The Paradigm Shift on Risk in Construction

Joseph A. Cleves, Jr. | Taft Stettinius & Hollister LLP | November 7, 2017

Many owners still rely on heavy-handed contracts to provide them with risk certainty. The goal is to reduce their risk by shifting it to designers and contractors.

While this approach has a certain logical appeal, it has the paradoxical result of increasing risk instead of eliminating it. A review of case law shows that careful drafting of contracts does not provide the imagined protection. The reason is found in the contradictory, unpredictable results that reported decisions reveal on provisions that either limit or shift liability. For example, a limitation on delay damage claims may cancel an owner’s implied warranty in one court’s estimation. Yet another court may nullify such a clause, citing the owner’s planning and design deficiencies as the root cause of the delay. More and more litigation of bedrock cases and principles, such as Spearin and the Economic Loss doctrine, have resulted in a proliferation of inconsistent decisions. The deeply fractured landscape of legal precedent has resulted in an environment where the outcome of disputes and impact of contract terms are unforeseeable. Rather than placing a premium on careful contract drafting, this approach renders careful contract drafting useless in the circumstances for which it was intended.

The search for stability calls for a dramatic change in approach — a paradigm shift. Among the possible solutions on the horizon, only an approach that eschews claims-making and litigation seems to offer the potential for success. Integrated Project Delivery (“IPD”) provides a radically different approach to construction. It supplants adversarial and fragmented relations with a contractual commitment to incentivizing collaboration among project participants. Strong consideration of IPD becomes essential in light of recent case law and recurrent conflicts spawning litigation among owners, designers and contractors.

Construction Companies Can Be Liable for “Secondary Exposure” of Asbestos to Household Members

Garret Murai | California Construction Law Blog | October 19, 2017

The history of asbestos regulation in the United States is complicated. Prior to the 1970s, asbestos-containing materials used in construction was widespread.

In 1971, when the U.S. Environmental Protection Agency issued an emissions standard for asbestos as part of the Clean Air Act. In 1972, the EPA extended this regulation to an occupational standard and, over the next decade, the EPA together with the U.S. Occupational Safety and Health Administration and the U.S. Consumer Product Safety Commission issued a wide array of regulations aimed at asbestos.

Finally, in 1989, the EPA enacted the “Asbestos Ban and Phaseout Rule,” which would have eliminated nearly 94 percent of all asbestos-containing products. However, the ban and phaseout was overturned in 1991 by the Fifth Circuit Court of Appeals in Corrosion Proof Fittings v. EPA (5th Cir. 1991) 947 F.2d 1201, on the grounds that the EPA had not considered alternative regulations short of prohibition.

While an outright ban on asbestos failed in the U.S., the use of asbestos has been curtailed significantly over the years, primarily due to asbestos litigation, which continues today.

The next case, Petitpas v. Ford Motor Company, Case No. B245037 (July 5, 2017), discusses the breadth these asbestos cases can take and how crazy these cases can get in terms of the evidence.

Petitpas v. Ford Motor Company

In Petitpas, husband and wife Marline and Joseph Petitpas sued Ford Motor Company, Exxon Mobil Corporation, Rossmoor Corporation and others alleging that exposure to asbestos through Joseph’s work resulted in “secondary exposure” of asbestos by Marline.

Joseph’s Work at Enco

Joseph and Marline met in 1966 while Joseph was working at an Enco service station in Pomona, California. Humble Oil, a predecessor company of Exxon, owned the Enco service station. Joseph later worked at different Enco service stations in in Ontario and Pleasanton, California.

While working at the Enco service station, Joseph did a variety of work on Ford cars including brake inspections and replacements. He did brake inspections two or three times a day and brake replacements two or three times a week. During this work Joseph used an air compressor to blow dust out of wheel assemblies to check or change brakes.

According to Marline, she watched Joseph do brake work on a total of seven to ten cars at the Enco station, and while should couldn’t recall the make or model of those cars, the work created dust which she breathed in. Marline also testified stat she watched Joseph clean up at the end of the day, which involved blowing or sweeping the floor, which also created dust which she breathed in. And finally, according to Marline, while she and Joseph were dating, Joseph would wear his Enco service shirt when they went out after work and, after they were married, Marline would wash Joseph’s uniform.

