No Coverage for Subcontractor’s Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    Finding faulty workmanship that did not cause property damage beyond the subcontractor’s work, the court found there was no coverage under the CGL policy. Middlesex Ins. Co. v. Dixie Mech., Inc., 2022 U.S. Dist. LEXIS 175190 (N. D. Ga. Sept. 27, 2022). 

    The case involved a construction project on Elba Island, Georgia. IHI E&C International Corporation (IHI) filed suit against Robinson Mechanical Contractors (“Robinson”) for faulty construction work, including a pipe rack and process module installation. The pipe racks allegedly contained defective welds. Robinson filed a third-party complaint against Patriot Modular, Inc. (Patriot), Robinson’s subcontractor, for faulty work for IHI. Finally, Patriot filed a fourth-party complaint against Dixie Mechanical, Inc. (Dixie), alleging it subcontracted with Dixie to perform fabrication, welding, testing, and inspection of pipes under Patriot’s subcontract with Robinson. Patriot contended that to the extent it was found liable to Robinson for any defective work, delays or breaches of contract for Dixie’s work, Patriot was entitled to recover such amounts from Dixie.

    In this case, Dixie’s insurer, Middlesex Insurance Company, sought a declaration that it had no duty to defend or to indemnify Dixie. Middlesex contended that the claims of faulty workmanship in the underlying complaints constituted neither an “occurrence” nor “property damage.”

    The court agreed. “Occurrence” had to cause “property damage” and the insured had to incur a liability to pay “damages because of such property damage.” Coverage for property damage under a CGL policy required damage to property other than the work itself, and the insured’ liability for such damage would have to arise from negligence. The only reasonable interpretation of the allegations in the underlying complaints was that the asserted damages resulted from Dixie’s allegedly faulty workmanship under the subcontract and affected only the construction project.

    Therefore, judgment was entered in favor of Middlesex. 


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.

Licensing Mistakes That Can Continue to Haunt You

Alexa Stephenson and Rick Seely | Compliance Construction Litigation

Today there are nearly 290,000 contractors licensed in California. This number continues to grow as California law requires businesses or individuals who alter any road or structure to be licensed contractors if the total cost of the project is $500 or more (including labor and materials). Complaints about improper and defective work performed by contractors are constantly filed with the California Contractors State License Board (“CSLB”) and any violations by those contractors could result in a license suspension. A contractor whose license is suspended by the CSLB or otherwise becomes unlicensed jeopardizes a contractor’s livelihood, compromises current insurance policies, and curtails an ability to obtain future insurance coverage. Moreover, being unlicensed could force a contractor to disgorge all money received on a project per California Business & Professions Code § 7031. What can contractors do to stay vigilant and avoid these scary outcomes? Stay tuned for a few suggestions.

  1. Stay Qualified

Contractors must make sure the correct person and/or entity is holding the contractor’s license. Contractors can obtain licenses as a sole owner, partnership, corporation, joint venture, or limited liability company. For any form of the business entity, one individual must act as qualifier to meet the CLSB license requirements. This qualifying individual must have the knowledge, experience, and skills to manage the daily activities of a construction business (including field supervision) or be represented by someone else with at least four years of experience within the past ten years as an unsupervised journeyperson, foreperson, supervising employee, or contractor in the trade being applied for.

When applying as a sole ownership, an individual must be the owner or a responsible managing employee (“RME”) permanently employed by the contractor and working 32+ hours each week. For partnerships, either general partner or RME will suffice. For corporations, officers designated as a responsible managing offer (“RMO”) or their RME can qualify. Limited liability companies are also allowed to have responsible managing members or managers to serve as the qualifier.

But wait, there’s more!  Please note: The CSLB requirements for the qualifying individual became more stringent this year to ensure that bona fide, permanent, likely full-time, and senior employees are the ones seeking licensure. Additionally, one person cannot serve as the qualifier for more than one active license, except in specific conditions. 

