You Can’t Treat Construction Claims Like Your Grandkids

Matthew DeVries | Best Practices Construction Law

I have seven children. and two of them have flown the coop.  I also have two grandchildren who are ripe for spoiling. You see, grandchildren are a different type of kid, which means I get to treat them different than the kiddos living under my roof.  In construction, however, some courts have held that the type of contract delivery method do not change the treatment of the other contract clauses, such as the applicability of a differing site conditions clause.

Appeal of John C. Grimberg Co., Inc., ASBCA No. 58791 (Oct. 25, 2018) involved the construction of a biolab facility at Fort Detrick, Maryland. The contract was a design-build contract.  As is typical of a design-build contract, no unit prices for rock excavation were set for because the contractor’s foundation solution is not established at the time of award. Interestingly, this contractor had performed other contracts at Fort Detrick involving deep foundations that happened to be design-bid-build contracts containing unit prices for excavation.

During construction, the presence of incompetent rock forced the contractor to use more drilling rigs than anticipated.  This crowded the site and prevented scheduled commencement of grade beams and rough-in of underslab MEP work. By the time the contractor completed drilling piers, it had excavated nearly four times the amount it had anticipated in its proposal.  The contractor submitted a Request for Equitable Adjustment, alleging that it had encountered a Type I differing site condition—i.e, where the site differed materially from those represented by the government. The contracting officer denied the claim, and the contractor appealed.

To establish such a claim, a contractor must prove: (1) the conditions indicated in the contract differed materially from those actually encountered during performance; (2) the actual conditions were reasonably unforeseeable to the contractor at the time of bidding; (3) contractor reliance; and (4) damages.  In this case, the board rejected the government’s argument that the differing site conditions clause is applied more restrictively to a design-build contractor than in the design-bid-build context. The board reasoned:

The identical DSC clause is required to be included in fixed-price construction projects, whether the design-bid-build or design-build method of contracting is utilized. There is no justification for interpreting the clause differently in the design-build context. As appellant concedes, design risk is transferred to contractors in the design-bid context, but not the risk of DSCs. A design-builder does not forfeit its rights under the DSC clause to rely on solicitation representations of subsurface site conditions.

The board concluded the contractor had established Type I differing site conditions claim that the “quantities of rock encountered greatly exceeded the quantity reasonably foreseeable based on a fair reading of contractual indications, albeit the Project was constructed in highly-variable karst topography at the site.”

Ultimately the decision is a good lesson for contractors to document “all of the facts, circumstances and contractual indications of subsurface conditions,” which is what the board relied upon in making its decision.  Another lesson learned is the importance of “reasonableness” when drafting or submitting claims.  Although the board found that two of the borings used by the contractor were unreasonable, it was “more reasonable” than the government’s analysis.  In the end, reasonableness matters.

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 Coverage for Claim Deemed Made After Policy Expired When Insured First Received Actual Notice of Lawsuit

Elizabeth Jewell | Wiley Rein

The United States District Court for the Northern District of Illinois, applying Illinois law, has held that a claim was deemed first made when the insured received actual, rather than constructive notice of the claim. Philadelphia Indem. Ins. Co. v. Lewis Produce Mkt No. 2, 2022 WL 1045640 (N.D. Ill. Apr. 7, 2022).

The insured, a supermarket, was insured under two successive professional liability policies (the “2020 Policy” and the “2021 Policy”). A lawsuit alleging violations of the Illinois Biometric Information Privacy Act (BIPA) was filed against an uninsured affiliate of the supermarket on the last day of the 2020 Policy, but the insured did not receive notice of that lawsuit until one week later, by which time the 2021 Policy had incepted.  The insured notified its professional liability carrier of the lawsuit and the complaint was later amended to add the insured as a defendant.

The insurer filed a declaratory judgment action, seeking an order it had no duty to defend or indemnify the insured under the policies because under the 2020 Policy, the lawsuit was not a claim deemed first made during the policy period because the insured received notice of the lawsuit after the 2020 Policy expired. The parties agreed that the 2021 Policy, unlike the 2020 Policy, did not provide coverage for BIPA violations.

The court granted a motion for judgment on the pleadings in favor of the insurer. The court highlighted the 2020 Policy’s terms, which provided “a claim shall be considered made when an Insured first receives notice of the Claim.” The court held that while the lawsuit was filed within the 2020 Policy’s policy period, under the relevant policy language, the Claim was deemed made when the insured first received notice of the lawsuit, and it was undisputed that the insured did not receive actual notice of the Claim until after the expiration of the 2020 Policy. As such, the lawsuit was not a Claim made during the relevant policy period. The court also rejected the insured’s argument that it had constructive notice of the lawsuit during the policy period because the lawsuit was a matter of public record, and that constructive notice should be sufficient to deem the claim first made during the 2020 Policy, noting that such an interpretation would contravene the plain and unambiguous language of the 2020 Policy and would render the language deeming a claim first made when the insured “first receives notice” superfluous.

