Maybe Relief for Public Contractors Should Come from Thoughtful Legislation

Lexie R. Pereira | The Dispute Resolver

With loss, comes suffering; and, when it comes to the coronavirus, loss exists in many forms. Attorneys across the country – particularly those representing contractors on public projects – are asking themselves, generally, “how can my client suffer less?” Or, more pointedly, “is there an argument to support my client’s right to entitlement to compensation for COVID-19-related costs?”

On public projects, the short answer is maybe not until the government steps in. Construction lawyers are faced with the unfortunate reality that public sector contracts appear to preclude contractors from seeking adjustments to the contract price because these contracts commonly include (1) a clear “no-damages-for-delay” provision, (2) time as the sole remedy for “force majeure” delays, and (3) a “compliance with laws” provision that is silent as to which party bears the risk of a change in laws. These provisions help public owners properly protect the interests of the citizens by appropriately allocating their tax dollars to a construction project that follows a carefully thought-out contract. However, as a result of these well-intentioned owner-friendly provisions, public contracts can make it difficult for contractors to receive compensation for COVID-19-related costs.

One can draw a parallel between public contracts and some of the insurance industry’s business interruption coverage policies. Of course, every insurance policy is different and must be analyzed on a case-by-case basis; however, the business interruption policies at issue often (1) have a clear “virus” exclusion, (2) require “property damage” to trigger coverage, and (3) are silent as to the application of the “civil authority” exclusion when it comes to partially mandated shutdowns (i.e. when the case is that construction offices, but not jobsites, may have been required to shut down). As a result, policyholders’ business interruption claims arising from COVID-19 are facing blanket denials from insurance carriers.

However, the denials of claims in both the insurance and construction industries alike can have potentially crippling effects. With respect to insurance, the consensus is becoming somewhat clear: the federal and/or state governments may need to step in. In response, several states (including Massachusetts, Rhode Island, New York, and New Jersey) have sponsored bills to provide long-term reimbursement relief to insurance companies and even to create exceptions to the policies’ strict exclusions, like the “virus” exclusion. As follows, attorneys are advising policyholders to follow the old adage “a claim never made is a claim never paid.” Therefore, attorneys who want to help their clients suffer less should encourage strict compliance with the “prompt” notification mechanisms to preserve claims under their insurance policies.

Similarly, attorneys are encouraging contractors to comply with the claim procedures in their public contracts, despite the currently-present contractual roadblocks. This advice is perhaps motivated with the hope that relief will be provided, whether it comes from the owner or as a part of a government-sponsored relief scheme similar to that of the insurance industry. The good news is: over one-hundred and thirty-five members of Congress agree with this approach, at least when it comes to supporting State Departments of Transportation (DOTs). On May 11, 2020, Representatives Conor Lamb and Bob Gibbs led the House in calling on Speaker Pelosi and Leader McCarthy to support approximately $49.95 billion in federal funding for State DOTs in the next COVID-19 response package.1 The request explained how support of State DOTs can help ensure planned transportation projects proceed as planned, which in turn supports the economy by protecting the jobs of State DOT employees and construction workers. Comparably, the Under Secretary of Defense released a memorandum on March 30, 2020, with the subject “Managing Defense Contracts Impacts of the Novel Coronavirus,” stating that “Where the contracting officer directs changes in the terms of contract performance, which may include recognition of COVID-19 impacts on performance under that contract, the contractor may also be entitled to an equitable adjustment to contract price using the standard FAR changes clauses (e.g., FAR 52.243-1 or FAR 52.243-2).”2 This memorandum suggests that contracting officers may have the authority to treat COVID-19 impacts as compensable delays under the FAR Changes clause.

