Many federal construction contractors have been there: it’s near the end of the project and the government raises an issue with work that was done much earlier, but is not in strict compliance with the specifications. The contracting officer demands strict compliance with the specifications, even if it means tearing out completed work to fix the defect. And of course, the contracting officer insists that the government does not have to pay for the additional work. The contractor has to proceed as directed, but is the contractor actually entitled to additional compensation or not? On December 17, 2019, the Armed Services Board of Contract Appeals handed down its decision in the Appeal of Buck Town Contractors & Co., confirming that if the government knew about the defective work during performance but said nothing, then it has constructively waived strict compliance with the contract specifications and the contractor is entitled to additional compensation.
Buck Town involved a U.S. Army Corps of Engineers project to rebuild a levee with strips of reinforcing geotextile. The specifications required that all seams between the strips be perpendicular to the centerline of the levee. The contractor installed the strips in the right direction, but when it reached the end of a roll of geotextile, it would simply continue that installation with a piece from a new roll. This created a seam on certain strips that was parallel to the centerline of the levee, in clear violation of the specifications.
During performance, this non-compliant work was observed by the Corps’ Quality Assurance representatives, who approved of the work without objection. Buck Town’s installation of connected strips with parallel seams was noted in both the government’s QA logs and the contractor’s Quality Control logs, without identifying it as non-compliant with the specifications. In reliance on the government’s approval, Buck Town rebuilt the levee above the non-compliant geotextile installations. Later on, Corps’ personnel from another project discovered the defect, and the contracting officer directed Buck Town to remove the levee and reinstall the geotextile in compliance with the contract specifications. Buck Town did the additional work and then submitted a claim for the time and costs incurred.
The Corps denied the claim arguing that it was entitled to strict compliance with the contract specifications. Buck Town appealed to the ASBCA, arguing that the Corps had waived strict compliance by approving the non-compliant installation and allowing it to proceed with the work. The contracting officer testified that he was unaware of the non-compliant installations, and the Corps’ QA representatives testified that they were unaware that the geotextile installations failed to meet the contract requirements. The Corps argued that it could not have waived compliance with the contract specifications when the contracting officer did not have actual knowledge that the reinforcing geotextile was not being installed in conformance with the contract requirements.
The Board rejected these arguments, holding that the knowledge of the QA representatives was imputed to the contracting officer and therefore he knew, or should have known, that the work was not being performed in strict compliance with the contract. By failing to identify the non-compliant work during performance, the government waived strict compliance with the contract specifications. The Board sustained Buck Town’s entitlement to time and money incurred in correcting the defective work.
The takeaway for contractors is that you may be entitled to additional time and money for corrections to defective work, provided you can show that the government knew about the defective work and allowed you to proceed anyway.
On December 31, 2019, the First District Illinois Appellate Court issued its decision in Owners Insurance Company v. Precision Painting & Decorating Corporation, clarifying what does and does not constitute “property damage” caused by an “occurrence” in the construction defect context. 2019 IL App. (1st) 190926-U, 2019 Ill. App. Unpub. Lexis 2425.
The underlying case involved allegations of negligence, consumer fraud and breach of contract. In particular, the underlying homeowner claimants alleged that Precision Painting & Decorating Corporation (Precision), whom the homeowners had hired to perform certain exterior paintwork at their home, failed to conform to U.S. Environmental Protection Agency (EPA) regulations with respect to the presence of lead-based paint. In its contract, Precision had agreed to take special care with respect to containing lead dust while working on the homeowners’ property. Despite having agreed to do so, Precision (allegedly) took almost no precautions, resulting in significant contamination to the interior of the home.
Owners Insurance Company (Owners) had issued Precision a CGL policy, providing coverage for “property damage” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
Precision tendered its defense to Owners. Owners filed a DJ Action arguing that it owed no duty to defend as the homeowners had failed to allege any “property damage” caused by an “occurrence.” Specifically, Owners argued that, under Illinois law, damages resulting from an insured’s breach of contract are not recoverable under a CGL policy.
