Loss Ensuing from Faulty Workmanship Covered

Tred Eyerly – April 28, 2014

The court found coverage for damage resulting from faulty workmanship. Drury Co. v. Mo. United Sch. Ins. Counsel, 2014 Mo. App. LEXIS 319 (Mo. Ct. App. March 25, 2014).

The School District entered a contract with general contractor, Penzel Construction Company, Inc., to build an addition to a high school. Under the prime contract, the School District was to purchase property insurance, including builder’s risk “all-risk” coverage. The policy was to cover the interests of the owner, the contractor, subcontractors and sub-subcontractors in the project.

The School District obtained a policy from Missouri United School Insurance Counsel (MUSIC). Exclusions in the all-risk policy included loss due to faulty workmanship or materials, “unless loss by a peril not otherwise excluded ensues and then MUSIC shall be liable only for such ensuing loss.”

Penzel entered a subcontract with Drury to install a roof deck made of Tectum. Drury began installing the Tectum on the project’s roof. Rain and ice storms occurred over the next several months and the Tectum suffered moisture damage. Drury submitted the claim to MUSIC, which the claim denied based upon the faulty workmanship exclusion.

Drury sued MUSIC for breach of contract, among other claims. The trial court granted summary judgment to Drury, finding that regardless of MUSIC’s assertion that the faulty workmanship exclusion applied, the trial court determined the loss was covered because the covered peril of rain ensued.

The court of appeals affirmed. The policy covered damage to the Tectum resulting from “rain snow, or sleet.” Although loss caused by faulty workmanship was excluded, MUSIC did not allege that Drury undertook deliberate damage-inducing actions. Because Drury sustained an ensuing loss from the precipitation, MUSIC was liable for the ensuing loss regardless of whether Drury’s workmanship was faulty.

via Insurance Law Hawaii: Loss Ensuing from Faulty Workmanship Covered.

Texas Supreme Court holds Contractor’s Agreement to Complete Work in a “Good and Workmanlike Manner” not an Agreement to Assume Liability for its Defective Work

George B. Hall, Jr. – Phelps Dunbar LLP

On certified questions from the U.S. Fifth Circuit Court of Appeals, the Texas Supreme Court held that a contractor’s agreement to complete its work in a “good and workmanlike manner” does not enlarge its duty to exercise ordinary care in fulfilling its contract, and thus does not assume liability for damages arising out of its defective work that would otherwise trigger a contractual liability exclusion. Ewing Construction Co., Inc. v. Amerisure Ins. Co., No. 2014 WL 185035 (Tex. Jan. 17, 2014).

A contractor constructed tennis courts for an independent school district. The school district complained that the courts began cracking and flaking, making them unusable for their intended use, and filed suit against the contractor. The contractor’s contract with the school district included an agreement to complete its work in a “good and workmanlike manner.” The contractor’s CGL policy included an exclusion for contractual liability “assumed in a contract.” In the litigation that ensued, the insurer took the position that the failure to complete the work in a “good and workmanlike manner” triggered the exclusion. This position was based, in part, on the Texas Supreme Court’s earlier dicta in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s, London, 327 S.W.3d 118 (Tex 2010). The Texas Supreme Court held that a contractor’s promise to complete its work in a “good and workmanlike manner” was not an agreement to assume liability, and that the contractual liability exclusion would not apply. This decision effectively overrules the Texas Supreme Court’s prior suggestion in Gilbert that breach of contract could trigger a contractual liability exclusion.

CSLB Breaking News: Part of $150 Million San Diego Construction Project Stopped After Discovery of Unlicensed Subcontractor

Amy L. Pierce – April 13, 2014

On Friday, April 11, 2014, the California Contractors State License Board issued a News Release confirming that drywall work on the “$150 million, 45-story Pinnacle Towers construction project in downtown San Diego has stopped after the [CSLB] determined the sub-contractor hired for the work, Clayton Wall & Ceiling Systems Inc. (Clayton), is not properly licensed in the state of California.” The News Release further confirmed that “[o]n April 4, 2014, investigators with CSLB, California Department of Industrial Relations (DIR), and the San Diego District Attorney’s Office, responded to an industry lead and performed an unannounced inspection of the construction site.” They “determined that drywall work began in January 2014, even though the company has not yet completed the licensing process.” The CSLB issued an administrative citation to Clayton for acting in the capacity of a contractor without a license and assessed a civil penalty of $15,000, as permitted by Cal. Bus. & Prof. Code § 7028.7. DIR’s Division of Labor Standards Enforcement (DLSE), also known as the Labor Commissioner’s Office, also cited Clayton for performing services without a valid state contractor license and assessed a $64,000 fine.

The News Release reported that the primary contractor, Pinnacle International Development Inc. (Pinnacle), contracted with Clayton on August 8, 2013 for the $6.34 million drywall job. Then, on December 3, 2013, Clayton applied for a California’s contractor’s license. “When it comes to contracting without a license the law is very clear,” said CSLB Registrar Steve Sands. “You cannot enter a contract to work, or actually do any work until you’re licensed. There’s no gray area here.” California law defines “contractor” broadly to include “any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or other structures or works in connection therewith …” It includes subcontractors and specialty contractors.

“An employer operating without a license creates an unfair advantage over businesses that follow the rules,” said DIR Director Christine Baker. “This case shows how the Labor Commissioner’s Office works effectively with other state agencies to enforce the law and protect workers and business in California.” Pinnacle may also face administrative action for contracting with a non-licensee.

