Waive or Do Not Waive Subrogation, But There is No Try

W. Gustin Vandiford | Subrogation & Recovery Law Blog

A recent federal case provided an excellent example that not all supposed waivers of subrogation are, in fact, waivers. In National Surety Corp., et al. v. Bozeman, 2022 WL 953053, No. 1:20-cv-01187-WJM-GPG (D. Colo. March 30, 2022), National Surety filed a subrogation action alleging the defendant – the owner of the unit where the fire originated – was liable for damages caused by the fire’s spread to the common elements of the condominium building. National Surety insured the condominium association (the “Association”). The parties agreed that an Association declaration providing that the Association’s board of directors would obtain insurance for the condominium building and common improvements applied to the Association and the individual unit owners. The declaration additionally stated, “[t]he Board of Directors shall make every reasonable effort to obtain policies…containing the following…the insurer waives its right of subrogation as to any claim against each unit owner.” (emphasis added). The board of directors for the Association obtained insurance from National Security that actually affirmed the carrier’s right of subrogation and did not include any waiver against the Association’s unit owners.

The defendant moved for summary judgment, arguing the declaration’s language – requiring the board of directors to “make every reasonable effort” to obtain waivers of subrogation against unit owners – constituted a waiver of subrogation. It relied on a prior case, Universal North Amer. Ins. Co. v. Bridgepointe Condominium Association, Inc., 195 A.3d 543 (N.J. Super. Ct. 2018), in which a court found the carrier’s right of subrogation was effectively waived by the condominium association’s by-laws, which stated its insurance policies “shall contain waivers of subrogation.”

The National Indemnity court denied the defendant’s motion. The court distinguished the declaration’s language from the by-laws in the Universal case because the former only required to board of directors to make reasonable efforts rather than mandating it to obtain a waiver of subrogation. The court held that the declaration’s language did not constitute a waiver under Colorado law because it did not clearly manifest the intention to relinquish a right.

In summary, agreements to provide for waivers of subrogation must clearly manifest the intention to relinquish the right.  Simply agreeing to make reasonable efforts to do so is insufficient.  This case highlights the importance of closely analyzing the language of a purported waiver of subrogation to determine if it is an enforceable waiver. Failure to do so may result in failing to pursue an otherwise recoverable subrogation claim.


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 experts@adviseandconsult.net.

Five Ways to Protect Bidding Opportunities and Bid Formulations

Evan Blaker | Cohen Seglias Pallas Greenhall & Furman

The bidding process for a construction project includes a vast array of folks: estimators, owners, project managers, design professionals and many others. Security, especially cybersecurity, can prove a challenge, and those receiving, drafting or issuing bids would be wise to consider potential problems before they become a reality. This can be accomplished by establishing and maintaining standards and protocols to protect your work product. These protocols can cover elements including accessibility, document protections, review processes and fundamental security protections such as passwords. Here are five essential steps parties should enact to guard their proprietary bidding information:

  1. Limit accessibility to services that provide portals where new projects are presented for bid and require log-on criteria to access the portal. These limitations are the building blocks for good security. Safeguarding access to the portals—and minimizing the number of people who have access—is a simple and practical approach that can and should be used from the initiation of the services.
  2. Require any employee with access to bid requests to sign an NDA. NDAs are imperative to protecting data and can be valuable tools for doing so, assuming they are well-written and address the particulars of what employees and former employees cannot disclose.
  3. Require any and all employees to work full-time and prohibit “moonlighting” for other contractors. One potential area for leaks comes from employees working for competitors. Policies prohibiting such overlap head off such issues before they occur.
  4. Review incoming and sent emails/items from those employees that issue bids. Regular examinations of such communications can help the reviewers proactively spot and address possible issues.
  5. Keep access to bidding pro-forma documents limited and password protected. Similar to the first point, limiting access, especially to important documents, and using strong passwords, are sensible methods for strengthening security.

While there may not be any one way to protect bid formulations and processes fully, taking the above steps will significantly mitigate risk. Consistent, well-implemented and written requirements may also be useful if controversy arises, so parties should consult with their counsel to ensure their procedures are up-to-date and clearly documented.


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 experts@adviseandconsult.net.