The trial court agreed, finding that no “accident” or “occurrence” was alleged. The trial court observed that the homeowners’ contract with Precision had specifically provided for various EPA-required precautions with respect to the use of lead-based paint. The trial court concluded that Precision’s failure to implement those precautions was not an “accident,” which in the trial court’s view, referred to something “unforeseen or untoward or disastrous.” Instead, the trial court characterized Precision’s conduct as nothing more than a foreseeable breach of contract.
Precision appealed, and the Appellate Court reversed and remanded. The Appellate Court found that the trial court’s focus on foreseeability was misplaced. It observed that: “[i]nstead of focusing on the foreseeability of the event itself (the release of lead-based particles), or even generally the damages (lead contamination),” Illinois case law instructs courts “to focus on what, specifically, was damaged, and whether the remediation of that damage fits within the general purpose of a CGL policy.” Id. at *12 (emphasis added). The Appellate Court emphasized that: “when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident.’” Id. at *14.
The Appellate Court was careful to contrast these so-called “beyond” damages with damages arising out of faulty workmanship, alone. It reiterated that it is well-settled under Illinois law that “there is no occurrence when a [contractor’s] defective workmanship necessitates removing and repairing work.” Id. at *14. This is true even when a contractor’s faulty workmanship results in consequential damages to any other part of the project for which the contractor has responsibility, as it remains part of the contractor’s work product. However, where damages extend beyond the scope of a contractor’s work product, the court concluded that those damages are more properly classified as unforeseeable accidents, and thus “occurrences.”
The Appellate Court found that Precision’s “work product” was limited to the exterior of plaintiffs’ house. Thus, any damage to the interior of the home, as well as to the surrounding land, was outside the scope of Precision’s project. Because plaintiffs had alleged damages “beyond repair and replacement, and beyond damage to other parts of the same project over which [Precision] was responsible,” plaintiffs had satisfactorily alleged “property damage” caused by an “occurrence.” The Appellate Court reversed and remanded in accordance with those findings.
The court found coverage for alleged faulty workmanship was barred by the Combination Construction Related Endorsement and Roofing Endorsement. Evanston Ins. Co. v. A&S Roofing, 2019 U.S. Dist. LEXIS 142828 (W.D. Okla. Aug. 22, 2019).
In 2010, A&S entered into a subcontract with the contractor to replace roofs on three buildings owned by Oklahoma Property Investors (OPI). Eagle was a subcontractor of A&S that installed the roofing. After the roofs were replaced, OPI filed suit against A&S, alleging that A&S provided 15-year warranties for the roofing work performed on the three buildings and that A&S breached each warranty by performing the work in a poor manner, resulting in failures to each of the roofs. OPI sought monetary relief including damages to its properties, of its tenants, and costs of repairs to its properties.
A&S’s insurer, Evanston, denied coverage. Evanston pointed to the”legally obligated to pay” language of the CGL policy and argued coverage only extended to tort-based claims. Evanston argued the OPI lawsuit did not allege any tort claims, only warranty claims arising from contract. Second, Evanston contended the alleged “poor craftsmanship” giving rise to the claims in the OPI lawsuit that did not constitute an “occurrence” under the policy.
A&S argued that OPI’s claims sounded in negligence. The court found that the OPI lawsuit alleged claims that arguably sounded in both contract and tort. Although the word “negligence” did not appear in the complaint, the claims alleged a breach of warranty due to the work being performed in “a poor craftsmanship like manner” and sought damages proximately caused by the poor performance of that work, i.e., damage to OPI’s properties (other than costs of repair or replacement) and damage to the property of OPI’s tenants. Such proximately-caused damages sounded in tort. Evanston was entitled to a declaratory judgment that it had no duty to indemnify with respect to the contract-based claims. But because the OPI lawsuit included allegations which rose the potential of liability with respect to tort-based claims, Evanston was not entitled to a declaratory judgment that the “legally obligated to pay” coverage language applied to relieve Evanston of its duty to defend.
