Appraisal May Include Cause of Loss Issues

Tred R. Eyerly | Insurance Law Hawaii

    The federal district court determined that an appraisal can include causation issues when determining the amount of loss. B&D Inv. Grp., LLC v. Mid-Century Ins. Co., 2021 U.S. Dist. LEXIS 246853 (N.D. Ill. Dec. 28, 2021).

    B&D commercial building was damaged by hail. B&D submitted a claim to Mid-Century, but the parties disagreed as to the damage. Mid-Century found there was hail damage to metal vents on the roof and estimated the repair costs to be $4,271.95. Mid-Century found no hail damage to the roof itself. B&D disagreed and insisted that there was additional damage to the property, specifically the roof.

    B&D requested an appraisal, but Mid-Century denied the request. Mid-Century found that the condition of the roof was due to wear and tear and therefore constituted an excluded cause under the policy. B&D filed suit seeking a declaratory judgment compelling the parties to proceed with an appraisal.

    The policy authorized an appraisal if the parties disagreed as to the “amount of loss.” B&D argued that when an insurer admitted there was a covered loss, determining the extent and causation of the damage was part of the “amount of loss” determination and subject to the appraisal clause, and not a coverage dispute. Mid-Century, on the other hand, framed the dispute as whether damage to the roof was caused by hail or by wear and tear and deterioration. 

    The policy did not define “amount of loss.” The parties agreed there was a covered hail loss to the metal vents on the roof. Because Mid-Century maintained any additional damage to the roof was due to wear and tear and deterioration, a disagreement existed as to whether the damage to the roof was caused by hail or by wear and tear. The court agreed with B&D that because damage to the roof was also caused by hail, an appraisal should be conducted to resolve the disagreement as to the “amount of loss” from the hail. 

    The initial determination by Mid-Century found that the amount of loss to the roof vents was based on the fact that the damage was due to hail. Mid-Century then ruled out any loss for the roof itself based on its view that the damage to the roof was caused by wear and tear and deterioration. This analysis inherently involved causation determinations. It logically followed that the causation for all of the damage would be part of the amount of loss analysis by an appraiser.

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

Can I Enforce The Arbitration Clause In A Terminated Agreement?

Joseph A. Apatov, Stephanie Hand-Cannane, James W. Sandy, Chase Stoecker and Alyssa Weiss | McGlinchey Stafford


Statute of Frauds

Kopsky v. MURrubber Technologies, Inc., 9th Dist. Summit Nos. 29867, 29984, 2022-Ohio-511

In this appeal, the Ninth Appellate District affirmed the trial court’s decision, agreeing that the alleged agreement was barred by the Statute of Frauds under R.C. 1335.05 as it was not in writing and any alleged agreement that may have existed was one for personal services of indefinite duration that was dependent upon the will of a third party.

The Bullet Point:  Under Ohio’s R.C. 1335.05, “[n]o action shall be brought whereby to charge the defendant * * * upon an agreement that is not to be performed within one year from the making thereof; unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person thereunto by him or her lawfully authorized.” Simply stated, pursuant to the Statute of Frauds, certain agreements must be in writing or are unenforceable. R.C. 1335.05 is narrowly construed, and Ohio courts apply the Statute of Frauds only to agreements which, by their terms, cannot be fully performed within a year, and not to agreements which may possibly be performed within a year. Consequently, an oral agreement with an indefinite time for performance, or which is dependent upon a contingency which may or may not happen with a year, does not fall within the Statute of Frauds. Further, even if a contract could be terminated within a year, the possibility of wrongful termination is not the same as the possibility of performance within the statutory period. However, in a matter involving a “personal services contract, where a defendant’s obligation to perform is contingent upon the future acts of a third party and will continue for an indefinite time in the future, the contract falls within the Statute of Frauds.”

In this case, the alleged agreement between the plaintiff and the former owners of the defendant’s company was an agreement for personal services. The plaintiff admitted there was no length of time stated for the agreement, and there was no discussion on how long the agreement would last or how it could be ended. As further noted by the appellate court, the former owners’ obligation to perform its part of the agreement was based upon whether a third party acted and utilized the company for its business. As such, the alleged agreement at issue was a personal services agreement of indefinite duration that was dependent upon the will of a third party. Consequently, the appellate court agreed that the alleged oral agreement was barred by the Statute of Frauds and summary judgment was properly granted in favor of the defendant.

