Time’s Up! Or Is It?

Dara Jebrock and Lindy Keown | CLM | Spring 2018

Proposed legislation in Florida would lengthen the statute of repose for counter, cross and third-party claims in construction defect.

The time for bringing certain actions for latent construction defects in Florida may be relaxed, depending on the outcome of proposed legislation. Senate Bill 536 and House Bill 875 – both up for vote during the 2018 legislative session – propose new language to Florida’s 10-year statute of of repose to allow counterclaims, cross-claims, and third-party claims up to one year after the statute of repose has otherwise expired.

To understand the effect of this proposed legislation, a quick primer on the statute of repose is necessary.  Unlike the statute of limitations, which establishes a time limit within which an action must be brought after a cause of action accrues, the statute of repose “cuts off the right of action after a specified time measured from the delivery of a product or the completion of work…regardless of the time of the accrual of the cause of action or of notice of the invasion of a legal right,” according to Sabal Chase Homeowners Ass’n, Inc. v. Walt Disney World Co. quoting Bauld v J.A. Jones Const. Co.

Now imagine a general contractor – let’s call it Better Builders – has been served with a construction defect suit on the afternoon of the day the 10-year statute of repose expires. Of course, Better Builders wants to sue the involved subcontractors whose scopes of work are implicated by the alleged defects. However, Better Builders’ project files on this 10-year-old project are at an offsite storage unit – inaccessible for review. Sadly for Better Builders, its potential third-party action will likely be time-barred because the statute of repose expired the day it was served – that is, unless a lucky lawyer has immediate access to the project files and works against time to detect issues and file suit against the responsible subcontractors on the same day Better Builders was served. Without a remedy, Better Builders may be liable for the entirety of any construction defect damages.

While the statute of repose is purposefully unforgiving – recognizing that an aging building should not be the subject of construction defect litigation in perpetuity – the new, proposed legislative language is a game changer for a time-pressed construction defect defendant. Practically, the pending legislation will allow a defendant, sued right before the statute of repose expires, to investigate and bring counterclaims, cross-claims and third-party actions against potentially liable entities for an additional year after the expiration of the statute of repose. Without this revision, time-barred defendants are left without recourse against parties that should be on the hook.

Current State of the Law

For construction defect claims, section 95.11(3)(c) of the Florida Statutes sets forth time periods within which a party must bring suit for a deficiency in construction. If the party does not file a suit within the given time frames, any claims regarding the defect(s) will be barred. One legislative purpose for enacting this statute was to “limit the amount of time an architect, engineer or contractor could be exposed to potential liability for the design or construction of an improvement to real property,” as found in Long v. First Fed. Sav. & Loan Ass’n.

Under the statute’s guidelines, the statute of repose applicable to “[a]n action founded on the design, planning, or construction of an improvement to real property” must be commenced within 10 years after the latest of the following four events:

1) Date of actual possession by the owner

2) Date of the issuance of a certificate of occupancy

3) Date of abandonment of construction if not completed

4) Date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his employer.

At least on Florida court has held the repose periods in Fla. Stat. § 95.11(3)(c) apply to “all claims,” including claims for indemnity and contribution. See Fla. Dep’t of Transp. v. Echeverri, 736 So. 2d 791, 792 (Fla. 3d DCA 1999), finding that the plain language of the statute indicates it applies to indemnity and contribution actions.

Proposed Legislation

The proposed legislation is simple but powerful. The legislation recommends the following language be added to Section 95.11(3)(c) of the Florida Statutes:

[C]ounterclaims, cross-claims, and third-party claims that arise out of the conduct, transaction or occurrence set out or attempted to be set out in a pleading may be commenced up to 1 year after the pleading to which such claims relate is served, even if such claims would otherwise be time barred.

If passed, this legislation will undoubtedly benefit construction defect defendants, such as general contractors. For instance, our hypothetical Better Builders, which was served with a lawsuit in the 11th hour on the very day the statute of repose expired, would have a meaningful opportunity to investigate and pursue claims against the subcontractors whose scopes of work are implicated by the defect claims and may therefore be liable. Likewise, if Better Builders has a counterclaim or cross-claim, it can pursue those claims in the year that follows service of process.