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.

What do the Rules of Evidence Have to Do With Documenting a Construction Claim? Everything.

Jacob Zahniser | Miller Nash

Construction is a document-intensive industry. Construction disputes are equally document-intensive. Given the critical role of written documentation in preserving and resolving construction claims, it is essential that construction companies adequately train the people who create and manage written documentation. Otherwise, evidentiary challenges could sink an otherwise meritorious claim or defense.

This issue recently came to a head in case of Arrowood Indemnity Co. v. Fasching, 369 Or 214 (Feb. 10, 2022). While not a “construction” case, Arrowood Indemnity highlights the importance of proper document creation and management.

In Arrowood Indemnity, the plaintiff insured a student loan. The defendant defaulted on the loan. The plaintiff paid the claim and sued defendant to recoup its payment. At trial, the parties filed cross-motions for summary judgment, each of which pivoted on whether documents the plaintiff received from a third party were admissible under the rules of evidence. The “rules of evidence” are designed to ensure the reliability of the evidence offered at trial. One such rule—the rule against hearsay—provides that an out-of-court statement, which includes documents, cannot be admitted into evidence. Instead, a competent witness must testify that something happened (or did not happen).

An important exception to the hearsay rule, particularly for document-heavy construction projects, is the “business records” exception. Under this exception, written business records may be admissible, even if the author is unavailable to testify, provided the author created the document based on knowledge of the event, near the time when the event occurred, and as part of the business’s regular record keeping activity.

In Arrowood Indemnity, the plaintiff argued documents from third parties qualified as admissible business records. The defendant disagreed, arguing that, in order for the documents to qualify for the business records exception, the plaintiff had to present evidence about the record-making practices of the businesses that created the documents, and the plaintiff failed to do so. The trial court agreed with the plaintiff, ruling that “as long as the documents [were] received, incorporated, and relied upon” by the plaintiff, the documents were “admissible as business records.” The trial court granted the plaintiff’s motion for summary judgment, denied the defendant’s cross-motion for summary judgment, and entered a judgment in the plaintiff’s favor. The defendant appealed, which was affirmed by the Oregon Court of Appeals.

Defendants petitioned the Oregon Supreme Court to address the issue of what evidence a party must present to establish the business records exception for documents created by third parties. The Supreme Court held that the party proffering the documents must present evidence of the third party’s record-making practices sufficient to establish that the documents were made contemporaneously with the acts they describe, by (or from information transmitted by) a person with knowledge, as part of a regularly-conducted business activity, and pursuant to a regular record-making practice. Because the plaintiff failed to present such evidence, the trial court erred in admitting the documents into evidence, remanding for further proceedings.

Applying Arrowood Indemnity to your next construction project:

  1. Document the event at or near the time of occurrence. A daily field report summarizing an on-site conversation about a site condition may be excluded from evidence if the information about the conversation was written down days or weeks after the conversation took place. If too much time passes, project documentation could be excluded from evidence.
  2. The author must have knowledge of the event. The project manager’s letter based on what the project superintendent told him or her may be excluded from evidence; the project manager does not have the knowledge to accurately document the condition or occurrence. While the rule allows the document to be written from information transmitted by someone with knowledge, the better practice is for the document be written by a person who has seen or experienced what the document is about.
  3. Have a regular practice of record keeping. Daily field reports should be consistent and uniform in what they record about the project. Inconsistent field reports could be inadmissible to prove critical events otherwise noted in the reports.

Proper project documentation is critical to maintain any claim or defense. Proper documentation alone is only half the battle; the document must also be admissible as evidence. For documents to be admitted as evidence, the people in the field should know how to document the events in a manner that ensures the document would be admissible as evidence to prove a claim or defense.

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.

Florida’s Statute Of Repose – Elimination Of Stale Claims

Anthony S. Wong and Lee H Jeansonne | Wood, Smith, Henning & Berman

Big changes may be on the horizon for Florida statute of repose for construction claims. Florida SB 2022-736 proposes to amend Fla. Stat. §95.11(3)(c) to eliminate the distinction between patent and latent claims and apply a uniform four year statute of repose to protect the construction industry from stale claims and prolong litigation many years after control of the project has been turned over by the developer or contractors.

SB 2022-736 proposes to eliminate an often litigated issue: whether a defect is patent or latent, and apply a uniform statute of repose for construction claims. Additionally, as discussed below, SB 2022-736 seeks to give teeth to the right to repair with the intention to help the parties settle and resolve construction defect claims without having to engage in drawn out litigation.

