Project Owners Can Effectively Combat Contractors’ Efforts To Use The Spearin Doctrine As A Sword With Strategic Planning Beforehand

Rose Tanner and paul Sonderegger | Thompson Coburn

Contractors across the country can use the over 100-year old Spearin Doctrine—which places liability for construction defects on the party who either mandates specifications or is given discretion—as an offensive weapon to recoup damages. Recent case law has been handed down that clarifies and sets forth scenarios when a contractor can use the Spearin Doctrine as a sword. Through careful planning, project owners and developers can draft construction contract terms and conditions that can effectively negate contractors’ ability to utilize the Spearin Doctrine offensively in lawsuits.

Background

Defendant contractors or subcontractors have traditionally used the Spearin Doctrine as a shield to liability for the failure of a project’s design. See United States v. Spearin, 248 U.S. 132, 136 (1918). The Spearin Doctrine provides that, when an owner provides mandatory design plans and associated specifications, an implied warranty attaches as a matter of law, and the contractor cannot be at fault when the design fails. Spearin also states that an owner cannot prevent a contractor from using the Spearin shield by including general contract clauses, such as broadly requiring the contractor to examine the site or check the plans pre-construction. 

A majority of states have adopted the Spearin Doctrine, including Missouri. See Penzel Constr. Co., Inc. v. Jackson R-2 Sch. Dist., 544 S.W.3d 214, 226 (Mo. Ct. App. 2017).  Penzel recognized that the Spearin Doctrine is not limited to its original use as a shield; it can also be used as a sword by contractors against owners. In Penzel, the contractor’s use of the Spearin Doctrine in its breach of contract claim resulted in a $800,000 jury verdict award to the plaintiff contractor. The Missouri Court of Appeals affirmed this judgment. Penzel Constr. Co., Inc. v. Jackson R-2 Sch. Dist., No. ED 108821, 2021 WL 3040984, at *27 (Mo. Ct. App. July 20, 2021), reh’g and/or transfer denied (Aug. 23, 2021). For additional discussion of Penzel, see Missouri appellate court opens the door to Spearin claims by contractors against public entities (thompsoncoburn.com).

Drafting construction contracts to avoid the Spearin sword

Owners can avoid the Spearin sword by giving contractors contractual discretion or responsibility for the design. A recent federal court decision highlights how important it is for owners to carefully draft their contractual documents. In BAE Sys. Ordnance Sys., Inc. v. Fluor Fed. Sols., LLC, No. 7:20-CV-587, 2022 WL 969773, at *16 (W.D. Va. Mar. 30, 2022), a defendant subcontractor brought a Spearin-based counterclaim against the plaintiff contractor. The Spearin counterclaim has so far survived, because the court found the contract terms were “ambiguous” as to who had responsibility for the design.  For example, one contract term stated (emphasis added):

It is incumbent upon the Subcontractor to review the documents submitted and to perform their own analysis, including Hazard and Operability Studies and Life Safety Code Analysis. The Subcontractor shall be solely responsible for the design and all safety reviews and safety submittals with all required state and federal agencies.

The plaintiff attempted to isolate the single underlined phrase from the above provision to argue that the subcontractor had design responsibility; therefore, the subcontractor’s Spearin claim should be dismissed. But, the court chose to view the underlined phrase in light of the entire provision and held that it was ambiguous as to whether the referenced responsibility related to design as a whole or only to safety-related design.  The court also discussed seemingly contradictory terms throughout the contract.  Owners cannot escape the Spearin sword simply by placing one sentence in a provision or an entire contract; their contract as a whole must consistently give the contractor at least some discretion or control over the design.  

When owners leave no room for contractor discretion in constructing a project, they leave the door open to contractor-initiated Spearin claims. For example, if an owner’s design specifications state that a certain named material or device is to be used as “the only approved” option or to be used “exclusively,” the owner cannot avoid liability if that material or device causes a delay or failure. See Christopher Glass & Aluminum, Inc. v. Tishman Constr. Corp. of Illinois, 2020 IL App (1st) 191972-U, 70. 

