Don’t Waive Too Much In Your Mechanic’s Lien Waiver

Christopher G. Hill | Construction Law Musings | October 3, 2019

In the past few years, the Virginia General Assembly has, with certain caveats, precluded pre-furnishing waiver of mechanic’s lien rights.  While this essentially outlawed the types of mechanic’s lien waiver clauses that pervaded construction contracts in Virginia, the key to the previous sentence is “pre-furnishing.” What the General Assembly left intact were the usual waivers of mechanic’s lien rights typically required to be provided to Owners and others in the payment chain in exchange for payment.

These lien waivers come in a few “flavors” from conditional to unconditional, partial to full.  Their terms usually include an acknowledgement of receipt of payment (we’ll get to this later), and a statement that the one seeking payment knows of no possible claims by lower tier subcontractors and then waives all mechanic’s lien rights against the property for work performed and included in the request for payment.  Often over my years as a Virginia construction attorney, I have noticed that these waivers are often signed without comment or review.  They are just part of the process and more often than not are not even an issue for most projects.  Of course, if they are an issue they can be a big one, and their terms can come back to bite a claimant that has not properly vetted them.

The first potential issue is waiving lien rights while acknowledging receipt prior to actual receipt of the check or wire.  Many of the waiver forms that are out there list a payment amount, or possibly simply state that the waiver is in exchange for some small payment, and then state “receipt of which is acknolwedged” or something similar.  The issue here is that receipt may not have happened yet because these lien waivers are submitted as part of the payment package in order to get paid in the first place.  In short, should you sign the waiver prior to payment, you may have acknowledged a non-event and in the event of non-payment have a written document stating that you waived your claim to a lien for that money.  What a court would do with this, I am unsure, but why risk it?  My advice, be sure your waiver is contingent on actual clearance of payment as well as receipt.

Another issue is that many of these forms waive “all claims” against the paying party up to the date of the waiver.  If you have other projects going with the same paying party, this could potentially waive your claims on those as well.  Again, this waiver is broader than necessary and puts payments at risk for other work.  Why take the chance?  Be sure your waiver is limited to the project at hand.

A third issue is that, particularly with final or unconditional waivers, the waiver may simply waive all rights for now and forever, but not accurately state what exceptions there may be (for instance outstanding claims, currently unresolved change orders, retention and the like) for payments in the future.  In theory, these could waive your rights to such claims if you do not properly state what exceptions or claims are out there.  As with the prior two, why take the chance with your money, be sure to note exceptions, should they exist and do so whether the form calls for it or not where the waiver is unconditional.

These are far from the exhaustive list of items to look out for but are illustrations of the potential pitfalls for payees with lien waiver forms.  As always, I recommend consulting with an experienced construction lawyer when presented with a waiver form.

California Supreme Court Holds “Notice-Prejudice” Rule is “Fundamental Public Policy” of California, May Override Choice of Law Provisions in Policies

Timothy Carroll and Anthony Miscioscia | White and Williams | September 3, 2019

On August 29, 2019, in Pitzer College v. Indian Harbor Insurance Company, 2019 Cal. LEXIS 6240, the California Supreme Court held that, in the insurance context, the common law “notice-prejudice” rule is a “fundamental public policy” of the State of California for purposes of choice of law analysis. Thus, even though the policy in Pitzer had a choice of law provision requiring application of New York law – which does not require an insurer to prove prejudice for late notice of claims under policies delivered outside of New York – that provision can be overridden by California’s public policy of requiring insurers to prove prejudice after late notice of a claim. The Supreme Court in Pitzer also held that the notice-prejudice rule “generally applies to consent provisions in the context of first party liability policy coverage,” but not to consent provisions in the third-party liability policy context.

The Pitzer case arose from a discovery of polluted soil at Pitzer College during a dormitory construction project. Facing pressure to finish the project by the start of the next school term, Pitzer officials took steps to remediate the polluted soil at a cost of $2 million. When Pitzer notified its insurer of the remediation, and made a claim for the attendant costs, the insurer “denied coverage based on Pitzer’s failure to give notice as soon as practicable and its failure to obtain [the insurer’s] consent before commencing the remediation process.” The Supreme Court observed that Pitzer did not inform its insurer of the remediation until “three months after it completed remediation and six months after it discovered the darkened soils.” In response to the denial of coverage, Pitzer sued the insurer in California state court, the insurer removed the action to federal court and the insurer moved for summary judgment “claiming that it had no obligation to indemnify Pitzer for remediation costs because Pitzer had violated the Policy’s notice and consent provisions.”

