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.

Identifying and Accessing Coverage in Complex Construction Claims

Jeffrey J. Vita and Michael V. Pepe | SDV Insights

I. Introduction
First-party, third-party, builder’s risk, professional liability, commercial general liability, wrap-ups, and additional insured status are all potential sources of insurance coverage for a large construction loss. Therefore, it is critical for construction industry participants, from owners and developers to general contractors and their subcontractors, to have a functional knowledge of the different types of insurance coverage available to them and how those coverages intersect to respond to a loss. This paper presents a brief overview of the various types of coverage available to contractors, construction managers, and owners in a large construction loss and the risks each coverage is designed to insure.

In general, there are two forms of coverage: (1) First-party liability coverage, which protects an insured’s own losses on a project during construction; and (2) Third-party liability coverage, which insures the project participants for losses that become the subject of claims or suits brought against the project participants by third parties. When a loss occurs, such as property damage, both types of coverage can be implicated. For example, if a fire burns down a building under construction, the contractor likely would incur first-party losses such as cleanup costs. The contractor may also have third-party exposure if the owner alleges that the contractor was responsible for the fire. On the other hand, when a bodily injury occurs, all losses to the contractor will be third-party losses. A broad overview of each of these policies is provided below.

II. First-Party Insurance Coverage for Construction Projects
First-party coverage protects the insured or its property against a covered loss.

A. Builder’s Risk
Builder’s risk is a form of commercial property policy that provides coverage for direct physical loss to the construction project while it is being built. Unlike liability policies, builder’s risk coverage does not require a claim or suit to be brought against the insured to trigger coverage. Rather, builder’s risk policies provide first-party coverage, i.e., coverage for the insured’s own property (the building that is being constructed), typically along with any materials and fixtures to be incorporated into the finished project.

Generally, builder’s risk policies are written on either an “all-risk” (often referred to as “special form” policies) or “named peril” basis. All-risk policies provide the broadest coverage. All-risk policies typically insure against all risks of loss except those specifically excluded. Most jurisdictions that have analyzed all-risk policies have held that all-risk policies cover all fortuitous losses, which cause some form of physical alteration to covered property.1 Some courts have gone a step further by not requiring any actual physical damage or alteration of property to trigger coverage.2 Courts agree that the initial burden of showing that coverage is triggered is on the insured. This is generally satisfied by proving that there was a fortuitous loss to covered property. Then the burden shifts to the insurer to prove that an exclusion unambiguously applies.3

In contrast, “named peril” policies insure against only those losses caused by a specifically listed peril or cause of loss. Named peril policies typically include coverage for fire, windstorms and hail, flood, earthquake, and other specific risks. The insured has the burden of proving that one of the listed perils caused its loss to obtain coverage.4 Generally speaking, policyholders prefer broad all-risk coverage for construction projects; however, all-risk coverage is more costly than named peril coverage and may not be feasible for every project.

Builder’s risk insurance policies vary widely. Insurance Services Office (“ISO”) has developed a standardized builder’s risk form (CP 00 20), but most carriers nonetheless choose to write builder’s risk policies on their own forms. Also, many policyholders look to the London markets for coverage. Because of the variation in terms, policyholders must carefully review their policies to ensure that they receive the coverage they expect.5

One area to pay particular attention to is who is insured under a builder’s risk policy. An owner may choose not to insure any contractors or only the prime contractor, when the owner purchases a builder’s risk policy. When an owner negotiates with the prime contractor for the prime contractor to purchase a builder’s risk policy, the prime contractor will often require that the owner, as well as upstream parties and lenders, be added as additional insureds. It is possible that a builder’s risk policy may insure only the party that purchased the policy or every party in the contractual chain from the landowner to the lowest tier subcontractor. In addition, most policies limit an insured’s status to the scope of their insurable interest in the project. Thus, a subcontractor may only have coverage for its own work or materials.

Perhaps one of the biggest impacts of who is an insured under a builder’s risk policy is related to subrogation. Parties must be very careful in drafting waivers of claims and waivers of subrogation with respect to first-party losses covered under a builder’s risk policy. Suppose a party that is an insured under a builder’s risk policy has not waived claims against a downstream party, and the downstream party is not an insured under the builder’s risk policy. In that case, the builder’s risk insurer may bring a subrogation claim against the downstream party if the downstream party caused the property damage for which a claim was paid.6 In this situation, the downstream party may be surprised to find out it has liability even though a builder’s risk policy was in place. This example illustrates the importance of carefully drafting risk transfer provisions and reviewing them in conjunction with the insurance that is purchased to ensure the risk transfer
mechanisms work as intended.

Finally, it is important to be mindful of the temporary nature of builder’s risk insurance. Builder’s risk coverage ceases once construction is completed. Thereafter, the owner must procure appropriate property insurance to cover operations at its new premises. Some policies call for a specific expiration date of coverage, while others automatically terminate upon occupancy of the project, whether in whole or in part. This may cause a coverage issue if the project contemplates a phased roll-out or if the owner otherwise decides to start its business operations in one area of the project before the entire project is complete. Therefore, builder’s risk policyholders must work with their insurers to ensure that there is no gap in coverage in these scenarios. If there is an overlap, there are appropriate “other insurance” provisions to establish priority clearly.

