Inside this Issue
- A1 - Certificate of Merit Required with Complaint – Or Case Dismissed With Prejudice
- A2 - EPA’s “Final” Rule on ASTM Phase I Environmental Site Assessments
- A3 - Contractual Liability Exclusion in CGL Policy Does Not Bar Coverage for Damages Arising out of Contractor’s Breach of Contract
- A4 - Homeowner Recovers from Individual Owner of a Limited Liability Company
Article 1
Certificate of Merit Required with Complaint – Or Case Dismissed With Prejudice
See similar articles: Certificate of Merit | Expert Witness
Many states require that when a complaint is filed against a design professional, an affidavit of an expert must be filed simultaneously (or within a short period thereafter) stating that in the opinion of the expert the defendant design professional failed to meet the standard of care for the design professional services that are the subject of the complaint. In a case by a contractor against a consulting firm that performed independent inspection services of the construction work, the Nevada Supreme Court held that the services constituted professional services, that the inspector met the definition of a design professional under the state statute, and that failure of the contractor to file an expert affidavit/report with the complaint was a fatal error that required the complaint to be dismissed with prejudice. City Center v. Converse Professional Group, 310 P.3d 574 (NV 2013).
Under the state statute, in a law suit involving “nonresidential construction,” the plaintiff’s attorney “shall file [an affidavit and expert report] concurrently with the service of the first pleading.” The law requires that the court “shall dismiss the action” if the affidavit and expert report are not filed.
In this case the plaintiffs were subcontractors whose work had been inspected by the consultant. After they were brought into litigation between the project owner and the prime contractor, the subcontractors filed third party complaints against the consultant to recover damages that allegedly arose from the deficient performance of the inspection services that failed to detect problems and deficiencies in the subcontractors’ work.
In response to the claims by the subcontractors, the consultant filed a motion to dismiss on the basis that it was a “design professional” and that the initial pleading of the subcontractors was void and could not be cured by a subsequent amended pleading since it failed to include the required affidavit and report with its original pleading.
Turning to the question of whether the inspection firm was a “design professional” under the state statue, the court looked to the language of the statute that has a rather broad definition of who is a design professional. It provides that a design professional is someone who holds “a professional license or certificate issued pursuant to chapter 623 … or a person primarily engaged in the practice of professional engineering, land surveying, architecture or landscape architecture.” The court stated that it was particularly relevant that “the practice of ‘professional engineering’ includes, but is not limited to … any professional service which involves the application of engineering principles and data, such as … consultation, investigation, evaluation, planning and design, or responsible supervision of construction where the public welfare of the safeguarding of life, health or property is concerned… It also includes services that are ‘necessary to the planning, progress and completion of any engineering project or to the performance of any engineering service.’”
Here, the subcontractors alleged that the consultant was required to inspect the steel work for irregularities and deficiencies and make certain that the installation of the steel comported with the construction plans and specifications. The consultant was also required by contract to sample and test for tensile strength of the steel. This, said the court, involves engineering principles to determine how the steel responds to various amounts of stress. By virtue of engaging in the practice of engineering, as gleaned from the services that were identified in the subcontractors’ pleadings, the court found the consultant was a “design professional.”
Having determined that the consultant was a “design professional” the court held the pleadings must be dismissed with prejudice for failure to meet the requirements for filing a suit against a design professional.
Comment: The statute of Nevada is perhaps a model that should be adopted by other states. Currently, the certificate of merit statutes vary considerably by state. In Maryland, for example, there was confusion over who was considered a design professional. The statute defines the term much more narrowly than does Nevada. In addition, if the plaintiff in Maryland fails to file the certificate in a timely manner, the statute simply calls for the case to be dismissed without prejudice. The plaintiff then can file a new complaint (with the required certificate of merit affidavit) assuming the time permitted by the statute of limitations has not elapsed. To me this seems like less than half a loaf.
For a certificate of merit statue to be meaningful, and have any teeth, the dismissal should be WITH PREJUDICE. Why give the plaintiff a second chance? How hard is it for the attorneys to learn what is required by the statute, and file the affidavit timely? Rather than allow the plaintiff to correct its mistake by filing a new complaint, the better remedy would be to dismiss the case with prejudice. Otherwise it provides little, if any, benefit to the legal system or to design professional defendants who will have to start again with an answer to the new complaint. In fact, it creates extra work for the courts and parties, and is judicially inefficient.
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. 2 (Feb 2014).
Copyright 2014, ConstructionRisk, LLC
Article 2
EPA’s “Final” Rule on ASTM Phase I Environmental Site Assessments
See similar articles: ASTM | CERCLA | Environmental Site Assessment | ESA
By: Steven D. Urgo, Esq.