The insurance policy in Pitzer had three relevant provisions: (1) a notice provision requiring Pitzer to provide “notice of any pollution condition” with a “written report as soon as practicable;” (2) a consent provision requiring Pitzer to obtain the insurer’s written consent “before incurring expenses, making payments, assuming obligations, and/or commencing remediation due to a pollution condition;” and (3) a choice of law provision stating that New York law governed all matters arising under the Policy. Based on the choice of law provision, the federal district court in Pitzer held that New York law applied to the policy. Under New York law, a policy delivered in New York is subject to the notice-prejudice rule; however, a policy delivered outside of New York was subject to a “strict no-prejudice rule” under New York common law, “which denies coverage where timely notice is not provided.” Since the policy in Pitzer was delivered in California, the insurer did not need to prove prejudice from the College’s late notice of its pollution claim.

The district court in Pitzer held that the insurer was entitled to summary judgment because Pitzer College’s notice was not timely and the insurer did not need to show prejudice from that late notice. “[A]lthough a state’s fundamental policy can override a choice of law provision,” the district court observed, Pitzer “failed to establish that California’s notice-prejudice rule is such a policy.” Had it done so, Pitzer may have been able to avoid dismissal of its coverage claim due to its late notice of the pollution discovery and remediation work. Thus, Pitzer appealed to the Ninth Circuit Court of Appeals on the issue of whether the notice-prejudice rule was a fundamental public policy of California. The Ninth Circuit certified the question to the California Supreme Court.

The California Supreme Court in Pitzer held that the notice-prejudice rule was a fundamental public policy of California for several reasons, including that the rule “protects insureds against inequitable results that are generated by insurers’ superior bargaining power.” The notice-prejudice rule, the Supreme Court added, “is based on the rationale that the essential part of the contract is insurance coverage, not the procedure for determining liability, and that the notice requirement serves to protect insurers from prejudice, . . . not . . . to shield them from their contractual obligations through ‘a technical escape-hatch.’” (internal citations and quotations omitted). The Supreme Court left it for the Ninth Circuit Court of Appeals to determine, based on its holding that the notice-prejudice rule is California’s public policy, “whether California has a materially greater interest than New York in determining the coverage issue, such that the contract’s choice of law would be unenforceable because it is contrary to our fundamental public policy.”

Building on that holding, the Supreme Court also concluded that, with respect to the policy’s consent provision, “failure to obtain consent in the first party context is not inherently prejudicial” to insurers, and “the usual logic of the notice-prejudice rule should control. . . .” The Supreme Court found “no reason to believe imposing this rule on first party insurers will prove so unmanageable for those suffering actual prejudice to justify a contrary conclusion.” Thus, the court held, “California’s notice-prejudice rule is applicable to a consent provision in a first party policy where coverage does not depend on the existence of a third party claim or potential claim.” The California Supreme Court distinguished consent provisions in third-party liability policy context, “sometimes called ‘no voluntary payment’ provisions,” which “are designed to ensure that responsible insurers that promptly accept a defense tendered by their insureds thereby gain control over the defense and settlement of the claim.” In the third-party liability policy context, the Supreme Court observed, “the insurer’s right to control the defense and settlement of claims is paramount,” and California courts “generally refuse[ ] to find the notice-prejudice rule applicable to consent provisions in third-party policies.”

Installation of Solar Panels Ain’t “Roofing Work” Under OSHA Says 9th Circuit

Garret Murai | California Construction Law Blog | July 22, 2019

In a straightforward case, but one with widespread applicability today, the 9th Circuit Court of Appeals held that rooftop installation of solar panels isn’t (ain’t) “roofing work” under OSHA.

In Bergelectric Corp. v. Secretary of Labor, Case No. 17-72852 (June 6, 2019), contractor Bergelectric Corporation sought review of a final order of the Occupational Safety and Health Review Commission, in which OSHA held that Bergelectric was required to comply with the stricter safety standards governing work on “unprotected sides and edges” as opposed to the more lenient safety standards governing “roofing work.”

In 2016, Bergelectric was hired to install solar panels on the roof of a hangar at the Marine Corps Air Station Miramar in San Diego, California. While Bergelectric was performing work OSHA conducted an inspection.  Bergelectric informed OSHA that they were using “warning lines” and a “safety monitor” in compliance with OSHA’s safety standard for roofing work and, further, that its employees would use personal fall arrest systems (PFAS) should they do work outside the warning lines.

OSHA issued a citation alleging that Bergoelectric had violated 29 C.F.R. § 1926.501(b)(1), which requires employees working near unprotected sides and edges to be protected by guardrail systems, safety net systems, or PFAS.

At the hearing on the violation, Bergelectric argued that the alternative standard under 29 C.F.R. § 1926.501(b)(10), which allows workers performing roofing work on low-sloped roofs to use warning lines and a safety monitor, applied.  The hearing officer disagreed, and Bergelectric appealed but OSHA declined review.

