Poisoning the Well: Washington Supreme Court Applies Efficient Proximate Cause to Eviscerate Pollution Exclusion in Liability Policy

Meredith Whigham Caiafa | PropertyCasualtyFocus | July 7, 2017

Professionals and practitioners in first party property insurance are likely familiar with the efficient proximate cause rule, which requires an insurance policy to provide coverage where “a covered peril sets in motion a causal chain,” even if subsequent causes-in-fact of the loss are excluded by the policy. As indicated by our previous coverage [123] of this doctrine, this can be a confusing analysis that leads to unpredictable results.

Until recently, the efficient proximate cause rule has only been applied to first party insurance policies. But this is no longer the case, at least in the state of Washington. In Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017), the Washington Supreme Court held that, due to the efficient proximate cause rule, a pollution exclusion in a CGL policy did not apply to a claim for bodily injury from carbon monoxide inhalation, because the release of the pollutant was caused by negligence. Moreover, the consequences of the insurer’s failure to consider efficient proximate cause were severe; despite no precedent for the application of this rule to a liability policy, the court also held that the insurer acted in bad faith by failing to defend the claim based on efficient proximate cause.

In Xia, the claimant bought a house constructed by Issaquah Highlands 48 LLC (“Issaquah”), which had a CGL policy issued by ProBuilders. Soon after moving in to the home, the claimant became sick due to inhalation of carbon monoxide. The release of the carbon monoxide was caused by improper installation of an exhaust vent.

After Issaquah notified ProBuilders of the claim, ProBuilders denied coverage under the policy’s pollution exclusion, which excluded, in pertinent part:

Bodily injury, property damage, or personal injury caused by, resulting from, attributable to, contributed to, or aggravated by the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants, or from the presence of, or exposure to, pollution of any form whatsoever, and regardless of the cause of the pollution or pollutants.

This Exclusion applies regardless of the cause of the pollution and whether any other cause of said bodily injury, property damage, or personal injury acted jointly, concurrently, or in any sequence with said pollutants or pollution. This Exclusion applies whether any other cause of the bodily injury, property damage, or personal injury would otherwise be covered under this insurance.

After receiving a $2 million judgment and an assignment of the claim against ProBuilders from Issaquah, the claimant filed a declaratory judgment action against ProBuilders for breach of contract and bad faith. ProBuilders won summary judgment on a different exclusion in the trial court, which the Washington Court of Appeals rejected. However, the appellate court affirmed the judgment on the alternative ground that the pollution exclusion applied.

The Washington Supreme Court took up the issue of whether the pollution exclusion applied to relieve the insurer of its duty to defend. Ultimately, the court held that although the insurer did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, because the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater – the pollution exclusion could not bar coverage despite its clear application to the facts of the case.

The court summarily dismissed any claim that efficient proximate cause had not previously applied to third party policies, stating:

We have never before suggested that the rule of efficient proximate cause is limited to any one particular type of insurance policy. Instead, the rule has broad application whenever a covered occurrence under the policy-whatever that may be-is determined to be the efficient proximate cause of the loss.

Having established that the efficient proximate cause rule applied, the court held that the fact that the pollution exclusion unambiguously applied did not matter, because the underlying complaints alleged that the release of the pollutant was caused by negligence. Further:

If ProBuilders sought to avoid liability for damages resulting from particular acts of negligence, it certainly could have written specific exclusions to that effect-for instance, an exclusion for acts of negligence relating to the installation of home fixtures generally or hot water heaters specifically. . . . Such an exclusion may have been foreseeable given that this policy was for the construction of a new home, but no such exclusion is found in this insurance policy. Issaquah Highlands paid valuable premiums for an insurance policy providing broad coverage for all forms of negligence except those acts specifically excluded, and it was a covered act of negligence that was the efficient proximate cause of Xia’s loss.

The court accordingly granted judgment as a matter of law to the claimant on both breach of contract and bad faith.

The key to the court’s reasoning appears to be in its statement that “[h]aving received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.” The Xia decision essentially establishes a rule that, regardless of the type of policy, insurers cannot draft exclusions that will be upheld “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.”

