Force Majeure Application to Increase in Price of Materials

Kent B. Scott | Babcock Scott & Babcock

Is a substantial increase in the cost of materials covered by a force majeure provision? If so, what is the appropriate remedy?

Short Answer

In short, the answer is dependent on the terms of the specific contract. If a contract is a fixed price contract, an increase in the cost of materials likely will not be covered by a force majeure provision. Moreover, if a contract is a fixed price contract and it contains a “no damage for delay” provision, then it is very likely an increase in the cost of material will not be covered by a force majeure provision. Since it is unlikely a substantial increase in the cost of materials will trigger a force majeure provision, it is not necessary to determine what the appropriate remedy would be.

Analysis

Applying Florida law, the Eleventh Circuit found that a contractor who entered into a fixed price contract with a property owner and subsequently saw a substantial increase in its costs due to effects of a series of hurricanes, which caused a shortage of labor and material, was precluded from recovering additional labor and material costs from the force majeure events – i.e., the hurricanes. S&B/BIBB Hines PB 3 Joint Venture v. Progress Energy Fla., Inc., 365 Fed. Appx. 202, 203, 205 (11th Cir. 2010). In S&B, the parties’ contract required the contractor to “provide pricing for [all material, equipment, workmanship, labor, engineering, and any other items or labor performed or furnished] at a firm fixed price.” Id.at 203. The contract further contained a “no damage for delay” provision that provided “that in no event shall Contractor be entitled to any increased costs, additional compensation, or damages of any type resulting from such Force Majeure delaysId. at 204. The court ultimately found that:

“it would subvert the entire purpose of a fixed price contract to allow [the contractor] to recover additional labor and materials costs when the benefit of a fixed price contract is to protect against price increases, labor shortages, material shortages, and the like. In contracting for the fixed price construction job, ‘the parties thoroughly addressed and allocated the risks’ inherent in the project, and [the contractor] could have increased its prices to reflect the risks it was assuming.”

Id. at 205-06 (quoting Marriot Corp. v. Dasta Const. Co., 26 F.3d 1057, 1065-66, 1066 (11th Cir. 1994)). The court reasoned that “[t]he contract made plain that [the contractor] bore the risk of these additional expenses and could have negotiated an alternate contract containing an escalation clause, a cost-plus arrangement, or a higher fixed price to protect against unforeseen expenses or increased its contract price to account for such risks.” Id. at 206.

The Fourth Circuit similarly held that a force majeure clause does not protect against changes in market price. Langham-Hill Petroleum Inc. v. S. Fuels Co., 813 F.2d 1327, 1330 (4th Cir. 1987). In Langham-Hill, two parties entered into a fixed price contract for a lump sum number of barrels of oil, which would be purchased at the fixed contract price over four monthly installments. Id. at 1329. The first three installments concluded without dispute. Id. However, prior to the fourth and final installment there was a substantial drop in the world oil prices. Id. The purchaser invoked the contract’s force majeure clause and refused to perform any further obligations under the contract. Id. The Fourth Circuit reasoned that “[i]f fixed-price contracts can be avoided due to fluctuations in price, then the entire purpose of fixed-price contracts, which is to protect both the buyer and the seller from the risks of the market, is defeated. Id. at 1330. The Fourth Circuit adopted the Seventh’s Circuit reasoning in Northern Indiana Public Service Company v. Carbon County Coal Company, 799 F.2d 265 (7th Cir. 1986), which dealt with a utility company’s efforts to escape a fixed-price coal contract, that:

[the defendant] committed itself to paying a price at or above a fixed minimum and to taking a fixed quantity at that price. It was willing to make this commitment to secure an assured supply of low sulphur coal, but the risk it took was that the market price of coal or substitute fuels would fall. A force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed price contract is that the market price will change. If it rises, the buyer gains at the expense of the seller (except insofar as escalator provisions give the seller some protection); if it falls, as here, the seller gains at the expense of the buyer. The whole purpose of a fixed price contract is to allocate risks in this way. A force majeure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.

