Insured’s Leaky “Abrupt” Interpretation of All-Risk Insurance Collapses Under Eleventh Circuit Scrutiny

D. Barret Broussard | Property Casualty Focus

In S.O. Beach Corp. v. Great American Insurance Company of New York, No. 18-1967 (11th Cir. Oct. 31, 2019), the Eleventh Circuit affirmed the district court’s grant of summary judgment in full to the insurer, finding there was no ambiguity in the all-risk policy’s definition of a “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 intended purpose” (emphasis added).

The case involved the caving in of several floors of the insured’s building, which the insured claimed was caused by water damage from a leaking pipe that deteriorated the floors’ sill plates, causing a “collapse.”

Under the all-risk policy, all fortuitous loss or damage would be covered unless there is fraud, willful misconduct, or a delineated exception. One such exception was for a “collapse,” which, as set forth in the policy, would only be covered when caused by a specified cause of loss, including hidden decay.

The district court granted summary judgment in full to the insurer on the basis that the insurer produced evidence that the collapse of the three floors was gradual, rather than abrupt, and therefore the loss was excluded under the policy. On appeal, the insured argued that the collapse provisions were ambiguous and should be construed against the insurer — specifically, the policy allegedly defined a collapse as abrupt while also providing that gradual decay may qualify as a collapse.

The Eleventh Circuit disagreed with the insured, finding that “collapse” was not ambiguous because causation and occurrence are not the same. While a collapse’s causation may be something gradual or abrupt, the question is whether the collapse (i.e., the event of occurrence) itself is abrupt. Therefore, because the insured failed to produce any evidence that the collapse was abrupt, the Eleventh Circuit affirmed the district court’s decision, effectively ending this campaign to carve out extra-contractual caving coverage.

Agreement to Arbitrate Assignable, but Subject to Statute of Limitations

Stanley A. Martin | Commonsense Construction Law

Construction of an apartment building was completed in 2005, under a contract with an arbitration clause. The building was sold in 2015, and the seller assigned its rights under the construction contract to the buyer.

In 2018, one or more balconies on the building collapsed. Subsequent investigation showed that waterproofing and flashing for some of the framing members had never been installed.

The buyer started arbitration with the original contractor, and the contractor sought a court injunction against the arbitration. The contractor argued that the right to arbitration could not be assigned absent its consent, and the claim was too late, anyway. The buyer argued, on the other hand, that the right to remedies under the completed construction contract could be assigned without consent, and that the contractor’s “fraudulent” failure to properly perform the work, discovered only recently, resulted in a different statute of limitations analysis.

The trial court held that the right to pursue contract remedies after completion of the project could be assigned. And since that right was subject to an arbitration clause, the buyer/new owner could pursue any timely claim in arbitration.

But the real issue was timeliness of the claim. First, the court held that the allegations concerning the original construction were allegations of breach of contract. Efforts to dress the claim up as one for “fraudulent construction” would not extend the statute of limitations. Second, the statute of limitations for a contract claim (six years) had long since passed. Further, there was some evidence that the original owner knew about water damage to the framing before the property had been sold, and any investigation by the buyer should have uncovered that condition, unless the original owner had already repaired it.

Since the statute of limitations had passed, the court granted a permanent stay against any arbitration between buyer and contractor. The case is Matter of Turner Constr. Co. v Mount Auburn LLC, 2020 N.Y. Misc. LEXIS 25 (Jan. 2, 2020) (subscription required).

ASBCA Confirms that the Government’s Failure to Identify a Defect During Construction is a Constructive Waiver of the Specifications

Maria Panichelli and Michael Richard | Obermayer Rebmann Maxwell & Hippel

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.

Allocation of Risk in Construction Contracts (Updated)

Ellis Baker, Ibaad Hakim and Richard Hill | White & Case

Risk in construction contracts

‘Risk’, in a project delivery context, can be defined as ‘an uncertain event or set of circumstances that, should it occur, will have an effect on the achievement of one or more of the project’s objectives’.1 Risk exists as a consequence of uncertainty, and, in any project, the exposure to risk produced by uncertainty must be managed.2

Common risks prevalent in construction projects include weather, unexpected conditions, errors in cost estimating and/or scheduling, delays, financial difficulties, strikes, faulty materials, faulty workmanship, operational problems, inadequate plans and/or specifications, and natural disasters.Projects will also have additional specific risks, dependent on their nature and surrounding circumstances.

