Inside this Issue

A1 - Acceptance Doctrine Prevents Construction Defect Suit
A2 - Waiver of Subrogation Enforceable on Gross Negligence Claims
A3 - CGL Carriers Had no Duty to Defend Professional Liability Claim against Designer of Pedestrian Bridge that Collapsed at Florida International University

Article 1

Acceptance Doctrine Prevents Construction Defect Suit

See similar articles: Acceptance Doctrine | Georgia | Waiver and Release

The “acceptance doctrine” was applied in a negligent construction tort case to dismiss a homeowner suit against the contractor that built the original homeowner. The new homeowner purchased the home under an “as is” agreement and soon after purchase discovered evidence that the roof and HVAC system were negligently constructed. Liability for injuries caused by readily observable defects is shifted by this doctrine away from the contractor and onto the owner at the moment of acceptance of the defective work by the original owner. Thomaston Acquisition, LLC v. Piedmont Construction Group, Inc., 306 Ga. 102 (2019).

As explained by the court, many states have moved away from the acceptance doctrine and now apply a foreseeability doctrine that has no privity of contract requirement. But Georgia adheres to the acceptance doctrine, which provides:

“[A]n independent contractor is not liable for injuries to a third person, occurring after the contractor has completed the work and turned it over to the owner or employer and the same has been accepted by him, though the injury result from the contractor’s failure to properly carry out his contract.”

One exception to the doctrine is that it will not be applied to bar a third party’s claim for injuries suffered as a result of a defect that is hidden from reasonable inspection. Although it lacked privity of contract with the construction contractor, the new homeowner argued it should be treated like the original owner because it is the current owner of the property. In rejecting that argument, the court stated this would undermine the acceptance doctrine's foundational purpose of shielding contractors from liability for injuries occurring after the owner has accepted the completed work.

The court explained the reason for the doctrine is that a contractor has no authority to inspect or make changes to the property after it completes its work, and may not be authorized to even enter the premises. This reasoning was particularly applicable under the facts of the instant case, where:

“The original owner could have refused to accept the work altogether or accepted it on the condition that the appellees would repair any readily observable defects. But the original owner did not do that; it accepted the apartment complex, and upon that acceptance, all liability for readily observable defects shifted from the appellees to the original owner. After that time, the appellees had no control over the property and no authority to repair or maintain it. When the original owner sold the complex [ ] – two years after construction was completed, turned over to, and accepted by the original owner – the liability did not shift back to the appellees.”

As far as fairness to new owners, the court said subsequent purchasers can protect themselves by adequately inspecting and refusing to purchase defective property or demanding repairs by the seller before closing. Moreover, they didn’t have to purchase the property with an “as is” contract that cut off potential rights against the seller.

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.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. 21, No. 9 (Oct 2019).

Article 2

Waiver of Subrogation Enforceable on Gross Negligence Claims

See similar articles: anti-indemnity | Exculpatory Clause | Gross Negligence | Subrogation

A condominium sustained $3 million in fire damage when a portable electric generator on a truck owned by its roofing repair contractor malfunctioned. The truck was parked in the condo garage despite contract language expressly prohibiting that. The condo property insurance (“United National”) paid the damages and then filed a subrogation action against the contractor for negligence, gross negligence and breach of contract. The contractor was entitled to summary judgment due to a waiver of subrogation clause in its contract. United National Insurance Company v. Peninsula Roofing, 777 Fed Appx. 639 (2019).

The waiver of subrogation clause of the contract provided, “[t]he Owner and Contractor waive all rights against [ ] each other … for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work….”

To the extent that fire damages were covered under the condo association’s policy, the contractor successfully argued that the condo association agreed to waive the right to sue the contractor to recover those costs. And because the condo association could not sue the contractor, its carrier likewise could not sue the contractor in subrogation. The trial judged granted the contractor’s motion for summary judgment and this was affirmed on appeal.

United National argued that the subrogation waiver was applicable only to damage caused by authorize activities of the contractor, and that the contractor was in breach of contract by parking its truck in the garage, which led to the fire and damages. In rejecting the carrier’s argument that the subrogation waiver is applicable only to damage caused by activities that Peninsula was authorized to perform under the contract, the court stated:

To accept United National’s reading of the subrogation waiver—that it applies only to damage that is both covered by property insurance and caused by activity falling within the scope of Work—we would need to insert new language into the waiver’s text. That is, we would need to rewrite the waiver along roughly these lines: ‘the Owner and Contractor waive all rights against each other for damages caused by fire or other causes of loss, to the extent covered by property insurance obtained pursuant to this section or other property insurance applicable to the Work, unless said damages were caused by the Contractor’s non-Work conduct.'