Prime Contractor Beware, No. 2: “Know Thy Owner”

David Taylor | BuildSmart

Here’s the Scenario: After months of working with a new national developer (and providing hours of unreimbursed value engineering), you get the draft prime contract and see that the named “owner” will not be the hugely successful developer, but a specially created “limited liability company” that’s sole “asset” is the land upon which the project will be built. The developer has also shopped around to obtain investors for this project, and the LLC is made up of a series of limited liability companies, limited partnerships, etc. The project is also being financed, so that the sole owner “asset” is subject to a deed of trust/mortgage by the lender that will take precedence over any contractor lien claim. While there’s been zero discussion or mention of this “owner,” the pressure is on. What options do you have?   

A Warning

Those old timers who have been around recall the series of failed projects and bankruptcies that followed the 2008-2010 financial meltdown. This put many construction companies out of business while the lenders foreclosed, wiped out any liens, and then sold the projects without having to pay a dollar to the construction companies that built the half-completed projects. Any non-escrowed withheld retainage is gone. Always, always, know that there is a reason a “LLC” is called a “limited liability” company.

So, what can a prime contractor do?

  • Demand and ask for evidence of financing whether or not the owner is or is not financing the project. Some owners do not need financing. If using an AIA form prime contract, remember that the standard A201 General Conditions (Article 2.2) states that upon a written request, the owner is required to provide “reasonable evidence” that the owner has made “financial arrangements” to fulfill the owner’s obligations. And the contractor also has no obligation to “commence the work” until such information is provided. If the AIA form is not used, include something similar in your prime contract.
  • Don’t sign the contract until you have some reliable information about financing. For financed projects, you have some leverage. Typically, the owner/developer is ready to finalize the plans, get the prime contract signed, close the loan, and break ground. And to close the loan, it needs an executed prime contract. At this late date, it’s really hard for an owner to then find another contractor. Use that leverage if necessary. 
  • Protect withheld retainage: Many states (like Tennessee) have mandatory limitations on the amount of retainage that can be withheld (ranging from 5% to 10%), and for a long project, that’s a lot of delayed profit. Know the retainage laws (and penalties) if the retainage is not escrowed throughout the project, which is mandatory in some states (like Tennessee). Try to have the owner even agree NOT to withhold retainage, which would allow a contractor to in turn have very, very happy subcontractors. 
  • During the course of the project, track payments and don’t accept promises of payment. No matter the explanations, strictly adhere to the payment terms and conditions, especially for deadlines for notices for claims. Know deadlines for lien notices. It’s also vital to carefully examine those typically required partial lien releases that are required to be provided with pay applications: Make sure that any and all claims or proposed change orders are carved out and preserved. You better believe that after a dispute or termination, without making these efforts, these lien waivers will be thrown back in the contractor’s face by the owner or the lender.      
  • Before you exercise any default, threats to stop work, or initiate ADR proceedings, make sure that there not any other executed documents that may have been required by any lender. My previous post discussed the issues with the demand that the contractor execute the typically required “Consent and Assignment Agreement” in favor of the lender.

The Bottom Line

In 98% of your projects, contractors will get paid, which will in turn allow subcontractors to get paid, and the work will be done properly and on time. Any issues are worked through in good faith. The “we are all a team” attitude should prevail throughout a successful project, and everyone should pledge to work together again. But remember “who” you are contracting with, and it’s not the great developer. If there are issues and the developer decides to tank the project, or has issues with the lender, you could be holding the bag and face potential liability from subcontractors. “Know thy owner” is a mantra that should be a part of every internal discussion before embarking on a new project.


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 experts@adviseandconsult.net.

Proposed FAR Rule Creates Climate-Related Inventory and Disclosure Requirements for Federal Contractors

Christine Garson and Shaun Kennedy | Holland & Hart

On November 14, 2022, the Federal Acquisition Regulation (“FAR”) Council issued a proposed rule that may require certain federal contractors to disclose their greenhouse gas (“GHG”) emissions and associated financial risk. The proposed rule also establishes science-based targets for reduction of GHG.

This rule implements the inventory and disclosure set forth in Executive Order (“EO”) 14030, Climate-Related Financial Risk, as well as portions of other related EOs. It revises FAR Part 23, creating a new subpart entitled “Public Disclosure of Climate Information.” Importantly, GHG disclosures will be considered by contracting officers as part of a responsibility determination under the standards set forth in FAR Subpart 9.1.

