California Design Professionals’ Indemnity Obligations Limited Under 2018 Contracts

Ryan W. Young | Lewis Brisbois Bisgaard & Smith LLP | June 22, 2018

The California Legislature has narrowed the scope of enforceable indemnity agreements applicable to licensed architects, engineers, and land surveyors through its amendment of Civil Code § 2782.8. This represents an important development in the allocation of risk in the construction community, since Section 2782.8 previously limited indemnity clauses only as to design professional service contracts with local public agencies entered into on or after January 1, 2007.

Under amended Section 2782.8, all contracts with non-state agencies for design professional services entered into on or after January 1, 2018, that require licensed architects, engineers, and land surveyors to indemnify their client are now unenforceable, except to the extent the claims against the client arise out of the design professional’s negligence, recklessness or willful misconduct.

Section 2782.8, as amended, also caps a design professional’s liability for the cost to defend their client to the design professional’s proportionate percentage of fault. The design professional, however, is required to meet and confer with other parties to an action regarding unpaid defense costs, where one or more of the defendants has dissolved or become bankrupt.

This limitation of the duty and cost to defend, however, does not apply to (1) any contract for design professional services where a project-specific general liability policy insures all project participants for general liability on a primary basis and also covers all design professionals for their liability arising out of their services on a primary basis; and (2) a design professional who is a party to a written design-build joint venture agreement.

All design professional service contracts with non-state agencies entered into on or after January 1, 2018, are now deemed to incorporate by reference the provisions of this section and the provisions cannot be waived.

Civil Code § 2782.8 is silent, however, as to the trigger date for the above-referenced duty to defend. Consequently, parties to this kind of contract should address the timing of the defense obligation in the contract, because California law requires an immediate defense upon a proper request, unless the parties state otherwise.

Recent California Legislation May Have an Impact Contractors and Design Professionals

Kimberly A. Blake | Gordon Rees Scully Mansukhani | June 1, 2018

Several bills that have recently been introduced in California will likely have an impact on the construction industry and, in particular, contractors and design professionals. Below is an overview of recent and pending legislation in California that includes the Labor Code, the Business and Professions Code, and the Government Code.

Contractor Liability Under the Labor Code

AB 1701, which was introduced February 2017, and became effective on January 1, 2018, adds Section 218.7 to the Labor Code.1

The Labor Code governs the basic rights and obligations of workers and employers in the employment context. Under current law, an employee may generally sue her employer for wage claims, such as nonpayment of wages, fringe benefits, and contributions to a health and welfare or pension fund. Until January 2018, however, there had been no requirement that a direct contractor must assume liability for any successful wage claims brought against a subcontractor working for the direct contractor.

In an effort to create a new avenue for collecting remedies in wage claims, AB 1701 requires that a direct contractor making or taking a contract for the construction or repair of any structure must assume liability for “any debt owed to a wage claimant incurred by a subcontractor at any tier” acting under or by the direction of the direct contractor, where the wage claimant’s performance of labor is related to the construction project.2 Because AB 1701 covers “building(s)” and “structure(s)” as well as “other work”, it applies to all construction projects involving a direct contractor.3

Consequently, direct contractors are obligated to assume such liability at the time the contractor enters into the construction contract. However, AB 1701 provides that the direct contractor’s liability does not extend to penalties or liquidated damages unless otherwise provided.4 Therefore, a direct contractor must assume liability for wage claims against subcontractors, but should specify in the written contract that liability does not include penalties or liquidated damages.

Architect Liability

AB 1489, which was introduced February 2017, would add Section 5536.25 to the Business and Professions Code.

The Business and Professions Code provides rights and obligations to members of specific professions. Under current law, Section 5536.25 absolves a licensed architect of liability for damages that may arise when the architect’s signed and stamped plans or specifications are changed or used without the architect’s prior written approval.5 If enacted, AB 1489 would add the provision that an architect will not be liable for damages that may arise when the construction deviates from the permitted plans or specifications, regardless of written authorization.6

AB 1489 would create a broad liability shield for architects regarding construction projects that do not conform to the architect’s signed and stamped plans. Besides the direct benefit to architects, AB 1489 should reduce legal costs in the construction industry by providing greater certainty as to architect liability as well as reducing the usefulness of seeking a written authorization from the architect to deviate from the original plan.

Accessory Structures on Single-Family Lots

AB 2939, which was introduced in February 2018, would add Section 65852.2 to the Government Code.

The Government Code organizes the government of California and sets forth rights and duties of various governmental entities. Under current law, a local agency must approve an application for a building permit to create within a single-family zone one “accessory dwelling unit” per lot, if the accessory dwelling unit is part of an existing residence or accessory structure, has independent exterior access from the existing structure, and has sufficient side and rear setbacks for fire safety. An “accessory dwelling unit” is a residential dwelling unit providing complete, independent living facilities for one or more persons.

