Monthly Archives: December 2014

Top 3 Construction Law Developments of 2014

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Don Gregory | Kegler Brown Hill & Ritter | December 16, 2014

There were a number of significant legal developments impacting the construction industry over the past year. Here are my top three:

1. Ohio Supreme Court Enforces “Pay-if-Paid” Clause

The Ohio Supreme Court in Transtar Electric, Inc. v. A.E.M. Electric Services Corp., Slip Opinion No. 2014-Ohio- 3095 announced a bright line rule that “[t]he use of the term ‘condition precedent’ in the payment provision of a contract between a general contractor and a subcontractor” is essentially magic language that on its own “clearly and unequivocally shows the intent of those parties to transfer the risk of the project owner’s nonpayment from the general contractor to the subcontractor.” Opinion, at syllabus #2.

Ohio courts have traditionally enforced ‘pay-if-paid’ language to operate as an absolute bar to a lower-tier’s right to payment only if the ‘pay-if-paid’ clause clearly and unequivocally showed that the parties intended to shift the traditional risk of owner non-payment from the general contractor to its lower-tier.

If the payment clause did not meet this high bar, Ohio law instead required courts to find that the ‘pay-if-paid’ clause was to be treated as a ‘pay-when-paid’ clause that did not shift the risk of nonpayment but instead still required the contractor to pay its lower tier within a reasonable period of time. Disputes over the enforceability of ‘pay-if-paid’ or ‘pay-when-paid’ clauses in Ohio have thus turned on whether the contract has clearly and unambiguously indicated that the lower-tier was accepting the risk of owner-non-payment.

Though the Ohio Supreme Court’s decision in Transtar does not change the Ohio law that requires clear and unambiguous language to enforce a pay-if-paid clause, it establishes Ohio as a state where the phrase “condition precedent” in a subcontract payment clause will create a pay-if-paid clause and “negate the need for additional language to demonstrate the intent to transfer the risk [of owner nonpayment].” Opinion at paragraph 25.

2. Texas Supreme Court Throws Out “No Damage for Delay” Clause when there is Bad Faith or Other Active Interference by the Owner

The Texas Supreme Court, in a nationally watched case, found that a “no damage for delay” clause – generally enforceable in Texas – could not bar owner-caused delay damages when they “resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision.”

The Court also reaffirmed the principle that “a contractual provision’ exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy.'”

“To say otherwise would be incentivize wrongful conduct and damage contractual relations.”

“This conclusion is supported by … court decisions in at least 28 American jurisdictions. We join the overwhelming consensus.” Zachary Construction v. Port of Houston Authority, No. 12-0772, (TX August 29, 2014).

We assisted with the amicus brief supporting the winning position filed by the American Subcontractors Association.

3. Ohio Supreme Court Finds Later Enacted Statute of Repose Unenforceable to Bar Construction Defect Claims

Ohio and most other states have a “statute of repose” which basically provides that a certain amount of time after substantial completion one cannot be sued for construction defects or other injuries. For example, Ohio currently has a 10-year statute of repose set forth in R.C. §2305.131.

The Supreme Court of Ohio was faced with a case where a condominium complex was finished in 1990 and defects were not discovered until 2003. As Ohio had no enforceable statute of repose in 2003 (it had been declared unconstitutional), the Supreme Court ruled that the later enacted Ohio statute of repose could not be applied retroactively to bar the defect claim.

Instead the Supreme Court ruled that the condo association had four years after the date of discovery of the defect to file its claim and had timely done so. Oaktree Condominium Assn., Inc. v. Hallmark Bld. Co., 2014-Ohio-1937.

This case means that some construction defect claims, by condo associations or others, may survive even though construction was completed more than a decade ago.

via Top 3 construction law developments of 2014 – Lexology.