B. Subcontractor Default Insurance
Subcontractor Default Insurance (“SDI”) is a first-party coverage that indemnifies an insured contractor for losses resulting from a subcontractor’s default. SDI insures the cost of completing the work, the cost of correcting defective/non-conforming work, legal and other professional expenses, costs incurred in the investigation, adjustment, litigation, and defense of disputes related to the default and other expenses as set forth in the policy. SDI is often considered an alternative product to performance bonds and differs from such bonds in several respects:

SDI is a two-party insurance agreement between Contractor and Insured as opposed to a three-party guarantee arrangement between bonding company, subcontractor, and contractor. The Contractor prequalifies the subcontractors as opposed to the bonding company. Coverage extends to the policy limit, unlike a bond which is limited to the value of the contract. The insurer responds quickly to the claim as opposed to the bonding company, which can take considerable time to investigate the claim.

III. Third-Party Liability Insurance for Construction Projects
Third-party coverage protects the insured against claims made against it. The person or entity making the claim is the third party that suffered some loss for which it seeks to hold the insured liable.

A. Commercial General Liability Insurance
Commercial General Liability (“CGL”) insurance is the most common form of third-party liability insurance purchased by businesses, including those operating in the construction industry. CGL policies are meant to provide the policyholder “with the broadest possible spectrum of protection and to transfer to the insurer the risk of all liabilities for unintentional and unexpected personal injury or property damage arising out of the conduct of the insured’s business.”7

CGL policies are primarily a standardized product, written on a form drafted (and periodically revised) by the ISO (form number CG 00 01). The standard policy form provides coverage for “those sums that the insured becomes legally obligated to pay as damages” because of “bodily injury” or “property damage” caused by an “occurrence,” or because of “personal and advertising injury,” which takes place within the coverage territory during the policy period.8 Standard CGL coverage applies to the insured’s operations nationwide. It is common, however, for construction project participants to purchase a specific CGL policy to cover a single project, such as wrap-up insurance policies which are discussed in more detail below.

CGL insurers have two key duties to their insureds in the event of a covered loss. The first key duty is the insurer’s duty to defend. In practice, the insurer’s duty to defend means that it will retain an attorney on the insured’s behalf when the insured is made party to a lawsuit or claim. This duty to defend may convert to a duty to reimburse,9 or the insured may have the right to select their own counsel, which the insurer pays in cases of a conflict of interest.10 The duty to defend, which essentially functions as “litigation insurance,”11 is typically provided outside of the policy’s limits of liability, meaning that all costs the insurer expends in defense of its insured will not count towards reducing or exhausting the per-occurrence or aggregate limits of liability. Whether an insurer has a duty to defend a given claim is dependent on the policy terms and state law. Most jurisdictions recognize that the duty is broad and is triggered whenever a claim is alleged against the insured that has the potential to invoke coverage under the policy, including those claims which may appear groundless, fraudulent, or false.12

The second key duty is the insurer’s duty to indemnify their insureds from any covered legal liability. Whereas the duty to defend depends on filing a suit against the insured,13 the duty to indemnify is typically triggered by entry of a final judgment, settlement, or other means of final resolution.14 “In short, whereas the duty to defend is measured by the allegations of the underlying complaint, the duty to indemnify is measured by the facts as they unfold at trial or are inherent in the settlement agreement.”15

Parties to construction contracts also may shift their risk by requiring “additional insured” status on another party’s CGL insurance. More specifically, an “upstream” party (e.g., an owner or general contractor) will require in its subcontracts that all “downstream” parties (e.g., subcontractors and suppliers) provide the upstream party with additional insured status on the downstream parties’ CGL insurance. Parties may specify terms such as limits of liability, coverage triggers, and scope of additional insured status. There are several benefits to additional insured status. First, the additional insured is typically entitled to the same coverages under the CGL policy as the named insured, subject to the “triggering” language of the additional insured endorsement, which usually requires some causal connection between the named insured’s work and the additional insured’s liability.16 Second, the upstream party protects its own insurance program by shifting risk from the upstream party’s insurance to the downstream party’s insurance. The upstream party’s limits are not exhausted, and the loss does not count against its loss/claim history. This benefits the upstream party because it avoids the possible negative impact on insurability or increased premiums on future policies.