On appeal to the 9th Circuit Court of Appeals, the 9th Circuit noted that for OSHA to prove a prima facie violation of a particular safety standard:

[T]he Secretary [of Labor] must show by a preponderance of the evidence that (1) the cited standard applies; (2) the employer failed to comply with the terms of the cited standard; (3) employees had access to the violative condition; and (4) the cited employer either knew or could have known with the exercise of reasonable diligence of the violative condition.

And here, explained the Court,  29 C.F.R. § 1926.501(b)(1), which OSHA relied on, provides:

Unprotected sides and edges. Each employee on a walking/working surface (horizontal and vertical surface) with an unprotected side or edge which is 6 feet (1.8 m) or more above a lower level shall be protected from falling by the use of guardrail systems, safety net systems, or personal fall arrest systems.

Whereas, 29 C.F.R. § 1926.501(b)(10), which Bergelectric argued should apply, provides:

Roofing work on Low-slope roofs. Except as otherwise provided in paragraph (b) of this section, each employee engaged in roofing activities on low-slope roofs, with unprotected sides and edges 6 feet (1.8 m) or more above lower levels shall be protected from falling by guardrail systems, safety net systems, personal fall arrest systems, or a combination of warning line system and guardrail system, warning line system and safety net system, or warning line system and personal fall arrest system, or warning line system and safety monitoring system.

The Court held that the more stringent “unprotected sides and edges” standards applied, relying on 29 C.F.R. § 1926.500(b), which defines “roofing work” as the “hoisting, storage, application, and removal of roofing materials and equipment, including related insulation, sheet metal, and vapor barrier work, but not including the construction of the roof deck.”

Solar panels, explained the Court, are not among the materials involved in “roofing work.” Simply put, held the Court, solar panels are neither “roofing materials [or] equipment” used in the construction of a roof, such as “insulation, sheet metal [or] vapor barriers.”

So there you have it, if you’re installing rooftop solar panels on a roof with unprotected sides or edges more than 6 feet above a lower level you must either: (1) use guardrail system; (2) safety net system; or (3) each employee must use personal fall arrest systems.

Be careful out there.

Florida’s Citizens Property Insurance May Be Immune From Bad Faith, But Is Not Immune From Consequential Damages

Michael S. Levine, Andrea DeField and Daniel Hentschel | Hunton Andrews Kurth | June 7, 2019

A coverage dispute arising as a result of property damage from Hurricane Frances, which occurred in 2004, will continue following a Florida appellate court decision in an action brought against Citizens Property Insurance Corp.

The insureds, Manor House, LLC, Ocean View, LLC, and Merrit, LLC, presented a claim to Citizens for damage sustained at nine apartment buildings as a result of Hurricane Florence. After payments for a portion of the property damage were sustained, Citizens continued to dispute the full amount due. Meanwhile, the insureds suffered lost rental income because of the delay. Ultimately, the insureds filed suit against Citizens alleging, among other things, breach of contract and fraud, and sought to recover extra-contractual damages for loss of rental income due to the delay in adjusting and repairing the damaged property.

The trial court granted Citizens’ motion for partial summary judgment on several issues, including Citizens’ motion for partial summary judgment regarding appraiser and umpire fees; motion for partial summary judgment to prevent the insureds from pursuing a claim for extra-contractual, consequential damages; and motion for judgment on the pleadings on the insured’s claim for fraud.

Despite finding that the trial court had accurately interpreted the insurance policy at issue – to not provide coverage for lost rental income – Florida’s Fifth District Court of Appeals reversed the lower court’s decision, finding that the trial court ignored the “more general proposition” that the injured party in a breach of contract action was entitled to recover monetary damages that would put it in the same position it would have been in had the other party not breached the contract. As a result, the court held that, when an insurer breached a contract of insurance, the insureds were “entitled to recover more than the pecuniary loss involved in the balance of the payments due under the policy” as consequential damages, provided that the damages “were in contemplation of the parties at the inception of the contract.”

The appellate court determined that the insureds were denied the opportunity to prove whether the parties contemplated that the property at issue would suffer consequential damages in the form of lost rental income if Citizens breached its contractual obligations. The opinion further made clear that, even though Citizens was immune from bad-faith claims, it was not statutorily immune from this aspect of the insureds’ claim because the consequential damages claimed by the insureds were “based squarely on breach of contract claims requiring no allegation or proof that Citizens acted in bad faith.”

The decision is a significant win for policyholders as it reiterates their ability to seek all damages flowing from an insurer’s breach of contract, even if such damages are in addition to policy benefits. And, more importantly, this applies even where the insurer is a an entity that is immune from bad faith liability under Florida law.

The Hunton Insurance Coverage team congratulates our friend, Molly Chafe Brockmeyer, of Boyle & Leonard, P.A., and her colleagues, Mark Boyle and Alexander Brockmeyer, on this victory for Florida insureds. Molly has presented with members of our team at the ABA Insurance Coverage and Litigation Committee Annual Conference and Mark and Molly have co-counseled with members of our team on prior cases.