On the other hand, if a specification allows the contractor some amount—even minimal—discretion, it may be deemed a “performance specification” (as opposed to a “design specification”) and the owner can avoid liability for a failure stemming from that specification. See A.G. Cullen Const., Inc. v. State Sys. of Higher Educ., 898 A.2d 1145, 1157 (Pa. Commw. Ct. 2006).  In A.G. Cullen, the owner successfully avoided the Spearin sword. The contract offered the names of two approved window manufacturers, but also expressly permitted the use of other manufacturers so long as they could provide windows “with equal performance characteristics.” The contractor first attempted to purchase windows from one of the two “approved” manufacturers, but the manufacturer could not provide conforming windows. This resulted in a costly delay to the project. The court analyzed the language of the specification and concluded that the contractor was not bound to that one window manufacturer. Because the contractor could have chosen a different window system, the specification was a “performance specification,” and, therefore, the owner could not be held liable for delay-related damages due to the contractor’s choice of window manufacturer. Similarly, in Ames Constr., Inc. v. Clark Cty., No. 218CV299JCMGWF, 2020 WL 3488736, at *5 (D. Nev. June 26, 2020), a contractor filed breach of contract claims against the owner after higher-than-expected water flow caused delays and resulting repairs to the project. The specifications provided an estimated water flow and it described the result it wished to achieve (“a dry construction site”), but it permitted the contractor to decide how best to achieve that result. Accordingly, the court granted summary judgment in favor of the owner. The key to owners avoiding liability under Spearin, therefore, is to expressly provide the contractor with discretion in the contract’s design specifications.

Looking ahead

Recent decisions anticipate future discussion on the allowable reach of the Spearin sword. In Tolliver Group, Inc. v. United States, the Federal Circuit Court of Appeals deferred on an opportunity to limit the use of the Spearin sword. The contractor—as plaintiff—sought recovery for the legal fees it incurred in litigation that was based on technical manuals that it created for the government. The contractor made a Spearin-based argument that it should be allowed to recover costs from the government because it followed the government’s design specifications. The trial court agreed and cited Spearin. However, the Court of Appeals ruled that the trial court should not have relied on Spearin because the contractor did not put the defendant on notice of its Spearin implied warranty claim. This decision highlights the importance of citing Spearin and relying on design specifications, not other specifications, if a party wishes to rely upon and utilize the doctrine.

The Federal Circuit explicitly noted that it was not ruling on whether the Spearin Doctrine could be used by a contractor seeking reimbursement for attorney’s fees; rather, it was remanding the decision based solely on the trial court’s lack of jurisdiction. The Federal Circuit left the door open to future discussion on this topic by noting, “the United States has raised significant questions about whether the Spearin doctrine applies here.”  Tolliver Grp., Inc. v. United States, 20 F.4th 771, 775 (Fed. Cir. 2021).

Recent and current litigation highlights the importance of carefully drafting clear construction contract terms and conditions on the issue of responsibility for design specifications by and between owners and contractors. Thompson Coburn’s Construction Litigation practice group works closely with the firm’s transactional attorneys to advise clients on drafting contracts that can avoid unnecessary exposure.  Thompson Coburn will continue to follow the evolving case law on the Spearin Doctrine and analyze implications for its clients’ contracts.

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.

Intentional Act Without Intent to Harm May Not Be an Occurrence

Alycen A. Moss, Elliot Kerzner and Teri Mae Rutledge | Cozen O’Connor

An intentional act may not be an “occurrence” even when there is no intent to cause harm, according to a California appellate court’s recent ruling in Ghukasian v. Aegis Security Insurance Co.1 Ghukasian involved an insured who hired contractors to level land and clear trees on land she understood to be a part of her property. However, the land cleared and leveled by the insured’s contractor was not owned by the insured but by her neighbors.

The neighbors sued the insured and her contractor in the underlying action, alleging trespass and negligence. The underlying complaint alleged that the insured and her contractor entered upon the neighbors’ property without their consent, made deep cuts into a natural hill on the property, caused a natural swale located on the property to be filled with dirt, and removed, cut down, and carried off timber, trees, and underwood from the property.

The insured tendered the underlying action to her insurer. The policy at issue provided coverage if a “suit is brought against [the insured] for damages because of … property damage caused by an occurrence to which this coverage applies.” An “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results during the policy period in … [p]roperty damage.” The insurer denied coverage for the underlying action on the grounds that it owed no duty to defend because the complaint alleged intentional, not accidental, conduct.

