Is Equipment Installed As Part Of Building Renovations A “Product” Or “Construction”?

Joshua Lane | Ahlers Cressman & Sleight | March 20, 2019

A statute of repose terminates the right to file a claim after a specified time even if the injury has not yet occurred.[1] The construction statute of repose bars claims arising from construction, design, or engineering of any improvement upon real property that has not accrued within six years after substantial completion.[2] But what constitutes an “improvement upon real property” necessitating application of the six-year bar, and when does the bar NOT apply?

The Washington Court of Appeals recently addressed these questions in Puente v. Resources Conservation Co., Int’l.[3] There, the personal representative of the estate of Javier Puente sued several parties after Mr. Puente, an employee of a manufacturer, suffered fatal boric acid burns in 2012 while performing maintenance on a pump system installed at the manufacturer’s facility in 2002. The estate alleged claims of negligence and liability under the Washington Product Liability Act (WPLA).[4] The trial court granted summary judgment to defendants, concluding that the installed pump system constituted a statutory “improvement upon real property” and the six-year statute of repose applied. The estate appealed.

The Court of Appeals reversed, concluding that the faulty pump system equipment, while “integral” to the manufacturing process at issue, was not so integrated into the facility as to render it an integral part of the building structure. Indeed, the court held that the equipment was an “accoutrement … to the manufacturing process taking place within the” building.[5]

The Court looked to the Washington Supreme Court decision in Condit v. Lewis Refrigeration Co.[6] There, the Court concluded that the conveyer belt and refrigeration unit that caused the injury to the plaintiff was not an improvement upon real property but was engineered and designed as part of the “manufacturing process taking place within the improvement.”[7]

The Court of Appeals went on to contrast the decisions in Pinneo v. Stevens Pass, Inc.[8] and Yakima Fruit & Cold Storage Co. v. Central Heating & Plumbing Co.[9], where the improvement was found to be an integral part of the building structure and the statute of repose applied. In Pinneo, the operator of the Stevens Pass ski area retained a contractor to replace and install a ski lift.[10] In Yakima Fruit, the repair of a building refrigeration system required the removal of an entire floor of the building structure and could not be accomplished with either the system or the building remaining intact.[11]

The Court in Puente determined that the pump system at issue was more akin to the conveyer belt and refrigeration unit in the Condit case than the ski lift in Pinneo or building refrigeration system in Yakima Fruit because the pump system was not necessary to the function of the building and was not part of the building’s “construction” but “simply ‘house[d]’ within the … building.”[12] Accordingly, the Court concluded that the lawsuit was subject to product liability law and not the six-year statute of repose that would bar the claim under the construction law statute.

The determination of whether a mechanical system within a building constitutes an “improvement upon real property” and is therefore subject to the six-year statute of repose hinges on whether the system must be integrated into and become a part of the building itself.

Comment: The extent of equipment’s “integration” within a structure – much like the degree to which property is a fixture or merely chattel – is not merely a theoretical academic question but has serious liability implications for the equipment’s owner. In addition to keeping in mind the statute of repose, when considering actions and defenses arising out of the installation of equipment in construction projects that is not integral to building operations, counsel should carefully consider whether product liability or construction law applies. Varying applications will have significant effect on the law governing particular claims and defenses.

[1]Major League Baseball Stadium Pub. Facilities Dist. v. Huber, Hunt & Nichols-Kiewit Constr. Co., 176 Wn.2d 502, 511, 296 P.3d 821 (2013).

[2]RCW 4.16.300; RCW 4.16.310.

[3]5 Wn. App.2d 800, 428 P.3d 415 (2018).

[4]Chapter 7.72 RCW.

[5]5 Wn. App.2d 800 at 813 .

[6]101 Wn.2d 106, 676 P.2d 466 (1984).

[7]Id. at 112.

[8]14 Wn. App. 848, 545 P.2d 1207 (1976).

[9]81 Wn.2d 528, 503 P.2d 108 (1972).

[10]Pinneo, 14 Wn. App. at 849

[11]Yakima Fruit, 81 Wn.2d at 529-31.

