Mitigation of Construction Defect Litigation- Top 10 Construction Contract Issues

Rebecca Dow | National Law Review | April 18, 2017

When negotiating a construction contract with a general contractor (GC), the owner/developer should be aware of, and address, a number of issues to attempt to mitigate or limit the risk of construction defect litigation for a residential project, including multi-family and for-rent residential apartment and senior housing projects. The standard forms of construction contract—such as the American Institute of Architects (AIA) or ConsensusDocs—are more beneficial to the contractor than the owner in many respects.  A construction contract will need to be reviewed thoroughly and revised to better protect the owner, and in the case of residential construction, should in particular, address the following top 10 key issues:

1) Scope of Work—The scope of work should be well-defined, accurate, comprehensive and identify the basic components of the project. The scope should not be based solely on the drawings and specifications, which are never 100% complete, and the contractor should agree to reasonably infer the scope of work from the contract documents to produce the intended work.  If there is an inconsistency in the contract documents or between the drawings and specifications and contract documents, the contractor should provide the better quality or quantity of the work or materials. The contractor should be required to report any errors, omissions or inconsistencies in the contract documents to the owner.   Contractor’s work should be subject to inspection by the owner, applicable city, county or governmental entities, and any third-party inspectors retained by owner or construction lender for quality assurance and quality control.  Contractor should give advance notice to owner as to specified key system installations—such as soil, foundation, acoustical, exterior, building wrap, HVAC and structural components to allow review and inspection by such third-party inspectors.

2) Change Orders—Don’t allow material “field changes” from the approved plans and specifications.  If there is a question as to the proper way to construct any aspect of the project, such change must be documented through an RFI process by the contractor.  If there are changes or selections not specified in the plans or specifications, any change should be documented and approved by the architect and third-party inspectors, if appropriate.  Any changes should be documented through a written change order.

3) Indemnification—The contract should include a well-written and thorough indemnification and defense obligation by contractor for all construction defect claims and costs, damages, actions, liabilities, judgments and obligations, including investigative and repair costs, attorneys’ fees and costs and consultant fees and costs.  The indemnity and defense should apply to all negligent or willful acts or omissions of contractor. The indemnification and defense obligations should survive the expiration or termination of the construction contract through the statute of repose and limitations (eight years in Colorado).

4) Warranties—Contractor should warrant that its work is free from defects and will be completed in a good and workmanlike manner.  The warranty should commence upon substantial completion of the work and continue through the period of the statute of repose and limitations.  The warranty should include any specific warranty provided to residential purchasers by the owner.

5) Subcontracts—Contractor should incorporate the terms of the GC contract into the subcontracts and provide a copy to the owner.  In particular, the subcontractors should have the same indemnification, defense, warranty and insurance obligations to the GC that GC has toward the owner. Subcontractors should be required to be joined in the same arbitration or litigation action as the owner and any homeowner or homeowners association.

6) Insurance—The contract should specify the insurance required and be reviewed by an expert in residential construction insurance.  An Owner Controlled Insurance Program (OCIP) or Contractor Controlled Insurance Program (CCIP) are preferred. The OCIP or CCIP should be reviewed to determine if it covers design and construction or only construction. If only construction, the design professionals will need to have proper coverage and limits. The OCIP or CCIP should not contain any exclusions for multifamily, condominium or residential use. Insurance coverage should be maintained through the statute of repose and limitations.

7) Dispute Resolution—The contract should specify binding arbitration by a single arbitrator pursuant to the AAA Construction Industry Arbitration Rules or other arbitrator such as DeMars & Associates.  However, if a homeowner or homeowners association brings a lawsuit against the owner, then the GC and the subcontractors should be obligated to join such proceedings at owner’s request to resolve the dispute.

8) Compliance with Laws/Environmental Matters—The GC and subcontractors should be obligated to comply with all applicable laws, rules, codes and regulations, which may include the Americans with Disabilities Act of 1990, and all applicable environmental laws related to hazardous substances, storage and disposal of hazardous materials.  The contract should require that the work be completed free of mold or fungi or unacceptable moisture levels.

9) Construction Lender—Contractor should be required to satisfy requirements of the construction lender including payment schedule, lien waivers, affidavits and inspections.

10) Damages/Attorneys’ Fees—An owner should not waive its right to consequential damages, even if the waiver is “mutual” in the contract.  Such a waiver is not “mutual” because it harms an owner, who has mainly consequential damages, more than the contractor, who has mainly direct damages.  Don’t be fooled by the “mutual” language in the contract.  In addition, owners should consider whether to add a provision to the contract providing the prevailing party in any action under the contract to its costs and expenses, including attorneys’ fees and consultants’ fees and experts’ fees arising out of any claim or action associated with the contract and be applicable to trial or arbitration and appeals.