Merger By Deed

Talmadge Crossings, LLC v. The Andersons, Inc., 6th Dist. Lucas No. L-21-1113, 2022-Ohio-645

In this appeal, the Sixth Appellate District affirmed the trial court’s decision, agreeing that the doctrine of merger by deed applied and precluded the breach of contract claim.

The Bullet Point:  The merger by deed doctrine holds that “when a deed is delivered and accepted without qualification pursuant to a sales contract for real property, the contract becomes merged into the deed and no cause of action upon said prior agreement exists.” Ohio’s merger by deed doctrine is essentially an application of the contract doctrine of integration, which holds that “all prior documents are considered to be integrated into the final contract, and only the provisions contained in the final contract are part of the agreement.” Ohio courts apply the merger by deed doctrine to determine the intent of the parties. As such, “if there is a specific survival clause in the prior contract of sale, or in a contemporaneous document delivered at the same time as the deed, which states that its provisions are to survive the delivery of the deed, then the merger doctrine does not apply.” In this case, the plaintiff accepted the deed without qualification, with no protest or reservation of rights. Therefore, the doctrine of merger by deed applied. Upon closing, the purchase agreement merged with the deed, thereby precluding the plaintiff’s breach of contract claim.

Class Action Certification

Midland Funding, LLC v. Colvin, 3d Dist. Hancock No. 5-21-04, 2022-Ohio-572

In this appeal, the Third Appellate District affirmed the trial court’s decision, agreeing that the “predominance” and “superiority” requirements of class certification pursuant to Civ.R. 23(B)(3) were established.

The Bullet Point: Pursuant to Civ.R. 23(B)(3), a class action may be maintained if Civ.R. 23(A) is satisfied, and if: “(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. The matters pertinent to these findings include: (a) the class members’ interests in individually controlling the prosecution or defense of separate actions; (b) the extent and nature of any litigation concerning the controversy already begun by or against class members; (c) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and (d) the likely difficulties in managing a class action.”

With regard to analyzing Civ.R. 23(B)(3), the Supreme Court of Ohio has stated that “it is not sufficient that common questions merely exist; rather, the common questions must represent a significant aspect of the case and they must be able to be resolved for all members of the class in a single adjudication. And, in determining whether a class action is a superior method of adjudication, the court must make a comparative evaluation of the other procedures available to determine whether a class action is sufficiently effective to justify the expenditure of judicial time and energy involved therein.” A predominance inquiry is far more demanding than the Civ.R. 23(A) commonality requirement and focuses on the legal or factual questions that qualify each class member’s case as a genuine controversy.

Enforcement of Arbitration in Terminated Agreement

Franklin Dissolution L.P. v. Athenian Fund Mgt., 8th Dist. Cuyahoga No. 110641, 2022-Ohio-623

In this appeal, the Eighth Appellate District affirmed the trial court’s decision, agreeing that a party does not waive enforcement of an agreement’s arbitration provisions simply because the agreement has been terminated.

The Bullet Point:  At issue in this dispute was whether a party could enforce an arbitration agreement contained in an agreement that had otherwise terminated. In Ohio, there is a presumption favoring arbitration when a dispute falls within the scope of an arbitration provision. If the trial court is “satisfied that the making of the agreement for arbitration or the failure to comply with the agreement is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the agreement.” R.C. 2711.03 (A). The Ohio Supreme Court set forth the principles underlying a court’s determination of whether to order arbitration pursuant to a written agreement as: “1) whether the parties agreed to submit any dispute to arbitration; 2) whether the agreement creates an obligation to arbitrate a particular grievance; 3) when deciding if the parties agreed to submit a particular grievance to arbitration, the court is not to rule on the potential merits of underlying claims; and 4) that where an arbitration provision is contained in a contract, there is a presumption of arbitrability.”

Here, the management agreement specifically stated that “any dispute between the parties arising out of or relating to this Agreement or the affairs and activities of [the Partnership] shall be settled by arbitration…This agreement to arbitrate shall be specifically enforceable, the arbitration decision shall be final and judgment may be entered upon the arbitration decision in any court having jurisdiction over the subject matter of the dispute.” The defendant argued that because the plaintiff denied responsibility for payment of fees under the management agreement because the agreement terminated, it was estopped from attempting to enforce the arbitration provision. However, as the appellate court explained, a party does not waive enforcement of an agreement’s arbitration provisions simply because that agreement has been terminated. Moreover, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Because the arbitration provision in the management agreement was valid and the dispute fell within the scope of the arbitration provision, the appellate court affirmed the judgment compelling arbitration.