The insured proceeded to sue her insurer for breach of contract, declaratory relief, and insurance bad faith. The trial court granted the insurer’s motion for summary judgment, explaining that the insured’s mistaken belief as to the boundaries of the property did not transform her intentional act of hiring contractors to clear and level the land into an accident for the purposes of qualifying as an occurrence under the policy.

On appeal, the Ghukasian court affirmed the trial court’s grant of summary judgment to the insurer. The court explained that the underlying complaint alleged harm from the insured’s intentional conduct. The court noted that the leveling of land and cutting of trees were not unexpected or unforeseen events. On the contrary, the insured specifically instructed her contractor to level certain land and cut trees, which is exactly what was done. The court held that the insured’s mistaken belief about the boundaries of her property was irrelevant to determining whether the conduct itself – leveling land and cutting trees – was intentional.

In reaching its conclusion, the Ghukasian court relied on two California Court of Appeal decisions: Albert v. Mid-Century Ins. Co.2 and Fire Ins. Exchange v. Superior Court.3

In Albert, similarly to Ghukasian, a neighbor sued the insured for building an encroaching fence and pruning the neighbor’s trees. The trial court, as in Ghukasian, granted summary judgment to the insurer on the basis that no occurrence was stated. The Albert court held it was irrelevant to the occurrence analysis that Albert did not mean to harm the trees she pruned because she intended the pruning in the first instance. Significant to the Albert court was that the complaint was entirely absent of any allegation that any unforeseen accidental conduct (a slip of the saw, for example) resulted in damage to the trees.

Fire Exchange concerned the construction of a building that encroached on a neighboring property by about five and a half feet. The court found that the insured’s mistaken belief that the building could be constructed where it was did not cure the fact that the construction itself was constituted entirely of intentional acts: the insureds intended to build a building precisely where they built it.

The insured contended that the California Supreme Court implicitly held otherwise in Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co.4 In that case, a third-party claim against an employer for the negligent hiring, retention, and supervision of an employee who intentionally injured that third party potentially stated an occurrence under the employer’s commercial general liability policy because the employee’s conduct may be deemed an unexpected consequence of the employer’s negligence. The Liberty Surplus court broadly indicated that an accident or occurrence is subsumed in the broader category of negligence. It was this holding that Ghukasian argued required a finding of a potential occurrence.

The Ghukasian court, however, was unpersuaded by this argument. The court distinguished Liberty Surplus by pointing out that the injury involved there was caused by the employee’s independent tortious conduct. By contrast, in Ghukasian, the insured’s intentional conduct of leveling land and cutting trees was the immediate cause of the injury. There was no additional, independent act that produced the damage. Rather, the work done on the property was, according to the underlying complaint, precisely what was intended. Moreover, the court noted that the Liberty Surplus decision contained no language indicating it intended to overrule prior California case law holding intentional acts are not accidents merely because the insured did not intend to cause injury.

The court likewise rejected the insured’s contention that the complaint alleged an occurrence because the underlying action alleged a cause of action for negligence. The court pointed out that, under California law, the scope of the duty to defend does not depend on the labels given to the causes of action. Instead, it rests on whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy. Noting that the underlying complaint alleged that the insured and her contractor entered the neighbors’ property without consent, made deep cuts into the hill, and removed timber, trees, and underwood from the property, the court observed that there were no allegations or evidence that the neighbors’ property was damaged by an accident, such as by inadvertently dropping equipment on the neighbors’ property. Thus, although the underlying action alleged a cause of action for negligence, the factual allegations reflected intentional acts.

Concluding that the acts for which the neighbors sought to impose liability on the insured were not accidental, the court held that the underlying lawsuit against the insured did not trigger coverage under the policy. Because the insured’s claims for breach of contract and declaratory relief failed as a matter of law, the court held her bad faith claim necessarily failed as well. Accordingly, the court affirmed the trial court’s grant of summary judgment to the insurer.