White & Williams
For insurers, lenders, and those in the real estate business, Phase I Assessments have often been used as a gatekeeper for commercial transactions. This gatekeeper role originated in 2002, when CERCLA was amended to limit liability for bona fide prospective purchasers and contiguous property owners, and to clarify CERCLA’s innocent landowner defense.
In 2005, EPA promulgated the All Appropriate Inquiry Rule (AIA Rule) to establish standard practices that qualified for these new
protections from CERCLA liability. At that time, the AIA Rule referenced ASTM standard E1527-05 – Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process - and authorized its use to comply with the AIA Rule.
On December 30, 2013, EPA issued its “final” final rule that politely suggests using E1527-13. EPA’s AIA Rule, however, will also continue to reference E1527-05 until some unspecified future date and allow that standard to still be used. EPA, warns, however, that if people don’t start using the new standard, EPA may have to “explicitly require” use of the “enhanced activities provided for in the updated ASTM-13 standard.” This article explains what standards now apply and what is required by the standards.
So which standard applies? According to EPA the answer could possibly be both, or neither. Confused? In response to comments regarding its August 2013 final rule that was rescinded and replaced with the December 2013 rule, EPA stated that, while an ASTM standard can be used to comply with the AIA rule, the actual standard is the AIA Rule – 40 CFR 312.11. In other words, before you bet the farm on a Phase I report that is based on either of the ASTM standards, it is important ensure that the site investigation passes muster under Part 312.11.
So what’s new? E1527-13 is similar to E1527-05 in format, process and areas of coverage. According to both EPA and ASTM, however, E1527-13 provides “clarification” to E1527-05, and additional guidance to assist in determining if there are releases or threatened releases of hazardous substances at a site. Here’s the lowdown on the significant changes:
Vapor Releases – the “migrate/migration” definition was revised to specifically include vapor migration – however, indoor air quality is still a non-scope item for Phase I Assessments. The revised definition is meant to clarify that releases that migrate via vapor in the subsurface or soils are a “recognized environmental condition” (REC).
EPA went out of its way here to clarify in its preamble to the rule that assessment of vapor releases was always required under E1527-05. This is despite the fact that some commenters noted that assessments under E1527-05 had previously overlooked or did not consider vapor releases when conducting Phase I Assessments. Some fear that EPA’s clarification comments in the preamble will open a Pandora’s Box of litigation against consultants who failed to assess vapor migration in assessments performed under E1527-05.
Do you need to be concerned about EPA’s comments in a preamble to a rule? Courts look at the following factors to determine if a preamble is binding: (1) the agency’s own characterization of the action; (2) whether the agency published the action in the federal register or CFR; and (3) whether the action has binding effects on either private parties or the agency. See Florida Power & Light Co. v. EPA, 145 F.3d 1414 (D.C. Cir. 1998) (finding preamble to proposed regulation under RCRA not binding); Louisiana Env’t Action Network v. EPA, 172 F.3d 65 (D.C. Cir. 1999) (Preamble to apparent final rule binding where agency published material in federal register and EPA characterized preamble as “regulation”); Kennecott Utah Copper Corp. v. Dep’t of Interior, 88 F.3d 1191 (D.C. Cir. 1996) (no categorical bar to judicial review of preamble but review must await application in “concrete case”).
Since there does not appear to be a bright line test for determining if a preamble is binding, you may not want to cavalierly ignore EPA’s comments about vapor intrusion under E1527-05. But before you reach for the Tums and your old Phase I Reports, it may be that any potential for vapor releases under E1527-05 were captured in an analysis of other types of releases or threatened releases at a site. If other types of releases were not captured, then you may have more to worry about than vapor issues.
Practice Note: Going forward, make sure an assessment of vapor migration is on your Phase I checklist.
Post Remedial Care – Many sites undergo cleanup that leaves certain levels of contaminants in place, but protects the public and environment by use of various deed restrictions and engineering/institutional controls. The definition of “historical
recognized environmental conditions” (HREC) has been clarified so that it refers only to prior releases that have been remediated to unrestricted residential use, i.e., no actionable levels of contaminants remain.
A new term, Controlled Recognized Environmental Condition (CREC) has been added to describe sites where a release was remediated, but contaminants remain in place, subject to restrictions/controls. A CREC falls within the “recognized environmental condition” definition.
Note, however, that E1527-13 does not require the consultant to confirm the integrity of the control. Since the liability
protections afforded by undertaking AIA may be forfeited if a purchaser fails to prevent or limit exposure to any previously
released hazardous substance, care should be taken to monitor and comply with any post remedial care plan that is in place, and ensure that if applicable, a viable party remains obligated, via an indemnity and/or filed Uniform Environmental Covenant, to maintain any preexisting controls. To the extent you would like your consultant to comment or make recommendations as to any existing controls, see the bullet below regarding “recommendations.”