Florida’s legislative session began Jan. 9, 2018. As of press time, the bills were both being evaluated by legislative subcommittees. If passed, the new legislation will go into effect July 1, 2019.

 

Limiting Third-Party Claims through Controlled Insurance Programs

Brian M. Stork | Kane Russell Coleman Logan PC | May 4, 2018

All owners and general contractors are familiar with the scenario where the employee of a subcontractor is injured while working on a large construction project. The subcontractor is generally a workers’ compensation subscriber and, therefore, immune from any direct claims asserted by the injured employee. In other words, the injured employee’s sole remedy against his employer is to seek workers’ compensation benefits – often referred to as the workers’ compensation bar.

The workers’ compensation bar would not, however, extend to claims against the owner, general contractor and other parties working on the project. As a result, the subcontractor employee often sues these parties in an effort to obtain additional funds beyond the workers’ compensation benefits, regardless of how attenuated the claims may be against these other parties. In effect, the workers’ compensation bar may actually encourage litigation against parties beyond an injured employee’s employer in an effort to attempt to be made whole. This process frequently shifts the risk of loss to parties on the project that bear little or no responsibility for the underlying incident, e.g., the owner or general contractor.

In an effort to address this issue, in 1983, the Texas Legislature enacted what is now Section 406.123 of the Texas Labor Code, which permits a general contractor and a subcontractor to enter into a written agreement under which the general contractor provides workers’ compensation insurance to the subcontractor and its employees. In return, the general contractor is treated as the “employer” of the subcontractor’s employees for purposes of the application of the workers’ compensation system and is entitled to protection under the workers’ compensation bar. This means the employee is no longer permitted to pursue a third-party claim against the general contractor but, instead, is limited to receiving workers’ compensation benefits.

Section 406.123 protections unfortunately were not made specifically available by statute to other parties involved in the construction process, most notably project owners, which is why Controlled Insurance Programs, often referred to as “CIPs” or “Wraps,” were developed. These are specific insurance programs modeled on the mechanism provided under Section 406.123 that allow an owner (in an Owner Control Insurance Program or “OCIP”) to purchase insurance (of all types, including workers’ compensation insurance) for all parties working on a given construction project.[1] An OCIP provides a project owner several advantages, including: (i) cost savings in negotiating the purchase of insurance; (ii) uniformity of coverage for all claims; and (iii) less animosity between the parties on the construction project, in particular in reference to indemnity claims, which can generate significant legal expenses. However, perhaps the most significant benefit afforded an owner under an OCIP is the potential extension of immunity under the workers’ compensation bar to the owner (and other contractors participating in the insurance program).

Although Section 406.123 applies by its terms only to general contractors, the Texas Supreme Court has recognized the Section 406.123 protections in the form of the workers’ compensation bar can be extended to project owners and other participants in an OCIP. In Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433 (Tex. 2009), the Texas Supreme Court held an owner that provides an OCIP to all contractors qualifies as a “general contractor” as defined under the Texas Labor Code. A “general contractor” is defined as “person who undertakes to procure the performance of work or a service, either separately or through the use of subcontractors.” Tex. Labor Code § 406.121(1). The Texas Supreme Court found that, so long as an owner hires a general contractor or subcontractors to perform work on the project, it constitutes a “general contractor” under this definition. The Entergy Gulf States ruling means that a project owner can enter into a written agreement to provide workers’ compensation coverage (i.e., an OCIP) that meets the requirements of Section 406.123 and will therefore become entitled to immunity under the workers’ compensation bar in connection with any third-party claims asserted by any general contractor or subcontractor employees insured under the program.

Importantly, the extension of the workers’ compensation bar not only applies to the owner that has obtained the OCIP, but it also applies to bar direct claims asserted against a general contractor who is insured under the program. In HCBeck, Ltd. v. Rice, 284 S.W.3d 349 (Tex. 2009), the Texas Supreme Court held that even though the applicable general contractor did not specifically purchase workers’ compensation insurance on behalf of a subcontractor, so long as the subcontractor participated in an OCIP offered by the project owner, the general contractor was considered to have “provided” the workers’ compensation insurance coverage necessary to qualify for protection under the workers’ compensation bar of Section 406.123. Indeed, at the appellate court level, this workers’ compensation bar has even been applied to claims made by a participating subcontractor’s employee against another participating subcontractor. See e.g.Etie v. Walsh Albert Co.Ltd., 135 S.W.3d 764 (Tex. App.—Houston [1st Dist.] 2004, pet. denied).