Washington Court Tunnels Deeper Into the Discovery Rule

Lian Skaf | The Subrogation Strategist | May 10, 2019

Often times, properly analyzing when a statute of limitations begins to run – not just how long it runs – is crucial to timely pleading. In Dep’t of Transp. v. Seattle Tunnel Partners, 2019 Wash.App. LEXIS 281 (Was. Ct. App. Feb. 5, 2019), Division Two of the Court of Appeals of Washington addressed when the discovery rule starts the statute of limitations clock on a negligence cause of action. The court held that the statute of limitations begins to run when the plaintiff knows that the factual elements of the claim against the defendant exist. The clock starts to run even if the plaintiff wants to investigate the possibility of other contributing factors or the defendant identifies opposing viewpoints on the theory of the claim.

In this matter, the Washington State Department of Transportation (WSDOT) contracted with an engineering firm, WSP USA, Inc. (WSP), for an evaluation of the Alaskan Way Viaduct in 2001. As part of this project, WSP retained the services of Shannon and Wilson (S&W), another engineering firm, to conduct geological profile logs, groundwater-pumping tests, and prepare technical memoranda. In 2002, WSP and S&W installed a pumping well with an eight-inch steel casing (TW-2). In 2009, apparently based on the work done by WSP and S&W, WSDOT determined that a bored underground tunnel was the best option for replacing the viaduct.

In January of 2011, WSDOT and Seattle Tunnel Partners (STP) entered into a contract to construct an underground bored tunnel. STP launched its tunnel-boring machine (TBM) on July 30, 2013. A hollow steel casing emerged from the project surface site on December 4, 2013 and STP stopped its boring work two days later to investigate the slow rate of tunneling and rise in temperature of the TBM that ensued after seeing the casing. From December 6, 2013 to January 28, 2014, STP conducted an investigation into the cause of the boring issue. The relevant dates and events are as follows:

December 9, 2013:STP’s project manager sent an email stating that STP hit a WSDOT well
December 10, 2013:WSP’s engineer sent an email casting doubt on the issue
December 12, 2013:STP sent a letter to WSDOT stating they were investigating
December 17, 2013:WSDOT identified the damaged casing as being from TW-2
January 11, 2014:STP laid out a plan to resume tunneling
January 15, 2014:STP responded to questioning from WSDOT, identifying the well casing as the cause of damage
January 28, 2014:STP resumed tunneling
February 2, 2014:STP stopped tunneling indefinitely due to damage to the TBM

WSDOT filed suit against STP for breach of contract on October 9, 2015. STP subsequently answered and counterclaimed, alleging that WSDOT failed to disclose the presence of TW-2. In addition, on January 26, 2017, STP filed a complaint against S&W, adding WSP to the action the following day. Thereafter, S&W and WSP filed a joint motion for summary judgment, claiming that STP’s action was barred by the three-year statute of limitations for negligence. S&W and WSP claimed that even with application of the discovery rule, which delays the running of the statute until the plaintiff knows or in the exercise of due diligence should have discovered the factual bases of its cause of action, STP had sufficient knowledge of the facts at issue prior to January 26, 2014, and thus STP’s complaint was untimely. After the lower court found in favor of the STP, S&W and WSP appealed.

In support of its position on appeal, STP argued that there was an insufficient basis to start the running of the statute of limitations by January 26, 2014. STP highlighted internal correspondence between S&W, WSP and WSDOT, questioning the role of TW-2 in the incident. STP also argued that the statute of limitations should not begin to run until it determined that TW-2 was the “true cause” of the incident.

The court found both of STP’s arguments unpersuasive. The court reasoned that it was not when STP knew the bases of the cause of action that triggered the statute, but when STP discovered them. It also held that neither the possibility of other contributing factors existing nor the fact that an investigation is ongoing alters the point in time when the plaintiff has sufficient notice of an accrued claim to trigger the statute of limitations. Based on these principles, the court determined that January 15, 2014, was the latest day it could be argued that STP had sufficient notice, actual or inquiry, for the statute of limitations to begin. Thus, because STP filed its complaint after the three-year statute of limitations had expired, the court reversed the ruling of the lower court.

While the discovery rule has an equitable purpose and can often be helpful in prosecuting claims thought to be untimely, it is not a magic wand. The case described herein is a good example of the rule’s limits. Since the determination of when a plaintiff has sufficient notice under the discovery rule for a statute to begin to run is a factual one that is subject to interpretation, counsel should be aware of the potential for differing interpretations. Thus, whenever possible, practitioners should err on the side of caution when deciding when to file a complaint if a statute of limitation is about to run.