Joseph’s Work at Leisure World

Later, Joseph went to work for Rossmoor as a draftsman. At the time, Rossmoor was building Leisure World, a large retirement community in Walnut Creek, California. While at Rossmoor, Joseph would visit the construction site as part of the work. He typically spent an hour to an hour and a half at the project site. At first, he drove his own car to the site, and later he used a company car for visits. Leisure World used gypsum drywall, joint compound, textured ceiling material and stucco at the project.

According to Joseph, they owned one car, and once or twice a week Marline would drive him to work in the morning and pick him up in the evening. When Marline would pick up Joseph they would typically hug one another. Joseph also occasionally came home for lunch. Joseph testified that before he left a construction site he might stomp his feet or brush off his pants if dusty, but that it was “very possible” that dust from the construction site might be on his lower pants at the end of the day. With the exception of Joseph’s slacks, Marline would wash Joseph’s shirts, socks and underclothes. In addition, on occasion, according to Joseph, he would show Marline the partially completed buildings while no one was around.

According to the Petitpas’ experts, numerous studies had connected asbestos to lung disease, that asbestos from joint compound, textured ceilings and brakes can cause mesothelioma, and that each exposure to asbestos raised Marline’s risk of developing mesothelioma.

Rossmoor’s Motion for Non-Suit

Following the Petitpas’ presentation of their case at trial, Rossmoor moved for non-suit (note: a motion for non-suit is a motion presented by a defendant after a plaintiff has presented its case at trial contending that the plaintiff has failed to prove each element of its causes of action) contending that it owed no duty to protect family members of workers working in an environment with asbestos, arguing that it was irrelevant whether such exposures occurred “from laundering the clothes, from riding in the same automobile as someone who was directly exposed or giving someone a hug in the parking lot by the office.”

Rossmoor also contended that there was no evidence that Marline was directly exposed to asbestos at the Leisure World project site, arguing that “there is no testimony that they were at the house at the time that the construction work was going on and/or that they  were even on the premises at the time that construction work was going on where there was any  potential release of asbestos fibers” and that “Mrs. Petitpas specifically testified that, when she walked into the house, she didn’t see any dust.”

In response, the Petitpas’ responded that expert testimony had showed “that the nature of respirable asbestos fibers are, in fact, microscopic and invisible to the naked eye,” that only specialized testing can demonstrate if there are asbestos fibers in the air, and because the houses were under construction at the time “that asbestos and asbestos dust, asbestos laden dust was in the structures. And . . . it doesn’t go out. So there doesn’t need to be someone actively doing work for asbestos exposures to occur.”

The trial court granted Rossmoor’s motion and the Petitpas’ appealed.

The Appeal

On appeal, the Court of Appeal explained that the California Supreme Court, in the recently decided case Kesner v. Superior Court (2016) 1 Cal.5th 1132, had held that companies can be held liable for “secondary exposure” if asbestos from a job site causes someone in a worker’s home to become sick.

However, held the Court, “in the context of a cause of action for asbestos-related latent injuries, the plaintiff must first establish some threshold exposure to the defendant’s defective asbestos-containing products, and must further establish in reasonable medical probability that a particular exposure or series of exposures was a ‘legal cause’ of his injury, i.e., a substantial factor in bringing about the injury.”

And, here, while it was “possible” that Marline was exposed to asbestos from dust on Joseph’s clothing because Joseph was in the presence of dust that may have contained asbestos and Marline was in the presence of Joseph, the “[m]ere presence at a site where asbestos was present is insufficient to establish legally significant asbestos exposure.”

Rather, explained the Court of Appeals “”[a] possible cause only becomes ‘probable’ when, in the absence of other reasonable causal explanations, it becomes more likely than not that the injury was a result of its action.” And, here, while the Petitpas’ expert had testified that exposure <em>could</em> have occurred if Marline shook visible dust from Joseph’s clothing or if Joseph dusted off his pants in the presence of Marline, no one testified that either of these hypothetical scenarios had in fact occurred.

Conclusion

For those involved in the construction industry, Petitpasis warning that your duty to your workers can extend to their household members as well. The case is also illustrative of the breadth of evidence considered in such cases – possibilities versus probabilities – and degree to which the strength of a plaintiff’s evidence is dependent on the testimony of the plaintiffs themselves. After all, the case could have easily turned the other way had either Mr. or Mrs. Petitpas testified that it was likely that Joseph had dusted off his pants in front of Marline.