Arbitrator Should Decide Whether Dispute Falls Within The Scope Of The Arbitration Clause

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Addressing who should decide whether a dispute falls within the scope of an arbitration clause, the U.S. Court of Appeals for the 11th Circuit reversed a district court’s denial of a motion to compel arbitration and remanded the case for an order compelling arbitration. U.S. Nutraceuticals, LLC v. Cyanotech Corp., No. 13-12863, 2014 WL 5471913 (11th Cir., Oct. 30, 2014) (Pryor, J.) (Wilson, J., dissenting).

The dispute over the scope of the arbitration clause existed because the clause changed over the course of the parties’ history.  In the parties’ initial agreement, all disputes were to be resolved in arbitration.  In 2010, however, the parties amended the agreement and, in relevant part, carved out of the arbitration clause disputes relating to the breach of the confidentiality provision of the parties’ agreement.  When one party sued the other for tortious interference and breach of the confidentiality provision, the defendant raised whether the dispute belonged in arbitration rather than litigation and moved a federal court to compel arbitration.  If the earlier agreement’s clause applied, then the parties would be required to arbitrate; if the more recent agreement’s clause applied, then the case could stay in the court system.  The district court held that the 2010 clause applied and denied the motion to compel arbitration.  Cyanotech appealed.

The 11th Circuit disagreed, noting first that both versions of the parties’ arbitration clause—like many arbitration clauses—incorporated the rules of the American Arbitration Association into it.  Under 11th Circuit precedent, such incorporation constituted a clear agreement to have an arbitrator decide whether the arbitration clause applies.  To avoid the all-inclusive arbitration clause in the earlier agreement, the plaintiff sued only under the 2010 agreement.  But the 11th Circuit considered this a mere “legal label” and examined the “true thrust” of the complaint (i.e., the facts alleged therein), which the court concluded implicated both the 2010 contract and the earlier.  In this case, that meant an arbitrator should decide whether the carve-out in the 2010 arbitration clause applies or not.

The dissenting judge took the plaintiff at its word and concluded that only the 2010 version of the clause applied.  Accordingly, the dissent would have affirmed the district court’s reliance on the carve-out and refusal to compel arbitration.

Practice Note: This case teaches several lessons to practitioners.  First, individuals or companies with long-standing relationships, governed by a sequence of agreements, should be cognizant of differences in their arbitrations clauses over time.  Second, when parties agree to change their arbitration clauses, they should consider whether they intend the changes to be retroactive.  Third, negotiators should consider including language regarding who decides arbitrability.  Finally, when pleading a dispute, consider whether claims can be pleaded to fall within (or without) a particular arbitration clause.

via Arbitrator Should Decide Whether Dispute Falls Within The Scope Of The Arbitration Clause – Intellectual Property – United States.

“Specified Cause of Loss” in Colorado Can Determine Whether There is Coverage

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Brandee Bower | Property Insurance Coverage Law Blog | December 10, 2014

I recently came across a case in Colorado involving a suit filed by a business owner against the insurance company for damage to his building when an underground water main leak caused settling.1 The facts are:

The plaintiff owned a building where he operated a martial arts training program. He noticed a crack in the wall and reported the damage to his insurance agent. The claim was denied by the insurer based upon an exclusion for settling. Almost two years later, plaintiff again contacted his agent because the damages had increased significantly. He found out that a city water line was being repaired nearby. Water was ‘bubbling up like an artesian well’ in the basement of an adjacent building. The city found a leak and repaired it. Plaintiff told his insurance company that this leak caused his damage too, but the claim was denied. The insurance company relied on an exclusion which stated that they would not pay for damage due to settling, cracking, shrinking or expansion but if damage results from the ‘specified causes of loss’ it would be paid. The policy stated ‘specified causes of loss’ included water damage, and ‘water damage’ included “accidental discharge or leakage of water…as the direct result of the breaking or cracking of any part of a system or appliance containing water.”

