Keeping Construction Risks Less Risky

John J. Sylvanus | Barley Snyder | August 14, 2017

Major construction is full of risk and reward. Owners, architects, engineers, contractors and subcontractors – all are bound to each other by a web of agreements, common schedules and desired outcomes. Everyone on a project is dependent on everyone else and subject to events beyond their control. Your ability to complete work timely and on budget depends on others.

Controlling risk requires recognition of events with risk potential and taking appropriate steps to limit its potential impact. Risk events will occur, and when they do, you need to be prepared to act promptly and appropriately. It is critical to remember that the process of determining the appropriate response to such an event requires looking at it not only from your viewpoint and determining how best to respond based on your potential costs and losses, but also considering how others may react and the risk of that reaction to you. When foreseeable but unanticipated problems occur, you can incur losses by having your schedule disrupted or pushed back, your work interfered with or problems caused for others. Although delays and additional costs you may incur are easy to determine, the biggest risks might be those that don’t affect you directly. Follow these rules to minimize risk factors:

Rule 1: Know your Contract

Most owner/contractor agreements limit the owner’s liability for delays caused by others that lead to a time extension. Additional cost-change orders will be denied leaving you with the choice of accepting the additional costs or going through time-consuming and expensive litigation. Your agreement may also require you to warrant equipment you supply. Take seriously your responsibility to review submittals to make certain they are correct and don’t rely on the owner’s architect or engineer to do it. Make sure your purchase orders require suppliers to indemnify you in the event a claim is made against you.

Rule 2: Aggressively deal with potential risks

Don’t ignore potential risks under the assumption owners and design professionals know what has occurred, who is responsible and what you are doing to deal with the risk. Never assume a problem will be resolved without you handling it yourself.

Rule 3: Prepare for litigation 

Avoid litigation at all costs — it seldom benefits anyone involved. Just as military preparedness is the best way to avoid war, handling every risk situation as if it were going to a lawsuit is the best way to avoid one. Be sure you have documented every step in the process of dealing with a risk event and be sure everyone knows what you have done to respond to it. The greater awareness everyone has of your preparedness and your ability to defend any claim against you, the less likelihood there is of your being dragged into litigation.

Rule 4: Consult experienced and knowledgeable counsel

Keep your attorney in the loop on problems arising during construction. Responding to them is far cheaper than having to defend or prosecute a lawsuit if that problem goes unresolved.

Pacing in Construction Scheduling Disputes

Luke Mecklenburg | Snell & Wilmer | September 11, 2017

On a high level, construction delay litigation involves sorting out the impacts to the critical project path and determining which party is responsible for those impacts. One of the more difficult elements of this process is determining whether a delay would have occurred regardless of one party’s critical path impact due to a separate, independent impact to the critical path by the other party.  For example, a contractor cannot collect delay damages for delays caused by the owner if the contractor itself was causing independent impacts that would have pushed off the completion date anyway.

However, the concept of “pacing” provides a potential defense for a party who is not on pace with the as-planned schedule for noncritical activities, even where those activities are still ongoing after the planned completion date. “Pacing delays” are a type of concurrent delay that occur when one party makes a conscious decision to decelerate or slow down the pace of noncritical activities to keep pace with the critical delays of another party. A more formal definition would be “deceleration of the work of the project, by one of the parties to a contract, due to a delay caused by the other party, so as to maintain steady progress with the revised overall project schedule.”  Zack, Pacing Delays–The Practical Effect, Construction Specifier 47, 48 (Jan. 2000).  A party to the construction process may decide to slow down its performance of noncritical activities to keep pace with the delayed progress. For example, contractors may adjust the pace of their work in light of delays in owner-furnished equipment, delays by other multiple prime contractors, delays in permits, limited access, or differing site conditions. Owners may slow down their response time to requests for information or submittals, or postpone the delivery of owner-furnished equipment or the processing of change orders.  Id. at 48.

The ultimate result of a pacing claim is that, instead of an alleged concurrent delay being considered independent and thus non-compensable, concurrent delays can become arguably a direct result of work keeping pace with delays caused by the other party, thus triggering a claim for a compensable extension of time.  In other words, why “hurry up and wait”?

These concepts have been considered and accepted by courts, which generally hold that the party not causing the delay has the right to slow down work when faced with delays caused by another party.  However, a party seeking to pace their activities should be very comfortable that the delays by the other party do have a direct and uncurable impact on the critical path.  If a party slows its work, and it is later determined that the project would have been completed earlier but for that slowing, then the “pacing” party will likely be liable for delay damages.  The dispute becomes a “chicken or the egg” argument, and “pacing” by any party responsible for performance of work impacting either the preceding or succeeding activity represents a gamble that scheduling analysis, in hindsight, will not show “pacing” to have been justified because the “paced” work activity created additional float for completion of either the preceding or succeeding activities.