Risk Management 101: Tailor Your Construction Insurance Requirements to the Discipline so You Don’t Get Taken to the Cleaners

James P. Bobotek | Pillsbury Winthrop Shaw Pittman LLP | October 3, 2017

In the world of construction, whether you’re a lender, owner, contractor or subcontractor, your success hinges largely on risk management. While there’s no substitute for sound business and construction practices (such as proper preconstruction planning, proven construction means and methods, use of experienced personnel, and stringent safety programs), among the most important project risk allocation tools are the contracts governing the various parties’ rights and obligations. Within those contracts, risk is primarily allocated through indemnity and insurance requirement provisions. When preparing insurance requirements for construction-related contracts, it is crucial to ensure these pieces are well-fitted and comfortable, like a good piece of tailoring. This requires the indemnity and risk obligations associated with each project discipline to be clearly identified and addressed.

Design professional contract requirements should include auto and commercial general liability, workers’ compensation/employer’s liability and, most importantly, professional liability coverages. Pay particular attention to the limits of the professional liability coverage; requiring excess limits for this coverage may be appropriate depending on the project’s size. Consider requiring that the coverage be “project specific,” either through a separate project policy or sublimits applicable only to the project. For large projects, a lender may consider requiring, or an owner may consider obtaining, owner’s protective professional insurance coverage, which indemnifies the owner directly for losses arising out of professional negligence of architects/engineers exceeding the limits available under the architects’/engineers’ own professional liability policies.

The entities performing construction work on the project should be required to carry auto and commercial general liability insurance, workers’ compensation/employer’s liability, and an excess liability policy providing coverage over the auto and CGL policies’ limits. Many owners also insist on payment and performance bonds from contractors and/or subcontractors. For those contractors and subcontractors performing any design-build functions, professional liability coverage should also be required. To prevent coverage gaps, contractors’ and subcontractors’ insurance requirements should include pollution liability coverage. If the owner procures the property or builder’s risk coverage, contractors and subcontractors should consider the need for an “installation floater” or similar coverage to protect their equipment and supplies onsite, offsite, and in transit.

While the liability coverage referenced above covers most project accidents resulting in (i) bodily injury, or (ii) damage to property other than what is being constructed, in most cases it does not cover damage to the structure being built. Although it is possible to obtain coverage for damage to construction projects under an owner’s existing property policy, coverage limitations in standard property insurance forms make procurement of a builder’s risk policy desirable in most cases. If a builder’s risk policy is purchased, consideration should be given to whether the owner or the contractor obtains it. This determination is best made on a project-by-project basis, taking into consideration such factors as the type of project (i.e., new construction or renovation of an existing structure); type of contract (cost plus or stipulated sum); financing/lender’s requirements (the owner may want to “bundle” soft cost and loss of income coverage with the builder’s risk policy to avoid claim delays and argument among insurers over coverage); the presence of a master property program (owner or contractor); location of project; the parties’ relative economic leverage to negotiate the most favorable premium and coverage; the contractor’s level of sophistication; and the owner’s desire to participate in project-specific risk management.

Finally, numerous risk management products, including insurance policies and bonds, are required to cover the risks presented by a construction project. To the greatest extent possible, the coverage provided by these policies should fit together. Policy provisions are drafted to create in one policy the exact coverage that was excluded by another policy—just as the pieces of a garment are sewn together without unintended gaps. Have your broker and/or attorney review all of your applicable policies to prevent gaps in coverage. You may need to amend one or more of your policies through endorsements, or purchase additional coverage, to close these gaps. Tailored properly, the project’s insurance program should fit like a well-made suit.

When Your “Private” Project Suddenly Turns into a “Public” Project. Hint: It Doesn’t Necessary Turn on Public Financing or Construction

Garret Murai | California Construction Law Blog | September 27, 2017

In 1931, during the Great Depression, the federal government enacted the Davis-Bacon Act to help workers on federal construction projects. The Davis-Bacon Act, also known as the federal prevailing wage law, sets minimum wages that must be paid to workers on federal construction projects based on local “prevailing” wages. The law was designed to help curb the displacement of families by employers who were recruiting lower-wage workers from outside local areas. Many states, including California, adopted “Little Davis-Bacon” laws applying similar requirements on state and local construction projects.