[12]Puente, 5 Wn. App.2d 800 at 812.

Insured Wins Because “Decay” and “Rot” Don’t Have to Mean the Same Thing

Dwain Clifford | The Policyholder Report | April 11, 2019

Earlier this week, the Washington Court of Appeals affirmed the bedrock principle in insurance-coverage cases that insurers will always lose when a genuine ambiguity controls whether an insurer will have to pay a claim. The ambiguity in this case arose both from lexicographers’ habit of capturing nuances in writing dictionary definitions of “decay,” and the insurer’s own choice to use different words for supposedly the same meaning.

In Feenix Parkside LLC v. Berkley North Pacific, the insured’s roof had collapsed after the building’s trusses failed, but without any evidence of dry rot or similar “decay” weakening them. Under the policy, a collapse caused by “decay that is hidden from view” is covered, but collapse from other causes, such as defective construction (but without some accompanying decay), was excluded. Relying on the first definition of decay that would first come to mind for most insureds in the Pacific Northwest, Berkley denied the claim because its adjusters did not find any “aerobic decomposition of proteins chiefly by bacteria.”

Not so fast, said the court. Although decay in the context of damage to a building (and, perhaps, especially one in rainy Auburn, Washington just south of Seattle) might naturally imply dry rot, the dictionary definitions are not so limited. In particular, several versions of Webster’s dictionaries included some variant of “decay” to mean “the condition of a person or thing that has undergone a decline in strength, soundness, or prosperity or has been diminished in degree of excellence or perfection.” Webster’s usage example for this meaning is “the decayof the public school system.”

This shaded difference in meaning, driven by the context of how “decay” is being used, may have tipped the scales in favor of Berkley’s proposed, and coverage-defeating, definition. One does not usually speak of the “decline in strength” of a damaged building, after all, but of rotted framing. But that is not how policy interpretation works in insurance-coverage disputes. Washington, like Oregon, favors any genuine ambiguity in favor of the insured. And because Berkley’s adjusters had found a “decline in strength” of the roof trusses caused by “higher than normal temperatures,” which then gave way in the collapse, the insured got the checkered flag. No rot required.

Winning coverage was also possible because of ambiguity in how Berkley itself described these issues in different parts of its policy. The court noted that Berkley used “decay” in the additional coverage for collapse cases, but also generally excluded losses caused by “’Fungus’, Wet Rot, Dry Rot and Bacteria.” If “decay” really meant only damages caused by “rot,” as Berkeley argued in defending its denial of coverage, then it could have simply repeated this word in the collapse-coverage provision. Using different words, the court reasoned, implied different meanings, including the broader meaning the insured provided.

Winning coverage was also possible because of ambiguity in how Berkley itself described these issues in different parts of its policy. The court noted that Berkley used “decay” in the additional coverage for collapse cases, but also generallyexcluded losses caused by “’Fungus’, Wet Rot, Dry Rot and Bacteria.” If “decay” really meant only damages caused by “rot,” as Berkeley argued in defending its denial of coverage, then it could have simply repeated this word in the collapse-coverage provision. Using different words, the court reasoned, implied different meanings, including the broader meaning the insured provided.

One cannot read many insurance-coverage opinions without developing a healthy skepticism for the first, and perhaps most natural, meaning of a term in an insurance policy. Coverage law doesn’t work that way, and Feenix Parksidereinforces that insureds and their attorneys must be able to think about what word means outside of its traditional context, where ambiguity may be born to the insured’s benefit.

Wildfire Took Your Home? Don’t Count on Insurance: Viewpoint

Liam Denning | Claims Journal | April 12, 2019

Own a home? No doubt you’ve insured it. Very sensible of you. But if that home were, say, burned to the ground, then your insurance company probably wouldn’t cover the cost of rebuilding it.

Don’t feel too bad, though. It’s only partly your fault.