The News Release further confirmed that Clayton’s license application will be on-hold until the fines are paid or until an appeal is heard. This will delay Clayton’s ability to work on the San Diego project, or any other project in the state. In addition, the Labor Commissioner’s investigation of the business will remain active.

Labor Commissioner Julie A. Su warned that “Scofflaws should know that state agencies are sharing information and finding violations that might have previously been overlooked.” “In challenging economic times it’s important to protect honest businesses from being put at a competitive disadvantage, and workers from being given less than their earned wage.” Su said.

via CSLB breaking news: part of $150 million San Diego construction project stopped after discovery of unlicensed subcontractor – Lexology.

Oklahoma Appraisal Endorsement May Be Non-Binding on Insurer : Property Insurance Coverage Law Blog

Larry Bache – April 21, 2014

In my last post, I wrote about my trip to Oklahoma and the opportunity to help victims of devastating hail storms and catastrophic tornadoes. One of the major reasons litigation is the most viable option in these claims is because many of the policies at issue include a non-binding appraisal provision. Here is an example that I pulled from a policy’s Oklahoma Changes—Appraisal Endorsement IL 01 74 07 05:


If we and you disagree on the value of the property or the amount of loss (“loss”), either party may make written demand for an appraisal of the loss. In this event, only the party which demanded the appraisal will be bound by the results of that appraisal.

If the policyholder demands appraisal and gets a favorable result, the carrier is not obligated to pay the award as the non-invoking party. It is simply a one-way street. Many of these claimants have residential damages totaling less than $15,000. The carriers are banking on attorneys not getting involved because of the size of the claims.

I am an advocate for the appraisal process because it is the most efficient avenue to restore policyholders under duress to their pre-loss condition. In the vast majority of these Oklahoma hail and tornado claims, the carriers recognized coverage and the only issue remaining is a dispute over the amount of the loss. Surely carriers will argue they are only acting within the boundaries of Oklahoma law. However, insurers that choose to use this endorsement are dissuading use of the most effective alternative dispute mechanism for the parties to resolve the claim, and encourage litigation by failing to pay what is owed and then providing the insurer an out if it does not like the award issued by a neutral third-party umpire.

Seeing the damaged homes with tarps on their roofs and businesses that are still not fully operational as a result over a disputed amount of loss is heartbreaking. Some carriers chose not to include this amendatory endorsement and are bound by the appraisal process. These select carriers made a choice and that choice was to provide a mechanism to restore their policyholders quicker and more efficiently. These select carriers also highlight the carriers that fail to provide their policyholders with the same option.

via Oklahoma Appraisal Endorsement May Be Non-Binding on Insurer : Property Insurance Coverage Law Blog.

Dot Your I’s and Cross Your T’s on Ohio’s Prompt Pay Act

Earl K. Messer – April 4, 2014

Ohio’s Prompt Pay Act has real teeth. If a higher-tier contractor is paid for work done by a lower tier and does not pay that lower tier within ten days, the higher-tier contractor may find itself paying 18% interest on the withheld funds and the lower tier’s attorneys fees. Ouch. Funds can be withheld for retainage and in the case of bona fide disputes, but, if one miscalculates and ends up liable under the statute after a lengthy battle, the interest and attorneys’ fees can substantially increase the higher-tier contractor’s loss.

A recent case in Cleveland illustrates the dangers. In Frank Novak & Sons, Inc. v. A-Team, L.L.C., D.B.A. Servicemaster, the Cleveland Browns hired a contractor to clean and repair parts of the stadium damaged by flooding. The general contractor hired various subcontractors to do the work. With one subcontractor in particular, it was unclear whether the parties had entered into a written agreement or an oral agreement. It was also unclear whether they had entered two contracts or only one. After the work had started, there was additional flooding and additional work had to be done. The subcontractor contended that there were two separate contracts and that it had been paid nothing on the second one. The general contractor claimed that there was only one contract, that it had overpaid the subcontractor on it and that nothing further was owed. The court agreed with the subcontractor, finding that the general contractor had been paid for the subcontractor’s work on the second contract and had not paid the subcontractor. Oops.

As a result, the court held that the subcontractor was entitled to the interest as set forth in the statute, i.e., 18% per annum starting 10 days after the general contractor’s receipt of payment from the owner. Here, the battle went on for more than six years. As a result, the interest alone is now more than the entire amount in dispute at the outset. In addition, the statute provides that the prevailing party gets its reasonable attorneys’ fees, unless the court finds it “inequitable.” So, the general contractor presumably has now paid its own attorneys for a full trial and a full appeal, and it has to pay its subcontractor’s full claim, it has to pay the interest which is now more than the full original claim, and it has the sword hanging over it of having to pay for its subcontractor’s attorneys’ fees unless it can convince the trial court that paying those fees would somehow be “inequitable.” The appellate court sent the case back to the trial court to decide the attorneys’ fees issue. This general contractor has probably now incurred three or four times its original exposure to liability.

A word to the wise: be careful. If a higher-tier contractor has a solid basis to withhold funds when it has been paid, the statute certainly permits that action. However, if there is a real dispute over whether that is the case, the higher-tier contractor takes a significant risk of a judge agreeing with the lower-tier contractor, thereby dramatically increasing its liability.

via Dot your I’s and cross your T’s on Ohio’s Prompt Pay Act – Lexology.