The favorable treatment of OCIP programs was most recently endorsed on May 3, 2018, when the First Court of Appeals in Houston overturned a more than $17 million judgment obtained as a result of an accident that occurred during construction of the new Baylor University Football Stadium. Austin Bridge & Road LP v. Raquel Suarez et al., Case Number 01-16-00682-CV. Baylor implemented an OCIP on the project. As part of the OCIP, Baylor required its general contractor and all subcontractors to participate in the program. Baylor hired Austin Commercial LP as the general contractor on the project. Austin Commercial then entered into a subcontract with its subsidiary Austin Bridge & Road LP (ABR). ABR hired Derr & Isbell Construction, LLC (D&I) to perform certain work on the project. An employee of D&I, Jose Dario Suarez, was killed in an on the job accident. His family brought wrongful death claims against ABR and obtained a verdict in excess of $17 million. ABR argued that this verdict was in error because ABR was entitled to protection under the workers’ compensation bar as a result of its participation in the OCIP. Essentially, ABR claimed that Suarez’s remedy was limited to receiving workers’ compensation benefits and he (and his heirs) had no right to assert a direct claim against ABR. The First Court of Appeals agreed and overturned the verdict. This is an important illustration of how an OCIP program can help mitigate risk on large construction projects.

Texas courts have clearly favored a broad application of the Section 406.123 protections to all parties working on a construction project so long as the OCIP is properly structured. Accordingly, when owners are evaluating potential insurance programs and safeguards to put in place, in particular in reference to large commercial projects, they should closely examine the utility of obtaining an OCIP. The program can result in significant cost savings and greatly reduce the administrative time and expense of the inevitable jobsite injury claim.

Can You Settle Your Third-Party Claim While in Coverage Purgatory?

P. Wesley Lambert | Brouse McDowell | November 13, 2017

Most commercial general liability (CGL) policies grant control over the defense and settlement of third party claims to the insurer. Thus, the right to settle, or not settle, a third-party claim against the policyholder resides with the insurer. However, when an insurance company breaches its policy, for example by wrongfully refusing its duty to provide a defense to its policyholder, the policyholder may settle the claim against it without securing the insurer’s consent. Sanderson v. Ohio Edison Co., 69 Ohio St. 3d 582, 635 N.E.2d 19 (1994). Conversely, when the insurance company is honoring its defense obligation, even under a reservation of rights to later contest coverage, the policyholder must respect the policy’s grant of control of the settlement process to the insurer or risk losing coverage for any settlement reached without the insurer’s consent.

But, what happens when the insurer is providing a defense to the insured, and thus technically complying with the policy’s terms, yet has made it clear that it will not actually indemnify the policyholder for any settlement or judgment? These situations leave the policyholder in a sort of coverage purgatory – it is receiving the defense coverage it bargained for, but not the indemnity coverage. Policyholders may want to resolve the claims against them in order to limit their liability, but may also be afraid that doing so will result in a forfeiture of coverage for the settlement amount.

Fortunately, courts have constructed an alternative path for policyholders stuck in these situations, holding that insures may not leave their policyholders in limbo by controlling the policyholder’s defense but unequivocally refusing to indemnify the policyholder for any settlement or judgment. In Ward v. Custom Glass & Frame, Inc., 105 Ohio App.3d 131 (8th Dist. 1995) and Patterson v. Cincinnati Ins. Cos., 2017-Ohio-2981, 2017 WL 2291605 (8th Dist. Aug. 22, 2017), the Eighth District Court of Appeals held that when an insurer clearly indicates that it will not indemnify the policyholder, the policyholder is relieved from the obligation to secure the insurer’s consent prior to settling the claim against it.

In both cases, the policyholder was subject to a third-party claim that the insurer had agreed to defend. However, the insurer in both cases stated, in no uncertain terms, that it would not indemnify the policyholder if there were a judgment against it. Thus, the insurance companies maintained that they had the right to control the policyholder’s defense, and its ability to settle the claim, but that it would not actually fund any settlement or ultimate judgment. The policyholder, left with no other option, settled the claim itself, while at the same time keeping the insurer apprised of the settlement negotiations.