This article is not intended to be an all-inclusive list of revisions that should be made to a construction contract for the benefit of an owner/developer.  Owners/developers should consult with an attorney well versed in construction contracts.

Faulty House Inspection did not Cause Property Damage 11th Cir, Florida

Jody Nathan | Reinsurance Law Blog | April 19, 2017

In Auto-Owners Insurance Co. v. Ralph Gage Contracting Inc., the Kjellanders sued Gage after he inspected a house they wanted to buy and gave it a positive report.  The Kjellanders claimed the house had mold and a bad HVAC system, and they wouldn’t have bought it if they had known about the problems — which the inspector should have discovered.  But since the inspection did not cause the property damage, Gage’s insurance did not cover the claimed loss.

Under the terms of the Policy, Auto-Owners agreed to pay “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” In pertinent part, the Policy provided coverage for “property damage” only if it was “caused by an ‘occurrence.’” The Policy defines “property damage” this way:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In a case like this one — where the term “accident” is undefined by the Policy — the Florida Supreme Court has said that “accident” means “not only ‘accidental events,’ but also damages or injuries that are neither expected nor intended from the viewpoint of the insured.”

The plain language of the Policy requires unambiguously a causal link between the alleged “property damage” and an “occurrence.” Here, the only asserted “occurrence” is Gage’s alleged negligent inspection. Thus, to show that their claim is within the Policy’s coverage, the Kjellanders must demonstrate that Gage’s negligent inspection caused “property damage” within the meaning of the Policy.

The property was damaged before the inspection, not because of the inspection.  Thus, there was no coverage for the loss. The case is not published.

Appeals Court Rules Lower Court was Wrong to Dismiss Florida Homeowner’s Construction Defect Lawsuit

Charmaine Little | Florida Record | April 24, 2017

The 5th District Court of Appeal in Florida has ruled on behalf of a Florida homeowner in a defection case that a trial court was wrong to dismiss the case.

Homeowner Timothy Busch filed for an appeal with the court after the Circuit Court for Lake County tossed out his complaint against Lennar Homes LLC under a 10-year statute of repose for a defection claim. The appeals court reversed the trial court’s decision, saying that the actual complaint does not confirm that the statute of repose period was over before the homeowner filed the complaint.

The appeals court also said that the duty of the trial court is to solely consider the actual complaint and its attachments. Therefore, the trial court’s argument that Busch violated the 10-year statute of repose was not valid.

“When considering a trial court’s dismissal of a complaint on the basis of the statute of repose, the appellate court’s focus is on whether the factual allegations set forth int he complaint and its attachments establish that the claims for relief therein are time barred,” the appeals court ruled.

The appeals court also said that it is not the plaintiff’s responsibility to foresee certain defenses such as the statute of repose argument.

Busch said that he would pay Lennar Homes for construction on the home, according to court documents. But about a decade after settling in the home, Busch filed a Chapter 558 notice against Lennar Homes, stating there were “several alleged construction defects.” Lennar Homes responded with a motion to dismiss the complaint because Busch’s statute of repose had ran out.

According to Florida’s statute of repose “the action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.”

Although the trial court agreed that Busch had missed his state of repose, the appeals court sided with Busch and said the contract was not valid at the time of signing because both parties did not uphold their end of the deal. Under the contract, Busch could close on the home even if more work needed to be done. The complaint didn’t say that Lennar Homes stopped working on the house after the closing. Therefore, the appeals court ruled that the trial court was incorrect in dismissing Busch’s claims and overturned its ruling.

Missouri Court of Appeals Upholds Acceptance Doctrine to Absolve General Contractor of Premises Liability

John A. Watt | Baker Sterchi Cowden & Rice LLC | April 21, 2017

In the case of Wilson v. Dura-Seal and Stripe, the Missouri Court of Appeals for the Eastern District held that the “acceptance doctrine” is still valid law in Missouri, and bars liability against a construction contractor for the injury of a third party after the owner of the premises has accepted the work. Citing prior case law, the Court explained the law as follows: “After an owner accepts a structure, the general rule is that a general contractor is not liable to persons with whom he did not contract….In the absence of formal acceptance, constructive or practical acceptance will suffice….Acceptance of the work is attended by the presumption of the owner … made a reasonably careful inspection of the work, knows of its defects, and so accepts the defects and the negligence that caused them as his own.”