California’s current prevailing wage law requires that contractors on state and local public works projects pay their employees the general prevailing rate of per diem wages based on the classification or type of work performed by the employee in the locality where the project is located, as well as to hire apprentices enrolled in state-approved apprentice programs and to make monetary contributions for apprenticeship training.

Sometimes, however, it can be difficult to determine whether a project is a public works project or a private works project, even when you intentionally try to structure it as a project in which prevailing wages are not required, as one developer found out in the case of Cinema West, LLC v. Baker, California Court of Appeals for the First District, Case No. A 144265 (June 30, 2017).

Cinema West, LLC v. Baker

The Disposition and Development Agreement

In 2004, the City of Hesperia (City) began acquiring vacant property in its downtown area for the development of a “Civic Plaza,” which was to include a city hall, public library, other governmental buildings and “complimentary retail, restaurant, and entertainment establishments.”

In 2010, the City entered into a disposition and development agreement (DDA) with Cinema West, LLC (Cinema West) to develop a “12-screeen digital cinema immediately west of the Civic Plaza Park.” Under the terms of the DDA:

  1. The City was to convey 54,000 square feet of real property to Cinema West for $102,529;
  2. Cinema West was to construct as 38,000 square foot, 12-screen digital theater on the site which was to be operated for a minimum of ten years; and
  3. The City was to construct a parking lot, water retention system and off-site improvements including curbs, gutters and sidewalks for the theater.

In addition, under the terms of the DDA and other related documents:

  1. The City was to provide an interest-bearing loan to Cinema West in the amount of $1,546,363 equal to the City’s estimated cost to build the parking lot, water retention system and off-site improvements ($1,443,834), in addition to the fair market value of the property conveyed to Cinema West ($102,529) which was forgivable over ten years. This amount was later increased by $250,000 on account of rising steel prices and the City’s adoption of new building codes; and
  2. The was to provide a one-time payment of $102,529 as consideration for the ten-year operating agreement.

The DDA stated that the City was not “providing any financial assistance to [Cinema West] in connection with [Cinema West’s] acquisition of the Site or development of the Project thereon” and that Cinema West “is paying fair market value to acquire the Site and is responsible for paying the full costs of all improvements to be constructed on the Site”

The Department of Industrial Relations Decision and Superior Court Writ Proceeding

In November 2012, as construction of the theater and parking lot were nearing completion, the International Brotherhood of Electrical Workers Local 477 (Union) submitted a request to the Director of the California Department of Industrial Relation (DIR) for public works coverage determination for the project.

In response,Cinema West submitted a letter arguing that the theater was a private project not subject to California’s prevailing wage statutes because: (1) Cinema West purchased the property for fair market value; (2) no public financial assistance was involved; (3) there was “no evidence to suggest that the parking lot was built because it was needed to serve the Project”; (4) their was no “no public funding” associated with the  ten-year “forgivable loan”; and (5) the one-time operating agreement payment was never consummated.

The DIR disagreed. First, although under the DDA Cinema West was to construct the theater and the City was to construct the parking lot, water retention system and off-site improvements, the DIR construed  construction of the theater and construction of the parking lot and related improvements as a “single complete and integrated theatre complex” and thus a “public work” subject to prevailing wages. Second, the DIR construed the City’s ten-year “forgivable loan,” one-time operating agreement payment, and construction of the parking lot and related improvements as “public subsidies” also making the project a “public work” subject to prevailing wages.

In April 2013, Cinema West filed an administrative appeal which was denied by the DIR in June 2013. Thereafter, Cinema West filed a petition for writ of mandate under Code of Civil Procedure section 1085 with the Sonoma County Superior Court to challenge the DIR’s decision. As part of its writ, Cinema West submitted evidence that was not part of the administrative record, including statements in its verified petition and three declarations. At the hearing on Cinema West’s writ, the trial court sustained the DIR’s objections to Cinema West’s extra-record evidence and denied Cinema West’s writ concluding that the evidence “in” the record was undisputed and that based on that evidence alone the project was a public works.

Cinema West appealed.