As a matter of public policy, government intervention in line with the above makes sense. Despite the general rules that deny contractor recovery in the face of (1) a clear “no damages for delay” provision,3 (2) time as the sole remedy,4 and (3) a silent compliance with law provision,5 these rules are unfair (and perhaps unlikely to be upheld) considering the ongoing global pandemic. For example, on lump sum and GMP projects in particular, it would be inequitable for a public owner to completely deny claims for additional costs – like those of COVID-19-required demobilization and remobilization – on the basis of (1) a clear “no damages for delay” provision, (2) time as the sole remedy, and (3) a silent compliance with law provision. What’s more, public contracts are often procured via competitive bidding, which naturally means that contractors cut as many costs as safely as possible, not pricing out a ‘just in case a global pandemic shuts down this project for a couple weeks’ cushion. In fact, because public owners want to ensure that workplaces, including construction jobsites, are operating safely and in full compliance with new COVID-19 safety measures, they have a competing interest when it comes to compensating COVID-19-related costs. Since their competing interest brings with it some additional costs that were in no way contemplated by contractors when they priced their jobs, they ought to have some skin in the efforts for recovery as it would be unfair for public owners to ask contractors to simply absorb COVID-19-related costs.

Indeed, the ramifications of allowing owners (and insurers) to benefit from such harsh claim denials could have detrimental effects on the entire construction industry. Consider the alarming fact that if contractors continue to be denied compensation for COVID-19-related costs, then numerous contractors, subcontractors, and suppliers will inevitably goes out of business, thereby crumbling the industry and, likewise, the economy. While public owners and insurance companies may suffer in the short-term in light of legislation that requires exceptions to their contracts, they are in a much more stable position to weather this storm over the long-term. In other words, at present, they are not the string that will make the sweater unravel. After all, the greater suffering ought to be borne by the owner anyway, even if it is the state. One can reason that even though neither the owner nor the contractor could have ever predicted COVID-19, it is the owner – not the contractor – who remains the ultimate beneficiary of the project. As follows, maybe relief for public contractors should come from thoughtful legislation, like that already pending for the benefit of the insurance industry.


https://www.agc.org/sites/default/files/State%20DOT%20House%20Support%20Letter_Signed.pdf

https://federalconstruction.phslegal.com/2020/04/articles/contractor-information-sources/delays-resulting-from-coronavirus-may-be-both-excusable-and-compensable/https://www.nationaldefensemagazine.org/articles/2020/3/16/industry-may-find-relief-for-coronavirus-delayshttps://www.jdsupra.com/legalnews/delays-resulting-from-coronavirus-may-58448/

Although a contract has a clear “no damages for delay” clause, the contractor is not necessarily foreclosed from recovery if there exist other avenues for recovery within the contract. In fact, in many jurisdictions, “no damages for delay” clauses are not enforced where the delay for which recovery is sought was not reasonably contemplated by both parties at the time of contracting. JWP/Hyre Elec. Co. v. Mentor Village Sch. Dist., 968 F. Supp. 356, 360 (N.D. Ohio 1996); see Corinno Civetta Const. Corp. v. City of New York, 493 N.E.2d 905, 910 (N.Y. 1986). That is not necessarily the case in Massachusetts; however, there exist other ways a contractor can avoid the harsh effects of a “no damage for delay” clause. Joel Lewin & Eric Eisenberg, Delays, Suspensions and interruptions—No damage for delay clauses—Exceptions, Massachusetts Practice Series on Construction Law § 6:22 (2018). For example, a contractor may point to other contract provisions that provide relief. Id. (citing Stone/Congress v. Town of Andover, 6 Mass. L. Rptr. 330, 1997 WL 11737 (Mass. Super. Ct. 1997) (denying a summary judgment motion in favor of a contractor that argued that its damages were not for delays, but rather for changes in the work for which it was entitled to compensation under the changes clauses in the general contract). A closer look into the specific contract language is necessary in order to determine whether there exist other avenues for recovery.

Despite the fact that the sole remedy is time, there may still be room for a claim for additional compensation if contractor has a separate delay claim. “Force majeure” events, like abnormally bad weather and presumably the COVID-19-related costs at issue here, normally entitle the contractor to time, but not money. However, similar to the idea above that a contractor can avoid the harsh effects of a “no damage for delay” clause by pointing to other contract provisions, a contractor may recover for “force majeure” events when they are coupled with other compensable delay events. See id.; Philip J. Bruner & Patrick J. O’Connor, Jr., §3.7.2—Contractor’s Compliance with Law, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update). For example, in Appeals of Bechtel Environmental, Inc., a contractor was adversely affected by weather when a government-caused design delay pushed toxic waste landfill remediation activities into the hotter summer months, resulting in lower efficiency. Philip J. Bruner & Patrick J. O’Connor, Jr., §15.1.6.2—Weather delays, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing Appeals of Bechtel Environmental, Inc., E.N.G.B.C.A. No. 6137, E.N.G.B.C.A. No. 6166, 97-1 B.C.A. (CCH) ¶ 28640, 1996 WL 686423 (Corps Eng’rs B.C.A. 1996)). Perhaps the express language in the AIA A201-2017’s § 8.3.3 provides the support for this: “This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.”