Langham-Hill, 813 F.2d at 1330 (quoting N. Ind. Pub. Serv’s., 799 F.2d at 275).

Utah courts seem to follow this reasoning. In Kilgore Pavement Maintenance, LLC v. West Jordan City, 2011 UT App 165, ¶ 2, 257 P.3d 460, a pavement contractor provided a city with a fixed price bid that was based on liquid asphalt oil being priced at $350 per ton, which the city accepted, and the two parties subsequently entered into a contract. Id. Shortly after the parties entered into the contract, the price of liquid asphalt increased to $1005 per ton. Id. at ¶ 3. The court ultimately held that the contractor “assumed responsibility for supplying all materials necessary for its performance, and therefore, assumed the risk of supply cost increaser”, which ultimately precluded the contractor from relying on a claim of impossibility or commercial impracticability. Id. at ¶8, 12. While a force majeure clause is absent from the reasoning in Kilgore, Kilgore does provide that under Utah law, a fixed price contract is prima facie evidence of an allocation of risk of the change in the contracted material’s market price.

Conclusion

Assuming the contract between an owner and contractor is a fixed price contract, it is likely the substantial increase in price cannot trigger the force majeure clause since the contractor assumed the risk of an increase in the market price of lumber when it entered into the fixed price contract. the contractor had the opportunity to bargain for an escalation provision, a cost-plus contract, or a higher contract price to reflect its risk. Thus, the contractor is contractually obligated to purchase lumber at the higher market price so long as lumber is available for the contractor to purchase.

It is important to note that although it is likely Burton Lumber is precluded from relying on a force majeure provision, it may still have a claim under an excuse doctrine, such as “frustration of purpose, impossibility, and commercial impracticability.” § 7:322. Relief from disruption caused by COVID-19 pandemic, 2A Bruner & O’Connor Construction Law § 7:322. However, pursuant to Kilgore, it is unlikely such a claim would be successful. 2011 UT App 165, ¶ 8, 12, 257 P.3d 460.

Material Cost Escalation: Who Bears the Cost Now? And, What Can Be Done to Address the Problem in the Future?

Sherman Botts | Stinson

While an increase in construction costs for materials is not new to the industry, the extent of the cost increases during this COVID-19 time may be beyond anyone’s experience. Prior to COVID-19, material costs have spiked for many products, such as oil, asphalt, concrete and plywood. Those cost increases may have arisen from certain tragedies involving Mother Nature’s hand, such as flooding, hurricanes, fires and tornadoes. In other instances, increased costs may have been prompted by tariffs recently implemented over the past few years by governmental actions. In each case, the increased cost is usually unforeseen and the parties are faced with the basic dilemma: who should bear the cost of the increased costs? Owner? Contractor? Subcontractor? Or, some or all of the above?

With the COVID-19 pandemic, the increased costs and delays appear to affect far more materials than ever before. Beginning in early 2020, construction projects are facing increased costs with structural steel, lumber, copper, plumbing and electrical materials. There is no uniform assessment as to the degree of increase in prices, which have ranged from 25% for tariff-affected materials to more than 70% to 300% for lumber. Some have observed that structural steel has increased by more than 250%.

Coping with Cost Increases and Delays on an Existing Project

A common scenario now involves a construction client who calls and asks two essential questions: (1) who must bear the brunt of the increased cost for a particular material; and (2) whether the increase can be passed on to other parties associated with the project. The construction lawyer’s first response should be: “What does your contract provide?” Indeed, the first step in any analysis must start with the contract that the parties negotiated (or maybe just blindly signed) at the outset of the project. Does the prime contract or subcontract include a “force majeure” clause? (For those new to construction contracts, the title “force majeure” may not appear in the body of the contract but the concept is often present.) The French term “force majeure” means a “greater force” and usually excuses delays experienced by a contractor or subcontractor when the delays are unforeseen and caused by reasons beyond their reasonable control. A common example of a force majeure clause is found in AIA Documents A201, in the underscored portion of Section 8.3.1 below:

§8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.

