Who’s Responsible?

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The CLM

“Go back to work.” Those words from the general contractor precipitated the subcontractor employee’s injury. Still, the general contractor was not liable. In a win for the construction industry, the Court of Appeal ruled in August 2022 that the Privette Doctrine barred subcontractor employees’ injury claims against general contractors.

The Privette Doctrine is great for property owners, but, until now, it left general contractors in purgatory. The doctrine holds that the owner of property is not liable for injuries to a hired party’s employee. That is true even if the property owner created the condition that caused the injury. The theory is that, as the hirer, the property owner has delegated all safety to the company doing the work. That makes imminent sense. Still, how Privette applied to a contractor-subcontractor relationship was murky until McCullar v. SMC Contracting (2022) 83 Cal. App 5th 197.

Before going too far, we must discuss the term “general contractor.” While it can refer to a construction company that self-performs most or all its work, it also can refer to a company that just manages the construction or anything in between. The problem for the general contractor arises when its subcontractor’s employee is hurt onsite. The exclusive remedy doctrine limits the employee’s recovery against the subcontractor to workers’ compensation. There is no chance for a “nuclear verdict,” nor is there a jury for reptile theory to influence. Other than a hurt employee, a higher xmod, and some increasing premiums—the subcontractor is good.

That same employee, however, could make a civil tort claim against the general contractor—double points if the general contractor is a design-builder and the employee asks, “Why didn’t you design the project with safety in mind? Oh, I remember, to increase your profit, right?” Now, the general contractor and its various carriers worry about reptile theory and a nuclear verdict, and therein lies the problem. Did the contractor delegate the safety duty to the subcontractor like the property owner did? The Court of Appeals thinks yes.

McCullar v. SMC Contracting started the discussion. In that case, a general contractor hired a subcontractor to install a fire sprinkler system in Lake Tahoe, California. On the day of the incident, the subcontractor’s employee, McCullar, came to work and found that ice covered the floor. When McCullar told the general contractor, the general contractor confirmed that the ice was caused by work the general contractor did the night before. They then told McCullar to “get back to work.” McCullar asked his employer, the subcontractor, about the safety issue because of the icy floor. The subcontractor told McCullar to “get the job done.” Later, McCullar was injured when the ladder he was using slipped on the ice.

The Court of Appeals held that the general contractor delegated all control over fire sprinkler installation. This included ensuring that the subcontractor’s employees could do their work safely, as provided under the Privette Doctrine. The court further held that the Privette Doctrine shielded the general contractor from liability. That is true even though the general contractor caused the ice to form on the floor and directed McCullar to go back to work after he told the general contractor about the ice.

Though the McCullar court cited some exceptions to the Privette Doctrine, it held that they did not apply in this case. And so, a hirer (or general contractor) may be held liable when it: retains control over any part of the independent contractor’s (or subcontractor employee’s) work; negligently exercises that retained control; and that negligence affirmatively contributes to the worker’s injury.

While the court found that the general contractor retained control over the subcontractor’s work, it did not find that the general contractor “negligently exercised its retained authority in a manner that affirmatively contributed to McCullar’s injuries.” The court held that, even if the general contractor negligently creates a known workplace hazard, the subcontractor still “retains the responsibility for assessing whether its workers can perform their work safely.”

The court said that the general contractor’s “direction to ‘go back to work’ did not interfere with or otherwise impact McCullar’s decisions on how to safely perform his work. [The general contractor] did not, for example, direct McCullar to place a ladder on the ice and then attempt to climb it.” The court also declined to hold the general contractor liable on the theory that the general contractor knew about the unsafe condition and should have remedied it.

Handling Subcontractor Employee Claims

McCullar v. SMC Contracting strengthened Privette by applying it to injuries in a contractor-subcontractor relationship. This opens some new avenues for contractors to protect themselves better and for claims handlers and attorneys to litigate more effectively. On the pre-litigation side, contractors are wise to beef up the safety portions of their subcontracts. Make it clear in those documents that the subcontractor is responsible for their own employees’ safety. Contractors can go a step further by holding daily safety meetings before work starts and telling those onsite that they should not work if there is an unsafe situation. The goal here is for the contractor to continue delegating safety to the subcontractor specialists who can best implement it for their work.