The Court of Appeals Decision

On appeal, the Court of Appeals noted that “[t]he conditions of employment on construction projects financed in whole or in part by public funds are governed by the prevailing wage law,” that “[t]he overall purpose of the prevailing wage law is to protect and benefit employee on public works projects,” and that the public works statutes are “liberally construed to further its purpose.”

The Court of Appeals further noted that Labor Code section 1720 “broadly” defines “public works” to mean “construction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds” including “work performed during the design and preconstruction phases of construction, including, but not limited to, inspection and land surveying work, and work performed during the post construction phases of construction, including, but not limited to, all cleanup work at the job site.”

Further, explained the Court of Appeals, the term “paid for in whole or in part out of public funds” has been broadly interpreted:

It encompasses both direct and indirect subsidies, including “[t]he payment of money or the equivalent of money by the state or political subdivision directly to or on behalf of the public works contractor, subcontractor, or developer”; “[p]erformance of construction work by the state or political subdivision in execution of the project”; “[t]ransfer by the state or political subdivision of an asset of value for less than fair market price”; “[f]ees, costs, rents, insurance or bond premiums, loans, interest rates, or other obligations that would normally be required in the execution of the contract, that are paid, reduced, charged at less than fair market value, waived, or forgiven by the state or political subdivision”; “money loaned by the state or political subdivision that is to be repaid on a contingent basis”; and “[c]redits that are applied by the state or political subdivision against repayment obligations to the state or political subdivision.” (§ 1720, subd. (b)(1)-(6).) The statute excepts from this otherwise broad definition of public funding “a public subsidy to a private development project that is de minimis in the context of the project.”

Cinema West’s Extra-Record Evidence

Addressing Cinema West’s extra-record evidence first, the Court of Appeals noted that “[i]t is well established that the use of extra-record evidence is limited and generally improper since review is normally confined to the record.” And, here, held the Court:

Cinema West implies that there is an exception to the extra-record evidence rule when the court deems the administrative record inadequate or the agency’s efforts to develop a record wanting, but it cites no authority for this proposition. Nor does it explain what criteria the court should consider in determining the adequacy of such record or efforts. Regardless, Cinema West has failed to demonstrate any inadequacy in the PWL coverage proceedings before the Director or in the record there developed. The coverage determination was initiated by the Union, which submitted documentation pertaining to the Hesperia theater and parking lot development. The documents the Union submitted consisted entirely of public records pertaining to the development. While characterizing the Union’s evidence as “one-sided,” Cinema West does not contend that any of the documents submitted by the Union are not genuine, and the City submitted copies of many of the same documents in response to the Director’s request. It does not suggest any pertinent documents are missing from the record. And contrary to Cinema West’s suggestion that the Union’s proffered evidence was all that was submitted, the record reflects that both the City and Cinema West were provided notice of the proceedings and given the opportunity to submit any documents in their possession bearing on the issues. The Director twice requested documents from the City, indicating her intent to have a complete record.

It was in this context that the trial court found Cinema West had the opportunity, but chose not to, submit any evidence in the initial proceeding or the appeal. Cinema West makes much of the fact that it sought and was denied a hearing on its administrative appeal but, as the trial court observed, a hearing was “not a prerequisite for an interested party to submit evidence.” The trial court’s implied finding that the Director did not preclude Cinema West from submitting evidence and the court’s express finding that Cinema West’s failure to do so was its own choice are supported by substantial evidence.

A Public Works Project Under the Labor Code

Next, addressing Cinema West’s arguments that the project was not a public work subject to the prevailing wage laws, the Court held that the project was a public works for two reasons.

First, the theater and the parking lot and related improvements, while constructed separately by Cinema West and the City, should be considered a single project for the following reasons:

  1. The DDA indicated that the parking lot was directly related to the theater and specifies that “[t]he Parking Lot Improvements will be designed and constructed by [City] as necessary to serve the proposed 12-screen theater with 1,800 seats and any other uses contemplated by [City] . . .”;
  2. Cinema West and the City used the same engineering firm to prepare the plans for the design of both the theater and parking lot;
  3. The DDA provided that following the City’s construction of the parking lot Cinema West was obligated to “maintain the Parking Lot Improvement pursuant to the CC&Rs and the reciprocal access and parking agreement, including the cost of utilities (water and electricity)”; and
  4. The theater and parking lot were built together on the same vacant parcel of land.