Covered Contractors

The proposed rule imposes GHG inventory and disclosure requirements on two categories of contractors registered in the System for Award Management (“SAM”), with limited exceptions (discussed below):

  1. Significant contractors. Contractors that received between $7.5 million and $50 million in federal contract obligations in the prior federal fiscal year.
  2. Major contractors. Contractors that received more than $50 million in federal contract obligations in the prior federal fiscal year.

The FAR Council anticipates that approximately 5,766 significant and major contractors will be impacted by this proposed rule.

Proposed GHG Inventory and Disclosure Requirements

The proposed rule imposes several GHG monitoring and disclosure requirements. In significant part, it requires covered contractors to compile inventories for:

  1. Scope 1 emissions, which include GHG emissions from sources that are owned or controlled by the reporting company; and
  2. Scope 2 emissions, which include GHG emissions associated with the generation of electricity, heating and cooling, or steam, when these are purchased or acquired for the reporting company’s own consumption but occur at sources owned or controlled by another entity.

Under the proposed rule, GHG is defined to include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride.

The proposed rule also provides direction regarding the proper conduct of a GHG inventory, including reference to accounting and reporting standards and calculation tools. Further, the inventory must represent emissions during a continuous period of 12 months, ending not more than 12 months before the inventory is completed.

Major contractors must fulfill additional requirements, including the development of an annual climate disclosure, which must be published on a publicly available website. This disclosure must include:

  1. Inventories of Scope 1 and Scope 2 emissions, as defined above;
  2. Inventory of Scope 3 emissions, which are emissions that are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity;
  3. A description of the entity’s climate risk assessment process and any risks identified; and
  4. Completion of those portions of the CDP (formerly Carbon Disclosure Project) Climate Change Questionnaire that align with the Task Force on Climate-Related Financial Disclosures (“TCFD”).

Furthermore, major contractors must develop science-based targets and have those targets validated by the Science Based Targets Initiative (“SBTi”). A science-based target is a target for reducing GHG emissions that is aligned with the latest climate science, as further described in the proposed rule.

Impacts

Importantly, contractors that fail to inventory their annual GHG emissions, and disclose such emissions in SAM, will be treated as not responsible under FAR Subpart 9.1. Further, major contractors that fail to publicly share their annual climate disclosure and set targets to reduce emissions will also be treated as not responsible.

Significant and major contractors must complete GHG inventories for Scope 1 and Scope 2 emissions within one year after publication of the final rule. Major contractors have two years to complete the additional requirements specific to them.

Exceptions

Significant and major contractors falling under the following categories are listed as exempt from the GHG inventory, disclosure, and target requirements:

  1. An Alaska Native Corporation, a Community Development Corporation, an Indian tribe, a Native Hawaiian Organization, or a Tribally owned concern;
  2. A higher education institution;
  3. A nonprofit research entity;
  4. A state or local government; or
  5. An entity deriving 80 percent or more of its annual revenue from Federal management and operating (“M&O”) contracts that are subject to agency annual site sustainability reporting requirements.

There are also exceptions for certain major contractors that are considered small businesses for purposes of their primary North American Industry Classification System (“NAICS”) code identified in SAM, or where the major contractor is a nonprofit organization. Such major contractors are not required to complete an annual climate disclosure or to set science-based targets; however, they still must complete GHG inventories of Scope 1 and Scope 2 emissions and the associated SAM reporting requirements.

Conclusion

This proposed rule directly engages the federal contractor supply base in its goal of shedding light on major annual sources of GHG emissions and impending climate risks. By enhancing transparency and accountability, the Government expects that contractors will take action, resulting in increased resilience of the federal supply chain.

Public comments on the proposed rule are due by January 13, 2023.


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 experts@adviseandconsult.net.

Five Tips for Municipalities to Keep in Mind When Embarking on Construction Projects

Thomas Lambert | Pullman & Comley

Municipalities are some of the largest land developers in the state, accounting for building projects that include everything from schools and stadiums, municipal buildings – such as fire departments or public works facilities, to even affordable housing projects. However, along with the anticipation of a new project to improve your municipality’s infrastructure, come the added headaches of a construction industry that is subject to increased costs for materials, problems with contractors, potential state oversight, and waste.