This case was tried to a jury and they awarded $556,000 in actual damages plus $556,000 in punitive damages. By its verdict, the jury determined that the damage to plaintiff’s building was done by the leaking water main. In its appeal, the insurance company alleged error with the court’s ruling that the exclusion for settling did not apply if the cracking resulted from the leaking water main. The insurance company relied on Kane v. Royal Insurance Company,2 which held that an exclusion for damages caused by a flood applies regardless if it is caused by natural forces or by third-party negligence. Similar cases were cited regarding a settling exclusion being applied regardless of whether it was due to soil conditions or accidental water discharge. The plaintiff contended that the settlement exclusion should only apply to damages resulting from natural conditions over time.

By reading the policy, the appeal court found it was not clear whether the efficient cause of the settling could be from a natural occurrence or from broken pipes. It also found that the language in the Kane policy that avoided the claim of ambiguity was not incorporated in this policy. Thus, the court found that by failing to use the general language the coverage and exclusion provisions were inconsistent and ambiguous so there was coverage for the damages.

I’m sure you’ve seen it in our blogs many times, but reading your insurance policy and understanding the terms is extremely important. The use or non-use of a word or phrase can make all the difference.

1 Novell v. American Guar. And Liability Ins. Co., 15 P.3d 775 (Colo.App. 1999).

2 Kane v. Royal Ins. Co., 768 P.2d 678 (Colo. 1989).

via “Specified Cause of Loss” in Colorado Can Determine Whether There is Coverage : Property Insurance Coverage Law Blog.

What Constitutes an “Occurrence” in your CGL Policy?

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Matthew M. Brady | Pillsbury Winthrop Shaw Pittman LLP | December 5, 2014

In Cincinnati Ins. Co. v. AMSCO Windows, No. 13-4155, 2014 WL 6679589, at *3 (10th Cir. Nov. 26, 2014), the United States Court of Appeals, Tenth Circuit, held that construction defects brought against a window manufacturer (“AMSCO”) were “occurrences” as defined under the manufacturer’s Commercial General Liability (“CGL”) policies and, therefore, those CGL policies provided coverage for those claims.

In our experience, when courts follow the minority and find that manufacturing or construction defects cannot be an occurrence under a CGL policy, they often rotely apply what they see as precedent, instead of carefully analyzing the policy language and the facts. Here, both the district court and the Tenth Circuit give us a refreshing and thoughtful analysis into this issue. Read about it after the jump.

AMSCO maintained insurance coverage from Cincinnati Insurance Company (“Cincinnati”) under a series of renewable CGL policies (the “Policies”) from 2002 through 2007. Those Policies obligated Cincinnati to:

pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend any “suit” seeking those damages…. This insurance applies to “bodily injury” and “property damage” only if … [t]he “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory.

In 2010, various Nevada homeowners brought actions against the contractors who built their homes, alleging that defective window products and improper installation caused property damage. The contractors asserted claims against the company who sold AMSCO’s windows and that company in turn brought claims against AMSCO.  Cincinnati refused to defend AMSCO and instead sought a declaration from the district court that it had no duty to defend or indemnify AMSCO against the homeowner claims because, under Utah law, the property damage alleged did not implicate an “occurrence” covered by the Policies. The district court disagreed with Cincinnati and held the insurer owed a duty to defend under the Policies.

The U.S. Court of Appeals affirmed. In reaching this conclusion, the Court interpreted the plain language of the Policies and applied well settled Utah state law regarding what constitutes an “occurrence.” Looking at the plain language of the Policies, the Court highlighted that “occurrence” was defined as:

an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Cincinnati argued that in claims involving manufacturing defects in windows, there are no circumstances where any resultant damage to the surrounding areas could ever be deemed an “occurrence.” This argument was based on the premise that the resulting damage was “foreseeable” to AMSCO and therefore could not be considered an “accident” within the definition of “occurrence.”