Until Ghukasian, some insureds had attempted to use Liberty Surplus to impose a formulaic construction of occurrence without regard to the nature of the acts underlying a “negligence” cause of action, despite the fact that Liberty Surplus did not explicitly indicate it was overruling the several California Court of Appeal decisions finding that the mere presence of a cause of action for negligence does not, without more, trigger coverage and did not specifically overrule those cases finding that certain negligence claims necessarily involving intentional conduct — like negligent misrepresentation — do not state an occurrence. Furthermore, Liberty Surplus did not overrule a prior occurrence decision, which reinforced the oft-repeated canon that “an injury-producing event is not an ‘accident’ within the policy’s coverage language when all of the acts, the manner in which they were done, and the objective accomplished occurred as intended by the actor.” See Delgado v. Interinsurance Exch. of Auto. Club of S. California, 47 Cal. 4th 302, 311–12 (2009).

The holding in Ghukasian clarifies that, under California law, an underlying action based on an insured’s allegedly intentional act may not qualify as an occurrence even if it is based on a misunderstanding of the factual circumstances (such as the boundaries of the insured’s property) and is not intended to cause any harm. With the Court of Appeal’s May 5, 2022, order to publish the Ghukasian decision, Ghukasian may now be cited as binding precedent in California’s lower courts.   

1Ghukasian v. Aegis Security Insurance Co., Case No. B311310 (Cal. App. 2d Dist. May 5, 2022.

2Albert v. Mid-Century Ins. Co. (2015) 236 Cal.App.4th 1281, 1289.

Fire Ins. Exchange v. Superior Court (2010) 181 Cal.App.4th 388. 

4 Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., 5 Cal. 5th 216 (2018)

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.

No Duty to Defend Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii

    The court determined the insurer had no duty to defend construction defect claims asserted against the insured. Pa. Nat’l Mut. Cas. Ins. Co. v. River City Roofing, 2022 U.S. Dist. LEXIS 38226 (E.D. Va. March 3, 2022).

    Branch Builds, Inc, was the general contractor for Shock Valley View Genesis, LLC (“Genesis”) in charge of constructing apartments. River City Roofing was a subcontractor for all roofing, aluminum and composition siding at the project. River City contracted and warranted its materials and work, agreed to indemnify Branch, and agreed to make Branch an additional insured under its CGL policy. 

    After completion of the project, Genesis reported defects in the construction. The roof, aluminum and composition siding allowed water intrusion and property damage to the apartments. Branch repaired and compensated Genesis for all damage done to the apartments. Branch then sued River City and another subcontractor and demanded judgment of $3,000,000. 

    River City’s CGL policy was issued by plaintiff insurer. River City failed to pay premiums and the policy was cancelled while construction was ongoing. The insurer filed suit seeking a declaratory judgment that it had no duty to defend or indemnify River City. Branch answered the complaint, but River City never made an appearance or filed an answer. 

    The insurer argued there was no duty to defend because the policy was cancelled. The underlying complaint, however, did not say that the policy was cancelled before the end of the policy period. Consequently, the policy cancellation did not guide the court’s determination on the duty to defend. 

    The court looked to the exclusions. The “Your Work” exclusion barred coverage for “property damage to your work arising out of it or any part of it.” The alleged damage to the apartments was River City’s own work. River City was hired to handle the roofing, which Genesis alleged was faulty and led to water intrusion. Any resulting damage to the portion of the property not built by River City, but which was caused by River City’s defective job performance, would be property damage “arising out of” River City’s work.

    The “impaired property’ exclusion barred coverage for damage to certain portions of the property other than River City’s work. Branch argued the work by River City was defective in workmanship and materials and that defective work caused damage to the roof itself, and other parts of the property. Further, Branch repaired the roofing deficiencies. Therefore, the exclusion applied. 

    Every allegation Branch alleged against River City was excluded by on the the exclusion. No accident occurred, and the alleged damage was entirely attributable to River City’s own work, or arose out of River City’s work, and was able to be repaired. Therefore, summary judgment was granted to plaintiff on the duty to defend.

    The motion was denied, however, on the duty to indemnify. A ruling on the duty to indemnify had to be deferred until after a final ruling in the underlying case.  

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.

Construction Defect Claims Not Covered

Tred R. Eyerly | Insurance Law Hawaii

    The court found that the insured’s negligent acts causing damage to only the structure of the home it built were not covered under the CGL policy. Westfield Ins. Co. v. Zaremba Builders II LLC, 2022 U.S. Dist. LEXIS 36189 (N.D. Ill. March 2, 2022).