Would delays and dramatically increased costs in materials caused by COVID-19 be covered by this contract clause in one of the most common contract templates in the construction industry? First, stating the obvious—this clause does not expressly refer to COVID-19 nor does it refer to “epidemics” or “pandemics.” (These words may be found in other published templates.) Because the provision in this instance makes no mention of the pandemic, should the contractor’s or subcontractor’s delayed performance be excused because of a COVID-19-caused event? There is no black and white answer in this regard.

Some would argue that the use of the word “unusual” in Section 8.3.1 means that the event must be unforeseen and that the COVID-19 events are NOT unforeseen or “unusual” because all parties in the construction industry have been dealing with COVID-19 for a long time, at least since the President declared the Coronavirus to be a pandemic on March 13, 2020. The argument continues that, since COVID-19 is a known event, experienced contractors and subcontractors should have learned how to address the risk of cost increases by locking down quotes from suppliers or advanced ordering of materials.

Many would argue, though, that the pandemic need not be expressly mentioned in the provision and that it should certainly qualify as an “unusual delay…. or cause beyond the Contractor’s control.” This is an important delay claim for the contractor or subcontractor to submit, particularly if the contractor or subcontractor faces the risk of a liquidated damage assessment. But an extension of contract time may be the only remedy available to the contractor or subcontractor under this provision. The potential for an increase in the contract sum is not mentioned here and its absence may be damning to a contractor’s request for increased compensation, unless the remedy of increasing the contract sum was negotiated into the contract.

It is important to note, however, that Section 8.3.1 may refer to only contract time extensions but it does not absolutely bar requests for increased costs. Indeed, Section 8.3.3 provides:

§ 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.”

As such, the request for increased cost recovery may still be submitted provided that the subcontractor’s or contractor’s claim complies with the applicable notice provisions in the contract. In addition, the claimant should consider submitting the claim in the in the form of an equitable request for additional compensation as discussed below.

If the contract provides no relief to the contractor or subcontractor for significantly increased costs, an equitable argument must be presented to deal with the facts at hand. The subcontractor may be placed in such a position that it is not able to perform its duties under its subcontract if it is forced to bear the burden of all increases in costs. Obviously, an assumption of a 300% increase in materials would likely put many subcontractors out of business. If a subcontractor walks off the project for that reason, the project will likely face substantial delays and increased costs that others would have to bear if the project is to continue and if there is no performance bond relief available.

The subcontractor should consider making a very prompt request for equitable adjustment in compensation under the doctrine of impracticality or impossibility to address the increased costs. The equitable claim should be submitted to the tier contractor above it so that it can be processed up the contracting chain. The claim must emphasize that the dramatic increase in costs is unforeseen and renders the subcontractor’s performance an impossibility and that the increased costs will negatively impact the subcontractor’s ability to successfully and timely perform if no relief is provided.

The net result of the increase and the subcontractor’s inability to perform can cripple the completion of the project, which is not in the best interest of any party to the project. Through timely communication among the parties, there may be acceptable alternatives to avoid a shutdown to the project. Perhaps other materials can be used? Perhaps there can be a sharing in the cost? Perhaps design changes can be made?

The courts have reviewed whether dramatic increases in cost of materials will excuse performance by a contractor but jurisdictions vary as to the outcome. On the excused performance side, consider the analysis by the New York court in Moyer v. City of Little Falls, 134 Misc. 2d 299, 301–02, 510 N.Y.S.2d 813 (Sup. Ct. 1986), and its observation and ultimate conclusion that:

[T]here is a growing trend that performance should be excused (1) if governmental action or other contingencies create a substantially unjust situation totally outside contemplation of the parties and (2) which an experienced draftsman would not reasonably anticipate. In this instance, it is stipulated that the 666% price increase [in dumping costs at the required landfill] was not and could not have been within the contemplation of the parties. Such a massive cost escalation is ‘excessive’ as a matter of law and future performance by plaintiff must be excused.