Expert Witness Testimony on Attorney’s Fees

Phillip Morris v. Naugle, Nos. 4D20-953 and 4D20-1287 (Fla. 4th DCA March 2, 2022)

The Fourth District held that the trial court erred in refusing a motion to exclude expert testimony where the expert provided no insight into what principles or methods were used to reach his opinion, reversed the attorney’s fees and costs judgment, and remanded for further proceedings.

The Bullet Point:  The Daubert standard applies not only to scientific testimony, but to all expert testimony. Therefore, even in a bench trial, courts must assess whether the expert’s reasoning or methodology can properly be applied to the facts in issue. Where the expert provides nothing more than pure opinion, the testimony should be excluded.

The issue in this appeal is whether the trial court should have excluded the testimony of a fee expert who provided pure opinion based on his experience as a lawyer and retired circuit court judge. The appellant moved to preclude the expert on the basis that he did not rely on proper factors and thus was not qualified to testify at the fee hearing under the admissibility standard set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). The Fourth District agreed, holding that Daubert applies to expert testimony on attorney’s fees, and, even during a bench trial, a court must determine admissibility of the evidence at some point. The Court found that because the expert provided no insight into what principles he used to reach his opinion, and there were clear errors in his methodology, the trial court could not assess the admissibility of the testimony.

Application of the Business Judgment Rule

New Horizons v. Harding, No. 3D20-1471 (Fla. 3d DCA Feb. 23, 2022)

The Third District held the business judgment rule does not need to be raised in defensive pleadings to shield corporate conduct from judicial review because the rule applies presumptively by operation of law.

The Bullet Point:  The business judgment rule protects officers and directors from judicial review of their acts, so long as they are made in good faith based on reasonable business knowledge. In Florida, directors of corporations, limited liability companies, not-for-profit corporations, and condominiums are immune from liability absent a showing of bad faith, self-dealing, or criminal conduct.

This appeal stemmed from a condominium dispute over assessments. The appellant contended that the trial court erred in failing to consider whether the actions of its directors were protected from review as the product of a valid exercise of business judgment. The Third District agreed, concluding that the appellant did not need to raise the business judgment rule as an affirmative defense. The Court further noted that the business judgment rule shields a condominium association’s decision from judicial review if that decision is within the scope of the association’s authority and is reasonable, and the appellant specifically alleged its quorum of directors acted with authority, neutrality, and good faith. Accordingly, the Third District remanded the case to the trial court, constraining its examination to the circumstances surrounding the appellant’s exercise of business judgment.

Payment of a Lien

Scheckler v. Monroe Cnty, No. 3D21-0464 (Fla. 3d DCA March 2, 2022)

The Third District examined whether a payment of a lien during the pendency of an appeal rendered the appeal moot.

The Bullet Point:  A payment made to avoid penalties is generally considered involuntary or compulsory, and relief is available in the form of a refund. Where an order implementing fees or a lien on a property is challenged as a due process violation, payment of the fine in full prior to the court’s determination will not render the challenge moot.

In this case, the petitioner received numerous code violations while his permit application to bring his building up to code was pending. At a code compliance hearing, the special magistrate entered a final order imposing fines for the violations and recorded the order as a lien on the property. The petitioner challenged the final order, arguing it was unconstitutional and violated his due process rights. During the pendency of the due process challenge, the petitioner paid all the outstanding fines, and, thereafter, the circuit court determined that this payment of the lien rendered the appeal moot. The Third District disagreed, finding that because the lien on the property had a coercive effect and relief was available in the form of a refund, the appeal presents a live case and controversy. The Court held that the payment of the lien was involuntary, and the finding of mootness by the circuit court both failed to apply the correct law and amounted to a violation of due process. Accordingly, the Third District granted the petition for certiorari, quashed the opinion dismissing the appeal as moot, and remanded the case.

Excusable Neglect and Relief from A Proposal for Settlement

Williams v. Fernandez, No. 2D21-802 (Fla. 2d DCA March 4, 2022)

The Second District reversed a trial court’s decision to rescind a proposal for settlement after it had already been accepted, because the evidence was insufficient to establish the proposal was made by unilateral mistake as a result of excusable neglect.