Although the volume and nature of contractual documentation for a construction project will vary as a consequence of the nature of the project, its scale and the procurement methodology adopted,4 a construction contract may be simply described as a contract between a contractor and an employer whereby one person (the contractor) agrees to construct an asset for another person (the employer) for agreed remuneration by an agreed time.5 A construction contract will include a compact of rights and obligations6 between the parties by which the parties allocate responsibilities between themselves in respect of risks that may transpire during the contract’s execution. In doing so, the parties define the impact of the occurrence of risks on three key elements, namely: the asset that is to be constructed by the contractor, the time at which the asset must be completed by the contractor and the amount the employer is obliged to pay the contractor. The collective allocation of such risks in a construction contract represents its ‘risk allocation’.

Pursuit of a ‘fair and equitable’ allocation of risk

Typically, in preparing the contract document bid package, the employer will be in a position to decide on its intended risk allocation. While there may be a temptation to allocate all or most major risks to the contractor, this must be tempered by an understanding of the potentially adverse consequences of allocating risk where doing so may preclude the submission of bids or result in an increase in cost such that the project is no longer financially viable.7 Improper risk allocation may also result in prolongation of construction completion times, wastage of resources and/or increased likelihood of disputes. As Shapiro states, ‘proper risk identification and equitable distribution of risk is the essential ingredient to increasing the effective, timely and efficient design and construction of projects.’8

While it is of course possible for parties to negotiate all the terms of any construction contract, a number of standard form contracts have been developed and it is common for one of these standard forms to be used as the basis for the final construction contract.9 One of the features of standard form contracts is the intent to produce a ‘fair and balanced’ allocation of risk.10 The rationale for pursuing this is that doing so will provide the best chance of successful project delivery. Echoing Shapiro, Lane notes that, ‘[a] contract which balances the risks fairly between a contractor and an employer will generally, in the absence of bad faith, lead to a reasonable price, qualitative performance and the minimisation of disputes.’11 Abrahamson suggests that in order to achieve a fair and equitable allocation of the risks inherent in construction projects, a risk should be allocated to a party if:

  • the risk is within the party’s control;
  • the party can transfer the risk, for example, through insurance, and it is most economically beneficial to deal with the risk in this fashion;
  • the preponderant economic benefit of controlling the risk lies with the party in question;
  • to place the risk upon the party in question is in the interests of efficiency, including planning, incentive and innovation; and/or
  • the risk eventuates, the loss falls on that party in the first instance and if it is not practicable, or there is no reason under the above principles, to cause expense and uncertainty by attempting to transfer the loss to another.12

While the principle of control of a risk is a powerful factor in the determination of risk allocation, it is not comprehensive and other principles should be utilised to address adequately the allocation of risk in a construction contract.13 For example, events of ‘force majeure’ by their nature cannot be controlled by either party but the consequences of such risks must be assessed and allocated. Bunni proposes that the following four principles are used for allocating risks in construction contracts:

  • Which party can best control the risk and/or its associated consequences?
  • Which party can best foresee the risk?
  • Which party can best bear that risk?
  • Which party ultimately most benefits or suffers when the risk eventuates?

The question of what is a ‘fair and equitable’ risk allocation is, ultimately, a subjective one albeit using objective tests mentioned above by way of assistance; in deciding how to procure a project and to allocate risks, an employer will need to weigh up the theoretical efficiency of the risk allocation with political and market dynamics and the needs of the particular project and its financiers (if any).

Allocating risk in a construction contract

There are various procurement methodologies or ‘routes’ by which an employer may wish to procure a construction project. The methodology selected will necessarily have an impact on the allocation of risk in certain respects in the construction contract. A summary of the major methodologies and their primary impacts on risk allocation is set out below:

Traditional procurement

In traditional ‘construct only’ procurement, the employer will engage a design consultant or team to prepare the design for a project and then bid and award a construction contract to a contractor to construct the project in accordance with that design. The employer will take responsibility for the design provided by the design consultant or team and the contractor will be entitled to relief (which may be in the form of an of the time for completion and/or increase in the agreed remuneration) if there are defects or deficiencies in such design. (See the section on the FIDIC Red Book in Chapter 4, ‘Introduction to the FIDIC Suite of Contracts’ and below.)

Design and build

In a design and build contract, the contractor will be responsible for both the design and construction to meet the contractual specification. This offers the employer ‘single point responsibility’ and is an advantage relative to traditional procurement where for example it may be difficult to establish whether a defect was caused by defect(s) in design (and therefore the responsibility of the design consultant) or construction (and therefore the responsibility of the contractor). (See the section on the FIDIC Yellow Book in Chapter 4, ‘Introduction to the FIDIC Suite of Contracts’ and below.)