Two-thirds of California wildfire victims are under-insured, according to Amy Bach, executive director of consumer advocacy group United Policyholders, speaking at a recent meeting of governor Gavin Newsom’s wildfire commission, held in Santa Rosa. Shocking as that figure seems, it comports with anecdotes I picked up reporting on the aftermath of the recent wildfires earlier this year. Meanwhile, Sarah Paulson of Kevin Paulson Insurance Agency Inc. in San Diego, estimates maybe 60 percent of policyholders are under-insured.

Now a new study titled “Minding the Protection Gap,” just published in the Connecticut Insurance Law Journal, concludes the prevalence of under-insurance among American homeowners might be closer to 80 percent. Kenneth Klein, a professor at California Western School of Law, bases that estimate partly on a report from the California Department of Insurance, prepared in the wake of the 2007 wildfires, that recently became public record. Remarkably, this found that even when homeowners had purchased extended coverage, 57 percent of such policies fell short.

Summing up his study over the phone, Klein calls homeowner insurance “a really weird market; people think they bought a Cadillac when they really bought a Yugo.”

By and large, homeowners think they do have adequate coverage in the event of a catastrophe – and that’s where they take a share of the blame. Standard policies haven’t offered “guaranteed replacement coverage” for several decades. But unless the homeowner takes the time to read the mind-numbing policy documents or ask the right questions, they generally assume they’re good if the sky falls.

Before piling onto this feckless homeowner, though, ask yourself a question: Do you know how much it would cost to rebuild your home? Didn’t think so.

Most likely, you’re relying on an estimate from your insurance agent. Typically, those are derived from sophisticated software tools such as Verisk Analytics Inc.’s 360Value or CoreLogic Inc.’s RCT. Insurance is the original big-data business, compiling myriad items of information to judge probabilities and costs; these tools are immense databases of such things as local labor rates, materials prices, storage costs and many other line items.

No software can accurately predict every contingency, though; especially if, for example, a wildfire burns down a whole neighborhood and surge pricing kicks in. More importantly, software doesn’t write insurance, companies do. And the incentives in homeowner insurance tend to skew one way.

Only a small proportion of homes are sold each year, capping the size of the market for policies. Customers tend to be ignorant of the true cost of reconstruction. And when disputes arise, courts tend to effectively side with the insurance provider – after all, the homeowner signed up for the coverage stipulated in their contract. In short, the homeowner tends to bear all the risk of under-insurance while usually being ignorant of that risk. Plus, thinking catastrophe a very remote possibility, they’re more motivated to keep their monthly insurance bill low than to cure their ignorance.

So there can be little incentive for an insurance provider to invest time and money in a more-thorough assessment of a home’s particular risks. It’s tempting to instead enter fewer parameters to the software tools to estimate coverage and simply quote the most competitive premium they can. Klein ran an experiment on his own home, getting replacement-cost estimates from six insurers and two software tools, involving different levels of detail. They ranged from $512,000 to more than $1.1 million.

One way of addressing this problem is better-educating the customer, such as with tools alerting them to potential under-insurance. Meanwhile, Klein recommends requiring insurers to quote a price for guaranteed replacement coverage. Would those premiums be higher? Probably much higher, although providers could also compete on them. More importantly, they would signal to homeowners the true cost of protecting their home – and they could then choose to accept it or go with a lower quote for standard insurance, with the clear understanding they bear the risk of less-than-adequate coverage. “This will reconnect risk creation and risk allocation,” Klein writes.

California’s wildfires didn’t create this market failure; just revealed it. The enormous claims arising from the past two wildfire seasons – some $25 billion – are having an impact on pricing and availability already. At that same commission meeting in Santa Rosa, Joel Laucher, chief deputy commissioner of the California Department of Insurance, said complaints about higher premiums or difficulty renewing coverage in the highest-risk counties have jumped by 224 percent and 573 percent, respectively, since 2010. Meanwhile, over the past five years, there has been a 51 percent increase in policies written for homes in wildfire-prone areas under California’s FAIR program – insurance so bare-bones the website states up top it should only be used as “a last resort.”