In Pennsylvania, in Aluminum Co. of Am. v. Essex Grp., Inc., 499 F. Supp. 53, 70 (W.D. Pa. 1980), new regulations for oil and pollution control dramatically increased the seller’s smelting costs and would have caused the seller to lose more than $75 million during the life of the contract while the buyer conversely stood to gain a windfall profit. The court found that regulatory changes of this sort were an unforeseen supervening circumstance, not within the contemplation of the parties at the time of contracting. To the relief of the seller, the court found that the seller’s performance became commercially impracticable.

By contrast, some courts in the Eighth Circuit have found that even excessive increases would not excuse performance by a contractor. In Iowa Electric Light and Power Company v. Atlas Corporation, 467 F. Supp. 129, 140 (N.D. Iowa, 1978), the U.S. District Court for the Northern District of Iowa held that an increase in seller’s costs by 52.2%, resulting in the seller’s loss of approximately $2,673,125.00, failed to constitute commercial impracticability, and precluding judicial adjustment or discharge of the contract for supply of uranium concentrate. In making such a determination, the court noted that cost increases of 50-58 percent had generally not been considered of sufficient magnitude to excuse performance under a contractual agreement. Iowa Electric was cited shortly after by Missouri Pub. Serv. Co. v. Peabody Coal Co., 583 S.W.2d 721, 726 (Mo. Ct. App. 1979), where the Missouri Court of Appeals for the Western District found that an escalation in costs did not render the contract “commercially impracticable” or excuse the contractor’s performance: “[i]ncreased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters [t[he essential nature of the performance.”

Proactive Steps for Future Projects

For new projects and new contracts, contractors and owners should consider discussing how the risk of cost escalation can be minimized or shared in the future. If past contracts did not provide any answers, a price escalation clause is often discussed for future contracts. The clauses come in all shapes and forms. Frequently, the clause describes a certain limitation or percentage guideline as to when a cost increase will be considered significant enough for cost relief. Consider the following:

Cost Escalation: In the event of significant delay or price increase of material, equipment or energy occurring during the performance of the contract through no fault of Contractor or its subcontractors, the contract sum, time of completion or contract requirements shall be equitably adjusted by change order in accordance with the procedures of the contract documents. A change in price of an item of material, equipment, or energy shall be considered significant when the price of an items increases ___% or more between the date of this contract and the date of installation. If the increase in price is at least ___%, but less than ___%, the equitable adjustment shall be based only on the amount of increase or decrease greater than ___%, but if the price increase is ___% or more, then the equitable adjustment shall be based on the entire amount of the price increase. If Contractor makes a request for an equitable adjustment to the contract price based on an increase in price, Contractor shall be required at that time to disclose its original price that has increased.

Richard A. Stockenberg, Material Price Escalation Clauses, as contained in The Anatomy of a Construction Contract, The Missouri Bar 2004.

Contractors may find some owners unwilling to consider a price escalation clause. From an owner’s perspective, the owner will expect the contractor or its subcontractor to take all necessary steps to control material costs at the outset of the project. These may include:

  1. Requiring the contractor or its subcontractors to purchase materials in advance.
  2. Requiring the contractor or its subcontractors to “lockdown” the price with its supplier.
  3. If a supplier is unwilling to lock down its pricing, an owner would expect the contractor or subcontractor to shop with another supplier. The problem with this alternative is that the market is changing and a growing number of suppliers are unwilling to lock down pricing for an entire project and will sell their materials at whatever price may exist at the time of the delivery.

To counter an owner’s refusal to consider a cost escalation clause, a contractor may include a very healthy contingency in its bid to accommodate the fluctuation in material costs. Is this what the owner wants?

The circumstances for recovery or rejection of increased costs in an existing project or drafting of an escalation clause for future contracts will require consultation with an experienced construction lawyer. Please contact Stinson for questions and assistance with these matters.

Construction Defect Damages May Exceed Cost To Repair

Peter Selvin | Ervin Cohen & Jessup

Construction defect cases often involve damage claims beyond simply the cost to repair the allegedly defective unit or component. These consequential damages may include damages for loss of use, expenses for mitigation and even attorney fees. For this reason, builders, suppliers, contractors and subcontractors who are faced with such claims should carefully review their insurance coverages, especially their CGL policies.