Regarding an “occurrence,” faulty workmanship gave rise to an occurrence where, as here, the work was not that performed by the insured but by a subcontractor of the insured, the property damage was not caused by purposeful neglect or knowingly poor workmanship and the damage included damage to the non-defective work product of the contractor and damage to the third-party property. Here, the undisputed factual record showed that Eagle, a subcontractor of A&S, installed the roofing. Accordingly, the court denied Evanston’s summary judgment motion on grounds no occurrence triggered coverage.
But the Combination General Endorsement exclusion barred coverage for breach of contract. Further, the Roofing Endorsement precluded coverage for operations involving membrane roofing. Evanston’s expert had found that membrane roofing was installed on the OPI buildings. Therefore, Evanston had neither a duty to indemnify nor a a duty to defend and was entitled to summary judgment.
A year ago, we wrote about a rapidly emerging area of insurance litigation in Connecticut: crumbling foundations. As a quick recap, tens of thousands of homes in northeastern Connecticut built over a span of more than 30 years may have been constructed with defective concrete that causes basement walls to prematurely deteriorate and eventually become structurally unsound.
The Crumbling Foundation Crisis
The problem, known as alkali-silica reaction (ASR), is the result of a chemical reaction caused by pyrrhotite, a natural occurring mineral used in the production of concrete from a manufacturer in northeast Connecticut. Last year, we noted that a federal judge had dismissed one ASR claim against Allstate Insurance Co. and that local federal courts had certified questions from crumbling foundation cases to the Connecticut Supreme Court.
The Connecticut Supreme Court recently answered those certified questions and provided significant guidance regarding crumbling foundation litigation in three decisions.
The facts of all three cases are typical of the many lawsuits regarding crumbling foundations that homeowners have brought against insurers in the past few years. Homeowners noticed cracking and/or crumbling in their basement walls. They submitted claims under their homeowners insurance policies, often after a structural engineer determined that the cracking was the result of ASR, a nonreversible condition. The insurers denied the homeowners’ claims, generally relying on language excluding coverage for settling and/or faulty materials. The homeowners then filed lawsuits for breach of contract and violations of the Connecticut Unfair Insurance and Unfair Trade Practices Acts.
The plaintiffs argued that the deterioration of the concrete in their basement walls substantially impaired the structural integrity of their homes such that the homes were in a state of collapse and were therefore covered because the policies at issue covered collapse.
To support their argument, the plaintiffs relied on the Connecticut Supreme Court’s decision in Beach v. Middlesex Mutual Assurance Co., 205 Conn. 246, 532 A.2d 1297 (1987). In that case, the court concluded that the term “collapse” “is sufficiently ambiguous to include coverage for any substantial impairment of the structural integrity” of an insured’s home at least when, as was the case in the policy at issue in Beach, “collapse” was undefined.
Three cases eventually found their way to the Connecticut Supreme Court through certified questions from local federal courts or decisions rendered by Connecticut trial courts.
Karas v. Liberty Insurance Corp.: What Is “Substantial Impairment”?
In its primary decision, Karas v. Liberty Insurance Corp., the Connecticut Supreme Court concluded that the Beach standard applied to the Liberty policy at issue because that policy did not clearly define “collapse,” although the policy did provide that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.” When not clearly defined, as it was in this case, the court noted that the term “collapse” can mean “not including mere settling or cracking, but including settling or cracking that results in substantial impairment of a home’s structural integrity.” The court explained, however, that the insurer could have easily limited its collapse coverage by using language that “unmistakably connote[s] an actual collapse.”