Two dissenting justices took issue with the majority decision’s extension of the application of the efficient proximate cause rule to CGL policies, and the finding of bad faith when no other case prior to this one had ever applied the efficient proximate cause rule to CGL policies.

Already known as an unkind venue to insurers, the Xia decision demonstrates that, at least in the state of Washington, insurers cannot be confident that clear and unambiguous policy exclusions will be upheld (at least in multi-peril situations), and should be wary of drawing distinctions in the application of legal doctrines based on the type of insurance policy at issue.

 

Colorado Supreme Court Repairs Defect in Construction Litigation Law

Richard M. Murray and Amy Hansen | Colorado Real Estate Journal | July 5, 2017

The Denver metropolitan area has faced a historic low in affordable housing, in particular the construction of new condominiums. Construction defect litigation has widely been accepted as a root cause for the near absence of new development. Colorado’s General Assembly wrestled with construction defect reform bills over the past several legislative sessions with progress finally made in the 2017 session, but leaving much work left to be accomplished.While various legislative efforts have come and gone to address construction defect litigation – notably, Senate Bill 177 that failed in the 2015 session – parallel issues were being presented in the state’s courts. One of the most prominent cases to be heard in the appellate courts was Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al.

The case addressed an all-too-common problem concerning arbitration provisions in community declarations. Developer-declarants, those who build a condo community and establish a homeowner’s association, routinely include in the declaration a provision requiring binding arbitration of construction defect disputes. The Colorado Common Interest Ownership Act expressly permits arbitration of such disputes and Colorado law has long favored arbitration as an alternative to civil actions in court. In conjunction with the arbitration requirement, a provision requiring the declarant to consent to any future amendment or removal of the arbitration clause would be included in the declaration. Despite these developer efforts in the governing documents, HOAs would later vote to remove the arbitration requirement without obtaining the requisite consent and then proceed to court with construction defect claims. This chain of events occurred in Vallagio.

In Vallagio, a condominium HOA brought a lawsuit against the developer/declarant alleging construction defects. The declaration included a mandatory arbitration provision specifically for construction defect claims. That section stated that its provisions “shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of the amendment.”

After the declarant turned over control of the project to the association, the unit owners voted to amend the declaration to remove the entire mandatory arbitration provision, without obtaining the declarant’s consent. Soon after the declaration was amended, the association filed a lawsuit in district court. The district court denied the declarant’s motion to compel arbitration, ruling the declarant consent requirement violated CCIOA and was void and unenforceable. An appeal followed and the dispute went up to the Colorado Court of Appeals and later the Colorado Supreme Court, garnering national attention.

In the Vallagio case, we drafted and filed amicus curiae briefs –“friend of the court” briefs – at both appellate levels on behalf of a coalition of developers, municipalities, chambers of commerce, trade organizations and business organizations, presenting arguments that declarations requiring declarant consent prior to the removal of an arbitration provision by homeowners are valid and enforceable under CCIOA.

On May 7, 2015, the Colorado Court of Appeals issued its published decision in the Vallagio case. The decision addressed a major problem in Colorado’s construction defect laws that Senate Bill 177 was designed to correct: If the declaration includes a requirement that an arbitration clause cannot be removed without the declarant’s consent, that declaration means what it says and that requirement is enforceable.

The association petitioned the Colorado Supreme Court for a writ of certiorari. The high court granted the petition to answer whether the Court of Appeals erred by holding as a matter of first impression that CCIOA permits a developer-declarant to reserve the “power to veto unit owner votes to amend common interest community declarations.”

The Supreme Court also addressed the Court of Appeals’ holding that claims against a declarant for violating the Colorado Consumer Protection Act can be submitted to arbitration.

The Colorado Supreme Court’s long-awaited decision was issued June 5, and the majority opinion echoed the arguments presented in Polsinelli’s amicus brief with respect to the CCIOA issues. The opinion, authored by Justice Richard Gabriel writing for a 5-2 majority affirming the judgment of the Court of Appeals, held that CCIOA does not prohibit a declaration from imposing the requirement of declarant consent for amendments. The court concluded “that the consent-to-amend provision contained in the Project’s original declaration is consistent with CCIOA and is therefore valid and enforceable.”