At the threshold, a defendant seeking coverage under its CGL policy in connection with a construction defect claim must satisfy the policy’s “occurrence” requirement. Although there is a split of authority on this point nationally, California law is settled that inadvertent property damage caused by intended construction activity constitutes an “occurrence.” See, e.g., Geddes & Smith v. St. Paul Mercury Indemnity Co., 51 Cal. 2d 558, 563 (1959); Anthem Electronics v. Pacific  Employers Insurance, 302 F.3d 1049 (9th Cir. 2002). See also Scott C. Turner, “Insurance Coverage of Construction Disputes,” Sections 6:56, 6:62 (2nd Ed.).

The next step is to establish that there has been “property damage.” This is because the basic coverage grant typically provides that the CGL insurer is responsible for paying “those sums that the insured becomes legally obligated to pay because of … property damage to which this insurance applies.” In turn, “property damage” is typically defined as either “physical injury to or destruction of tangible property … including the loss of use … resulting therefrom” or “loss of use of tangible property which has not been physically injured or destroyed [that has been] caused by an occurrence.”

It has been generally held that incorporation of defective components or faulty workmanship into a project constitutes “physical injury to tangible property,” thereby allowing coverage for damages from the loss, including damages measured by resulting decrease in the property’s value. See, e.g., United States Fid. & Guar. Co. v. Wilken Insulation Co., 550 N.E. 2d 1032 (Ill.App. 1989). The theory behind this rationale is that typical a coverage grant requires the CGL carrier to pay “those sums that insured becomes legally obligated to pay because of … property damage” (emphasis added). In other words, carrier responsibility includes not only damages that arise directly from the “property damage,” but also all sums arising because of the property damage. See, e.g., AIU Ins. Co. v. Superior Court, 51 Cal. 3d. 807 (1990) (reimbursement of response costs and the costs of injunctive relief under CERCLA and related statutes are insured “because of” property damage). While not exhaustive, the following examples illustrate some of the categories of consequential damages for which a CGL carrier may have responsibility.

Damage to the Larger Structure Caused by the Construction Defect

It is well established that damage to a physical structure, including the structure’s non-defective units or components, arising from the incorporation of the defective work should be covered under a CGL policy. See e.g., Economy Lumber v. Insurance Company of North America, 157 Cal. App. 3d 641 (1984). In some cases, damages are expressed as the diminution in value of the larger structure caused by the construction defect. See Franco Belli Plumbing & Heating v. Liberty Mut. Ins. Co., 2012 WL 2830247, *8 (E.D.N.Y. 2012) (“when one product is integrated into a larger entity, and the component product proves defective, the harm is considered harm to the entity to the extent that the market value of the entity is reduced in excess of the value of the defective component”); see also Anthem Electronics 302 F.3d at 1056-57 (“we decline to hold that coverage was precluded simply because the extent of such damage is expressed as an economic loss”).

So-Called “Rip and Tear” Damages

Where an owner must undertake repair work to existing conditions in order to access and remediate the defective work, the damages resulting therefrom may be covered. Thus, costs and expenses relating to this activity are considered part of consequential damages for which there should be coverage. Turner, supra, Section 6.29 (coverage for the damage to other, non-defective work necessarily caused in the course of removing or repairing the defective work).

Coverage for Costs Arising from Mitigation Efforts

In some cases, an owner may be obliged to take actions and incur expenses in order to protect the project from further damage caused by the alleged defect. Although the courts are split on this issue, the majority say these expenses are also considered as part of consequential damages for which there should be coverage. Turner, supra, Section 6.14, 6.22 (“costs incurred for mitigation or prevention of further property damage” are recoverable against CGL carrier).