If enacted, AB 2939 would add a substantially similar mechanism enabling the construction of multiple accessory dwelling units on multifamily zoned lots which already contain at least five residential units. AB 2939 would require a local agency to approve an application for a building permit to create one or more accessory dwelling units on lots zoned for multifamily use, where each accessory dwelling unit is located within the existing an existing multifamily structure or accessory structure, access to the accessory dwelling unit is independent of access to other residential units, and where the side and rear setbacks of every structure are sufficient for fire safety.7 Therefore, AB 2939 could spur the construction of new accessory dwelling units on multifamily lots with at least five residential units.

How Much Control Is Too Much Control? Federal Court in Florida Holds Designers’ Supervision of Project and Issuance of Design Documents Creates Control Over—And Potential Tort Liability To—Project Contractors

John J. Gazzola | Constructlaw | May 3, 2018

Suffolk Constr. Co. v. Rodriguez & Quiroga Architects Chtd., 2018 U.S. Dist. LEXIS 42652 (S.D. Fla. Mar. 15, 2018)

This case arises out of the design and construction of a science museum in Miami, Florida (the “Project”).  Museum of Science, Inc. (“MSI”), the Project owner, executed several agreements relating to the Project, including: (i) an agreement with Defendant Rodriguez and Quiroga Architects Chartered (“R&Q”) to serve as executive architect; (ii) an agreement with Defendant Grimshaw Architects P.C. (“Grimshaw”) to serve as the design architect; (iii) a construction services contract with Plaintiff Suffolk Construction Co. (“Suffolk”); and (iv) a direct contract with Suffolk’s subcontractor, Plaintiff Baker Concrete Construction, Inc. (“Baker”) for construction services after MSI terminated Suffolk for convenience.  After execution of these agreements, R&Q executed contracts with Defendant Fraga Engineers, LLC (“Fraga”) for mechanical, electrical, and plumbing design services, and with Defendant DDA Engineers, P.A. (“DDA”) for structural design and engineering services.

Suffolk and Baker (collectively, “Plaintiffs”) filed suit for negligence against R&Q, Grimshaw, Fraga, and DDA (collectively, “Defendants”), claiming that by issuing deficient design documents, Defendants breached their duties owed to Plaintiffs causing Plaintiffs to incur economic losses.  All Defendants but R&Q moved to dismiss the claims, arguing that they had no supervisory role or control over Plaintiffs, as demonstrated by the fact that their contracts with MSI did not designate them as “supervisory architects,” and thus, owed no duty to Plaintiffs.

Applying Florida law, the district court rejected this argument and held that Plaintiffs’ allegations were sufficient to survive a motion to dismiss.  The Court noted that Florida law provides that a duty may arise if the defendant’s conduct creates a foreseeable zone of risk and the defendant creates or controls that risk.  Over forty years ago, in A.R. Moyer, Inc. v. Graham, 285 So. 2d 397 (Fla. 1973) the Florida Supreme Court applied this law to hold that an architect owed a duty to a contractor despite their lack of privity.  There, the Supreme Court noted that as a matter of policy, supervising architects simply have too much control over a contractor not to owe the contractor a legal duty. While later Florida courts have limited Moyer “strictly to its facts,” an architect may still be liable to a contractor in tort in the absence of privity where the architect exerts control over the contractor.  Such control may be established where the architect maintains a supervisory role on a project, or where the architect acts with knowledge that the contractor will rely on its designs or plans.

In light of this law, the district court held that Plaintiffs’ allegations—specifically, Defendants’ preparation and issuance of design materials on which they knew Plaintiffs would rely and Defendants’ obligations to observe and supervise Plaintiffs’ work—were sufficient to show that Defendants maintained control over Plaintiffs such that a legal duty could be imposed.  Accordingly, the district court denied Defendants’ motions to dismiss and permitted the parties to proceed to discovery.

Don’t Assume A Design Role Unless You’re The Designer

George M. Nicholos | Vandeventer Black LLP | April 4, 2018

Recent weather conditions highlight the importance of avoiding unintentional design responsibility. This first quarter of 2018 has seen persistent periods of wind-driven rain; which often expose building envelope weaknesses. Uncontrolled rainwater penetration, condensation, and moisture related damage commonly result and threaten both structural integrity and building envelope performance. Indeed, virtually 90 percent of such sources of intrusion are uniquely associated with only 1 percent of the interfaces between materials or building components in the building envelope.