The court also agreed that the Colorado Consumer Protection Act does not preclude an agreement to arbitrate Colorado Consumer Protection Act claims against a declarant. This is a significant decision as it provides precedent on the arbitrability of Colorado Consumer Protection Act claims in the construction defect context against declarants.

The landmark decision provides greater certainty to the development community, potentially making developers more willing to build condominiums and other attached housing, which would help address the state’s current shortage of entry-level housing.

The Vallagio decision is momentous because it sets judicial precedent on an important piece of CCIOA and will likely be looked to by courts from around the country, as CCIOA is modeled after a national uniform act. Lastly, the Vallagio decision addresses a key component of recent legislative efforts that have been previously unable to reach the governor’s desk.

Giant Concrete Coverage Suit Tests Conn. Bad Faith Laws

Ryan Boysen | Law 360 | July 3, 2017

National insurance giants including State Farm, AIG, Allstate and a slew of others are staring down the barrel of an unconventional proposed class action in Connecticut that could cost them billions of dollars and will test the limits of the state’s insurance industry bad faith laws — all because of a mineral hardly anyone has ever heard of.

Pyrrhotite-contaminated concrete is the culprit behind a vast outbreak of crumbling basements and foundations currently sweeping eastern Connecticut. Fixing a crumbling basement or foundation can cost up to $250,000 per home and the problem is estimated to affect roughly 35,000 homes across eastern Connecticut.

The crisis threatens to crush the region’s real estate market and now it’s sucking in the state’s home insurers, as the massive liability goes unaddressed by both the state and federal government.

The proposed class action — which names all of Connecticut’s major property insurance carriers, roughly 30 in total — alleges the insurers were well aware of the problem before it exploded into the spotlight two years ago, and have been denying claims in bad faith in an attempt to wall themselves off from the crisis, one policyholder at a time.

It seeks to certify a class of all homeowners with crumbling foundations in three Connecticut counties and is asking for, among other things, a declaratory judgment that all of the insurers must cover repairs to all crumbling foundations in those counties, a provision one legal insurance blog termed a “Mega DJ” shortly after the suit was first filed last year.

“If the insurance companies continue to go down this path, it’s going to crush the middle class in eastern Connecticut,” Ryan Barry of Manchester-based Barry Barall & Spinella, who filed the suit, told Law360. “The whole thing is just crying out for a solution, and that’s what we’re trying to craft with this case.”

A “Massive, Unwieldy Class Action”

Since the crisis came to light in 2015 it’s become a contentious issue at every level of the state’s politics, with candidates for the 2018 governor’s race campaigning on it and state lawmakers deadlocked over a handful of hotly contested relief bills. Requests to the Federal Emergency Management Agency for aid have been denied, twice.

Given lawmakers’ inability to tackle the problem, it’s no surprise the courts have become the main source of relief for affected homeowners. Dozens of lawsuits against insurers who have denied crumbling concrete claims are pending in Connecticut state court right now, while a dozen or so have gone to district court.

Homeowners have prevailed in many of those district court suits, but thus far they’ve done little to address the problem as a whole, leaving plenty of room for a broader suit like Barry’s class action.

In addition to the declaratory judgment, the suit also seeks bad faith damages, and alleges the state’s insurers have a “general business practice” of denying claims in bad faith, in violation of the Connecticut Unfair Insurance Practices Act and the Connecticut Unfair Trade Practices Act. Those claims can result in substantial punitive damages, on top of the basic coverage sought by the declaration.

Every insurer Law360 contacted for this article declined to comment, except for Nationwide.

A spokesman told Law360 the company “is aware of the lawsuit” but “cannot discuss it.” However, he added that Nationwide “investigates each claim individually, applying the specific facts, laws, regulations and the purchased coverage to every claim decision.”

The insurers have come out against the suit with guns blazing, filing a flurry of individual and joint motions to dismiss in June, as well a joint motion to strike the class claims.

They argue the crumbling concrete issue is complicated and that coverage depends on the specifics of each policy and the damage to each foundation. Given the “fact-intensive investigation” needed to sort out each claim, a “massive, unwieldy class action” won’t fly, they say, in their joint motion to dismiss.