As a general rule, if the contractor agrees to perform the work for a stipulated sum and further agrees to comply with all laws and regulations governing the performance of the work, then, in the absence of any contractual provision permitting relief, it bears the risk. Philip J. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing DiCara v. Jomatt Const. Corp., 52 Misc. 2d 543, 276 N.Y.S.2d 11 (Dist. Ct. 1966) (contractor who agreed to sell a house at a specified price bore a responsibility for increased costs due to a 2% sales tax made applicable to the sale after the parties had reached agreement); Edwards v. United States, 19 Cl. Ct. 663 (1990) (government contract’s “permits and responsibilities” clause obligated the contractor to comply with all local laws and regulations regardless of whether they became effective before or during the term of the contract and applied to zoning changes affecting the work)).

A Few Things You Might Consider Doing Instead of Binging on Netflix

Garret Murai | California Construction Law Blog

Governments throughout the world have issued “shelter in place” orders requiring that residents stay at home except for “essential” purposes. As a result, in the United States, more than a third of Americans have been ordered to stay at home. This, in turn, has had a direct impact on construction projects which have slowed or have been temporarily shuttered altogether, and it will (not may) have an impact on the flow of project funds. So what can project owners and contractors do? We’ve got a few tips.

1.     Read Your Contract, Paying Particular Attention to Force Majeure, No Damages for Delay and Notice Provisions

For the most part, with the exception of statutory rights and remedies which we will discuss below, your contract spells out your rights and remedies should the proverbial “S” hit the fan. It is, in other words, the rules you agreed to, and you should know what those rules provide. Three provisions you should look for, and if they’re in your contract, you should review carefully are: (1) Force majeure provisions; (2) No damages for delay provisions; and (3) notice provisions.

Force Majeure Provisions

Latin for “superior force,” a force majeure provision defines circumstances beyond a party’s control that may render contractual performance by that party difficult or impossible to perform. A force majeure provision is, by its nature, defensive. In other words, it is a defense against a higher-tiered party’s claim that a lower-tiered party has failed to perform its obligations under a contract.

Most people think of force majeure events as being “Acts of God,” or, in other words, earthquakes, tornadoes, tsunamis and other naturally occurring events. That’s not always the case though. Force majeure provisions can include any number of “triggering” events including government actions, terrorism, riots and other events that aren’t naturally occurring.

In short, if your contract includes a force majeure provision, you need to read and understand it, so that you know what events trigger the provision. You also need to understand the intricacies of force majeure provisions. For example, few force majeure provisions that I’ve seen include a trigger for plagues or epidemic outbreaks such as the coronavirus, but many include government actions as a “triggering” event. Thus, while the coronavirus itself may not be a “triggering” event, state and local “shelter in place” orders currently in effect would likely constitute a “triggering” event.

No Damages for Delay Provisions

The current crisis is going to cause delays on construction projects, whether because the project itself is temporarily shut down due to “shelter in place” orders at the state or local levels, because of an inability to get workers out to the job site because they are sick or scared, because your work is impacted because other trades are not coming out to the project site, or because of delays in the delivery of or the inability to purchase materials and equipment.

There are many grey areas here, but the impact is the same: Delays on the project. Some contracts, recognizing that there could be delays on the project which no one could have foreseen or controlled, include “no damages for delay” provisions. An example of what a “no damages for delay” provision might look like is the following:

In the event that Subcontractor’s performance of its Work is delayed through no fault of its own, Subcontractor may request an extension of time for performance of its Work, but in no event shall be entitled to any increase in the Contract Price or damages arising from such delay.

In short, a “no damages for delay” provision, while allowing a contractor to seek an extension of the contract time due to delays, prevents a contractor from seeking an increase in the contract price, whether due to the need to pay workers for overtime or hazard pay, for increases in material costs, for extended general conditions, etc.