Loss of Use

Damage resulting from the loss of use of the premises is a key item within the larger category of consequential damages. Am. Home Assurance v. Libbey-Owens-Ford, 786 F. 2d 22,  25 (1st Cir. 1986); Federated Mutual Insurance Co. v. Concrete Units, 363 N. W. 2d 751 (Minn. 1985); Gibraltar Casualty Co. v. Sargent & Lundy, 214 Ill. App. 3d 768 (1990); Lucker Manufacturing Co. v. The Home Insurance Co., 23 F. 3d 808 (3rd Cir. 1994); M. Mooney Corp. v. United States Fidelity & Guaranty Co., 618 A.2d 793, 796 (N. H. 1992); Thee Sombrero v. Scottsdale Ins. Co., 28 Cal. App. 5th 729 (2018); Turner, supra, Section 6:33.

Attorney Fees Awards

Some courts have held that attorney fees awards against the negligent contractor, subcontractor or supplier qualify as an element of consequential damages recoverable under a CGL policy. For example, in APL Co. v. Valley Forge Ins. Co., 754 F.2d 1084 (N.D. Cal. 2010), reversed on other grounds, 541 Fed. Appx. 770 (2013), the court concluded that the attorney fees award against the insured was covered under the insurance policy at issue. The court cited the policy provision there that coverage was provided for “those sums that the insured becomes legally obligated to pay as damages because of …’property damage.’” The court noted that inasmuch as the insured became obligated to pay attorneys’ fees to the claimant arising out of the underlying property damage claim, the award was properly recoverable against the insurer. 754 F.2d at 1094.

Other cases have reached the same result. See, e.g., American Family Mutual Ins. Co. v. Spectre West Building Corp., 2011 WL 488891 (D. Az. Feb. 4, 2011) (in the context of a construction defect case, the Court found that attorneys’ fees that were assessed against the insured were covered under the insurance policy, noting that “the issue before the court is not whether attorneys’ fees and costs can be characterized as ‘property damage’, but whether they can be characterized as damages that [the defendant construction company] became legally obligated to pay because of property damage”).

When Construction Defects Appear, Don’t Choose Between Rebuilding and Building Your Case

Curtis Martin | ConsensusDocs

When construction defects occur during construction, they intensify pressure from a schedule that may already be tight.  Defects must be analyzed, confirmed, removed, and replaced and this can be time consuming.   Or course, a construction schedule rarely anticipates defects, demolition, and rework and the owner will still expect the project to be completed on time; however, pressing forward with immediate remediation may have unintended consequences.

Before starting demolition, consider the evidentiary doctrine of spoliation. Spoilation occurs when a party destroys or unreasonably deprives another party of evidence and courts have imposed sanctions on a party that deprives an opponent of evidence.   The doctrine has historically concerned documents, but its application has extended to electronic data, and courts also apply it to building conditions in construction defects cases.  So, before tearing out or fixing defective work, consider the need to allow the opposing party to inspect, test and document it. 

Imagine this scenario. The concrete in a slab placed by your subcontractor shows low compressive strength results in the 28-day cylinder tests.   Tearing out the slab and replacing it will put you at least a month behind schedule and you don’t want to waste any time before removing and replacing it.  Nevertheless, while you’re rebuilding the defective slab, be mindful that you are also building a case.  If you plan to recover the costs you incur because of the defective concrete from the responsible parties, you should allow the subcontractor (and possibly the concrete supplier and other implicated parties) to examine, preserve, and/or test the work in question.  Failure to do so may subject you to spoliation sanctions and jeopardize your right to recover damages. 

Fast forward to the litigation over the defect.  The concrete subcontractor may make a case that the concrete wasn’t defective at all.  Its expert may argue that cylinder tests aren’t always accurate, and that some may not represent the actual strength of the concrete – for example, some concrete cylinders may break early due to anomalous concentration of aggregate in the cylinder.   The expert may argue that if given the opportunity to review later tests, or conduct alternate testing of the slab’s compressive strength, it might be shown that the cylinder test results do not represent the actual concrete strength – that the slab was strong enough, met specifications and should not have been replaced.   

Courts may be sympathetic to a party claiming spoliation.  You should expect that a trial judge’s analysis of a spoliation claim will begin from the presumption that the parties have a duty to preserve evidence.  At least one court said that “the burden of prejudicial effects” falls upon the spoliating party.  