Below are key tips to keep in mind when planning your new municipal construction project:

1. STATE FUNDING? REMEMBER, THE STATE SETS THE RULES.

Thankfully, the state makes grant funding available for municipalities in certain instances to build out projects, such as for new school construction. But be aware, the money oftentimes comes with conditions. While a municipality may have an ordinance that governs its own construction processes, these can be superseded by a state’s requirements. This includes the state’s own rules regarding the RFP/RFQ process, including the requirement to provide notice of same through the state’s own contractor portal, up through the completion of construction, with requirements for notifications and approval along the way. These requirements, if not met, may result in the withholding of payments. Check out this link for more information from the state.

Make sure you know the requirements imposed by the state for projects in which their rules govern, such as the Office of School Construction Grants & Review for school construction projects using state grant money, or engage a professional that can guide you through those requirements.  You do not want to get near the completion of your project only to realize there was an oversight, resulting in your funding being withheld and a project deviates materially from the final plans and specifications as approved by state.

2. KEEP AND REVIEW THOSE CERTIFICATES OF INSURANCE.

Any time you rely on the help of a third party to accomplish your projects, you are inviting risk. Insurance helps mitigate those risks, though sometimes your own insurance is not enough. It cannot be stressed the importance of requiring and staying on top of contractors’ certificates of insurance. They are not documents to merely file away for a later date.

While you may require your contractors to carry insurance in your contracts, coverage needs can change quickly, making it necessary to regularly review the policies your contractors have in place. Unfortunately, contractors may not be versed about what risk management strategies they have in place. They may lead you to (wrongfully) assume that you are protected when you are not. And while you may be able to hold a contractor responsible for wrongs through litigation, whether it be a lawsuit or arbitration, the presence of insurance, including the right kind and right amount, can make you more likely to mitigate any risks. If you do not believe you have the expertise to understand this aspect, including the attendant risks, you should make sure you have outside help to stay on top of this for you.

3. SET CLEAR EXPECTATIONS.

Contracts with industry professionals, whether they be owners’ representatives, architects, general contractors, or others, should be abundantly clear. Risk should be specifically allocated for in the project. For example, you may not think that geopolitical problems or machinations would affect the construction of your new facility. However, two of the biggest drivers of costs in the past three years have included the global COVID-19 pandemic, which choked the fabrication and movement of supplies, and the war in the Ukraine, which caused ripple effects in the price of fuel that affected transportation costs or material components for which petroleum was a keep component. These international issues can severely impact risks with your project, so imagine how maneuverings of local groups, environmental changes, and other forces outside of your control may impact your project.

Of course, it is difficult to account for how every local, national, or international action or event might affect your particular project. However, you do not need to. Instead, your contracts should account for any and all risks and specify who will shoulder those burdens.  Make sure to specify who will bear the costs for materials, should the price escalate. If a contract fails to contemplate these terms, be ready for a contractor to argue that they should either be excused from performance or, worse, perform and send you a bill for an equitable adjustment for overages in supplies.

4. THINK ABOUT THE FUTURE.

Municipal owners should be intentional about what they plan to build and where, as changing conditions, such as those to our climate, may turn minor issues into bigger ones. Land and space are not always plentiful, so there may be a temptation to make a square peg fit in a round hole so to speak. A site that currently has a minor water issue may, over time, turn into a much bigger one, especially since changes to structures in neighboring areas may redirect or exacerbate waterflow in unanticipated ways. Landscaping decisions or further site development may similarly cause changes not anticipated when a project is originally built out.

And what about space utilization? Is what you are building enough? Is it too much? Oftentimes, these questions are asked by various members of boards or councils that comprise each municipality that may hold the key for approval of bonding to fund a project. Everyone wants a smaller price tag. To avoid a board’s wrath, it may be easier to shortchange a project or set unrealistic expectations for trends in usage of the facility you seek to build. Though the initial cost may be higher initially, a plan for a facility that adequately accounts for projected utilization down the road may be more prudent, especially if a project will be paid for through bonding that will obligate a municipality potentially for decades.

5. DONE BUILDING? NOW MAINTAIN IT.

The worst thing a municipal owner could do after building its new facility is to think it is finished. That could not be further from the truth. The municipality has a brand new asset that likely cost a pretty penny. It should be diligently maintained. Not only may warranties require such diligence maintenance, but there is truth to the idea that spending a dollar now through proactive, preventative maintenance may avoid spending a multiple of that tomorrow. Do not let yourself believe that your project is over once the doors are opened. Rather, that is when the real work begins.


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 experts@adviseandconsult.net.