Notice Provisions

Most construction contracts include notice provisions setting forth when, under what circumstances, and how notice may be given. Importantly, they often also set forth happens if you don’t give proper notice. In the current situation, notice provisions are extremely important as contractors face delays and time-related costs impacting their ability to meet contractually agreed upon completion dates and ability to perform their work without coming out at a financial loss.

Many notice provisions provide that if notice is not given, or not timely given, that a contractor waives its right to pursue claims in which notice was required. An example of notice provision related to delays and time-related costs is the following:

In the event that Contractor claims that its Work has been impacted through no fault of its own, Contractor may request an extension of the Contract Time and/or increase in the Contract Price by providing written notice to Owner no later than fifteen (15) days of the event giving to the claim. Provided, however, that should Contractor fail to provide timely notice, Contractor waives any right to an extension of the Contract Time or increase in the Contract Price.

In short, notice provisions are extremely important right now. In fact, even if your contract doesn’t include a notice provision requiring that notice be provided of delays and/or time-related costs, my suggestion, is that you consider sending notice anyway. To successfully bring a delay and/or time-related cost impact claim a contractor needs to show that the delay was both compensable and excusable.

2.     Understand Your Statutory Payment Rights

In California, there are three primary statutory payment remedies available to those performing work on construction projects: (1) mechanics liens and design professional liens; (2) stop payment notices; and (3) payment bond claims. Who can assert these payment remedies, when they can be asserted, and how they are asserted, varies. You can read more about each of these payment remedies by clicking the links above, but here’s a snapshot:

Who Can Assert These Payment Remedies

Only design professionals, that is, licensed architects, registered engineers, and registered land surveyors, can assert a design professional lien.

Only direct contractors, subcontractors, material suppliers, equipment lessors and laborers may asset mechanics liens.

And, only subcontractors, material suppliers, equipment lessors, and laborers may assert stop payment notices and payment bond claims.

When Can They Be Asserted

Here’s where it gets interesting, most people think that mechanics liens can only asserted after completing their scope of work. For direct contractors who are serving as general contractors that usually means when the entire project is completed. For all others it is when their work is completed.

But, importantly, given the situation we are in, “completion” under Civil Code section 8180 includes, not only completion of the entire project (in the case of general contractors) or completion of a party’s scope of work (in the case of all others), but also “cessation of labor for a continuous period of 60 days.”

Thus, in a situation where project sites may be closed for a prolonged period of time due to the various “shelter in place” orders, if this includes a cessation of labor for a continuous period of 60 days, contractors, subcontractors, material suppliers, equipment lessors and laborers would be able to record a mechanics lien even though the project or their scope of work has not yet been completed.

As to stop payment notices and payment bond claims, there is no requirement that that a subcontractor, material supplier, equipment lessor, or laborer complete its work before serving a stop payment notice or making a payment bond claim.

Similarly, for design professionals, a design professional does not need to complete its work before recording a design professional lien. However, there are three requirements that must be met first: (1) a building permit or other “governmental approval” must have previously been obtained; (2) construction must not yet have commenced; and (3) the design professional must make demand for payment not less than 10 days before recording its design professional lien.

Requirements Prior to Assertion

In order to record a mechanics lien, serve a stop payment notice or make a payment bond claim most claimants, with the exception of direct contractors, but then only if there is no construction lender on the project, must have first served a preliminary notice. More information on each of these statutory payment remedies, as well as forms, can be found in the Blueprints and Toolbox section of our blog.

3.     Know How You Can Statutorily Shorten Deadlines 

While there are statutory payment remedies available to contractors and others who furnish labor, materials and equipment on a construction project, project owners are not without their own remedies. For projects that are at our near completion, or that are mid-way through construction, a project owner can shorten the deadlines for a claimant to record a mechanics lien, serve a stop payment notice, or make a payment bond claim, by recording a notice of completion or notice of cessation.

Notices of Completion

A notice of completion may be recorded upon the occurrence of any of the following events:

  1. Actual completion of a work of improvement;
  2. Occupation or use by the owner accompanied by cessation of labor;
  3. Cessation of labor for a continuous period of 60 days; or
  4. For public works projects, acceptance by the public entity.