EPC/turnkey

In engineering, procurement and construction (EPC) contracts, a single contractor takes responsibility for all elements of design (engineering), construction and procurement of a project on a ‘turn-key’ basis. While similar to design and build contracts, in such EPC contracts the contractor will normally have significant discretion to design the project as it sees fit (so long as requirements of the output based or functional specification are satisfied) and such contracts also typically involve a heavier transfer of risk from the employer to the contractor. (See the section on the FIDIC Silver Book in Chapter 4, ‘Introduction to the FIDIC Suite of Contracts’ and below.)

Allocating specific risks

Risks that are typically allocated between the parties in construction contracts include:

Quantities

The volume of resources required for a construction project can be a source of uncertainty at the outset of any project. In contracts for a lump sum remuneration, the contractor is paid a fixed amount, regardless of the quantity of resources used. The risk of volumes of resources required therefore sits with the contractor and must be accounted for in the formulation of its bid.14 Conversely, under a re-measurement contract, the parties agree unit rates for the resources required for some or all of the works and remuneration is calculated based on the actual quantities used. In such an arrangement, in effect the employer bears the volume or quantity risk.

Errors in employer-provided information

In construction projects, it is common for the employer to provide the contractor with a range of information, including requirements for what is to be constructed (for example, the specification for the works), the location and condition of the site on which the works are to be constructed and other factors related to how the works will be undertaken (for example, the permits required for the works, the means of accessing the site and prevailing weather conditions at the site). Such information may be provided to the contractor for ‘information only’ on a ‘non-reliance’ basis. In such cases, the risk of errors or inaccuracies in such information will sit with the contractor. Alternatively, the employer may assume some or all of such risk, by allowing the contractor time and/or cost relief in circumstances where the information provided by the employer proves to be incomplete or incorrect.

Unforeseen ground conditions

The risk of unforeseen ground conditions is well known to the construction industry: ‘It frequently occurs in practice, particularly in engineering contracts, that unexpected difficulties are encountered during construction which may not only necessitate a change from the expected method of working, but in extreme cases may mean that completion of the work, at least in accordance with the original design, is impossible.’15

The effects can be felt in terms of time and money: ‘unforeseen site conditions…have an obvious capacity to cause delay and disruption to the performance of works on a construction or engineering project, and to cause an escalation in the contractor’s costs.’16

Certain types of work have a greater propensity for being affected by ground conditions, but most structures have subsoil foundations of some kind so the phenomenon of unforeseen ground conditions is widely applicable. Accordingly, the potential time and cost consequences should be provided for and taken into account in the parties’ forward planning, which includes tender pricing.

In the FIDIC suite of contracts, the Red and Yellow Books have traditionally sought a balanced allocation of risk in Unforeseeable Physical Conditions and related provisions, both as to time and cost. Unforeseen ground conditions are dealt with in a radically different way by the Unforeseeable Difficulties provisions of the Silver Book. (See the section on ‘Unforeseen ground conditions’ below.)

On 7 May 2019, FIDIC published a new Tunnelling and Underground Works Contract (to be known as the Emerald Book) which was a joint initiative of FIDIC and the International Tunnelling and Underground Space Association. The Emerald Book uses the Yellow Book as a base, but incorporates risk allocation recognising the nature of the works to be undertaken (in particular in relation to subsurface conditions).

Force majeure

In the course of a construction project, performance of the parties’ obligations can be delayed, impaired or altogether prevented by events outside the parties’ control. All major legal systems have rules governing the impossibility or inhibition of performance of contractual obligations. The underlying law of the contract selected by the parties, or that which applies in the absence of such selection, is capable of providing remedies and other outcomes to some extent but there is often a significant difference between civil law and common law traditions in this respect.

The concept of imprévision has long formed a part of systems deriving from French law and the doctrine of rebus sic stantibus is expressly incorporated into the German Civil Code.17

In the common law systems and notably in English law, there is no general theory of force majeure, which is not a term of art. The effect is that ‘performance of the relevant obligation must have been prevented by an event of force majeure and not merely hindered or rendered more onerous.’18

The difference in approaches between jurisdictions explains why parties to construction contracts routinely make their own express provision for force majeure. The treatment of Force Majeure (and now Exceptional Events) under the FIDIC suite of contracts and some other standard forms of contract is discussed further below.

Change in law

The starting or default position under a construction contract is that, in performing its obligations under the contract, each party will do so in compliance with and so as not to cause any breach of the laws applying to such obligations. In the absence of a specific provision dealing with the consequences of a change in law

CONTINUE READING THIS IN-DEPTH ARTICLE

1 Peter Simon, David Hillson and Ken Newland, Project Risk Analysis and Management Guide, Association for Project Management, p.17 (1997).