The Current State of Florida’s Statute of Repose

Florida’s statute of repose is intended to provide finality and certainty to builders and other construction professionals by ensuring that claims are brought in a timely manner, and they are not subject to liability indefinitely. Different jurisdictions have established differing statutes of repose, but the goal is finality. Ten year statutes of repose are considered on the longer end of the spectrum, as defects in the as-built conditions would assuredly manifest well before that time. Distinguishing between true construction defects and maintenance/wear and tear issues is almost always a battle and more so as the building ages.

In Florida, a claim based on the design, planning, or construction of an improvement to real property is subject to a four year statute of repose starting from when the owner taking possession, the issuance of a certificate of occupancy, abandonment of the project if not complete or when the contract is completed or terminated, whichever is later. However, if the claim involves a “latent defect”, then the four year statute of repose operates as a statute of limitations and the claim is instead subject to a ten year statute of repose starting from when the owner taking possession, the issuance of a certificate of occupancy, abandonment of the project if not complete or when the contract is completed or terminated, whichever is later.

Although not defined by statute, Florida Courts have held that a latent defect is a hidden or concealed defect which is not discoverable by reasonable and customary inspection, and the owner has no knowledge. Significantly, the test for patency is not whether the condition was observable by the owner. Rather, the test for patency is whether the “defective nature” was apparent to the owner. This test results in difficult jury questions regarding when an owner knew or should have known of a defect and whether such a defect would be apparent to the owner. Additionally, the ten year exception for latent defects allow owners to conflate legitimate construction issues with normal wear and tear and lack of maintenance. As a result, developers and contractors are often forced to litigate the old claims and are denied the finality that the Legislature intended to provide when the statute of repose was first adopted.

What is the Difference Between a Statute of Limitations and a Statute of Repose

Both a statute of limitation and a statute of repose bar lawsuits from being filed after a certain amount of time has passed. However, the major difference in the two come in the way they are triggered. The more common statute of limitations typically being to run when the injury occurs and could be subject to the discovery rule if the injury is hidden. In contrast, a statute of repose is triggered by specific events and can being to run even before an injury occurs. For example, in a personal injury case, a person may be injured by a latent defect 11 years after the completion of the building; however, while the person would ordinarily have 4 years to bring a personal injury claim under the statute of limitations, the claim, to the extent it relates to the original construction would be barred by the statute of repose under current Florida law.

New Legislation Pending in the Florida Legislature Would Eliminate the Ten Year Exception to the Current Statue of Repose

SB 2022-736 proposes to amend Fla. Stat. § 95.11(3)(c) by eliminating the current latent defect exception to the statute of repose for construction defect claims. If the amendment is adopted, a four year statute of repose will apply to all construction claims regardless of whether the defect is patent or latent. This will ensure that legitimate construction claims are brought in a timely manner, provide finality to the construction industry and reduce the amount of claims related to maintenance and wear and tear.

New Provision for the Rejection of Settlement Offers

The proposed bill requires claimants who reject a valid settlement offer to do so in writing and include the reasons for rejecting the offer. The claimant must include details on any portions of their claim that they feel were not addressed in the settlement offer and must also identify any portions they find unreasonable and clearly state the reasons why the offer is unreasonable from their perspective.

After a written notice of rejection of the settlement offer, the opposing party must be given 15 days to propose a supplemental offer to repair and/or submit payment to cover claimed damages or losses. If the claimant also rejects the supplemental offer, that should also be in writing and include detailed reasons as to why the supplemental offer is not sufficient to cover the claim. Any action filed without following these procedures may be stayed by the court upon a timely motion by the opposing party.

Limitation of Attorney Fees

If a claimant chooses to reject a settlement offer or supplemental settlement offer to remedy a construction defect, under the new law this rejection will limit the claimant’s ability to recover attorney fees from the defendant. In order to overcome this limitation, the claimant will need to show by a preponderance of the evidence (more probable than not that the claim is true) that at the time of the offer, the repairs and payment offered were not sufficient to remedy the construction defects. Attorney fees stemming from a contract between the parties is not impacted by this section of the law.

Acceptance by Claimant of a Supplemental Offer

Under the provisions of the proposed law, claimants who accept the initial or supplemental offer by the contractor or other construction professional will be required to enter into a contract to define the terms by which the construction defect will be remedied. This contract must be in place within 90 days after the acceptance of the offer. In addition, the offeror or insurer must pay the contractor for the work directly and such repairs must be made within 12 months of entry into the contract between the parties, unless the parties agree otherwise.