A notice of completion may be recorded on or before 15 days after completion of a work of improvement.

Notices of Cessation

A notice of cessation can be recorded if there has been a cessation of labor for period of 30 days.

When statutorily permitted, by recording a notice of completion or notice of cessation, a project owner may shorten the time period for potential claimants to record mechanics liens, serve stop payment notices and make payment bond claims, by shortening the time to make such claims by as much as two-thirds.

The Conflict Between Choice-of-Law Provisions in Insurance Policies and a State’s Fundamental Public Policy

Matthew Lewis | Property Casualty Focus | October 18, 2019

Many contracts include a choice-of-law provision in which the parties agree to use a particular jurisdiction’s set of laws to govern the contract. These provisions promote predictability. No matter where a dispute may arise under the contract, the contract will always be interpreted under the laws of the chosen jurisdiction. This practice of including choice-of-law provisions extends to policies of insurance.

However, these choice-of-law provisions are not always enforceable. Section 187 of the Restatement (Second) of Conflict of Laws indicates that the parties’ choice-of-law provision would not govern if it conflicts with a state’s fundamental public policy, and if that state has a materially greater interest in the determination of the issue than the contractually chosen state.

Recently, the Supreme Court of California addressed this issue as it pertained to a choice-of-law provision in an insurance policy in Pitzer College v. Indian Harbor Insurance Co., 8 Cal. 5th 93 (Cal. 2019). In this matter, the insurer, Indian Harbor, denied coverage to Pitzer College following an environmental remediation of land conducted by the school.

The insurance policy at issue contained a choice-of-law provision that indicated New York law would govern the policy. Additionally, the policy included a notice provision requiring Pitzer College to provide notice to Indian Harbor of any pollution condition it discovered, which resulted in a loss or remediation expense as a condition precedent to coverage. Finally, the policy included a consent provision requiring that no “costs, charges, or expenses shall be incurred, nor payments made … without [Indian Harbor’s] written consent.” However, the consent provision did provide an exception that Pitzer College could incur costs on an emergency basis, so long as it notified Indian Harbor “immediately thereafter.”

During the policy period, Pitzer College discovered lead contamination in the soil on land where a new dormitory was being constructed. Approximately two months after discovery of the pollution, Pitzer College remediated the land itself, at a cost of about $2 million. However, Pitzer College did not notify Indian Harbor of the remediation until six months after the discovery of the pollution. Ultimately, Indian Harbor denied coverage for the loss on the basis that Pitzer College did not timely notify it of the loss, or the costs incurred, which was in breach of both the notice and consent provisions of the policy.

Pitzer College brought suit in federal court against Indian Harbor for alleged breach of contract. Specifically, Pitzer College alleged that under California law, an insurer can only deny coverage for an insured’s failure to timely notify of a loss if the insurer can show that it was substantially prejudiced by the delayed notice.

The district court disagreed with Pitzer College’s argument that Indian Harbor had the burden of showing that it was substantially prejudiced by the delayed notice. The court held that because New York, pursuant to the choice-of-law provision in the policy, had a strict no-prejudice law for policies of insurance delivered outside New York, Indian Harbor was not required to show prejudice in its denial of coverage to Pitzer College due to lack of timely notice. As such, the court granted summary judgment in Indian Harbor’s favor. Pitzer College appealed to the Ninth Circuit Court of Appeals.

On appeal, the Ninth Circuit certified two questions to the Supreme Court of California: (1) whether California’s notice-prejudice rule was a “fundamental public policy” for choice-of-law analysis; and (2) whether the notice-prejudice rule applied to the consent provision of the insurance policy.

In determining whether California’s notice-prejudice rule was a fundamental public policy, the Supreme Court of California noted that a rule is a fundamental public policy when it: (1) cannot be contractually waived; (2) protects against otherwise inequitable results; and (3) promotes public interest.

In this matter, the court found that all three elements existed to establish the notice-prejudice rule as a fundamental public policy of the state. For the first prong, the court noted that the notice-prejudice rule could not be waived, because it restricted freedom of contract and prevented the enforcement of a contractual term (technical forfeiture).