Records Review (Yes, Please) – Many Phase I Reports that were completed under E1527-05 included a statement advising that the consultant had requested a review of state or federal records for the particular site, but as of the report’s date, the agencies had not responded. So the party relying on the report may need to decide to either pull the trigger on a transaction absent a file
review, or seek to extend a due diligence period (and perhaps pay an additional consulting fee) to have a file review performed.
Section 8.2.2 now states that if a site or adjoining site is identified in one or more of the standard environmental record
sources, e.g., commercially available environmental databases, pertinent regulatory files should be reviewed, unless the consultant provides a written justification for not conducting the review. Alternatively, the consultant can review files/records from other sources, such as on-site records, user provided records, local government records, or conduct interviews with regulatory officials or other individuals knowledgeable about environmental conditions. The end result is the cost and time to complete a Phase I assessment may increase, but so too may the quality of the assessment.
Other Revised Definitions – Most important among various revised definitions is the new REC definition: “the presence or likely presence of any ‘hazardous substances’ or ‘petroleum products’ in, on, or at a ‘property’: (1) due to release to the environment; (2) under conditions indicative of a ‘release’ to the ‘environment’ or under conditions that pose a ‘material threat’ of a future “release” to the ‘environment’. ‘De minimis conditions’ are not ‘recognized environmental conditions.’” This streamlined definition is more in line with what the AIA Rule requires insofar as assessing releases, and attempting to minimize disputes over
what is and is not an REC.
In revising the “de minimis conditions” definition, ASTM makes it clear that such conditions are not a REC or a CREC. In addition, the ASTM added definitions of “release” and “environment” to the standard that are verbatim to the CERCLA definitions.
No Recommendations, Please – Section 12.15 states that the standard does not require recommendations, and that the user should consider whether recommendations are needed. Recommendations are characterized as an “additional service that may be useful in the ‘user’s’ analysis of landowner liability protections] or ‘business environmental risk.’” Sometimes, less is more. If a consultant makes certain written recommendations, and they are not followed, you may open the door to forfeiting your AIA liability protection. Therefore, it may be advisable to set forth any recommendations in a separate document and in a format
that is more properly suited for other types of sensitive due diligence information that may be subject to non-disclosure or privilege protections.
Who’s Job Is It Anyway? – Both ASTM Standards differentiate which party, the consultant (environmental professional) or the user (the party seeking liability protection) is responsible for obtaining certain information, such as environmental liens levied on the site. Section 6.2 clarifies that the user – not the consultant – is responsible for determining if environmental liens or use limitations have been placed on a particular site by way of searching title or judicial records. The Standard states that a user should retain a title company, real estate attorney or title professional to conduct such searches.
What does it all mean?
As of now, it appears that a user can rely on a Phase I Assessment that is performed using either standard, so long as the Assessment satisfies the requirements of 40 CFR 312.11. My take on this is that since the new standard merely “clarifies” the old standard, an Assessment performed today under the old standard should yield the same outcome as one performed under
the new standard – a convergence of standards if you will.
As a result, it can be argued that a consultant cannot ignore the clarifications set forth in E1527-13, even if it conducted an Assessment using E1527-5, least it be exposed to liability for not following the “clarified” standard.
Users should also expect the same type of information to be provided to it under either standard, now that EPA has told us that the information required to be assessed in E1527-13 was supposed to be assessed under E1527-5 in the first instance. But in our consumer-oriented society, why would you buy old, when you can buy new?
For consultants and users alike, it seems preferable and cleaner simply to adopt E1527-13 as EPA politely suggests, or else EPA will
“expressly require” the regulated community to do so, along with eating a daily requirement of broccoli. A copy of the December 30, 2013 Rule is attached.
The opinions expressed in this e-mail are solely those of the author and not necessarily those of White and Williams or its clients.
About the Author
Steven D. Urgo | Member NY, NJ and PA Bars
White and Williams
1650 Market Street | One Liberty Place, Suite 1800 | Philadelphia, PA
19103-7395
Direct 215.864.7185 | Fax 215.789.7624
urgos@whiteandwilliams.com | whiteandwilliams.com
This article is published in ConstructionRisk.com Report, Vol. 16, No. 2 (Feb 2014).
Copyright 2014, ConstructionRisk, LLC
Article 3
Contractual Liability Exclusion in CGL Policy Does Not Bar Coverage for Damages Arising out of Contractor’s Breach of Contract
See similar articles: Contractual Liability | Indemnification clause | Insurance Coverage Disputes
A contractor entered into an AIA standard form construction contract with a project owner to build additions to a school, including construction of tennis courts. After the courts were completed they began flaking, crumbling, and cracking – making them unusable. The owner sued the contractor for breach of contract and negligence. The contractor tendered defense to its CGL carrier, but the carrier denied coverage on the basis of the contractual liability exclusion that excludes claims for damages based on an insured’s contractual assumption of liability. The carrier argued that the exclusion applied because the contractor contractually undertook the obligation to construct tennis courts in “a good and workmanlike manner.”