Use of Experts

Once an action has been filed, the Court is required to appoint a neutral expert to inspect and opine on the validity or extent of the construction defect claimed. However, an expert will not be appointed if all of the parties object, or if the Court finds that the appointment costs will exceed any possible benefits to the successful determination of the case. Any experts appointed by the Court must communicate and coordinate the inspection of the construction defect with all parties as directed by the court. The expert must submit a written report to the Court within 15 days after the inspection defect, unless otherwise indicated by the court. The following is required of the expert and the parties:

  • A description of how the expert conducted the examination of the alleged defect.
  • Identification of the persons present at the site while the expert conducted the inspection.
  • Include photographs or other documentation of the alleged defect including any relevant test results.
  • State whether the damages claimed by a claimant are more likely than not the result of a construction defect, another identified cause, or a construction defect and another identified cause.
  • Address other matters related to the alleged defect as directed by the court.
  • If the expert concludes that the damages are wholly or partially the result of a construction defect, the report must state the actions necessary to repair the defect and any repairs related to the defect, provide an estimate of the reasonable cost of repairs, and state the anticipated time needed for the repairs under the current market conditions for construction services and materials.

The parties are responsible for compensating the expert, but the prevailing party is entitled to reimbursement from the non-prevailing party. The expert appointed by the Court may not be employed to repair the alleged defect or recommend contractors to repair the defect in order to prevent a conflict of interest.

Duty to Repair the Defect

Fla. Stat. §558.0046, imposes a duty to repair the construction defect once the claimant receives compensation to complete the repair. If the claimant fails to use the funds to fully repair the defect, the claimant will be liable to any purchaser of the property for any damages that occur due to the failure to completely repair the defect and not disclosing such defect.

Required Notice to Mortgagee or Assignee

Under the new statute, claimants will be required to provide notice to a mortgagee or assignee if a notice of claim alleging a construction defect is made with respect to real property to which a mortgagee or an assignee has a security interest. The claimant must, within 30 days after service of the notice of claim on the contractor, subcontractor, supplier, or design professional, provide the mortgagee or assignee with a copy of the notice of claim by certified mail, return receipt requested.

If repairs relating to the defect are completed after notice to a mortgagee or assignee is provided, or if any settlement, partial settlement, arbitration award, or judgment is obtained by the claimant, the claimant must provide an additional notice to the mortgagee or assignee, by certified mail, return receipt requested, within 60 days after completion of the repairs or any settlement, partial settlement, arbitration award, or judgement, whichever is later.

Noteworthy Takeaways

  • This law will effectively eliminate the current 10 year latent defect exception to the statute of repose.
  • It will remove the latent construction defect exception and require all construction defect claims to be raised within the standard four (4) year statute of repose that is in place for all other construction defect claims.
  • This reduced time to initiate claims will limit stale claims and reduce the amount of claims related to maintenance and wear and tear.
  • This elimination of the latent defect exception should give more strength to offers to repair alleged defects and reduce the number of claims engaged in drawn out litigation.
  • Plaintiff’s are likely to benefit from these changes as repairs will occur quicker and prevent additional damage while the case is in pending litigation.
  • The law will allow for the contractor to make an offer to repair the defects and if the Claimant rejects the offer, the contractor is permitted to make a supplemental offer.
  • If the claimant rejects the offers, they must explain in detail why they are rejecting the offer and list exact reasons including the fact that additional remedies were required and not satisfied by the offer to repair.
  • If a claimant rejects a supplemental offer they may not be able to collect attorney fees, unless claimant can prove additional repairs were necessary beyond the settlement offer.
  • If a settlement offer is accepted the claimant MUST enter into a contract with the correct, licensed contractors to remedy the defects and the party making the offer must make payments directly to the contractor, and repairs must be completed within 12 months of the agreement.
  • The court will now be required to appoint an expert to inspect the alleged defect and report back to the court as well as the parties.
  • The Plaintiff must provide notice of the defects claimed or repaired, to the mortgagee or assignee.

The previously discussed changes to the construction defect law appear on the surface to be designed to reduce the backlog of claims in the courts and encourage the parties to resolve the claims with repairs rather than litigation. Defect claims must be made in a tighter time frame and therefore, claims that have historically been based on maintenance or normal wear and tear will likely be reduced and the court’s time will be focused on cases where significant issues are at dispute.

The changes also put statutory requirements on homeowners who make claims. Homeowners will now be required to give actual reasoning as to why they are rejecting settlement offers from the contractor with accompanying proof; and if they do actually accept an offer to repair, they are required by statute to contract with an appropriate contractor for the repairs, and the party paying for the repairs pays that contractor directly instead of sending the settlement money to the homeowner.

These changes seem to be designed to strengthen the prelitigation 558 Notice of Claim process and the opportunity to repair, by giving more teeth to offers to repair made by developers and contractors and encourage plaintiffs to resolve claims outside of formal litigation. The removal of the latent defect exception is likely to reduce the large volume of claims that stem from normal wear and tear, along with lack of maintenance.

If 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.