Even if the terms of the subrogation waiver made it applicable to this case, as the court concluded it was, United National argued that the waiver would be unenforceable because it was contrary to public policy. It argued that the waiver constituted an exculpatory clause that could be allowed to bar gross negligence claims. It also argued that it violated the state’s anti-indemnity statute prohibiting indemnity for damages arising out of sole negligence of the Indemnitee. The court rejected both arguments, its analysis being the following:

"[M]”multiple state courts of last resort facing the same question have concluded that even though public policy generally prevents the enforcement of exculpatory clauses against claims of gross negligence, the same is not true of subrogation waivers in construction contracts like the one at issue here. [citations omitted]. United National does not explain why Maryland law requires a different result; nor does United National identify any state court of last resort, which supports its own position.

Three additional factors, all of which the district court addressed, weigh against United National. (1) There is a significant difference between exculpatory clauses in general and the subrogation waiver at issue here…. [T]he subrogation waiver at issue here contains no express agreement relieving either party of its duty of care. the subrogation waiver at issue here contains no express agreement relieving either party of its duty of care. (2) Unlike exculpatory clauses in general, the subrogation waiver at issue here specifically contemplates that the injured party will be able to recover for its losses. (3) Making subrogation waivers in construction contracts unenforceable against claims of gross negligence would undercut one of the well-recognized purposes of such waivers: to reduce litigation over insured losses sustained during construction projects.”

Allegations of gross negligence were, therefore, not a reason to circumvent the subrogation waiver.

An Alternative argument by United National was that the subrogation waiver was unenforceable as contrary to the Maryland anti-indemnity statute, which provides:

[“A] ‘covenant’ in a contract ‘relating to ... the construction, alteration, repair, or maintenance of a building’ is ‘against public policy’ and therefore ‘void and unenforceable’ if it ‘purport[s] to indemnify the promisee against liability for damages arising out of bodily injury to any person or damage to property caused by or resulting from the sole negligence of the promise or indemnitee.’

The court disagreed with United National’s argument that this statute makes subrogation waivers unenforceable where the prevent contractors from being held liable for their sole negligence. The court noted that subrogation waivers are actually serve a good purpose in that “’[a]s a matter of policy,’ subrogation waivers ‘encourage parties to a construction contract to anticipate risks and to procure insurance covering those risks and also facilitate and preserve economic relations and activity’…. In this way, subrogation waivers serve ‘to cut down the amount of litigation that might otherwise arise due to the existence of an insured loss.’”

Article 3

CGL Carriers Had no Duty to Defend Professional Liability Claim against Designer of Pedestrian Bridge that Collapsed at Florida International University

Figg Bridge Engineers, Inc. (“FIGG”) and Munilla Construction Management, LLC (“MCM”) contracted to design and construct a pedestrian bridge on the Florida International University campus. The bridge collapsed, killing and injuring several people. Lawsuits followed. The commercial general liability (CGL) primary and umbrella policies included professional liability exclusions for damages “arising out of” rendering any professional services. The carriers obtained declaratory judgment that they owed no duty to defend the insured design professional because all allegations of the complaint against the designer implicated professional services. This also entitled them to reimbursement of $270,000 they had already spent in defending the engineer pursuant to a reservation of rights letter. Travelers Indemnity Company v. Figg Bridge Engineers, Inc., 389 F.Supp. 1060 (2019).

The polices in question contained identical exclusions for bodily injury or property damage “arising out of the rendering of or failure to render any professional services.” The exclusion defines professional services as “any services requiring specialized skill or training, including:

a. Preparation, approval, provision of or failure to prepare, approve, or provide any map, shop drawing, opinion, report, survey, field order, change order, design, drawing, specification, recommendation, warning, permit application, payment request, manual or instruction;

b. Supervision, inspection, quality control, architectural, engineering or surveying activity or service, job site safety, construction contracting, construction administration, construction management, computer consulting or design, software development or programming service; or selection of a contractor or subcontractor; or

c. Monitoring; testing, or sampling service necessary to perform any of the services described in Paragraph a. or b. above.

The carriers asserted they owed no duty to defend FIGG because every allegation in the underlying personal injury complaints falls under the professional services exclusion. They argued that even if the allegations don’t describe “professional services” they at least “arise out of” the professional services that FIGG rendered or failed to render.

FIGG, in arguing for coverage under the CGL policies, asserted that “despite the breadth of ‘arising out of’ and the definition of ‘professional services’ in the professional services exclusions”, there were allegations in the complaint that didn’t fall solely and entirely within the definition of “professional services” and were therefore outside of the exclusion.

In analyzing the merits of the arguments, the court looked only to the underlying complaints and the wording of the exclusion, and did not consider the wording of the design-build contract.

The Broad Nature of “Arising Out Of” Language

The court explained that when the words, “arising out of” are used in a contract, this does not require “proximate cause.” It is much broader than direct and proximate cause. As a side note, this is why attorneys and risk managers for design firms are so insistent on revising indemnification wording in design professional contracts to eliminate indemnity for damages “arising out of” wording and replace it with indemnity for damages “to the extent caused by” wording. As explained by the court:

The term ‘arising out of’ is broader in meaning than the term ‘caused by’ and means ‘originating from,’ ‘having its origin in,’ ‘growing out of,’ ‘flowing from,’ ‘incident to’ or ‘having a connection with.’ ” ... The term “requires more than a mere coincidence between the conduct ... and the injury. It requires some causal connection, or relationship.” It does not require proximate cause.”