“Plaintiffs cannot improperly seek to have the court ignore the facts and the policy language in favor of an overarching, and inevitably inaccurate, declaration,” the motion says. “That such a broad declaratory judgment lumping all defendants together could possibly enter is wishful thinking.”

Barry counters that all class actions inevitably involve a group of plaintiffs with facts specific to each of them. The important thing, he says, is that his proposed class are all suffering from the same basic problem: Having paid their premiums for years, they’re now left without coverage just when they need it most.

“Everyone has homes with crumbling concrete and their insurance companies refuse to cover their claims,” he says. “So long as that suffering is at the center of our case, I look forward to our day in court.”

“Nothing Has Been Done”

The situation in Connecticut has been simmering since the 90’s, as isolated reports began to trickle in of homes whose basements and foundations were falling apart for no discernable reason.

When pyrrhotite oxidizes on contact with air and water, it expands. When the mineral is present in concrete, that expansion leads to cracking that can ultimately cause the concrete to collapse into rubble, a process that can take years or even decades to run its course.

And as Connecticut’s residents are now beginning to realize, a sizeable portion of all the foundations poured in the state since the 80’s contain pyrrhotite-contaminated concrete.

The crisis didn’t come into full view until 2015 however, when a series of local news reports catapulted the issue into the spotlight. Now, as property values and tax revenues continue to fall in the affected areas, resentment among homeowners has reached a fever pitch.

“Nothing has been done — the politicians have failed us,” Tim Heim, an affected homeowner who’s currently suing his insurer and has founded a grassroots organization around the issue, told Law360. “There have been a million proposals, and in the meantime we’re stuck over here grabbing our ankles.”

Heim owns a stately three-bedroom in Willington that’s typical of the houses in Connecticut’s northeastern Quiet Corner, a region that lies somewhere between rural and suburban. On paper, it may well be worthless however. Fixing a crumbling foundation — a complicated process that involves lifting the entire house up on stilts while the concrete below is demolished and repoured — can take months to complete and costs anywhere from $100,000 to $250,000, depending on the home.

For a blue-collar region where the median home price hovers around $245,000, according to Zillow, it’s a price that’s simply not payable by most homeowners, including Heim.

“This is my home, it’s my biggest investment,” Heim says. “When you learn that it’s worthless, it’s absolutely devastating. It’s an emotional roller coaster I wouldn’t wish on my worst enemy.”

“Broader Pattern Of Bad Faith”

The crux of Barry’s suit alleges Connecticut’s insurance carriers began to see the writing on the wall before most of the state’s residents did, sometime around the early 2000’s.

Since then they’ve used multiple tactics to build a legal firewall between them and the crumbling concrete crisis, the complaint says, like denying all claims outright regardless of their merit, and changing the language in their policies, all allegations the insurers vigorously dispute.

While the suit’s construction might be relatively untested, a dozen or so one-off crumbling concrete suits between homeowners and their insurers have gone to Connecticut district court thus far. Ten of those suits have survived motions to dismiss and a handful have survived summary judgment — many of them settling shortly thereafter — with one case being won by the plaintiff at trial.

The insurers have won outright in only three of those cases. In each one, the insurer’s victory rested on language in the policy at hand that qualified coverage for a “collapse” as applying only to a “sudden” or “abrupt” collapse.

Barry’s suit alleges the insurers inserted that language into policies specifically to delete coverage for crumbling concrete, without properly notifying policyholders or reducing premiums, meaning the language is null and void, but the issue is sure to be a major battleground as the suit goes forward.

Donna Tommelleo, a spokeswoman for the Connecticut Insurance Department, which must sign off on all policy language changes, says the department has “determined that the vast majority of carriers provided proper notification” and is “currently not aware of facts or circumstances to indicate that unfair practices have occurred.”

The suit’s most imposing claims ultimately rest on the insurers’ alleged practice of denying claims for crumbling foundations across the board.

“We’re trying to lay out the broader pattern of bad faith denial of claims that has only been hinted at in the other cases,” Barry says.

That allegation forms the basis of the CUTPA and CUIPA claims, and the Connecticut district court’s treatment of such claims in the one-off suits has evolved in a fairly one-sided direction over the past few years: in favor of homeowners, and against insurers.