For claims handlers and attorneys, McCullar v. SMC Contracting creates fertile ground for dispositive motions. Claims handlers and attorneys must gear their offensive and defensive discovery strategies with this case in mind. Defensively, contractor employees must be prepared to explain in deposition that subcontractors are responsible for their employee’s safety. They should explain that anyone on their projects can stop a job, or refuse a task, for safety reasons.

These contractor employees should be prepared for reptile-theory like questions. For example, in deposition, an early reptile-theory question such as, “Isn’t it true that safety is the most important thing on a job?” can be handled by saying, “It’s up there as being one of the most important. That is why we ultimately delegate safety of subcontractors’ employees to the subcontractors themselves—they’re the experts we hired for that work, so they’re in the best position for safety.”
McCullar changed the injury landscape on construction jobs for the better. It has made it harder for employees to sue the general contractor while getting workers’ compensation benefits from their subcontractor employer. But given the fact intensive nature of McCullar, claims handlers and attorneys should be mindful of what types of answers plaintiffs can give to survive dispositive motions. And then gear the litigation strategy to minimize that probability.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

When Are General Conditions and General Requirements Covered by Builder’s Risk

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Michael V. Pepe and Grace V. Hebbel | Saxe Doernberger & Vita

General conditions and general requirements are terms of art in the construction industry that describe the indirect costs necessary to complete a construction project. After physical loss or damage to a project, the following question often arises: Are “general conditions” and “general requirements” covered under a builder’s risk policy?

General Conditions vs. General Requirements

General conditions are usually described as the cost of managing a construction project. Examples include salaries for personnel like project managers, supervisors, engineers, field office staff, as well as the cost of field trailers, office equipment and supplies, and anything necessary to support the staff.

General requirements are the non-management indirect costs of executing the project, including items such as pre-development costs, permits, security, dumpsters, fences, temporary lighting, worker amenities, and clean-up costs.

These costs may be distinguishable from the costs of labor and material that directly goes into the completion of a construction project, but they are still necessary costs required to complete the work. These hard costs are often referred to as “brick and mortar” costs because they include tangible elements that are physically part of the project and other essentials. While coverage for hard costs are clearly included by a builder’s risk policy, sometimes it may be less than clear whether the general conditions are covered, and if they are covered, whether they qualify as a “hard cost” or a “soft cost.”

Builder’s Risk and Hard Costs

Builder’s risk policies are designed to cover damage to the project itself, including materials, supplies, fixtures, machinery, and equipment being used in connection with the project. For example, builder’s risk covers all physical loss or damage resulting from events such as fire, vandalism, hurricanes, and other perils. Property typically covered under builder’s risk policies includes buildings, structures, materials that will form a permanent part of a structure, materials in transit, materials in storage, foundations, excavations, permanent fencing, and permanent fixtures.

Depending upon the language in the particular insurance policy at issue, other hard cost expenses may also qualify for coverage. The problem is that many builder’s risk policies do not define covered hard costs or soft costs in a clear and unambiguous way. They often do not define or identify “general conditions” The specific language of a policy can determine what costs are considered covered losses, and the cases involving these issues are very fact specific.

The distinction can be important even if general conditions are clearly covered because different sub-limits and deductibles can apply to coverage for different categories such as repair costs, expediting expense, contractors extra expense, and delay in completion.

Two Different Outcomes from Two Cases

In Zurich Am. Insurance Co. v. Keating Bldg. Corp.,1 the contractor sought coverage under an all-risk builder’s risk policy for increased cost of completing the project after a collapse. Zurich refused to pay for (1) “Extended General Conditions” (e.g., administrative costs, trailers, supplies and other costs that are not captured as direct charges, (2) “Contractor’s Delay” charges (e.g., costs and expenses such as idle labor and equipment, that was incurred before construction could begin); and (3) “Storage, Price Increased, Etc.” (e.g., increases in labor wages and building material costs, as well as storage costs that would not have been needed but for the collapse). Zurich argued that these “additional costs” were not covered by the policy, and even if they were covered, were excluded by the provision addressing “consequential losses, damages and expenses.”

The Court ultimately found all three categories of additional costs were covered by the all-risk builder’s risk policy, which covered “all fortuitous losses that an insured peril proximately causes unless an exclusion applies.” In construing the policy language, the court held that the term “property lost or damaged” referred to the entire structure, not simply the location of the collapse. As a result, the grant of coverage was not limited to repairing the collapsed portion, but also included the increased costs to construct the remainder. The court noted that other Zurich policies refer to losses required to “rebuild, repair, or replace such part of the property . . . as has been damaged or destroyed” but the policy in question did not contain similar limiting language.