Even in the exclusionary context, “arising out of” retains its broad interpretation. See Garcia v. Fed. Ins. Co., 969 So. 2d 288, 293 (Fla. 2007). The Florida Supreme Court has held the phrase “arising out of” is broader than the phrase “because of” and contemplates a more attenuated link. See id. Federal courts have consistently applied this broad construction to “arising out of” provisions. See Zucker for BankUnited Fin. Corp. v. U.S. Specialty Ins. Co., 856 F.3d 1343, 1350 (11th Cir. 2017) (“Decisions of the Florida Supreme Court, the Florida Courts of Appeal, and this Court show that the ‘arising out of’ standard is not difficult to meet.”); see also James River Ins. Co. v. Ground Down Eng’g, Inc., 540 F.3d 1270, 1275 (11th Cir. 2008).

What services are deemed “Professional Services”?

When professional services are undefined, the court states that the courts consider many factors, including “whether the service involves specialized skill, required specialized training, is regulated, requires a degree, and/or whether there is an entity that certifies or accredits persons or that sets forth standards of practice for the performance of those services.” “Whether ‘an act results from the nature of a professional services is determined by focusing upon the particular act itself, as opposed to the character of the individual engaging in the act.”

In this case, the CGL carriers asserted that the allegations against FIGG “arise out of” FIGG’s work as an engineer and its exercise of professional judgment. The court agreed that the underlying complaints alleged FIGG was liable by virtue of the engineer’s status and by accepting duties, obligations and responsibilities attendant to the design and construction of the pedestrian bridge. “The design and construction of a pedestrian bridge requires specialized skill or training.”

The court then went through each count of the complaint and determined that regardless of what words were used to describe the theories of liability (e.g., gross negligence, professional gross negligence, design and engineering, strict liability, ‘management, control and supervision,’ failure to warn, failure to ensure safety, misrepresentation that project construction was safe, ordinary negligence rather than professional, failure to disclose that bridge was unsafe, etc.)

Not Necessary for Policy to List every Service that is within Exclusion

The court says that FIGG argued that if a specific term is not expressly listed as a professional service it doesn’t fall under the professional services exclusion. “Not so,” says the court. “The exclusion by its own terms, provides a non-exhaustive list of predetermined professional services.” The fact that the word “construction” does not appear by itself in the non-exhaustive list of activities that constitute professional services doesn’t mean that the act of construction is not a professional service, concluded the court.

FIGG’s assertions fail to persuade. By its plain meaning, the Exclusion encompasses these activities as professional services. (See Exclusion ¶¶ 3(a)–(c)). Failing to require “construction operations to cease” arises out of the professional service of “construction management.” (Id.). Additionally, decisions on “post-tensioning operations” and acts or omissions challenging the “integrity” of the bridge “during the movement and erection phase” necessarily arise out of “engineering services” under the Exclusion. (Id.).

Undeterred, FIGG states “[o]ther counts against FIGG allege that FIGG failed to control certain aspects of the project as well as disclose information, and neither term or activity is excluded by the definition of ‘professional services.’ ” (Def.’s Reply 9 (citing MWC ¶¶ 161, 174) (alteration added)). FIGG’s reliance on the absence of a specific term from “professional services” is again misplaced. As to the specific allegations to which FIGG cites, the MWC discusses “the practices exercised by FIGG with respect to the management, control, and supervision of the FIU pedestrian bridge project” (MWC ¶ 161 (emphasis added)); and how “FIGG failed to disclose known information about the condition of the bridge to those working on the construction site of the bridge project” (id. ¶ 174).

Contrary to FIGG’s assertions, these allegations from the MWC fall under the Exclusion. The “management, control, and supervision” of the bridge project arise out of FIGG’s “supervision,” “quality control,” “engineering services,” or “construction management.” (Exclusion ¶¶ 3(a)–(b)). Further, actions or inactions relating to the safety of the bridge site arise out of “job site safety” or “engineering services,” and the failure to disclose information certainly arises out of the “failure to provide an opinion, recommendation, or warning.” (Id.).

For the reasons explained in great detail in the decision, the court found that all allegations of the underlying complaints against the engineer constituted allegations “arising out of” the performance or failure to perform professional services and were, therefore, excluded from coverage under the CGL policy. The CGL carrier was therefore not obligated to defend the engineer against the suit, and was in fact entitled to recover attorneys fees it expended in defending the engineer under a reservation of rights letter.

Comment: This decision presents a very thorough and well-reasoned explanation of the professional liability exclusion in a standard CGL policy. It is important to note how the court cut through the arguments that attempted to show that the engineer performed non-professional services, and that it was those non-professional services that entitled the engineer to coverage under the CGL policy. A key to the analysis was the application of the very broad meaning of “arising out of” professional services and the broad scope of services included within the definition of “professional services” under the policies.

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