As for the second prong of its analysis, the court noted that insurance contracts were “inherently unbalanced” and “adhesive” and that the notice-prejudice rule protects an insured against inequitable results based on an insurer’s superior bargaining power. What is particularly interesting about this part of the court’s analysis is that it did not draw any distinction between the type of policy in this matter (between a large, sophisticated entity such as the Claremont University Consortium and Indian Harbor) and a more common type of insurance policy (between an individual without any bargaining power and a carrier).

As to the third prong, the court found that the notice-prejudice rule promoted objectives that are in the general public’s interest because the rule protected the public from bearing the costs of harm that an insurance policy purports to cover. In other words, by requiring an insurer to show that it incurred substantial prejudice because of untimely notice, the rule lessens the likelihood that a loss covered by the policy would be denied by the insurer based on a technicality. Essentially, the notice-prejudice rule helps to prevent an insurer from “reap[ing] the benefits flowing from the forfeiture” of an insurance policy with a strict notice provision and lessens the risk of placing the burden of the costs of the loss on the public.

As to the second question certified by the Ninth Circuit to the Supreme Court of California, the court held that the consent provision, as it regarded first-party claims, had much of the same effect as the notice provision. Both provisions had the underlying purpose to “facilitate the insurer’s primary duties under the contact and speak to minimizing prejudice in performing those duties.” Because both provisions were inherently the same to the court, the rationale of the notice-prejudice rule would also govern the consent provision. As such, Indian Harbor would have to show that Pitzer College’s failure to obtain consent, as prescribed under the policy, would not be grounds for denying coverage unless it could show that the failure to obtain consent substantially prejudiced Indian Harbor.

It is important to note that the court drew a distinction between first-party claims and third-party claims as it regards consent provisions. Because third-party claims involve liability coverage and the insurer assumes the defense of the matter once defense is tendered by the insured, the rationale behind the notice-prejudice rule would not apply to consent provisions in third-party claims.

By holding that the choice-of-law provision in the Indian Harbor policy would not be enforceable as it relates to the notice and consent provisions, the Supreme Court of California essentially ruled that California courts would not enforce any notice provisions in insurance policies unless the insurer can show that it suffered substantial prejudice due to the lack of timely notice by the insured.

This holding introduces considerable uncertainty in choice-of-law analysis, which is already fraught with complications about where contracts are formed, the location of the risks insured, etc. Sometimes, the difference between certain jurisdictions’ laws are dispositive in insurance disputes. Moreover, not all states rely on the Restatement approach for conflict of laws, and thus the question of “conflict” with that state’s “fundamental polices” may not even come into play. However, if other states adopt the approach in Pitzer College, it may ultimately render choice-of-law provisions moot.

Additional Insurance Coverage: Fundamentals and Misconceptions

R. Thomas Dunn | Pierce Atwood | September 26, 2019

Additional insured (“AI”) requirements for commercial general liability (CGL) policies are very common in construction contracts. An Owner routinely requires its general contractor (“GC”) to provide AI coverage for itself, its affiliates, and sometimes a handful of other entities (lender, architect, etc.). In turn, the GC mandates its subcontractors to provide AI coverage for the GC, the Owner, and a cast of other characters. While frequently used, for good reason, this risk transfer tool is often misunderstood. In this post, I will explain the purpose of AI coverage, identify what it does and does not cover, and provide answers to a few misconceptions about additional insured coverage.

The Purpose of Additional Insured Coverage

The design of AI coverage is to trigger the insurance procured by lower-tier contractors. The Owner, GC, and subcontractors all have CGL insurance, but the goal of additional insured coverage is to make sure that someone else’s insurer will be on the hook to provide defense and indemnity should a covered claim arise. The goal is to insulate the insurers of upper tier entities (as well as the insured Owners/GCs) from defending or paying claims because the lower-tier’s insurer will provide such defense and indemnity. While the Owner/GC may have coverage already, they will not be impacted by claimed losses in their insurance program if such loses are covered by another carrier.