The court then expounded on the “substantial impairment” standard established in Beach, explaining “that, to meet the substantial impairment standard, an insured whose home has not actually collapsed must present evidence demonstrating that the home nevertheless is in imminent danger of such a collapse.” The court further explained: “[W]hether [the] evidence satisfies th[at] standard in any particular case necessarily will depend on the specific facts of the case and the strength and credibility of the expert testimony adduced by the insured and the insurer.”
In light of the fact that Karas involved questions certified from the district court, the Connecticut Supreme Court did not render a decision as to whether the “substantial impairment” standard was satisfied in this case and left that decision up to the federal court. The district court’s decision will be one to watch out for: The crumbling foundation in Karas was particularly severe, and the homeowners had already reinforced their basement walls with wood shoring based on the recommendation of an engineer. Karas therefore presents at least an arguable case for satisfying the “substantial impairment” standard, but the plaintiffs’ expert was undoubtedly asked whether he believed that the home was in “imminent danger of … collapse,” and the Connecticut Supreme Court’s decision does not reflect how the plaintiffs’ expert answered that question.
The Supreme Court also concluded that the term “foundation” in the policy at issue unambiguously includes basement walls and that the collapse provision of the policy therefore applied to any foundation. The court noted, among other things, that people generally understand that the concrete basement walls in their home are part of its foundation.
The Connecticut Supreme Court also decided two companion cases.
Jemiola v. Hartford Casualty Insurance Co.: Which Policy Applies?
In the first, Jemiola v. Hartford Casualty Insurance Co., the court considered a common issue in crumbling foundation cases: Which homeowners insurance policy applies. Like many insurers, Harford Casualty’s homeowners policy did not clearly define the term “collapse” for many years. Beginning in 2005, however, Hartford Casualty added language to its policy narrowly defining “collapse” as “an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its current intended purpose.” The policy went on to note that a building that was in danger of falling down was not in a state of collapse, a building that was standing was not collapsed, and a building is not in a state of collapse even when it shows evidence of cracking, bulging, settling, etc.
The plaintiff in Jemiola asserted that she noted cracking in her master bedroom in the late 1990s, nails popping out of her kitchen walls in between 2005 and 2006, and more nails displaced from windows around her house in 2009 and 2010. She claimed she first noticed cracks in her basement in 2006, but a contractor told her they were normal. In 2014, she noticed more cracking in her basement and learned that her house likely was constructed with defective concrete.
A structural engineer hired by the plaintiff opined that her home did not become structurally impaired until there was some outward manifestation of cracking and fracturing in her basement walls. Based on the plaintiff’s observations, that occurred by 2006.
The court noted that in order for the pre-2005 policies to apply, there must have been a substantial impairment of structural integrity prior to 2006. The combined testimony of the plaintiff and her expert established only that such an impairment existed by 2006, not that it existed before then. The plaintiff’s expert did not testify that the plaintiff’s earlier observations regarding cracks in her bedroom and nails in her kitchen wall were connected to the cracks in the basement.
As a result, the court applied the post-2005 policy language and concluded that the plaintiff’s home, which was still standing, had not “collapsed” under the policy. The court noted that the language in the policies required a temporal abruptness requirement and concluded that “a building that is still standing, even if it is in danger of falling down, has not suffered a collapse within the meaning of the policy.” The court noted, however, that the “issue of how extensive an actual collapse must be before coverage is triggered is not before” it and therefore declined to determine “whether the policy’s partial collapse provision is internally consistent with” other provisions.
The court therefore affirmed the superior court’s decision granting summary judgment to the defendant insurer in a significant win for Hartford Casualty Insurance Co.
In closing, the court noted that even if it agreed with the plaintiff’s claim regarding what policy applied, it would apply the standard articulated in Beach and conclude that summary judgment was proper because the plaintiff’s home was not in imminent danger of falling down.
Vera v. Liberty Mutual Fire Insurance Co.: What About a Mildly Affected Home?