The Court disagreed and clarified that the test for determining whether an event was an “occurrence” under a CGL policy is not whether the result was “foreseeable,” but rather whether it was “intended” or “expected.” In fact, the Utah Supreme Court (in N.M. on behalf of Caleb v. Daniel E.) explained two limited situations where damage to property would be “non-accidental” and therefore not an “occurrence:”

First, harm or damage is not accidental if it is the result of actual design or intended by the insured. Second, harm or damage is not accidental if it is the natural and probable consequence of the insured’s act or should have been expected by the insured. The first category presents a factual question as to what the insured intended. The second category generally presents a legal question as to what the average individual would expect to happen under the circumstances.

These circumstances did not apply. Cincinnati never alleged that the homeowners’ damage was intended or expected by AMSCO. Instead, Cincinnati argued that the damage was the “natural and probable result of the defective manufacture of the windows.” The Court held this to be a foreseeability argument with no bearing on whether the damage alleged was an “occurrence” under the Policies. Cincinnati’s failure to demonstrate that AMSCO actually expected or intended for the damage to result lead to the Court affirming the district court’s holding that Cincinnati had a duty to defend AMSCO.

This decision serves as a reminder to contractors and suppliers alike to assess their respective insurance coverage and confirm what “occurrences” are covered therein.

via What constitutes an “occurrence” in your CGL policy? – Lexology.

5 Contract Phrases that Could Cost Construction Clients

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Insurance Business | December 15, 2014

The intricacies of insurance requirements in construction contracts seem like they’ve never been denser.

According to a new white paper from Lockton Companies, insurance carriers are increasingly implementing restrictive additional insured endorsements, making full transfer of contributory negligence difficult.

“There is a wide array of words and phrases that trip people up when looking at the insurance requirements in construction contracts,” said Diane Bureman, Senior Vice President and Senior Account Executive with Lockton. “It is important that the insurance terms addressed in the construction contract are completely clear and ones with which you can comply.

“Every word and punctuation mark in a contract counts, so read everything literally.”

Misunderstanding such language can lead to rejected insurance claims for policyholders, and potential E&O claims for involved agents.

Bureman identifies specific examples of these terms in ‘5 Maddening Phrases That Can Cost You in Construction Contracts,” including:

1. Additional Insured vs. Additional named Insured

There’s just one word of difference between these two phrases, but that one word changes the meaning significantly. Bureman advises that most times, an insured would not want to add an “additional named insured” as they have the same rights as the primary insurance policyholder.

Additional insureds, on the other hand, are not covered for any claims not caused by the primary holder.

As such, additional named insureds receive the same coverage as the policyholder without having to pay a premium. You could be left with liabilities and exposures beyond your control by additing additional named insureds.

2. Maintain vs. Provide

When it comes to CGL policies, many contracts state CGLs must “provide” completed operations coverage for a certain number of years. This may force a contractor to implement a controlled insurance program, Bureman says, while “maintain” actually provides insurance covering the agreed up time frame.

3. Notice Requirements

Because insurers rarely provide notice of cancellation, expiration or a notice of material change, contractors may agree to provide notice of change, modification or nonrenewal if they want to assume this responsibility.

“There are times when exceptions may be made, for example, with governmental bodies like the Corps of Engineers,” Bureman says. “But these are rare and only available when there is a regulation, statute or covenant in place requiring this notice.”

4. Subject to Policy Terms, Conditions and Exclusions

A common contract phrase to limit liability, “subject to policy terms, conditions and exclusions” appears in many contracts to remind insureds that contractual liability coverage is just that: subject to policy terms, conditions or exclusions—things that aren’t always easily defined.

5. Aggregate Limits

A standard CGL policy contains a general aggregate and products/completed operations aggregate. The general aggregate refers to premises and ongoing operations occurrences.

Bureman says it is common for contracts to require CGL coverage with only a per-occurrence limit shown. That may lead many insureds to believe coverage is unlimited under the policy, though it is actually limited by policy aggregates—both of which must be stated.

via 5 contract phrases that could cost construction clients.