    Zaremba contracted to build a house for the Vrdolyak Trust. After completion of the home, the occupants found many problems, including painting defects such as bubbling and peeling, leaving the basement full of water for months, causing damage to ductwork, framing and piping in the house, etc. The Trust sued and Westfield denied a defense.

    Westfield filed a declaratory judgment action for a ruling that it had no duty to defend or indemnify. On Westfield’s motion for summary judgment, the court determined there was no property damage. Property damage included “physical injury to tangible property.” When the alleged damage occurred in the course of a construction project, tangible property had to be property outside the scope of the contract for project. 

    Zaremba’s construction project encompassed the entire home. The underlying complaint alleged only damage to the structure itself, or damage that fell within the scope of Zaremba’s contract. All the alleged damage constituted damage to the very house Zaremba was contracted to build. Therefore, it did not quality as “property damage” under the policy.

    Zaremba argued he purchased Products-Completed Operations coverage. But purchase of the coverage did not mean that, once the project is complete, any damage to the project itself was covered. While the Products-Completed Operations provision extended the grant of coverage in the insuring agreement to completed products or operations, it remained limited by the terms of that grant of coverage. Here, the insuring agreement required that an “occurrence” result in “property damage’ to trigger coverage. There was no property damage here when the underlying complaint alleged only construction defects causing damage within the scope of the contracted-for project. 

    Therefore, summary judgment was granted to Westfield. 

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.

Insurer Must Defend Faulty Workmanship Claims

Tred R. Eyerly | Insurance Law Hawaii

   The court determined that the insurer improperly denied a defense for construction defect claims made against the insured. Amerisure Mut. Ins. Co. v. McMillin Tex. Homes, 2022 U.S. Dist. LEIS 40363 (W.D. Texas March 8, 2022). 

    McMillin was a developer, general contractor and home seller. It constructed multiple homes in various communities in the San Antonio area. After the homes were completed, homeowners observed defects in the artificial stucco exterior finish. After claims were lodged against McMillin, the various claims were tendered to Amerisure. Amerisure filed for declaratory judgment that it had to duty to defend or indemnify and moved for summary judgment.

    Amerisure first argued the homeowners’ faulty workmanship claims did not allege “property damage” under the policies. It argued there were no allegations that any property damage existed, but merely that the stucco suffered from construction defects. The court disagreed. Among the allegations was the statement that due to the construction defects, the homes suffered damage “not only to the exterior stucco, but also to the underlying wire lath, paper backing, house wrap, flashing, water resistive barriers, sheathing, interior walls, interior floors and/ or other property.” Consequently, the underlying claims amounted to property damage.

    The court then considered exclusions relied upon by Amerisure. Exclusions J (5) and (6) precluded coverage for faulty workmanship. Both were limited by the phrase “that particular party” of property damaged due to the insured’s work. This limitation precluded application of the exclusions to damage on other parts of the home or non-defective portions of the insured’s work. Here, several of the homeowners alleged damage to parts of the house beyond the stucco system, including interior walls, interior floors and other property. Therefore, Amerisure failed to establish as a matter of law that Exclusions J (5) and (6) prohibited coverage for the homeowners’ claims. 

    Next the court determined that Exclusion k did not apply to the construction of a building because buildings were constructed or erected, not manufactured. 

    Exclusion L, Damage to Your Work, only applied to exclude damages to the insured’s “competed” work. The underlying complaints did not specifically allege when property damage from McMillin’s work occurred. The property damage could have occurred before, during, and after completion of McMillin’s work. 

    Finally, there was a duty to defend rip and tear allegations. Amerisure asserted that the policy did not cover tear-out work performed to remove and replace the stucco system because defective work itself did not constitute covered “property damage” and any ensuing tear-out work would not qualify for independent coverage under the policies. The extent of any property damage and whether repair or removal of the stucco exterior was necessary to fix any covered damages would depend upon the facts in each instance. For the duty to defend analysis, the insured needed only to demonstrate the potential that tear-out work would be necessary. 

    The duty to indemnify could only be determined when the underlying suit was concluded.

    Consequently, Amerisure’s motion for summary judgment was denied. 

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.