By way of contrast, in the 2008 case of Oceanside Pier View, L.P. v. Travelers Prop. Cas. Co. of Am.,2 the United States District Court for the Southern District of California held that increased costs of construction were not included in the grant of coverage. The court based its decision on the language of the policy which said the insurer “will pay for ‘loss’ to Covered Property from any of the Covered Causes of Loss.” The policy defined “Covered Property” as “Builders Risk,” and defined “Builders Risk” as:

Property described in the Declarations under “Builder’s Risk” owned by you or for which you are legally liable consisting of:

a. Buildings or structures including temporary structures while being constructed, erected or fabricated at the “job site”;

b. Property that will become a permanent part of the buildings or structures at the “job site”:

(1) While in transit to the “job site” or temporary storage locations;

(2) While at the “job site” or at a temporary storage location.

The Oceanside court held the “Builders Risk” provisions plainly provided coverage for losses resulting from the direct physical loss of buildings or structures being erected on the property but did not include coverage for increased costs of construction materials and labor to construct never-before constructed portions of the project.

In reaching its conclusion, the court also relied on the policy’s description of how to value covered property. The policy stated: “Covered property is valued as the least of (a) the cost to replace the covered property with other property, (b) the cost of reasonably restoring the property to its condition immediately before loss, or (c) the cost to replace the covered property with substantially identical property.” The court pointed out that this description did not contemplate coverage for increased costs of constructing buildings or portions of buildings which were not yet constructed at the time of delay.

The Bottom Line

The conflicting results in the Keating and Oceanside decisions can be explained by the differing language in the policies. While Keating’s grant of coverage did not contain limiting language on the types of risks covered by the policy, Oceanside’s did. The Oceanside policy only covered loss to buildings or structures while being constructed.

In contrast, the Keating policy covered “risks of direct physical loss . . . from perils not otherwise excluded.” Increased costs of construction for structures not yet completed at the time of the loss, though not a “loss to” “Buildings or structures while being constructed,” are a “risk of direct physical loss from a peril not otherwise excluded.” The language of the respective policies likely drives the opposite conclusions.

Policyholders should carefully review their policies when submitting a claim. They should be sure to consider whether general conditions are covered, and under what section of the policy they are covered.  

For more information, contact Michael V. Pepe at MPepe@sdvlaw.com or Grace V. Hebbel at GHebbel@sdvlaw.com.

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1513 F. Supp. 2d 55 (D.N.J. 2007)

22008 WL 7822214 (S.D. Cal. 2008)

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Waive or Do Not Waive Subrogation, But There is No Try

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W. Gustin Vandiford | Subrogation & Recovery Law Blog

A recent federal case provided an excellent example that not all supposed waivers of subrogation are, in fact, waivers. In National Surety Corp., et al. v. Bozeman, 2022 WL 953053, No. 1:20-cv-01187-WJM-GPG (D. Colo. March 30, 2022), National Surety filed a subrogation action alleging the defendant – the owner of the unit where the fire originated – was liable for damages caused by the fire’s spread to the common elements of the condominium building. National Surety insured the condominium association (the “Association”). The parties agreed that an Association declaration providing that the Association’s board of directors would obtain insurance for the condominium building and common improvements applied to the Association and the individual unit owners. The declaration additionally stated, “[t]he Board of Directors shall make every reasonable effort to obtain policies…containing the following…the insurer waives its right of subrogation as to any claim against each unit owner.” (emphasis added). The board of directors for the Association obtained insurance from National Security that actually affirmed the carrier’s right of subrogation and did not include any waiver against the Association’s unit owners.

The defendant moved for summary judgment, arguing the declaration’s language – requiring the board of directors to “make every reasonable effort” to obtain waivers of subrogation against unit owners – constituted a waiver of subrogation. It relied on a prior case, Universal North Amer. Ins. Co. v. Bridgepointe Condominium Association, Inc., 195 A.3d 543 (N.J. Super. Ct. 2018), in which a court found the carrier’s right of subrogation was effectively waived by the condominium association’s by-laws, which stated its insurance policies “shall contain waivers of subrogation.”