In a 2009 ruling that dismissed CUTPA and CUIPA claims from the earliest crumbling concrete case, Bacewicz v. NGM Ins. Co., U.S. District Judge Janet C. Hall wrote that the plaintiffs “failed to allege the multiple violations necessary to support [those claims] … They have only alleged improper handling of their own, single claim.”

Compare that to Judge Hall’s ruling last year on the insurer’s motion to dismiss in another of those cases, Liston-Smith v. CSAA Fire & Casualty Insurance Co. The plaintiffs cited only state court suits in which CUTPA/CUIPA claims had survived motions to strike to support their own claims, but Judge Hall said those suits weren’t relevant, since the standards for motions to strike aren’t as strict as the federal standards that govern a motion to dismiss.

Even so, Judge Hall took the unusual step of taking judicial notice of the other crumbling concrete suits involving CSAA in district court — including the class action — to allow the plaintiff’s CUTPA/CUIPA claims to survive, essentially doing their work for them.

Many of the other suits filed within the last few years have routinely sailed through motions to dismiss and motions for summary judgment on bad faith and CUTPA/CUIPA claims, unless they involve policies with the sudden and abrupt language.

Ultimately, all of the crumbling concrete cases rest on the Connecticut Supreme Court’s 1987 ruling in Beach v. Middlesex Mutual Assurance Co. That case, which didn’t involve pyrrhotite-contaminated concrete, held that “collapse” is an ambiguous term in an insurance contract, and applies to any “substantial impairment of the structural integrity of a building,” even if the building is still uninhabitable.

The crumbling concrete cases have thrown into sharp relief the ambiguity of the phrase “substantial impairment” itself however, and U.S. District Judge Stefan R. Underhill now says in a crumbling concrete case he’s overseeing that he’s “strongly considering” certifying that term and others to the Connecticut Supreme Court for clarification.

“Billion Dollar Problem”

The pyrrhotite problem ultimately stems from a single quarry operated by J.J. Mottes, just down the road from Tim Heim’s house, according to a joint investigation between Connecticut’s Attorney General and its Department of Consumer Protection that concluded late last year. That quarry has provided the majority of the region’s concrete aggregate for the past 30 years, the report says, and it sits atop a large vein of pyrrhotite.

J.J. Mottes continues to dispute its role in the crisis, though it’s since shut down the quarry and sold it off. A company spokesman declined to comment for this story. A few years ago its office burned down, Connecticut’s Journal Inquirer reports, with the fire destroying all of its records.

One Connecticut resident, Linda Tofolowsky, sued J.J. Mottes in 1997 after her home’s foundation inexplicably began bulging and cracking a few years after it was poured. That suit was tossed in 2003 however, because she couldn’t prove that the problem stemmed from the concrete itself, which meant her claim was barred by the 10-year product liability statute of limitations.

Pyrrhotite was never mentioned in the suit, and Tofolowsky opened a complaint with the Department of Consumer Protection in 2003, only to see the agency close it two days later.

“They kept pouring more and more foundations with the same stuff,” Tofolowsky told Law360. “Nothing ever happened to them. If the state had moved on this sooner they could have prevented a billion-dollar problem.”

Would This London High-Rise Pass Muster in New York? Short Answer: No

Megan Specia | The New York Times | June 27, 2017

The Dorney Tower in Camden, London, where hundreds of families were forced to evacuate this week because of safety concerns. CreditNiklas Halle’N/Agence France-Presse — Getty Images

Hundreds of families were evacuated this week from Dorney Tower, a 23-story London apartment building, after the authorities found unsafe features in it and nearly a hundred other buildings after the deadly Grenfell Tower blaze.

Would the building’s construction have passed safety regulations in New York City? Not even close.

Here are the shortfalls in Dorney Tower that never would have passed muster in New York, which has much more stringent building codes and safety checks, according to city safety officials.

Flammable exterior covering

Dorney Tower, completed in 1967 and refurbished in 2008, shares several problematic features with Grenfell Tower, which was encased in a flammable exterior covering, known as cladding, that contributed to the fire’s rapid spread. The cladding on the tower, which was added in 2008, failed safety tests this week.

In New York City, cladding must be tested and found to be fire resistant before it can ever be put on a building, said Thomas Fariello, first deputy commissioner for the city’s Department of Buildings, which enforces building codes.