Additional Insurance coverage provides an additional form of security for contractual indemnity provisions. In most construction contracts, a lower-tier contractor promises the upper-tier entity that it will pay for injury to person/property caused by the lower-tier contractor’s negligence. Indemnity means pay money. The promise to indemnify another is only as good as what backs up that promise. While a lower-tier’s CGL policy should provide coverage for assumed contractual liability, the advantage of AI coverage is that the upper-tier can go directly to the lower-tier’s insurer for coverage. A lawsuit against the lower-tier contractor is not required to trigger the coverage. Contractual indemnity and AI coverage are separate and distinct risk transfer mechanisms, but they work in tandem with each other. A reasonable level of redundancy is a positive attribute when it comes to planning to mitigate and transfer risk.

What Does Additional Insurance Cover?

AI coverage will not cover an Owner/GC if there is no relationship to the subcontractor’s work. If there is no such “nexus” between the subcontractor’s work and the claimed loss, then the Owner/GC cannot utilize the additional insured coverage. Clearly, there is no liability where the additional insured is 100% responsible for the loss. The “nexus” required between the loss and the subcontractor’s work varies based upon the language used in the additional insured endorsement and decisional law in the relevant jurisdiction. For example, earlier this year the Rhode Island Supreme Court held that a subcontractor’s insurer who had issued AI coverage for the general contractor did not owe additional insured coverage resulting from an injury to subcontractor’s employee because employee did not allege fault or negligence of the subcontractor. Bacon Constr. Co. v. Arbella Prot. Ins. Co. In Bacon, the Court interpreted the AI endorsement discussed in the next paragraph (ISO CG 20 3) and concluded that some negligence of the subcontractor needed to be alleged. Where the language of the AI endorsement is broader, such as coverage to an additional insured for “liability arising out of” the operations, the outcome is often different as seen in the 11th Circuit case of Zurich Am. Ins. Co. v. Southern-Owners Ins. Co. also decided earlier this year.

AI coverage for CGL policies are mostly written on standard forms written by the Insurance Services Office, Inc. (“ISO”). In many standard contracts, you will see a specific ISO form number identified. A commonly used form is ISO CG 20 33 07 04. In this form number, the last four digits “07 04” are the month (07) and year (04) the form was adopted by ISO. This form amends the CGL policy defining who is an Insured “to include as an additional insured any person or organization for whom you [the Named Insured] are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” ISO 20 33 07 04 (emphasis added). The additional insured is then covered for “‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by [1] [the Named Insured]’s acts or omissions; or [2] The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured.” ISO 20 33 07 04 (emphasis added). A few issues to be aware of with this standard AI form:

  • The Privity of Contract Problem. This form is useful for general contractors who are, by definition, going to be performing operations and have a contract with the Owner. You can rely upon this “blanket endorsement” and be comfortable that you have provided AI coverage to your Owner customer. But, what about subcontractors who are asked to name the Owner as an additional insured? They are not in privity of contract with the Owner and thus AI status from the subcontractor’s CGL policy may not be conferred as intended to the Owner. The result is that the subcontractor is in breach of its subcontract for failing to provide the specified AI coverage and the GC’s insurer will be stuck with coverage of the claim. To get around this issue, it is advisable to request a “scheduled endorsement” where the names of the entities who are intended to be conferred AI status are listed. An example of a scheduled endorsement is ISO form CG 20 37 07 04.
  • Scope of Coverage. The language “caused, in whole or in part” leads to some insurers to deny coverage or issue reservation of rights letters. This is because there may not be a sufficient showing that the Named Insured “caused” the alleged loss in whole or in part. This was the holding of the Rhode Island Supreme Court discussed previously in Bacon. Other AI endorsements, such as the pre-2004 editions of the CG 20 10 ISO AI endorsements, provide broader language but they may be difficult to obtain from insurers.
  • Completed Operations. The 20 33 form does not provide for completed operations. Many standard insurance requirements require a specific period of years for completed operations coverage. If you rely upon this form alone, you will not be providing the completed operations insurance. ISO form CG 20 37 07 04 provides for completed operations coverage.

In the AIA’s 2017 updates to its Owner/Contractor documents, the AIA specifically identifies ISO forms CG 20 10 07 04 and CG 20 37 07 04 as the minimum level of additional insured coverage to the extent commercially available. Updated forms exist of the CG 20 37 series, but they provide more limited coverage.