In Wilson, plaintiff brought suit against general contractor Dura-Seal for injuries she sustained when she tripped and fell in the gutter area of new asphalt, which had been applied by Dura-Seal at a public school. Wilson claimed that she fell as a result of the height differential between the gutter area and the new asphalt installed by Dura-Seal. Wilson filed a premises liability claim against the owner of the premises who then in turn added Dura-Seal as a third party defendant. Dura-Seal moved for summary judgment, stating that the owner had accepted their work and therefore bore the premises liability due to the acceptance doctrine. The plaintiff argued that there was no evidence that the owner had accepted the work.

It was undisputed that Dura-Seal had not performed any work on the drive lane for at least two months before the plaintiff’s injury and that the owner had paid Dura-Seal for all of the work. It was undisputed that the owner also had exclusive possession and use of the premises rather than the contractor. The Court of Appeals affirmed summary judgment and found that the undisputed facts showed that Dura-Seal was neither in control of the premises, nor had the right to control the premises at the time of the plaintiff’s injury.

The Court of Appeals also analyzed the “imminently dangerous” exception to the acceptance doctrine. This exception operates to impose liability on a contractor, even after the owner has accepted the contractor’s work, under the following conditions: “Where the structure was so defectively constructed as to be essentially and imminently dangerous to the safety of others; the defects are so hidden and concealed that a reasonable and careful inspection would not have disclosed them, and these things are known to the defendants but not to those who accepted them.” Here, the undisputed facts showed that the drive lane and the gutter area where Dura-Seal worked were in plain view and therefore was easily discoverable by the owner. The Court thus declined to apply the exception, and ruled in Dura-Seal’s favor, holding that plaintiff had accepted the work when it was completed and payment in full was made.

Missouri construction contractors and their counsel should be well aware of the dimensions of the acceptance doctrine, and the “imminently dangerous” exception, when defending cases of this type.

Question of Insurer’s Duty Hinges on Dictionary Definition

Samantha Joseph | Daily Business Review | April 7, 2017

Adam Handfinger of Peckar & Abramson

A dispute before the Florida Supreme Court looks like it could play by the book, specifically Black’s Law Dictionary. At the heart of the case is a question on whether insurers have a duty to intervene on a client’s behalf during pre-litigation efforts involving construction defect claims.

But it was the dictionary—and its definition of a legal “proceeding”—that took center stage during oral arguments Thursday, as one side sought to persuade the high court these pre-suit claims constituted judicial actions, and the other insisted they didn’t.

The court peppered appellant attorney Adam Handfinger with questions aimed at deciphering whether the claims met the dictionary’s parameters of “any procedural means for seeking redress from a tribunal or agency.”

“If (you) go by that, then this is not a civil proceeding,” Justice C. Alan Lawson said.

Justice Barbara J. Pariente seemed inclined to agree, noting the construction pre-suit process lacked an adjudicator—a key component under the dictionary’s definition.

The case pits Altman Contractors Inc. against general commercial liability insurer, Crum & Forster Specialty Insurance Co., which refused to step into a construction defect spat with a condo association. It stems from Altman’s role as general contractor for the luxury high-rise Sapphire condominiums in Fort Lauderdale.

That condo association served Altman with a notice of claim under Chapter 558 of the Florida Statutes, which governs construction defects.

Altman argued Crum & Forster had a duty to defend it, but the insurer countered the 558 claims were “not in suit.”

“The reason it’s become this nuanced discussion about what’s in the definition and what’s in the policy is that the policy is purposefully broad,” said Handfinger, co-partner in charge of Peckar & Abramson in Miami. “The definitions in the policy are broad, but they’re trying to ask the court to read them narrowly.”

Altman’s general commercial liability insurance policies with Crum & Forster define a “suit” as “a civil proceeding”—bad news for the contractor. But their definition also includes “arbitration” and “any other alternative dispute resolution … to which the insured submits with our consent.”

That last clause about consent was another sticking point for the justices, who weighed whether participation in the pre-suits was mandatory for respondents.

“None of my clients ever ignore this process,” Mark A. Boyle of Boyle & Leonard told the court. “We always participate.”

Boyle made an appearance for Altman and filed an amicus brief for the South Florida Associated General Contractors, Construction Association of South Florida, Leading Builders of America, Florida Home Builders Association and the National Association of Home Builders of America.

Meredith N. Reynolds of Peckar & Abramson appeared with Handfinger for Altman.

Kimberly A. Ashby of Foley & Lardner in Orlando and Holly S. Harvey of Clyde & Co in Miami appeared for Crum & Forster.