By that language, the carrier asserted that the contractor assumed liability for damages if the construction did not meet that standard. To the contrary, the contractor argued that the words “good and workmanlike” manner did not add anything to its obligation under the general common law to comply with the terms of the contract and exercise reasonable care in doing so. It argued that merely agreeing to construct in a “good and workmanlike” manner did not enlarge its obligations and was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion. The Supreme Court of Texas agreed with the contractor and held against the carrier. Ewing Construction v. Amerisure Insurance Company, No 12-0661, TTX 2013).
The court explained that the policy “excludes liability for damages the insured assumes by contract unless the exceptions bring the claim back into coverage”. “Assumption of liability” “means that the insured has assumed liability for damages that exceeds the liability it would have under the general law.” The court noted that it must be read this way, “otherwise the words ‘assumption of liability’ are meaningless and are surplusage.”
With regard to the significance of the allegations that the contractor failed to perform in a “good and workmanlike” manner, the court stated this is “substantively the same as … claims [that contractor] negligently performed under the contract because they contain the same factual allegation and alleged misconduct.” “[Plaintiff’s] claims that [contractor] failed to perform in a good and workmanlike manner and its claims that [contractor] negligently performed under the contract are substantively the same.”
The court said that it had previously defined “good and workmanlike” as “that quality of work performed by one who has the knowledge, training, or experience necessary for the successful practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work.”
The court concluded that a contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, and thus does not “assume liability” for damages arising out of its defective work such that the contractual liability exclusion would be triggered to bar coverage.
The insurance company argued that if the contractual liability exclusion were not applied here it would result in the policy being treated like a performance bond instead of an insurance policy. In rejecting that argument, the court stated that there were other business risk exclusions in the policy that a carrier could look to bar coverage instead of applying the contractual liability exclusion.
Comment: I would go so far as to say that, even if a contract had no particular language in its contract at all, or perhaps even worked without a written contract, the duty of performing a contractor’s work in a “good and workmanlike manner” would apply. That is a duty imposed by common law and the fact that the contract reiterates what the common law already requires, adds nothing additional to the contractor’s duty – and therefore nothing that would fall within the “contractual liability” exclusion.
In contrast, however, whenever I see those same words included in a design professional contract to describe the duty owed by the design professional, I recommend the words are inappropriate and they be deleted. This is because those words belong in a construction contract and not a professional services contract. Design professionals are held to a different standard as established by the generally accepted standard of care. This typically requires expert testimony to determine what is the applicable standard and whether the design professional failed to meet it.
To state that a design professional will perform in a “good and workmanlike manner,” is to treat the design professional like a contractor. It is at best confusing to say that a design professional does “work” instead of “service” and to suggest that service that requires the exercise of professional judgment and opinion is somehow to judged by whether it is “good” or “workmanlike.” In the context of a design professional services contract, I could better understand why an insurance carrier might assert that inclusion of those words might create uninsurable liability.
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. 2 (Feb 2014).
Copyright 2014, ConstructionRisk, LLC
Article 4
Homeowner Recovers from Individual Owner of a Limited Liability Company
See similar articles: Corporate Veil | Limited Liability Company | LLC | Personal Liability
The protection afforded to individuals who own solely, or with a small group, a limited liability company (LLC) is one of the key reasons that people incorporate such companies. From time to time, however, we see court decisions that either pierce the corporate veil, or find some other way to impose personal liability on the individual owners instead of limiting the liability only to the LLC.
Where a homeowner sued the LLC that built their home, a court found it appropriate to impose liability directly against the individual owner of the company for a number of reasons. After the written contract had been signed, the LLC owner continued to orally modify the contract and deal directly with the homeowner in such a way that the homeowner became uncertain and confused as to whether the LLC owner or the corporation was responsible.
The individual LLC owner also was personally liable for tortuously causing debris to buried underground on the homeowners lot. The main points the court made were that the relationship between the parties changed over time, and based on the LLC owner’s conduct, it became unclear to the homeowner with whom they were dealing in regard to various elements of the construction agreement.
The court did not impose liability on the individual because of his corporate position, but rather because of his personal behavior and interaction with the homeowner that clouded and confused responsibility. Without even resorting to piercing the corporate veil, the court imposed personal liability. Joseph General Contracting v. Couto, 72 A.3d 413 (CT 2013).
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. 2 (Feb 2014).
Copyright 2014, ConstructionRisk, LLC
Connect