The National Indemnity court denied the defendant’s motion. The court distinguished the declaration’s language from the by-laws in the Universal case because the former only required to board of directors to make reasonable efforts rather than mandating it to obtain a waiver of subrogation. The court held that the declaration’s language did not constitute a waiver under Colorado law because it did not clearly manifest the intention to relinquish a right.

In summary, agreements to provide for waivers of subrogation must clearly manifest the intention to relinquish the right.  Simply agreeing to make reasonable efforts to do so is insufficient.  This case highlights the importance of closely analyzing the language of a purported waiver of subrogation to determine if it is an enforceable waiver. Failure to do so may result in failing to pursue an otherwise recoverable subrogation claim.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Construction Mediation Tips for Practitioners and ‘Eyes Only’ Tips for Construction Mediators

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Stacy L. LaScala | Construction Executive

Construction mediation can occur during or after construction and prior to or during arbitration or litigation. But, regardless of when a construction mediation occurs, its success often depends on the parties’ willingness to exchange critical information well in advance of the mediation session.

TIPS FOR THE CONSTRUCTION PRACTITIONER

 1. Schedule a mandatory pre-session call.

A pre-session call with the mediator is the first and most effective opportunity to convey your client’s position and to allow the mediator to absorb and evaluate that information without distraction. On that call, counsel should describe the dispute and identify the decision-makers. Additionally, counsel should address the following questions:

a) Are the parties working together and sharing information, or are they at war?
b) Have the parties shared expert information?
c) Have demands been published?
d) Will the parties be publishing their briefs?
e) What confidential information is not in the mediation brief?
f) Will the decision-makers be participating? Are there any decision-makers who are not available or “behind the scenes”?

2. Exchange mediation briefs. 

Why submit a “confidential brief” just to the mediator? If what you have to say has merit or will impact the other party’s analysis, then it should be published before the mediation. Failing to publish your brief may be seen by the opposing party as evidence of a weak position.

Further, the sole audience of a confidential brief is the mediator, who is restricted from using the information provided. While counsel may believe that labeling the brief as confidential will give their client a tactical advantage, it typically serves as an impediment to the mediator’s effectiveness.

Instead, mediation briefs should be addressed to the other parties’ decision-makers. Why would a party want to squander the opportunity to speak to directly to the decision-makers on the other side?

On a practical level, the failure to publish your brief will typically result in requiring a time-consuming joint-session discussion of relative positions. If any new and/or significant information is provided during the joint session, the parties will typically need additional time to analyze the impact of that information and then schedule another mediation session.

One final note: Truly confidential information may be shared with the mediator during the pre-session call or through a separate communication.

3. Exchange demands in advance of the joint session.

Construction mediations often involve competing claims. Where multiple sides are looking for a monetary contribution, each must provide a well-reasoned demand in advance of the mediation. Each demand should include a breakdown and computation of the claim(s), including the amount of each specific damage category and an itemization of each component of litigation expense and fees claimed.

A demand is necessary, even if everyone already knows the amount of the claim. The act of putting together a comprehensive demand may reveal additional or increased claims not previously conveyed.

4. Have a mediated exchange of expert information.

Construction disputes are typically driven by expert witnesses, especially those involving scope of work, architectural deviations, change orders, interference with means and methods, critical path/delay and construction deficiencies.

Once the claimant’s initial reports are published, a mediated expert exchange guided by its experts provides context and an opportunity for the respondents to seek clarification. The process, moderated by the mediator, provides all sides with a guidepost that can have a significant impact on the direction of the dispute. Utilizing a virtual platform for the expert exchanges saves money and allows the experts to participate from their offices with all of their job documents at hand.

In particular, following the claimant’s presentation, critical gaps in data and positions identified during the presentation need to be addressed and time frames set for their resolution. This will typically take the form of additional inspections and the eventual production of a defense scope and cost of repair.

5. State demands on third parties.

Following the exchange of expert information, it is imperative that all respondents with affirmative claims state or clarify their demands. While this typically involves claims against subcontractors, suppliers and/or manufacturers, it can also include affirmative claims against other parties.

6. Identify multi-party considerations.

Where there is a significant number of parties, the construction practitioner should work with the mediator to identify associated groups of parties (e.g., soils-related parties, architectural parties, design professionals, insurers) and design a schedule to address the particular concerns and issues of each group.