The practical effect of a pacing argument on presentation of or defense of claims is that the schedule analysis becomes more complex than it might be otherwise.  Claimed concurrent delays take on more significance and need to be carefully analyzed and apportioned.  On a big project, this is complicated, expensive, and sometimes uncertain. Not surprisingly, vague or ill-defined pacing claims are often looked at critically by the courts or boards in these circumstances.  An analysis of float and which party is entitled to it also becomes an important and complicating factor in the analysis.  Also not unsurprisingly,  these types of cases often turn on the terms of the contract, the efforts of the parties to overcome the delays as shown in the project record, attempts to mitigate, and timely notices.

It’s Tradition! Pollution Exclusion Applies Only to Traditional Environmental Contamination: New Cases from Washington and Connecticut

Lucas M. Blower | Brouse McDowell | September 17, 2017

In general, a pollution exclusion precludes coverage for liabilities arising from the “discharge, dispersal, release or escape” of “irritants, contaminants or pollutants.” The exclusion was incorporated in commercial general liability (CGL) insurance policies in response to the massive environmental liabilities incurred by companies in the 70’s and 80’s.

And the exclusion has been effective, by in large, in precluding coverage for liabilities that are the result of traditional environmental contamination. But, for some insurers, that was not enough. These insurers argued that the pollution exclusion leaches out in new directions, applying not only to traditional environmental contamination, but extending to apply in new, non-pollution contexts as well.

For example, in Andersen v. Highland House Co., 93 Ohio St. 3d 547, 757 N.E.2d 329 (2001), the insurers relied on the pollution exclusion to deny a claim based on carbon monoxide poisoning in an apartment—hardly the sort of widespread environmental damage first envisioned by the pollution exclusion. The insurer nonetheless argued that the pollution exclusion applied because carbon monoxide was a “pollutant,” which the policy defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke vapor, soot, fumes, acids, alkalis, chemicals and waste.” Id. at 548. The Ohio Supreme Court, however, disagreed, holding that the pollution exclusion would not apply because it did not “specifically, and unambiguously state that coverage for residential carbon monoxide poisoning is excluded.” Id. at 548. According to the Court, the pollution exclusion was limited to situations involving “traditional environmental contamination.” Id. at 552.

While insurers have been rebuffed in their efforts to expand the scope of the pollution exclusion in Ohio, in other states, they continue to push at the edges of the pollution exclusion, hoping to spread its reach past the confines of traditional environmental contamination. But, in two recent cases—from Washington and Connecticut—the courts rightly halted the insurer’s attempts to expand the exclusion.

The recent decision from Washington’s Supreme Court, in Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 393 P.3d 748, 750 (Wash. 2017), mirrors Andersen in the facts, and reaches the same conclusion, but by a slightly different route. The underlying claim in Xia was based on the “negligent installation of a hot water heater that led to the release of toxic levels of carbon monoxide in a residential home.” The insurer denied the claim based on the pollution exclusion.

In interpreting the pollution exclusion, the Xia court, similar to the Andersen court, recognized that the pollution exclusion should only apply when the underlying cause of alleged liability “stems from either a traditional environmental harm or a pollutant acting as a pollutant.” Id. at 753. Unlike the Andersen court, however, the Xia court found that the carbon monoxide poisoning could be characterized as pollution. Still, the Xia court found that the insurer’s interpretation of the pollution exclusion violated Washington’s efficient proximate cause rule. Under that rule, a loss is covered, even if there are uncovered events within the causal chain leading to that loss, so long as the initial event—or the “efficient proximate cause”—is a covered peril. In Xia, the court found that the efficient proximate cause of the loss was the negligent installation of the hot water heater, which was covered. Accordingly, the pollution exclusion did not apply.

In Connecticut, likewise, an appellate court addressed a case where the insurer was arguing for an expansive version of the pollution exclusion. In R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 156 A.3d 539 (Conn. App. 2017), the policyholder was accused of mining and selling industrial talc that contained asbestos, which allegedly injured a host of claimants. The policyholder submitted a claim based on the lawsuits to its insurers, which denied the claims, in part, based on the pollution exclusion. The Connecticut appellate court disagreed with the insurers’ interpretation of the exclusion after an exacting review of the policy language. According to the court, the “policy language, when read as a whole, is intended to exclude coverage only for traditional environmental pollution, such as the intentional disposal or negligent release of industrial and other hazardous waste into the public air, land, or water resources.” Id. at 638. Since talc mining didn’t count as traditional environmental pollution, the court held that the pollution exclusion did not apply.

These two cases, and many others like them, should give insurers pause when they argue for a broad application of the pollution exclusion in non-traditional settings. Even if the terms in the pollution exclusion, standing alone, may seem broad enough to encompass ever new risks, the courts have rightly decided that they will not read the terms of the pollution exclusion standing alone. Rather, courts will continue their long-standing practice of interpreting the pollution exclusion solely within the limited context in which it was written. It’s tradition.

