Mere knowledge by an employer that a workplace is dangerous does not equate to an intentional wrong.” In addition, said the court, “The existence of an uncontested finding of an OSHA safety violation in the wake of this workplace injury does not establish the virtual certainty that [case precedent] demands. An intentional wrong must amount to a virtual certainty that bodily injury or death will result. A probability, or knowledge that such an injury or death ‘could’ result, is insufficient.”

For these reasons, the court concluded that the violation of the OSHA safety requirements pertaining to trenches deeper than five feet did not demonstrate there was substantial certainty of injury or death – and the exclusive remedy of the workers’ compensation act must be enforced to bar the litigation against the employer.

Article 5

Bidder Cannot Sue Architect for Tortious Interference with a Business Expectancy for Recommending that Project Owner Reject Its Low Bid

See similar articles: bid rejection | Interference with Contract | Third Party Rights

The bidder on a public school project has no valid business expectancy of being awarded a contract, only “wishful thinking,” and in the absence of evidence of fraud, injustice or a violation of trust, it’s tortious interference claim against the owner’s architect for recommending rejection of is low bid must fail as a matter of law. Cedroni Associates v. Tomblinson, Harburn Associates Architects, 821 N.W. 2d 1 (Mich. 2012). Under the common law, the court stated that “Given that a contractor that submits the lowest bid cannot bring a cause of action against the municipality when its bid is rejected, even when the municipality has adopted a charter provision that requires it to accept the ‘lowest responsible bidder,’ it is difficult to fathom how plaintiff’s submission of the lowest bid could have created a valid business expectancy in light of the highly discretionary process of awarding governmental contracts.” Moreover, the expectations of a bidder would be the same regardless of whether the allegations of wrong are against the government or against a third party design professional.

In addition to the common-law rule, the court cited a state statute as granting the municipality statutory authority to make a highly discretionary decision to “reject any or all bids.” In light of the combination of the common-law rule preventing a disappointed bidder from suing the public entity for rejecting its bid and the statutory provision that allowed the school district to reject any and all bids, “a bidder on a school district project should know that its submission of the lowest bid does not create a reasonable probability that the school district will award it the contract.” The bidder’s argument was made even more untenable according to the court, because the Invitation for Bid (IFB) included a project manual expressly stating that the school district has the “right to reject any and all bids” and that “the lowest dollar cost bidder may not always receive award of the bid.”

Having established that the bidder had no valid business expectancy of receiving a contract, and that the school district’s exercise of its discretion to accept or reject bids would only be subject to control of the courts “when necessary to prevent fraud, injustice or the violation of trust,” the court considered the evidence presented by the plaintiff in this case and determined “there is no evidence that this Court’s intervention is necessary….” For these reasons, the court determined that the trial court correctly granted the Architect’s motion for summary judgment against the plaintiff.

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ConstructionRisk.com Report (Dec 2012)