The Bullet Point:  A court should take caution in rescinding a proposal for settlement once it has been accepted. Unilateral mistake is not statutorily identified as an escape hatch for proposals for settlement, and the court cannot grant relief from the proposal based on unilateral mistake if excusable neglect is not established. A general assertion of error in an unsworn statement, without more factual development, is insufficient to establish excusable neglect.

This appeal concerned the trial court’s decision to rescind a proposal after it had already been accepted. The defendants, in seeking relief from the proposal for settlement, claimed the offer was a unilateral mistake made as a result of excusable neglect. In reversing the trial court’s decision to rescind the proposal, the Second District found the evidence was insufficient to establish excusable neglect because (1) the movants failed to present any sworn evidence, and (2) there was no testimony explaining the cause of the erroneous proposal, when the error was discovered, when it was cured, or whether counsel for the defendants proofread the document before sending it. The Court further cautioned that the decision to rescind an accepted proposal should not be made lightly, noting that a proposal for settlement is a sanctions mechanism, not necessarily a contract, and its terms are not subject to negotiation.

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

Five Mistakes Subcontractors Commonly Make Before Signing Construction Subcontracts

Kevin N. Tharp | Riley Bennett Egloff

Construction subcontractors assume a tremendous amount of risk with each subcontract that they sign with a prime contractor. While much of that risk cannot be avoided, there are some risks that subcontractors can reduce (if not eliminate) by avoiding the following mistakes prior to signing their subcontracts.

1. They Do Not Receive a Copy of the Prime Contract

Subcontracts often include a provision stating that the subcontractor is bound to the prime contractor on the same terms that the prime contractor is bound to the owner (commonly known as the “Flow-Down”). A subcontractor can only know-and abide by-the prime contract terms if the subcontractor obtains a copy of the prime contract before the subcontract is signed. For that reason, upon request, a prime contractor should promptly provide a copy of the prime contract (which may be redacted to protect confidential information, such as the prime contract price). If the prime contractor declines to provide the prime contract, the subcontractor should reconsider whether to do business with that prime contractor.

Too frequently, subcontractors negotiate, sign, and perform their subcontracts without ever seeing the prime contract. Years ago, one of my clients served as a replacement subcontractor on a large commercial project. Construction was well underway when my client became involved with the project. When I asked the prime contractor for a copy of the prime contract, the prime contractor agreed and stated that none of the other subcontractors-who were onsite performing large scopes of work for which they were charging seven- and eight-figure sums-had asked for a copy of the prime contract, without which the subcontractors could not possibly know all the risks they had assumed.

2. They Do Not Attempt to Negotiate

Generally speaking, construction subcontractors do not enjoy much leverage in negotiations with prime contractors. This frequently leads subcontractors to conclude that it is a waste of time to negotiate the terms of the prime contractor’s standard subcontract, so they do not try. This is a mistake for three reasons.

First, the prime contractors’ standard subcontract terms are often onerous, and they know it (even if they are not willing to acknowledge it). The prime contractors may be willing to soften some of the more onerous terms if the subcontractors ask. As the adage goes, “If you don’t ask, the answer is always ‘no.'” Second, suppose the subcontractor has a copy of the prime contract in hand. In that case, the subcontractor knows what the prime contractor’s obligations are to the owner and can negotiate subcontract provisions that are less onerous to the subcontractor but are sufficient to allow the prime contractor to satisfy its obligations to the owner (e.g., indemnification, claim notice deadlines, and retainage and other payment terms). Third, even if the prime contractor refuses to make any meaningful concessions, the process of preparing for the negotiation should cause the subcontractor to review carefully and understand the terms of the subcontract and the prime contract before work begins, with the result that the subcontractor will be better positioned to avoid disputes and to resolve amicably those disputes that cannot be avoided.

3. They Allow the “Flow-Down” to Work Against Them But Not For Them

When I am asked to review a draft subcontract on behalf of a subcontractor client, one of the first things I do is look for the “Flow-Down” provision, to confirm that the subcontractor has the same rights against the prime contractor that the prime contractor has against the owner (in addition to owing the prime contractor the same obligations that the prime contractor owes to the owner). If the prime contractor’s rights against the owner do not “Flow-Down” to the subcontractor, my first suggestion will be to correct that. There are few circumstances in which a subcontractor should shoulder the burdens of the prime contract without receiving the benefits of that contract.