Common Misconceptions about AI Coverage

  1. I am covered by my subcontractor’s insurance as an additional insured; I do not need my own policy. Yes you do. AI coverage by a subcontractor is not a replacement of a GC’s insurance obligations. For example, a subcontractor’s AI insurance only applies where the subcontractor’s conduct is related to the loss.
  2. All I need to do in my contract is attach a sample certificate of insurance identifying my company and the owner as additional insureds. While this method may work in some circumstances, a few additional steps will better protect your company. First, insert a clear promise by your contracting party to purchase and maintain specific types of insurance. The promise to procure insurance is important. Failure to have such language could result in finding that there were no insurance procurement obligations. Second, be specific in the entities you want to be named as the additional insured. This avoids any confusion and ambiguity. Third, make sure the AI coverage is “primary and non-contributory” to other insurance. This accomplishes the objective of having the lower-tier insurance companies respond to the claims without receiving contribution from your insurer.
  3. The AI coverage is automatic on my subcontractor’s “follow form” excess policies. Unlike AI endorsements that are commonly ISO forms, excess policies are manuscript policies – meaning each insurer prepares its own form. While many of these polices assert they follow the form of the underlying CGL policy, the scope of coverage for excess polices varies based upon the manuscript policies. Be sure to include the same requirements for additional insured status for your excess insurance specifications.
  4. All I need to do is obtain the certificate of service from my subcontractor to ensure AI status. The certificate of insurance forms are useful documents, but if you want to ensure that the proper AI status is obtained, you need to obtain the endorsement. While this is an additional step in the procurement process I am sure you would like to avoid, it is the only way you can verify the coverage. The certificate of service expressly states you cannot rely upon it for the insurance provided. As described in the Bacon and Zurich cases above, there are substantial differences in the outcome by using different ISO AI forms. Obtaining the endorsement provides necessary certainty on the insurance you have procured or been provided. The extra step is worth the effort.
  5. As an Additional Insured, I have the same rights as my subcontractor’ under its CGL policy. There is a difference in the CGL insurance policy between the definitions of the “Named Insured” – your subcontractor – and the “Other Insured” – the additional insured. The rights under the CGL insurance policy are different for the Named Insured versus the Other Insured. For example, as noted above, additional insureds are only covered where there is a nexus between the claim and the conduct of the named insured.
  6. This sounds great for Owners. I want to make sure everyone, including my design professionals provide additional insured coverage for me. Sorry, but additional insured coverage is not available for professional liability insurance policies.

Conclusion

AI coverage is an important tool in your risk management toolbox. It is also a valuable service you are providing your customer and there is not much cost associated with it. ISO updates their forms on a regular basis so it is important to work with your insurance broker or other insurance adviser to ensure you are receiving the coverage promised to you and that you are providing the coverage you promised to your customer.

Consequential Damages can be Recovered Against Insurer in Breach of Contract

David Adelstein | Florida Construction Legal Updates | June 1, 2019

In a favorable case for insureds, the Fifth District Court of Appeal maintained that “when an insurer breaches an insurance contract, the insured is entitled to recover more than the pecuniary loss involved in the balance of the payments due under the policy in consequential damages, provided the damages were in contemplation of the parties at the inception of the [insurance] contract.”  Manor House, LLC v. Citizens Property Insurance Corp., 44 Fla. L. Weekly D1403b (Fla. 5thDCA 2019) (internal citations and quotation omitted).   Thus, consequential damages can be recovered against an insurer in a breach of contract action (e.g., breach of the insurance policy) if the damages can be proven and were in contemplation of the parties at the inception of the insurance contract.

In Manor House, the trial court entered summary judgment against the insured holding the insured could not seek lost rental income in its breach of contract action against Citizens Property Insurance because the property insurance policy did not provide coverage for lost rent.  However, the Fifth District reversed this ruling because the trial court denied the insured the opportunity to prove whether the parties contemplated that the insured, an apartment complex owner, would suffer lost rental income (consequential damages) if the insurer breached its contractual duties.

This ruling is valuable to insureds because Citizens Property Insurance, a creature of statute, cannot be sued for first-party bad faith.  However, the Fifth District found that the consequential damages in the form of lost rental income did not require the insured to prove the insurer acted in bad faith, but merely, breached the terms of the policy.   This holding can be extended to other breach of contract actions against an insurer when the insured suffered and can prove consequential-type damages caused by the breach.