2 See Catriona Norris, John Perry and Peter Simon, Project Risk Analysis and Management Mini-Guide, Association for Project Management, p.4 (2018).

3 See Samuel Laryea and Will Hughes, The Price of Risk in Construction Projects, p.553 (2006).

4 See Julian Bailey, Construction Law, Volume 1, 2nd ed., p.49 (2016).

5 Peter Simon, David Hillson and Ken Newland (op.cit.), p.17 (1997).

6 Julian Bailey (op.cit.), p.1512.

7 Bryan Shapiro QC, ‘Transferring Risks in Construction Contracts’, p.5 (2010)

8 Ibid, p. 17.

9 See Graham Vinter, Project Finance, 4th ed., Sweet and Maxwell, p.1 (2013).

10 In relation to FIDIC, see Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers, FIDIC Contracts: Law and Practice, Informa, p.6 (2009).

11 Patrick Lane SC, ‘The Apportionment of Risk in Construction Contracts’, International Conference on Arbitration and ADR in the Construction Industry, Dubai (2005).

12 See article by Max Abrahamson, Journal of the British Tunnelling Society, Vols 5 and 6, November 1973 and March 1974; and CIRIA Report R 79 ‘Tunnelling – improved contract practices’ (1978).

13 Nael Bunni, ‘The Four Criteria of Risk Allocation in Construction Contracts’, International Construction Law Review, Vol 20, Part 1, p.6 (2009).

14 This would not apply to a contract based on a full bill of quantities, such as the JCT Standard Building Contract With Quantities 2016.

15 Nicholas Dennys QC and Robert Clay (eds), Hudson’s Building and Engineering Contracts, 13th ed., Sweet & Maxwell, p.402, (2015).

16 Julian Bailey (op.cit.), p.697.

17 Axel-Volkmar Jaeger and Götz-Sebastian Hök, FIDIC – A Guide for Practitioners, Springer, pp.329-330 (2010).

18 Hugh Beale, Chitty on Contracts, 33rd ed., Sweet & Maxwell, p.1236 (2018).

Last, but NOT Least: Why You Should Take a Closer Look at Your Next Indemnification Clause

Aimee Cook Oleson | Construction & Infrastructure Law Blog

Indemnification clauses appear in nearly every agreement, but they are often overlooked as mere boilerplate provisions after the parties have painstakingly negotiated all of the other terms. It is not uncommon for parties to simply re-use the indemnity language from a prior agreement without considering whether it is a good fit for their current project. This can be a big mistake that may lead to ambiguities and uncertainties if a dispute arises down the road. A standard or canned indemnification clause might work to undo all of the effort that has gone into properly allocating risk. These clauses often contain language such as “notwithstanding anything to the contrary herein,” or the like, which can alter and override other provisions in the agreement.

Indemnification clauses are arguably the most important part of an agreement when an accident or dispute arises on a project. Therefore, they deserve an extra look before finalizing an agreement. Here are a few issues to keep in mind when reviewing your next indemnification clause:

  • Have you included all necessary parties?
    • Any party who could face potential liability should be included as an indemnified party. This often includes entities and persons related to the contracting parties, not just the parties themselves.
    • A well drafted indemnity clause will ensure that all parties are liable for the result of their own work and negligence and that of any party that they have hired to work on a project. This includes employees, agents, subcontractors, or any other similar party.
  • What exactly will be covered?
    • An indemnification clause should provide for the defense of an indemnified party in addition to the recovery of damages.   In many instances, a clause can be drafted to protect against claims asserted as well as an ultimate finding of liability. This can be particularly important in the context of projects involving subcontractors and material suppliers who may not have direct agreements with an owner or general contractor.
  • While a clause should fully protect each party from liability for another party’s negligence, it is important not to go too far. The majority of states have statutory prohibitions against indemnification clauses that seek to hold a party liable for the negligence of another party it does not control. See e.g. Tex. Ins. Code § 151.102; Cal. Civ. Code § 2782; N.Y. Gen. Oblig. Laws § 5-322.1; Ga. Code § 13-8-2; Va. Code § 11-4.1.
  • An indemnity clause is often only worth as much as the underlying insurance coverage.
    • It is important to examine required insurance coverages and limits to make sure all parties can satisfy their indemnity obligations.
  • Finally, be sure to make the clause conspicuous and satisfy any other requirements regarding the formatting of an indemnification clause. These requirements often differ from state to state.

Taking the time to carefully review the indemnification provision in each contract with your business and legal team will help to ensure consistency and enforceability. This is an easy way to avoid unexpected liability.