In such complex, multi-party disputes, the parties, or at least the primary defendant, should provide the mediator with a claims matrix. Based on that matrix, the parties should give serious consideration to breaking down the mediation into separate segments, such as:

a) Separate mediations between the claimant and the primary defendant
b) Separate mediations among the primary defendant and third parties
c) Insurance: separate coverage mediation/calls

Construction practitioners need read no further. The following is a set of tips and suggestions for construction mediators in the trenches.

“EYES ONLY” TIPS FOR CONSTRUCTION MEDIATORS

 First and foremost, construction mediations require significant preparation and process. To begin, the construction mediator needs to obtain a working understanding the matter dynamics. This includes the status of relationships of the parties and their expectations of the process and future relationships.

1. Know whom you are working with.
In advance of the pre-session call, the mediator should research the parties to the dispute. This includes identifying all counsel through firm websites, LinkedIn, Twitter and Facebook.

2. Establish credibility early and keep working to maintain it.
Identify any parallel experiences the mediator has with counsel, including education, family and personal interests. These early links will help establish credibility, although this needs to develop over time. Try not to rush early communications, and don’t underestimate acquiring a fuller understanding of each party’s background, experiences, emotional investments and goals.

3. Make unscheduled pre-session calls.
There may be an advantage to making unscheduled pre-session calls to counsel. Unprepared remarks by counsel are almost always more helpful and more telling.

In any case, during the pre-session call, the mediator needs to not only acquire the salient facts, but also identify each party’s expectations and significant gaps in facts or understandings. Gaps may include:

a) Conflicting timing: This can happen when claimants are expecting a substantive response, usually in the form of a monetary offer to their position, and respondents are still seeking foundational information. This can also occur when there are still missing parties to the dispute.
b) Missing information: This can result from the parties failing to identify and exchange pivotal pieces of information
c) Emotionally charged settlement positions: These can be present when demands include claims of emotional distress, punitive damages or that a published apology be issued by the respondent as part of the settlement.
d) A decision-maker who is too invested in the dispute: This can occur when a party’s decision-maker was a direct participant in the construction and whose decisions resulted in the dispute.

Once the gaps are identified, the mediator needs to slowly start to adjust the parties’ expectations and potentially even provide pre-session homework. 

4. Work to have all sides publish their “confidential” briefs and reasoned demands in advance of mediation.
Many times, the mediator will need to use the pre-session conferral to convince the parties to share their “confidential” pre-mediation briefs and provide each other with detailed, reasoned demands (see discussion above).

5. Every mediation has its own pace, so timing is important.
Remember that every mediation has its own timing. Establishing credibility through understanding relative positions and making connections with counsel and decision-makers is an ongoing process.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Construction Contract Tip – Subcontractors, Don’t Waive Your Right to a Lien

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Sam DeBaltzo | Tonkon Torp

In the course of reviewing construction subcontracts, I’ve recently seen provisions similar to the following (simplified for convenience and confidentiality):

“The subcontractor shall reimburse the [Contractor and/or Owner] for any costs and expenses for any claim, obligation, or lien that arises from the performance of the work.”

“The subcontractor shall remove and discharge any lien, claim, security interest, or other encumbrance related to the subcontractor’s performance of the Work.”

The provisions are often followed with boilerplate requirements for paying the third-party claimant, bonding, reimbursement of attorneys’ fees, indemnification responsibilities, or other ways of providing security to the owner or general contractor. 

The purpose of these types of provisions is clear: owners want their projects completed free of liens, and they want the person responsible for the work to make sure that happens. This is an understandable position, and it is reasonable for any construction contract to require lien waivers. The problem is that these provisions do not require payment prior to the waiver.

Yes, if a subcontractor is paid, it should agree to keep the project clear of liens and remove any liens filed by its respective subcontractors or suppliers. But, until payment has occurred, retaining the powerful lien right is essential for any prudent subcontractor. Whether intentional by the drafting party or not, these provisions suggest the subcontractor is agreeing to waive its lien rights even when the owner or contractor fails to pay. 

With these specific provisions, I find the solution is simple and relatively unobjectionable; I like to add the phrase “provided subcontractor has been paid for the work” at the beginning of the phrase. Subcontractors should be on the lookout for these and other potential pitfalls, and make sure they do not unwittingly leave themselves unprotected by accepting provisions that are inherently unfair.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.