The requirement dates to 1968, and has been made more stringent since. Though retrofitted buildings may be held to different standards, new buildings are inspected upon completion to make sure that cladding was installed properly and that it matches the material that was tested. Facades on buildings taller than 75 feet are inspected every five years.

“The siding material in this city, with that fire testing, is not going to be able to go up in flames like that,” Mr. Fariello said.

An exterior panel was removed from Dorney Tower last week. CreditJustin Tallis/Agence France-Presse — Getty Images

The same contractor installed cladding on both Grenfell Tower and Dorney Tower, although officials said the material was different. The local authorities said the cladding on Dorney Tower would be removed.

Single stairway for evacuation

Dorney Tower, like Grenfell Tower, has only one flight of stairs available for residents if they have to evacuate the building.

In New York, any building taller than 75 feet must have at least two stairwells encased in concrete to provide a safe escape route.

Residents evacuated Dorney Tower as a precautionary measure on Sunday. CreditHannah Mckay/Reuters

“It’s a basic thing of being able to get people out of the building,” said Gus Sirakis, an assistant commissioner at the building department. A backup route is needed in case one of the stairways is inaccessible or being used by firefighters, he said.

New York buildings over 420 feet must have a third flight of stairs.

The single escape route out of Dorney Tower has long worried residents.

Amal Salah, 45, who has lived there on the 15th floor for the past 11 years, said her family had been on edge since the Grenfell fire.

“We only have the main staircase,” Ms. Salah said. “So we just hope that nothing will happen.”

Missing fire doors

London fire officials found that Dorney Tower and other buildings in the same complex lacked working fire doors, and in some cases were missing them altogether. Without working fire doors to block a fire, flames can spread quickly from one part of a building to another.

Fire safety equipment was checked at Dorney Tower after residents were evacuated. CreditHannah Mckay/Reuters

New York City officials said that fire doors in all high rises must be self-closing and self-latching, and noted that they were regularly assessed.

“If our inspectors are called to the building for any reason, that is something we will inspect for,” Mr. Fariello said.

Experts say at least part of the reason Britain has less-strict fire codes is because business-friendly governments have pared back regulations.

A 2005 measure ended a requirement for government inspectors to certify that buildings had met fire codes and shifted to a system of self-policing.

“We have the developers on our back a lot, because they want to build, build, build,” Mr. Fariello said. “We are kind of in their way a lot to make these things safe.”

Federal Court Rules Spearin Doctrine Contractor Immunity for Defects in Owner’s Design Includes Contractor’s Failure to Warn Owner About Defects

Alex Corey | Pepper Hamilton LLP | June 29, 2017

In general, courts will be hesitant to impose liability on contractors when the underlying problems stem from an alleged design flaw.

The legal doctrine of implied fitness of design warranty, recognized by the U.S. Supreme Court, provides that a contractor bound to build according to plans and specifications prepared by an owner will not be responsible for the consequences of defects in the plans and specifications. United States v. Spearin, 248 U.S. 132 (1918). Responsibility will remain with the owner, even when contractual provisions require the contractor to visit the site, check the plans and inform themselves of the requirements of the work. Id. Recently, the U.S. Court of Appeals for the Fifth Circuit ruled that a contractor’s immunity created by the doctrine of implied fitness of design warranty, as codified in Louisiana law, can include immunity for failure to warn an owner of defects or errors in the owner’s design. LaShip, LLC v. Hayward Baker, Inc., 2017 U.S. App. LEXIS 3694 (5th Cir. Mar. 1, 2017). Consequently, a contractor may not be responsible for damages resulting from its implementation of an owner’s design, even if the contractor could have discovered the defects therein.

Background

Beginning in 2007, LaShip, LLC undertook the construction of a large shipbuilding facility in Houma, Louisiana. In July 2008, LaShip retained Hayward Baker, Inc. (HBI) to complete the soil mixing and drill shaft work on the project.