In many respects, the wildfires expose the true costs of climate change and how they intersect with people’s choices about where and how they live; choices often made out of necessity or made at a time when phrases like “global warming” seemed utterly abstract. Mitigating wildfire risk is, of course, central to addressing this, but so is reform of insurance, society’s ingenious method of pooling risk. Pushing the industry to provide better incentives for, say, hardening homes and communities must be a priority for California – and, indeed, any other state facing rising risks from a changing climate. Making those risks, and their costs, crystal clear to consumers would be a good start.

The 10th Circuit Correctly Construes “That Particular Part” Narrowly

David Smith | Farella Braun & Martel | April 12, 2019

We do not often write about coverage opinions from jurisdictions as far away as Oklahoma; however, a recent case from the Federal Tenth Circuit looked at one of our favorite topics and came out with a much better reasoned opinion than recent decisions from the Ninth Circuit.

I’ve written before on the topic of the meaning of “that particular part” as the phrase is used in exclusions j (5) and j(6) of the Commercial General Liability (“CGL”) policy.  The “j” exclusions exclude coverage for damage to certain property.  Specifically, the j (5) and (6) exclusions state that the insurance does not apply to:

(5)    That particular part of real property on which you or any contractors or subcontractors working directly indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or

(6)    That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

The part of these exclusions that some courts consistently get wrong is the meaning of the phrase “that particular part.”  In particular, in June 2017 I wrote about the way the Ninth Circuit (supposedly applying California law) has on several occasions ignored the insurance industry’s own explanation of the meaning of the phrase “that particular part” and applied the exclusion to the entire project a contractor was working on.

Approaches in the Absence of a Differing Site Conditions Clause

Parker A. Lewton | Smith Currie | April 2, 2019

A contractor who has encountered unforeseen conditions will typically rely on the contract’s differing site conditions clause as a means to recovery. Most construction contracts address those issues directly. In ConsensusDocs Standard Agreement and General Conditions between Owner and Constructor, the starting point is § 3.16.2. But what if the contract does not contain a differing site conditions clause? Or, what if the contract does contain such a clause, but the contractor failed to provide adequate notice or satisfy other conditions or requirements of the contract? When reliance on a differing site conditions clause is impractical, a contractor still may seek recovery in certain instances under one or more of the following legal theories: misrepresentation; fraud; duty to disclose; breach of implied warranty; and mutual mistake.


Misrepresentation occurs when an owner “misleads a contractor by a negligently untrue representation of fact[.]” John Massman Contracting Co. v. United States, 23 Cl. Ct. 24, 31 (1991) (citing Morrison–Knudsen Co. v. United States, 170 Ct. Cl. 712, 718–19, 345 F.2d 535, 539 (1965)). A contractor may be able to recover extra costs incurred, under a theory of misrepresentation, if it can show that (1) the owner made an erroneous representation, (2) the erroneous representation went to a material fact, (3) the contractor honestly and reasonably relied on that representation, and (4) the contractor’s reliance on the erroneous representation was to the contractor’s detriment. See T. Brown Constructors, Inc. v. Pena, 132 F.3d 724, 728–29 (Fed. Cir. 1997). These four requirements can be satisfied, for example, through the use of deposition testimony detailing the owner’s representations and the contractor’s reliance thereon. See, e.g.C & H Commercial Contractors, Inc. v. United States, 35 Fed. Cl. 246, 256–57 (1996).


Whereas misrepresentation requires a negligent representation of material fact, recovery under a theory of fraud requires proof that the contractor was intentionally misled. Fraud, sometimes referred to as intentional misrepresentation, typically involves an owner knowingly concealing a difficult or costly condition in an effort to lower fixed-priced bids. Historically, courts looked to contractors for evidence of an express statement made by the owner. This high evidentiary standard has been relaxed over time, allowing contractors to demonstrate that the owner knew one thing but represented another, and the court can then infer the necessary intent from the circumstances.