Frequently failures of this sort result from the improper integration of related building components, such as windows, doors, and flashing from the design phase of a project. Things such as reduced fees and accelerated schedules can lead to less exhaustive detailing by the designer. But despite this growing trend, such exhaustive detailing is important, and in many cases necessary.

For example, Section 107.2.4 of the International Building Code mandates that construction documents include exterior wall envelope details, including flashing, intersections with dissimilar materials, corners, end details, control joints, intersections at roofs, eaves or parapets, means of drainage, water-resistive membrane and details around openings.

Yet, despite such requirements, and sound practices, some projects get released for bidding with increasingly less information. Instead, those designs attempt to shift design risk to bidding contractors (and their subcontractors) through the shop drawing phase.

The result can be disastrous, and expensive. Poorly conceived submittals or attempting to resolve the designer’s intent in-house can and often results with missed intent and requirements; resulting in widespread leaks and resulting damages to the building and other property. To avoid that, contractors and subcontractors must avoid proceeding without clear, documented direction from the designer.

Savvy contractors negotiate contractual terms to preclude such risk allocation to them, but sometimes that cannot be negotiated. If not, contractors need to proactively address related matters during the submittal process; at the earliest possible stage; and unsavvy contractors that proceed with the mentality of “this is how we always install these components,” proceed at their own peril.

One of the main ways to address unclear designs is effective use of the Request for Information (RFI) process. If there is any question, RFIs regarding design intention, clarifications, and instructions are appropriate for requesting specific guidance from the designer and/or owner. Follow the RFI process strictly, retain all records; and memorialize related discussions.

Additionally, follow-on contract requirements incorporating additional design input received should be formally entered as a contract requirement. Virtually every construction contract includes a requirement for written changes only, executed by authorized contract agents only. Without strict compliance with those requirements, unintentional risks can get assumed regarding not only performance but also design; along with the additional liabilities that follow.

Drawing a Line in the Sand: The Second Circuit Tries to Define Where D&O Coverage Ends and E&O Coverage Begins

Amanda Proctor | PropertyCasualtyFocus | March 30, 2018

Policyholders often obtain both errors and omissions (E&O) and directors and officers (D&O) liability insurance policies because they provide complementary coverage. E&O policies provide coverage for claims for wrongful acts arising from the provision of “professional services,” and while D&O policies also provide coverage for claims for wrongful acts, they often exclude coverage for such claims arising from the provision of professional services. Despite this distinction, determining the scope of a “professional services” exclusion in a D&O Policy is not always an easy task. The Second Circuit’s recent decision in Beazley Ins. Co., Inc. v. ACE Am. Ins. Co., No. 16-2812-cv (2d Cir. Jan. 22, 2018) illustrates the difficulties inherent in interpreting these types of provisions.

In Beazley, the court addressed an inter-carrier coverage dispute arising from a class action filed by retail investors against NASDAQ (the insured) for NASDAQ’s failures in executing Facebook’s initial public offering. Prior to the filing of the class action, NASDAQ had purchased an E&O tower from three insurers, one of which was Beazley, and a D&O tower from two insurers, ACE and Illinois National Insurance Company. ACE and Illinois National disclaimed coverage for the class action, relying on the “professional services” exclusion in the ACE policy.

Thereafter, the E&O tower paid the settlement for the class action as well as defense costs, and Beazley filed suit against ACE and Illinois National arguing that the “professional services” exclusion did not apply. The exclusion at issue provided that ACE “shall not be liable for Loss on account of any Claim … by or on behalf of a customer or client of the Company, alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.” Id. at 67.

Beazley’s principle argument was that the exclusion did not apply because retail investors are not “customer[s] or client[s]” of NASDAQ. The Second Circuit disagreed. Although insurance is a matter of state law, the Second Circuit looked to federal securities law to determine whether the terms “customer” or “client” have clear meanings in the insured’s industry. To justify its resort to federal law, the court stated “[w]ho counts as a customer of a particular insured within the meaning of the generic exclusion will often depend on the nature of the industry in which the insured does business.” Id. at 70. In this particular context, the court held that there was “little distinction between looking to ‘industry usage’ and federal case law to define a term.” Id. Having recognized federal law as a source to aid in the interpretation of undefined terms in the ACE policy, the court held that federal case law routinely recognized retail investors as customers or clients of NASDAQ.

The court also held that the underlying claims clearly arose out of the rendering of “professional services” within the meaning of the exclusion because they were based on NASDAQ’s alleged failure to properly execute purchase and sale orders and deliver timely confirmations.

The Second Circuit’s opinion shows that a court may look at different sources to determine the meaning of undefined terms in a policy, and may go so far as to look at federal law for an issue which is generally a matter of state law.