Coverage for Construction Defects Caused by Subcontractor Work

Amanda M. Leffler | Brouse McDowell | September 12, 2017

The Ohio Supreme Court has held that claims for the cost to repair an insured’s own defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy.” See Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712. In its decision, however, the Court approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:

  • Repair and replacement of a policyholder’s own defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and,
  • Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.

Importantly, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. A recent decision from one of Ohio’s appellate courts suggests that defective work performed by a policyholder’s subcontractors may be covered, regardless of whether the subcontractor’s work caused any consequential damages.

In 2008, Ohio Northern University contracted with Charles Construction Services (CCS) to construct a hotel and conference center. Ohio Northern Univ. v. Charles Constr. Servs., Inc., 2017-Ohio-258 (3rd Dist.). CCS retained several subcontractors to complete the work. After construction was completed, Ohio Northern discovered significant water intrusion and related damages, as well as serious structural defects, and brought suit against CCS.

CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no obligation to defend or indemnify CCS. Cincinnati contended that, under Custom Agri, property damages arising from defective work could neverconstitute an occurrence, regardless of who performed the work. In response, CCS argued that Custom Agri was inapplicable because almost all of the work at issue had been performed by subcontractors, not by CCS, and because CCS had purchased products-completed operations coverage which applied to the defective construction claims arising from the work of its subcontractors.

The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed the “Damage to Your Property” and “Damage to Your Work” exclusions, which expressly preserved coverage for damaged work or damages arising from faulty work if (1) the work was performed by a subcontractor, and (2) the damage occurred after construction was completed. The appellate court correctly noted that if it were to adopt Cincinnati’s interpretation of the policy, it would render these provisions meaningless. The court found that, at a minimum, the provisions created an ambiguity that must be resolved in favor of the policyholder. Thus, the appellate court held that Cincinnati had a duty to defend and indemnify CCS.

Interestingly, though not analyzed by the appellate court, even if the work at issue had been performed by CCS and not its subcontractors, the damages alleged by Ohio Northern would have required that Cincinnati defend CCS and indemnify at least a portion of any award against it. This is because Ohio Northern asserted claims not only for the repair and replacement of defective work, but also for consequential damages arising from such work. As noted above, the Supreme Court in Custom Agri cited with approval prior lower court opinions, which held that CGL policies cover such claims for consequential damages. Insurers and policyholders in Ohio continue to test the scope of the Ohio Supreme Court’s decision in Custom Agri. As in any case involving complex coverage analysis, policyholders should consider retaining experienced coverage counsel to assist in the claim process so as to best position their claim for coverage.

California Supreme Court Affirms California Fair Plan Ass’n v. Garnes, and Preserves Homeowners’ Interests

Stephanie Poll | Property Insurance Coverage Law Blog | August 17, 2017

The California Department of Insurance recently issued a press release announcing that the California Supreme Court affirmed the homeowner reimbursement protections recently decided in California Fair Plan Association v. Garnes.1 Back in June, my colleague Kevin Pollack wrote about the recent decision and whether actual cash value means fair market value or replacement cost minus depreciation in, Does Actual Cash Value Mean Fair Market Value or Replacement Cost Minus Depreciation.

Last week, the California Supreme Court refused to consider the insurance industry’s petition to overturn a lower court’s decision that insurers must pay to repair a home even if the repair costs exceed the home’s market value. There, a house fire occurred and the homeowner submitted a claim for $320,549 to her insurer, California Fair Plan Association. This amount represented the cost to repair the damaged home, less depreciation. Garne’s FAIR fire insurance policy had a limit of $425,000, yet Fair Plan denied the claim and only paid $75,000, which was determined to be the fair market of the property in 2011 (in large part due to the mortgage-driven recession).

The supreme court’s refusal to consider the proposal ended an ongoing battle and cemented an important decision that protects homeowners’ interests. Insurance Commissioner Dave Jones stated: “This is an important win for homeowners who should have confidence their insurer will deliver on its promises regardless of housing value fluctuations.”2 Jones filed an amicus brief in support of Garnes, arguing the Insurance Code entitled Garnes to be reimbursed. The lower court agreed and relied on Jone’s interpretation of the Insurance Code when ruling in Ms. Garne’s favor.

The Insurance Commissioner appeared as an amicus curiae, or friend of the court. Jones’ interest was in protecting consumers and ensuring the Insurance Code is properly interpreted and enforced. Our friends over at United Policyholders also filed an amicus brief supporting Garnes and advocating for homeowners’ rights.
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1 California Fair Plan Ass’n v. Garnes, No. A143190, 2017 WL 2303165 (Cal. Ct. App. May 26, 2017).
2 http://www.insurance.ca.gov/0400-news/0100-press-releases/2017/release082-17.cfm