Breach of Duty to Disclose

Similar to misrepresentation is failure to disclose. Under the duty to disclose, an owner is required to disclose all project-related information in its possession. A contractor can recover for an owner’s failure to disclose if (1) the contractor agrees to perform without knowledge of a material fact that will increase the cost or time of performance, (2) the government knew that the contractor had no knowledge of that material fact, (3) the contract specifications did not put the contractor on notice to inquire about that fact, and (4) ultimately, the government failed to provide the contractor with said information. Typically, the owner’s duty to disclose applies notwithstanding any specific request for information made by the contractor. Some courts, however, have found no liability when the contractor made no specific request. See, e.g.Schmelig Constr. Co., Inc. v. State Highway Comm’n, 543 S.W.2d 265 (Mo. App. 1976).

Importantly, an owner’s duty to disclose sometimes can extend beyond the confines of the specific site. For example, if the owner is aware of another nearby contractor encountering substantial rock in an adjacent area, the duty to disclose will apply. See, e.g., Jacksonville Port Auth. v. Parkhill-Goodloe Co., 362 So. 2d 1009 (Fla. Dist. Ct. App. 1978). Of course, what is considered to be sufficiently “adjacent” to trigger an owner’s duty to disclose is subject to debate.

Breach of Implied Warranty

To recover for a breach of implied warranty, a contractor must demonstrate that a valid warranty existed, the warranty was breached, and the breach caused harm to the contractor. One potential source of a valid warranty famously stems from the United States Supreme Court decision in United States v. Spearin. Under what is commonly referred to as the Spearin doctrine, the government impliedly warrants that the plans, specifications and details included in a solicitation are accurate, complete, workable, and biddable and, if followed, satisfactory results will be achieved. 248 U.S. 132 (1918). Generally, this implied warranty applies only to design specifications detailing the actual method of performance—it usually does not apply when the specifications simply establish an objective without specifying the method of performance to achieve that objective. Nonetheless, a contract’s specifications may be considered defective if a method of construction performance is specified and that method of performance cannot be followed due to an unanticipated site condition. If a contractor cannot achieve satisfactory results because of such a defect, the owner may be liable for breach of implied warranty.

A general disclaimer of responsibility for the accuracy of the owner’s plans or specifications will typically not allow an owner to escape liability for defects contained therein. See, e.g.Baldi Bros. Constructors v. United States, 50 Fed. Cl. 74, 79 (2001); Al Johnson Constr. Co. v. United States, 854 F.2d 467, 468 (Fed. Cir. 1988) (“The implied warranty is not overcome by the customary self-protective clauses the government inserts in its contracts[.]”). But this does not relieve the contractor from its duty to investigate and inquire about a patent ambiguity, inconsistency, or mistake the contractor recognizes—or should have recognized—in the specifications or drawings. Blount Bros. Constr. Co. v. United States, 171 Ct. Cl. 478, 346 F.2d 962, 972–73 (1965). This duty, however, applies only to patent errors—it does not impose on the contractor an obligation to search out hidden or subtle errors in the specifications.

Mutual Mistake

A less frequently followed road to recovery is the legal doctrine of mutual mistake. Under this theory, a party alleges that no valid contract actually exists because of the parties’ mutual mistake concerning the existence of a factual condition that goes to the very essence of the contract (e.g., the parties mistakenly believed the price of steel was lower than it actually was). If successful in having the contract reformed on this basis, the contractor can then seek to recover the actual cost paid on a quantum meruit basis (i.e., the reasonable value of the goods and services furnished). There are, however, two caveats worth noting. First, the doctrine of mutual mistake will not apply if the contract placed the risk of mistake on the party seeking reformation. And second, the mutual mistake must go to an existing fact: “If the existence of a fact is not known to the contracting parties, they cannot have a belief concerning that fact; therefore, there can be no ‘mistake.’” Atlas Corp. v. United States, 895 F.2d 745, 750 (Fed. Cir. 1990).


Typically, responsibility and remedies for unforeseen conditions will be governed by contract. Even when contractual remedies do not exist or the contractor is unable to use them, there are limited avenues to recovery outside the contract. Because these remedies may exist, it is wise to be as detailed and specific in documenting events and costs related to unforeseen conditions, even if contractual remedies are lacking.