If spoliation is proven, courts in most jurisdictions allow a variety of sanctions against the spoliator.  The harshest sanction for spoliation is fatal: the dismissal of a defect claim or the rejection of a defense because courts may treat the alteration or destruction of evidence as a form of admission by conduct.  Other sanctions can be less harsh but still damaging – for example, a judge may presume or instruct a jury to presume that missing evidence would have been detrimental to the party that altered or destroyed it.

Does the spoliation doctrine mean that you must halt construction or repairs that could damage or destroy defective work?   Unless there is an emergency or unsafe condition, the answer is usually yes; a pause should be made to put the parties responsible for the defective work on notice and provide an opportunity for them to inspect and evaluate it.   The goal then becomes to limit the length of the pause, so that repairs can get underway as quickly as possible.    With proper planning and swift communication and action, the pause may not unduly delay remediation.   And that pause will pay dividends in building your case and avoiding claims of spoliation. 

Every construction defect case is unique, but a few practical steps may guide you through the tension between preserving evidence and moving forward with repairs. 

  1. Thoroughly document the defect. 
  2. Give all potentially responsible parties written notice of the problem and an opportunity to inspect the site and document their findings if this can be done safely. 
  3. Notify the affected parties in writing of what steps will be taken to remediate the problem and when this will be done.   Solicit and consider any suggestions from affected parties about preserving evidence or allowing testing.  
  4. Consider whether an expert should be retained to assess, document, and report on the problem.  If testing is done, invite other parties to observe the testing and/or preserve other sections of the work to allow other parties to conduct their own testing. 
  5. Preserve all documents showing the original condition, corrections made, and all costs associated with remediation.   When possible, preserve samples of defective work for later inspection and/or testing. 

Owners, General Contractors, and subcontractors, when faced with defective construction, should work to preserve evidence that may be critical in a later legal battle. If they approach the problem prudently, they may be able to build their case while they rebuild the defective work.    

Eleventh Circuit Finds No “Property Damage” Where Defective Component Failed to Cause Damage to Other Non-Defective Components

Anthony L. Miscioscia and margo Meta | White & Williams

In Florida, damage caused by faulty workmanship constitutes “property damage;” however, the cost of repairing or removing defective work does not. Amerisure Mutual Insurance Company v. Auchter Company, 673 F.3d 1294 (11th Cir. 2012) (Auchter). But what happens when the cost of repairing or removing defective work results in loss of use of the tangible property which is not physically injured?

The United States Court of Appeals for the Eleventh Circuit was recently faced with this question in Tricon Development of Brevard, Inc. v. Nautilus Insurance Company, No. 21-11199, 2021 U.S. App. LEXIS 27317 (11th Cir. Sep. 10, 2021). Tricon arose out of the construction of a condominium. Tricon was hired to serve as general contractor for the project and hired a subcontractor to fabricate and install metal railings. The railings installed by the subcontractor were defective and damaged, improperly installed, and failed to meet the project’s specifications. Tricon filed an insurance claim with Nautilus Insurance Company, the subcontractor’s commercial general liability insurer, for the cost to remove and replace the railings.[1]

Relying on Auchter, the court concluded that the repair and removal of defective work does not constitute “property damage”. The court rejected Tricon’s contention that Auchter failed to consider that the repair and removal of defective components may result in a “loss of use of tangible property that is not physically injured”, and thus, qualify as “property damage”. It noted that the Auchter court held that “after interpreting the policy as a whole [and] ‘endeavoring to give every provision its full meaning and operative effect’” there was no coverage for the defective installation. The Eleventh Circuit therefore concluded that “the entire definition of ‘property damage’ in the post-1986 standard form commercial general liability policy must fail to cover the kinds of costs that Tricon incurred from its subcontractor’s deficient work.”


[1] Tricon was an additional insured under the subcontractor’s policy for liability for “property damage” caused, in whole or in part by the subcontractor’s direct or vicarious acts or omissions.