4. They Do Not Carefully Review the Scope of Work

All contractors are understandably fearful of a “bid bust”-i.e., after they have signed contracts, they learn that their contract prices are not sufficient to allow them to perform the contracted work profitably because (in calculating their bids) they overlooked part of their scope. To avoid this error, good contractors double-check the scope of work as part of their bid preparation. Contractors should use the same care in reviewing the scope of work described in their contracts prior to signing them. This is of particular concern to subcontractors because the prime contractors often take responsibility for preparing and assembling the subcontract documents and (occasionally) add scopes of work to the subcontracts without increasing the subcontract prices. Depending on the circumstances, a subcontractor may have a legal remedy against the prime contractor for the scope error. Still, the subcontractor is better served by not needing such a remedy in the first place.

5. They Agree to Subcontract Provisions They Do Not Fully Understand

In their rush to sign the subcontract and get started on the work, subcontractors will sometimes gloss over subcontract provisions that they do not understand, only to later learn-the hard way-precisely what those provisions mean. This is particularly true with respect to indemnity provisions, which run the gamut from the relatively narrow (e.g., providing indemnity against third-party personal injury and property damages claims typically covered by the subcontractor’s insurance) to the relatively broad (e.g., providing indemnity against all third-party claims arising out of subcontractor’s work, even if the claim was caused in part by the prime contractor or the owner). Usually, in an hour or less, a seasoned construction lawyer can review and interpret such clauses and provide suggestions for limiting the subcontractors’ liability in ways that may be acceptable to the prime contractors.

A well-advised subcontractor reduces its risks by reviewing, understanding, and negotiating before putting its signature on a subcontract.

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

Thoughts on New Pay if Paid Legislation

Christopher G. Hill | Construction Law Musings

Recently, the Virginia General Assembly closed its session having passed legislation essentially banning “pay if paid” clauses in construction contracts, both public and private.  Assuming that Governor Youngkin signs the bill into law on or before his deadline of April 11, 2022, the following new requirement will be grafted into any Virginia construction contract:

Such contract shall require such higher-tier contractor to pay such lower-tier subcontractor within the earlier of (i) 45 days of the satisfactory completion of the portion of the work for which the subcontractor has invoiced or (ii) seven days after receipt of amounts paid by the owner to the general contractor or by the higher-tier contractor to the lower-tier contractor for work performed by a subcontractor pursuant to the terms of the contract.

This is the main operative language (the 45-day payment requirement is also applied to project owners), but the legislation also imposes certain other notice duties upon both the owner and any higher-tier contractor on a construction project.  Interestingly, the legislation does not include a provision making it only effective for those contracts entered into after its effective date.  More on that later.

As a Virginia construction attorney that routinely represents construction professionals here in the Commonwealth, this represents a sea change in construction contracting akin to the earlier ban on pre-payment waiver of lien rights by contract.  This legislation can be seen as a boon for subcontractors that felt that they were required to finance the project while general contractors were able to wait on payment until the owners got around to paying the general contractor, regardless of the reasons for the owner’s non-payment.  Should this legislation pass, project owners and general contractors will be required to either pay the downstream contractors within a maximum of 45 days from completion of the work or provide reasons in writing for any non-payment, including the names of the lower-tier subcontractor(s) that provided the faulty performance justifying the non-payment.

Among the various questions that would have to be ironed out, presumably in court, are the following:

  1. What about contracts entered into prior to the effective date of the legislation?  The argument can be made that because the legislature did not explicitly state that the legislation is not retroactive, the ban on pay-if-paid applies to all construction contracts currently in place.  While this seems harsh, the General Assembly has explicitly stated that certain legislation only affects actions after that legislation’s effective date but did not do so here.  It will certainly be a point of litigation moving forward.
  2. How will retainage be handled?  Owners routinely withhold a percentage of the amount of any payment application from the general contractor by contract.  Will owners now have to provide notice every time such payment is withheld?  What effect does that have on a general contractor’s ability to withhold that same retention?  Unlike the mechanic’s lien statutes that state that retention is not subject to the 150-day rule, this bill does not mention retention in any way, leaving the door open to an argument that at the very least the owner would have to notify the general contractor every time it withholds retention.
  3. What if a higher-tier owner or contractor misidentifies the lower-tier subcontractor at fault?  Does this misidentification nullify any notice and subject the higher-tier entity to the interest and penalties in the statute?  What if there is a change in the trade subcontractor performing a certain scope of work and that is not communicated up the chain?