Second, responding to Cinema West’s argument that “not a penny of public funds was received by Cinema West in connection with the construction of the Theater,” because it was unable to perform some of the requirements of the operating agreement and therefore did not receive or accept the ten-year “forgivable loan” or the one-time operating agreement payment, the Court of Appeals held:

Even if . . . Cinema West never receives any of the promised payments, the DDA and related agreements call for the loans and one-time payment to be made and the one-time payment is not conditional. We agree with the trial court that allowing a developer to accept public benefits and, if a later determination is made that the project is a public work, disclaim public benefits to avoid paying prevailing wages would seriously undermine the [public works law (PWL)]. It would incentivize gamesmanship on the part of local government bodies and developers whereby projects would be publicly subsidized but constructed without PWL compliance. If an investigation later revealed the violation, the developer could still avoid paying prevailing wages and statutory penalties by repaying or disclaiming the public subsidy. And if the developer chose instead to retain the subsidy because its value exceeded the cost of post hoc PWL compliance and penalties, employees would be worse off because the passage of time and transitory nature of construction work increase the likelihood that some employees could not be found. Such a rule would discourage voluntary compliance and place undue burdens on the Department’s limited enforcement personnel. This cannot have been the Legislature’s intent.

Conclusion

Cinema West is a cautionary reminder for developers and contractors that even if a government entity does not directly construct or finance a project, but merely constructs necessary yet appurtenant parts of a larger project and does not directly finance a project but instead provides conditional loans that may never be received, a project may nevertheless be found to a be a public works project subject to prevailing wages. Cinema West also provides an important procedural reminder, that when submitting evidence in an administrative proceeding, provide all evidence on which you intend to rely on or you may be stuck with the “record” in any subsequent writ or appeal.

Is this Product the Answer to Your Clients’ Complex Construction Needs?

Bethan Moorcraft | Insurance Business Magazine | September 22, 2017

The US construction insurance market is a complex space to compete in. State-specific legislation and various approaches to construction management can sometimes make placing liability and settling litigation a real headache.

But there’s a new product on the block that might just make the lives of brokers in the construction insurance space a tad easier.

Liberty Mutual and Ironshore have introduced an Integrated Primary Wrap Up/Project Specific program offering general liability (GL) and professional liability (PL) protection for medium and large construction projects developed through Design-Build or Integrated Project Delivery (IPD).

The new integrated solution was developed after consultations with US brokerages about challenges in the large construction markets and the difficulties posed by changing approaches to construction management.

Design-Build or Integrated Project Delivery (IPD) blur the traditional lines of responsibility found in the more standard Design-Big-Build approach, allowing contractors and designers to work closely together from the early design stage right the way throughout construction. The more traditional approach would keep the processes separate and the designer would hand blueprints over to a contractor to develop.

“The new integrated solution helps remove the potential gaps in coverage intrinsic to the design-build and integrated project delivery methods,” said Aldo Fucentese, vice president, National Insurance Specialty Construction. “The most challenging aspect of the marketplace was how we could blend GL with PL coverage under one form.

“We solved the problem by developing an endorsement – which is a fully-blown PL form – under a GL form. Blending the two forms together also allowed us to consolidate the claims adjusting process should a claim occur.”

Liberty Mutual is also offering GL and PL clash deductible for additional premium, which is “a truly unique feature,” according to Ben Beauvais, executive vice president, casualty & construction, Ironshore.

The more traditional approaches to construction management provoked a lot of finger-pointing between carriers and denial of fault at the point of claim – something brokers were often left to negotiate for their clients. With this streamlined product, the coverage is “seamless” and there’s only one insurer present to sort things out.
Beauvais added: “The design-builder’s PL exposures are related to the professional services assumed in the agreement with the owner and then subcontracted to design professionals on the project.

“The level of project risk that the design-builder undertakes, according to the contract agreement, may vary from very onerous to fair-and-equitable. The PL coverages and the included risk management services are tailored to provide an integrated solution to design-build contractors’ complex exposures.”

Brokers have given a warm reception to the product so far, according to Fucentese. He said Liberty Mutual’s new-product approach is to consult with the brokerage world, understand broker pain-points and find value-add solutions to address any issues.

“We are very excited about the product. It simplifies the task for the brokers and makes the process of adjusting claims much easier to manage,” he added.