In the final case, Vera v. Liberty Mutual Fire Insurance Co., the court extended its holding in Karas to a home that was only mildly affected by ASR. According to the plaintiffs’ expert, the home was one of the least affected homes he had inspected. There were narrow spider cracks in the basement but no visible signs of bowing. The home was afflicted with ASR and the walls would eventually begin to bulge, but the expert could not testify with a reasonable degree of engineering probability that the walls would begin to bulge within the next hundred years, although he did say that it was probable that the walls would need to be replaced in that time frame.
Because Vera also involved a certified question, the Connecticut Supreme Court stopped short of applying its decision to the fact before it. The court’s recitation of the facts of that case, however, leaves little doubt that the plaintiffs will have an exceptionally hard time prevailing. According to the plaintiffs’ own expert, the plaintiffs’ home was not “in imminent danger of … collapse.”
A Win for Insurers
The Connecticut Supreme Court’s decisions are a win for insurers. First, the court reaffirmed insurers’ rights to define “collapse” narrowly to avoid coverage in situations in which a home’s foundation is crumbling but has not yet fallen down. Second, the court’s explanation of the Beach standard that applies to policies that do not sufficiently define “collapse” as requiring an “imminent danger of … collapse” effectively eliminates many claims against insurers. The policy in Vera is one such example. While some houses may be in imminent danger of collapse, many of them likely are not and will not be for many years. Nevertheless, crumbling foundations will likely remain an area of considerable claims activity and potential litigation for the foreseeable future, if for no other reason than the high stakes for individual homeowners.
Serge Somrov purchased apartment 7A at the Bay Parkway Terrace Condominium. After moving in Somrov replaced the floor of the terrace with Board approval.
Ten years later, Somrov was told that a leak on his terrace was causing water damage to the apartment below. Pursuant to the By-Laws Somrov was required to remove the tiles he installed as well as the cement underneath. And Bay Parkway was obligated to install waterproofing after which Somrov could re-install the tiles. Somrov removed the tiles but did not remove the cement. Bay Parkway refused to install the waterproofing until the cement was removed.
Somrov sought a preliminary injunction that required Bay Parkway to remove the cement and install the waterproofing.
To obtain a preliminary injunction, Somrov was required to demonstrate: a likelihood of success on the merits; an irreparable injury absent the injunction; and a balancing of the equities in his favor. The for the injunction was the allegations that Bay Parkway refused to install the waterproofing without a valid justification. Thus, Somrov argued that Bay Parkway Terrace was insisting that he “remove not only my tiles and adhesive, but the original concrete floor down to the existing layer of waterproofing material. The original concrete and the existing layer of waterproofing was not affected by either the installation of my original tiles, nor their removal.”
Bay Parkway’s By-Laws stated, concerning the terrace, that the owner of the unit must install “protective decking” and was responsible for the maintenance of any decking installed as well as the “repair or replacement of surface material where damaged”. The By-Laws also stated that Bay Parkway was responsible for “structural elements, such as rafters, bulkheads, etc.”
Somrov was clearly required to remove the tiles and the surface material of the terrace. Bay Parkway argued that the concrete was a surface material which was the responsibility of Somrov.
The Court found that was a question of whether or not the concrete should be considered sub-surface material, a distinct category. There were further questions whether Somrov removed all the tiles and glue which he was obligated to do. Thus, while it was true that a preliminary injunction could be granted where some facts are in disputes, some evidence of likelihood of success must be presented. Therefore, when “key facts” are in dispute and the basis for the injunction rests upon “speculation and conjecture” the injunction must be denied.
In this case the entire basis for Somrov’s request was subject to factual and legal questions, namely which party was responsible to remove the sub-surface concrete. While Somrov insisted it was the responsibility of Bay Parkway considering the nature of the material, there remained questions whether the responsibility rested with Bay Parkway Since Somrov did not demonstrate a likelihood of success on the merits, the motion seeking a preliminary injunction was denied.