I raise these questions because I think they will play out in the courts of the Commonwealth of Virginia absent some clarity.  I also believe that construction contracts should take them into account.  For instance, higher-tier contractors and owners should routinely require a list of lower-tier subcontractors and further impose a requirement that this list is updated if there are changes.

I would love to hear other questions that you as readers come up with when reading the legislation.  I am sure I haven’t hit on all points of potential controversy.

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

Understanding Insurance Terms in Construction Contracts

Seth Row | Miller Nash

Construction contracts at all tiers usually include terms requiring certain types of insurance, and often contain related provisions about indemnity. This “boilerplate” can be important if a job goes south, so here’s a short explanation of some of the key terms and how they relate to one another:

  • Builder’s risk insurance: This is insurance purchased by the owner or general contractor that covers property, equipment, and supplies at the jobsite (and sometimes beyond). It is a form of property or “first-party” insurance that pays to replace or repair covered property in case of theft, a fire, etc. It will usually provide coverage for some subcontractor supplies and equipment (but not all).
  • Liability insurance: This is insurance against claims made by others for property damage or bodily injury. Often called “third-party” insurance, this comes in many forms, the most common of which is “Commercial General Liability” or “CGL.” Everyone on a job should have their own CGL insurance, even if there is a “wrap” (see below), and of course, CGL is required by the CCB. One common dispute between policyholders and insurance carriers is over what kind of liability for property damage the insurance covers, and what it does not. Generally speaking, CGL insurance will cover liability arising from property damage to the work of other trades (or to the completed project), but will not cover the cost of correcting defects in the insured’s own work. In a classic example, CGL insurance should cover water damage to framing caused by incorrectly installed siding, but may not cover the cost of redoing the siding if there has been no damage to anything else. (Notice that we said “may not.” Whether insurance applies often depends on all the facts of a case and subtleties in the policy language. It is therefore very difficult to provide hard-and-fast rules about what is and what is not covered.)
  • “Wrap” insurance: This is a form of liability insurance purchased by the owner (“Owner Controlled Insurance Program” or “OCIP”) or the general contractor (“Contractor Controlled Insurance Program” or “CCIP”). It provides coverage for everyone enrolled in the “wrap,” which usually includes all trades, but excludes design professionals. If there is a wrap, the subcontractors will generally be asked to exclude insurance costs from their bids. Most CGL policies held by individual subcontractors exclude coverage for any project with a wrap.
  • “Additional insured”: Most construction contracts require that the lower tier contractor add the upper tiers as “additional insureds” on the lower tier’s liability insurance. This means that if the upper tiers are sued for something that involved the lower tier’s work, the upper tier contractors (and owner) can tender the claim to the lower tier contractor’s insurance and that insurance company will pay for their defense lawyer and (potentially) the settlement. This is a method of shifting risk from the upper tier contractor down to the lower tier. One common problem that we see is a mismatch between the scope of the coverage that the lower tier contractor promises to provide and what the lower tier contractor’s insurance policy actually provides. Liability policies usually have an additional-insured “endorsement” (an add-on to the policy) that says that anyone that the policyholder has agreed to add as an additional insured is an additional insured. But those endorsements often limit additional-insured coverage to less than the full scope of coverage provided by the policy. It is a good practice to have your insurance broker compare a draft of your construction contract with your insurance policy to make sure that you are not promising more than you can deliver.
  • Indemnity: Most contracts require the lower tier contractor to “indemnify” the upper tier contractors and owner from claims relating to the lower tier contractor’s work. This is a separate obligation from that of providing “additional insured” coverage, but involves many of the same concepts. And of course, in reality the lower tier contractor may not have the resources to pay to “indemnify” anyone beyond what is available from its insurance. In Oregon, the obligation to indemnify someone generally includes the obligation to pay for a defense lawyer. It is therefore important to pay close attention to claims that may trigger the obligation (and having insurance to step in), because they can be quite expensive.

Boilerplate clauses in construction contracts often turn out to be critical if something goes wrong. That is certainly true of insurance terms. Involving your insurance broker and counsel can help prevent problems down the road, and having a good understanding of the basic terms can make that conversation more efficient. Happy contracting!

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