  • Stay in Your Lane

Contractors must also make sure they are not acting outside of their license scope. Contractors in California can hold up to 44 different license classifications in 4 different license categories: Class A (General Engineering Contractor), Class B (General Building Contractor), Class B-2 (Residential Remodeling Contractor), and Class C (Specialty Contractor). Contractors are only allowed to perform work outside of their license classification in limited circumstances. For example, contractors only holding a Class B General Building Contractor license can self-perform the framing and carpentry work on the same project or self-perform two or more separate and unrelated trades other than framing or carpentry on the same project. Otherwise, a contractor holding the necessary specialty license must perform the work. It is always good to know your basic ABCs.

  • Stay Covered

Contractors must ensure they have the proper insurance coverage – including workers compensation insurance. Nearly all construction contracts will include provisions requiring the contractor to maintain a certain type and/or level of insurance. Being a contractor with continuous Commercial General Liability insurance policy is key to protect a contractor’s current and future business. Additionally, California law requires contractors to maintain workers compensation insurance, with few exceptions. Under California Business and Professions Code § 7110, a contractor’s license may be suspended or revoked if the contractor fails to secure proper workers compensation insurance. Therefore, a licensed contractor could have its license revoked simply because it did not have the necessary workers compensation insurance coverage throughout the project.

  • Stay in Touch

In sum, staying vigilant is a better than being in violation. Contractors should make sure they are compliant with their license status, qualifying personnel, and insurance requirements at all times. The CSLB website is a wealth of information for persons wanting to stay up to date on contractor licenses, updates to licensing requirements, and frequently asked questions. Staying in touch with the applicable rules and regulations will help contractors avoid licensing mistakes that can continue to haunt them for years to come.


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.

PSA: Pay If Paid Ban Goes into Effect on January 1, 2023

Christopher G. Hill | Construction Law Musings

I have written a couple of times here at Musings regarding the new pay-if-paid legislation passed by the General Assembly last session.  While the statute has some inconsistencies and a working group has made some recommendations, the legislation as passed will go into effect on January 1, 2023, without any changes (at least until next session).  As always, such action by our legislature here in Virginia will create work for construction attorneys assisting their clients to amend contracts to meet the new rules.

Essentially (and with minor inconsistencies between public and private contracts), the bill requires that any construction contract entered into after January 1, 2023 have the following provisions:

  • On public projects:  A payment clause that obligates a contractor on a construction contract to be liable for the entire amount owed to any subcontractor with which it contracts. Such contractor shall not be liable for amounts otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract. However, in the event that the contractor withholds all or a part of the amount promised to the subcontractor under the contract, the contractor shall notify the subcontractor, in writing, of his intention to withhold all or a part of the subcontractor’s payment with the reason for nonpayment.
  • On private projects: Requiring the Contractor or subcontractor to pay its subcontractors or sub-subcontractors within the earlier of (i) 60 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. In the event that a contractor withholds all or a part of the amount invoiced by any lower-tier subcontractor under the contract, the contractor shall notify the subcontractor, in writing, of his intention to withhold all or a part of the subcontractor’s payment with the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance.

The changes go on to provide for interest provisions for non-compliance and to specifically void any condition precedent pay-if-paid language that may remain in any construction contracts. For more on the specifics, check out my earlier post on this subject.  For the full text of the legislation as passed in SB550, click here.


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.

Court Affirms Duty to Defend Additional Insured Contractor

Tred R. Eyerly | Insurance Law Hawaii

    The appellate court affirmed the lower court’s ruling that the insurer must defend. Main St. Am. Assurance Co. v. Merchants Mut. Ins. Co., 2022 N.Y. App. Div. LEXIS 5507 (N.Y. App. Div., Oct. 7, 2022). 

    XL Construction Services, LLC was the contractor on a construction project. Timothy J. O’Connor was insured when performing drywall finishing as a self-employee subcontractor on the project. As part of a written indemnification and insurance agreement between the parties, O’Connor was obligated to obtain insurance for the benefit of XL Construction. O’Connor was insured by Merchants Mutual Insurance Company under a policy containing an additional insureds endorsement that provided coverage to a party where required by a written agreement, but “only with respect to liability for ‘bodily injury’ . . . caused in whole or in part, by . . . [O’Connor’s] acts or omissions.”