The contract between LaShip and HBI provided for HBI to install subterranean soil-mix columns to form the foundation of the shipbuilding facility. Pursuant to the contract, HBI obtained soil samples to ascertain the columns’ strength. Laboratory testing revealed that, in general, the soil possessed the requisite compressive strength provided for in the contract. Nevertheless, as the work progressed, the columns exhibited spiraling, and HBI experienced several cave-ins during its installation of the drill shafts and unwanted settlement of the foundation columns.

On January 21, 2011, LaShip filed suit against HBI in the Louisiana federal district court, alleging that HBI was liable for not warning LaShip about alleged defects in the design of the columns. The district court, after a 10-day bench trial, ruled that LaShip failed to prove by a preponderance of the evidence its negligent failure to warn and breach of contract claims against HBI. LaShip v. Hayward Baker, 2015 U.S. Dist. LEXIS 186946 (E.D. La. Aug. 13, 2015). The district court found that HBI did not breach its duty to construct the columns in accordance with the express provisions of the performance specifications or that any deficiencies with respect to the construction of the columns caused the settlement of any phase of the project. Id. at *61.

Fifth Circuit Evaluates LaShip’s Claims Under Spearin-Like State Law

The Fifth Circuit reviewed the district court’s ruling de novo and fully affirmed the decision. In regard to LaShip’s arguments that HBI was liable for its failure to warn of the column defects, the Fifth Circuit found that HBI was “statutorily immune” from this claim under Louisiana Revised Statute 9:2771 (LRS 9:2711), which provides that:

No contractor . . . shall be liable for destruction or deterioration of or defects in any work constructed, or under construction, by him if he constructed, or is constructing, the work according to plans or specifications furnished to him which he did not make or cause to be made and if the destruction, deterioration, or defect was due to any fault or insufficiency of the plans or specifications.

Both LRS 9:2711 and the doctrine of implied fitness of design warranty, recognized by the U.S. Supreme Court in Spearin, provide that a contractor is not liable for defects in the owner’s design. The Fifth Circuit reaffirmed this principle, ruling that a contractor is “shield[ed] from liability for any defects that may arise as a result of the contractor’s adherence to plans and specifications that were provided to it.” Id. at *4.

However, the Fifth Circuit noted that a contractor will be liable “if he has a justifiable reason to believe that adherence to plans and specifications would create a hazardous condition.” Id. LaShip, however, failed to point to any specific evidence indicating that such an exception was applicable. Id. As an example of a “hazardous condition,” the Fifth Circuit cited to Oxley v. Sabine River Authority, 663 So. 2d 497 (La. App. 3d Cir. 1995), where a contractor was found responsible for defects in an owner’s electrical plans when following the plans would expose handlers or workers to electrical voltage hazards.

HBI Had No Duty to Warn

HBI was given performance specifications by LaShip that it did not make. In reviewing those specifications, the Fifth Circuit found that the problematic settlement of the structure in the project stemmed from a design defect in the length of the columns. As such, HBI was afforded statutory immunity, pursuant to LRS 9:2711, based on its installation of the columns according to specifications in the contract.

Significantly, the Fifth Circuit rejected LaShip’s argument that, based on HBI’s geotechnical expertise, HBI knew or should have known that the design was allegedly defective and thus had an affirmative duty to warn LaShip. The Fifth Circuit opined that such an argument would unduly broaden the affirmative tort duty of contractors. In affirming the district court’s decision, the Fifth Circuit distinguished prior case law where a contractor was found to have breached a duty to warn the owner of a potential defect in the construction of a grain storage tank, noting that, in that situation, the liable contractor “both designed and constructed” the storage tank. Bunge Corp. v. GATX Corp., 557 So. 2d 1376 (La. 1990). HBI did not design the soil-mix column specifications.

The court also affirmed the dismissal of LaShip’s breach of contract claim, finding that HBI fulfilled its contractual requirement in confirming that the soil tested met the minimum threshold for unconfined compressive strength.

A Broader Scope of the Spearin Doctrine?

While the Fifth Circuit’s decision rested on Louisiana law, the similarity of the language of LRS 9:2771 and the Spearin Doctrine create important implications for contractors nationwide. In general, courts will be hesitant to impose liability on contractors when the underlying problems stem from an alleged design flaw. Not surprisingly, courts will be reluctant to absolve a contractor of liability if adherence to a defect in the owner’s plans would create a “hazardous condition.”