The insurers in both cases argued that the policyholder’s disregard of the policy’s consent to settle provision relieved the insurers from the obligation to cover the settlements. Both courts disagreed. The Ward court was particularly critical of the insurer’s conduct, holding that “[w]hen an insurance company refuses to provide coverage and at the same time seeks to maintain control of the same litigation, it . . . creates a frustration of purpose. Such conduct would compel a person of reasonable faculties to cut his costs and settle a lawsuit to avoid the possibility of a higher judgment.” Ward, 105 Ohio App.3d at 137. Thus, when an insurance company maintains that coverage does not exist, it “must make a clean break from the case and should not subject the insured to a guessing game or by its conduct cause the insured to incur more expenses than necessary.” Id. The Patterson similarly noted the “frustration of purpose” created when the insurer controls the defense of an action while at the same time disclaiming its duty to indemnify. Patterson, 2017-Ohio-2981 at ¶30.

Thus, policyholders trapped in coverage purgatory may look to Ward and Patterson for support when deciding whether they may settle a case against them without violating their policy’s consent to settle provision. It is important to note, however, that in both cases the policyholder kept the insurer apprised of the settlement negotiations and offered them the opportunity to remain involved in the process. While it is unclear whether this impacted the courts’ analysis of the case, policyholders would be well-advised to keep the lines of communication open with their insurer despite the ostensible breach of the policy’s indemnification obligation.

Construction Contracts, Third Party Claims and Tort Law Liability

Carl R. Pebworth | Faegre Baker Daniels | October 5, 2017

What tort obligations does a design professional on a construction project owe to non-parties — like, for example, the persons who will use what has been designed after it is built? Tort law involves the idea of a duty of care that the design professional owes to others arising out of the designer’s professional expertise and certification. Matters involving a design professional’s tort obligations typically raise the following issues:

  • The nature and extent of the professional’s duty of care to others
  • What kinds of damages can be recovered if this duty of care is breached
  • What is necessary to prove that a third party has been damaged by the breach

Contracts and Establishing the Standard of Care

In one Illinois case, a court addressed whether an engineer who had contracted to design a “replacement” for a bridge deck had a professional obligation to “improve” the bridge deck after it failed and third-party motorists were killed. In other words, did the design professional have an independent obligation to go beyond replacing the bridge deck, as the contract stipulated? The Supreme Court of Illinois said no, granting summary judgment as a matter of law in favor of the engineer as to the deceased motorists’ claims.

In this case, there was a contract that prescribed the duty of care that the design professional agreed to meet: “the degree of skill and diligence normally employed by professional engineers or consultants performing the same or similar services.” These contract obligations trumped the standard of care that would exist absent a contract: “the use of the same degree of knowledge, skill and ability as an ordinarily careful professional would exercise under similar circumstances.” While these standards look similar, they differ because one recognizes the limitations that the parties agreed to in their contract limit the engineer’s duty to others. Because the contract specifically required replacement — and not redesign — of the bridge deck, the engineer could not be held liable for failing to go beyond the contractual scope of duty.

The engineer could have been found liable to third parties if he had been negligent in performing services relating to the replacement of the bridge deck — that was in the scope of what the engineer had agreed to do. Moreover, the engineer could have assumed additional liability by voluntarily attempting to improve the bridge deck and delivering a poor or defective product.

Contracts and the Economic Loss Doctrine

A design professional’s obligations to third parties are further limited by the “economic loss doctrine,” which applies to claims that do not involve physical harm. This doctrine prevents a party from pursuing a claim for economic or commercial losses arising from an alleged breach of a duty of care if the design professional’s contract precludes recovery of consequential or tort-based damages. Put simply, the contract’s limitation of damages can preempt economic loss liability even in cases where a professional failed to meet the duty of care.

Another question that arises if a duty of care is present and a third party has suffered damages is whether the breach of the duty has “proximately caused” these damages. Here, many courts — including the Illinois court — look at what the professional has contractually agreed to do. If injury results from something reasonably within that contractually defined responsibility, a design professional can be seen to proximately cause damages that flow from the designer’s failure to competently perform those duties.