    The trial court found there was a duty to defend and entered judgment that Merchants Mutual was obligated to provided a defense to XL Construction.

    On appeal, Merchants Mutual relied upon the endorsement language restricting coverage for an additional insured only when “there was injury proximately caused by the named insured.” The underlying complaint sought damages for violations of the state labor law. Nonetheless, there could be more than one proximate cause of an injry. The underlying complaint suggested a reasonable possibility that O’Connor’s own negligence was a proximate cause of his injuries. The fact that the underlying complaint alleged labor law violations on the part of XL Construction and not negligence by O’Connor himself, was of no consequence because the allegations in the complaint brought the claim potentially within the policy provisions and triggered a duty to defend XL Construction as an additional insured.

    Therefore, the judgemt was affirmed.


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.

Professional Services Exclusion in CGL Policies

David Adelstein | Florida Construction Legal Updates

professional services exclusion in a commercial general liability policy means something.  It’s an exclusion an insurer will rely on to avoid insurance coverage based on “professional services” performed or rendered by the insured.  Don’t take it from me.  Take it from the recent opinion in Colony Insurance Company v. Coastal Construction Management, LLC, 2022 WL 16636697 (M.D.Fla. 2022) where the trial court granted a commercial general liability insurer’s motion for judgment on the pleadings based on the professional services exclusion.

Here, an owner sued, among other parties, an entity performing only construction management services based on construction defects at its project.  The construction manager did not perform any design or physical construction. It was hired to make site inspections of the construction, review construction quality and finish standards, ensure workmanship quality, coordinate the punchlist process, and supervise management and administration of the project.

The construction manager’s commercial general liability insurer sued for declaratory relief claiming it owed no duty to defend or indemnify based on the professional services exclusion.

The professional services exclusion stated that the commercial general liability insurance did not apply to property damages:

[A]rising out of the rendering or failure to render any professional service.  This includes but is not limited to:

(3) inspection, supervision, quality control, architectural or engineering activities done by or for you on a project on which you serve as a construction manager;

(4) engineering services, including related supervisory or inspection services.”

Colony Insurance, supra, at *3.

While the words “professional” or “professional services” were not a defined term in the policy, the court found they do have commonly understood meanings: “professional services are those that require a high degree of training or proficiency or involve specialized knowledge, skill, or labor that is primarily mental rather than physical.”  Colony Insurance, supra, at *3.  (Just because a word or term is not defined in the policy does not make the word or term ambiguous.  Id.)

The court found that the professional services exclusion applies to bar coverage. This means the construction manager’s commercial general liability insurer owed no duty to defend the construction manager in the underlying case and no duty to indemnify the construction manager for damages.

As a matter of common sense, the management, supervision, and quality control activities alleged in the complaint in the context of a construction project of the size and scope alleged are not activities a layperson could take.  Therefore, reading the exclusion in context and from the perspective of an ordinary person, the Court has no difficulty concluding without extensive analysis that these duties and tasks by their nature require specialized skill, training, and/or experience.  As such, the only reasonable conclusion is that the [owner’s underlying] claims against [the construction manager] fall within the [professional services exclusion].

***

Finally, paragraph (3) [in the exclusion above], if anything, supports the application of the exclusion here because ‘inspection, supervision [and] quality control’ are precisely the types of activities [owner’s] complaint alleges [the construction manager] undertook to perform.  The fact that those activities are listed in the exclusion are linked to [the construction manager] acting as ‘construction manager’ does not mean that the activities themselves would change their character if [construction manager] where somehow acting solely as a “construction consultant’ or an ‘owner’s representative.’  In any event, the nature of the activities themselves controls, and the activities alleged in the complaint plainly required specialized training and experience.

Colony Insurance, supra, at *4 (internal citations omitted).


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.