In Conclusion: Know (and Perform) Your Contractual Duties

In summary, a design professional’s contract serves to confine and to define the designer’s obligations — not just to the design professional’s client, but also to third parties with whom the designer does not have a contractual relationship. As long as the design professional sticks to what the designer has contracted to do and does that work professionally, the designer cannot be obligated to go beyond those duties.

The Impact of Sopris Lodging v. Schofield Excavation on Timeliness of Colorado Construction Defect Claims

Jean Meyer | Colorado Construction Litigation | January 23, 2017

On October 20, 2016, the Colorado Court of Appeals announced the Sopris Lodging, LLC v. Schofield Excavation, Inc.[1] decision. The Sopris decision significantly altered the potential pitfalls awaiting a general contractor in pursuit of third-party claims as well as potential defenses available for a subcontractor defending against third-party claims.

By way of background, the Sopris construction defect case arose out of the following facts: TDC was the general contractor for the construction of a hotel owned by Sopris Lodging. On March 11, 2011, Sopris Lodging sent TDC a notice of claim regarding alleged construction defects. On May 24, 2013, Sopris Lodging filed a complaint in district court asserting construction defect claims against one of the subcontractors of the hotel, and against the general contractor’s principals, but not the general contractor. Contemporaneous with the filing of the suit, Sopris Lodging and TDC entered into an agreement to toll the statute of limitations on Sopris Lodging’s potential claims against TDC.  In August 2013, Sopris Lodging joined the general contractor to the suit. A year later, in 2014, the general contractor joined a variety of subcontractors as third-party defendants.

In response to the general contractor’s third-party claims, some of the subcontractors moved for summary judgment, asserting that the general contractor’s claims against them were barred by the two year-year statute of limitations set forth in C.R.S. § 13-80-102. The subcontractors argued that the claims against the subcontractors accrued when Sopris Lodging delivered its notice of claim to TDC in March 2011. Because the general contractor did not file its third-party claims until 2014, the subcontractors asserted that the claims against them were time barred.

In response to these arguments, the general contractor asserted that C.R.S. § 13-80-104(1)(b)(II) tolls the statute of limitations for a defendant’s third-party claims until ninety days after a settlement or final judgment on the plaintiffs’ claims against the defendant. However, the trial court ruled that C.R.S. § 13-80-104(1)(b)(II) did not apply and that the general contractor’s claims against the subcontractors were time barred. After the trial court’s ruling, Sopris Lodging settled with TDC, which assigned its claims against the subcontractors to Sopris Lodging.  Thereafter, Sopris Lodging filed this appeal asserting that C.R.S. § 13-80-104(1)(b)(II) did in fact toll TDC’s claims.

The Court of Appeals ruled that if a third-party plaintiff brings third-party claims in the underlying construction defect case, the third-party claims must be timely pursuant to C.R.S. § 13-80-102 and that that the tolling provision set forth in C.R.S. C.R.S. § 13-80-104(1)(b)(II) does not provide for a blanket tolling of third-party construction claims. Rather, C.R.S. § 13-80-104(1)(b)(II) provides for a discrete (ninety day) revival of third-party claims after resolution of the underlying construction defect claims. The Colorado Court of Appeals acknowledged that this analysis could lead to a “somewhat anomalous conclusion” that the statute of limitations applicable to general contractors could expire before the first-party plaintiff filed suit against a general contractor. Nevertheless, the Court of Appeals recommended that where such an outcome is possible, a general contractor has the following options to preserve its claims against subcontractors: 1) when a general contractor receives a notice of claim, the general contractor should send its own notices to subcontractors; 2) in the alternative, where it is possible that third-party claims may expire, the general contractor should enter into a tolling agreement with the subcontractors; or 3) the general contractor could just wait until the resolution of the underlying construction defect case and bring suit during that ninety day revival period set forth in C.R.S. §13-80-104(1)(b)(II).  That said, if a contractor were to use this third option, its claims would still need to be brought within Colorado’s six-year statute of repose.  Colorado courts, however, will not entertain third-party claims against subcontractors that are not timely.

In conclusion, before a general contractor brings suit against a subcontractor, nuanced analysis is necessary to preserve the timeliness of claims against subcontractors.

[1] Sopris Lodging, LLC v. Schofield Excavation, Inc., 2016 COA 158, reh’g denied (Nov. 23, 2016).