B. Excess Liability and Umbrella Coverage
For many construction projects, the project participants’ risk of potential liability exceeds the amount of coverage available on a primary basis. Accordingly, policyholders often purchase excess and umbrella insurance policies, which provide coverage over and above the insured’s primary insurance. Excess and umbrella coverage responds only once the primary policy or policies have paid their limits of insurance.17 Excess and umbrella insurance, though both purchased to meet this need, differ in function.18

Excess insurance applies only after a set amount of primary insurance exhausts. There are many types of excess forms. Some excess policies strictly “follow form” to the designated underlying policy, except for items specific to the excess policy (e.g., limits and policy period). The policyholder enjoys the same or substantially similar coverage from the first dollar of primary coverage to the last dollar of excess coverage. Other excess policies may only follow form for specific items but not for others. For example, excess policies may contain their own terms that apply to the excess coverage, which may not match all terms of the primary policy.19 As a general rule, excess coverage will not be broader than the underlying primary coverage.

Umbrella insurance is a subset of excess insurance that provides potentially broader coverage than what is provided by the underlying policy. An umbrella policy performs two key functions: (1) it provides an additional layer of insurance for losses that are generally covered by primary insurance; and (2) it provides additional coverage for those less common liabilities that are not usually covered by primary CGL insurance (e.g., malpractice coverage). Thus, umbrella coverage is often considered a hybrid contract, which combines “aspects of both a primary contract and a following form excess insurance contract.”20

C. Wrap-Up Insurance Policies
It has become increasingly common for contractors and owners to purchase some form of consolidated or “wrap-up” insurance policy covering the project and all or some of the project participants. Wrap-ups consolidate what would otherwise be multiple policies held by the owner, general contractor/construction managers, and subcontractors into a single, unified insurance program.21 Most often, a wrap-up includes CGL and excess/umbrella insurance; although, a wrap-up may also include workers’ compensation insurance. A wrap-up is usually procured by either the owner (an “Owner Controlled Insurance Program” or “OCIP”) or the general contractor (a “Contractor Controlled Insurance Program” or “CCIP”). All project participants performing on-site work, with a few notable exceptions,22 are typically included as insureds on the wrap-up policies and have equal rights to coverage thereunder. Wrap-up policies provide many advantages to both the entity procuring the coverage and the other project participants. Given the economies of scale involved, the procuring party typically has greater bargaining power with potential insurers. As a result, it can often secure better coverage terms than any one party could obtain on its own. This is particularly important in jurisdictions where subcontractors struggle to procure quality coverage (whether due to poor insurance markets or lack of sophistication). In a “traditional” (i.e., non-wrap) project, the upstream parties must rely on downstream parties to secure appropriate coverage that will protect them as an additional insured. Procuring a wrap-up alleviates this concern. The party sponsoring the wrap-up controls the coverage it procures.

D. Professional Liability Insurance
Professional liability insurance is another type of third-party liability coverage that is particularly important to construction project participants performing some form of design or engineering services. Most CGL policies specifically exclude, by endorsement, coverage for bodily injury or property damage “arising out of the rendering of or failure to render professional services.”23 Professional liability insurance is intended to dovetail with this exclusion, providing broad coverage for any kind of act or service that arises out of specialized knowledge, skill, or labor that is predominantly intellectual.24 Although design professionals are not generally required by law to purchase and maintain professional liability insurance; most project owners require that they do to ensure there is an adequate means to respond to a loss caused by a breach of their professional services contract.25

Typically, professional liability insurance is supplied on a “claims-made” basis. This means that the policy will respond to claims first made against the insured during the period when the policy is in effect.26 When a claim is “made” for purposes of
triggering coverage, it is often defined as when the insured receives a demand for money or services or is made party to a lawsuit.27 Professional liability policies frequently include a “retroactive date,” a date in the past that cuts off coverage for claims that result from wrongful acts or omissions which took place prior to that date, regardless of whether the claim is made during the policy period. It is critical that construction industry policyholders ensure the retroactive date pre-dates the start of their services or work on the project to avoid incurring a gap in coverage.

Finally, additional insured status is not available on professional liability insurance, so upstream parties should not expect that project consultants can supply the upstream parties with that coverage. There are, however, specialized products
available for those project participants who may be concerned about incurring liability on a vicarious basis for the errors and omissions of their consultants. Those products are known as owner’s or contractor’s protective indemnity policies. These protective indemnity policies are a source of recovery for losses incurred by a contractor or owner because of a consultant’s professional negligence.

E. Other types of Coverage
Other lines of insurance coverage that may be implicated in a large construction project include, but are not limited to:

Pollution Liability
Protects against injury or damage caused by pollution, which is generally excluded under CGL policies. Pollution liability policies can provide coverage for both first-party and third-party losses. Pollution liability policies are often “claims-made”
policies, meaning that coverage expires when the project is completed. However, insureds can often purchase a “tail” to provide continued coverage after project completion.

Workers Compensation
Worker’s compensation is a type of first-party insurance that protects an insured’s injured workers and limits the insured’s liability for claims.

Business Auto Policy
The Business Auto Policy (“BAP”) is an ISO commercial auto policy that provides coverage for both auto liability and physical damage. Auto liability insurance covers third-party loss resulting from accidents caused by vehicles used in the policyholder’s business. Auto physical damage insurance covers first-party loss resulting from loss events, which include, but are not limited to, collisions, hail, theft, and vandalism.

Policyholders may expand coverage available under a BAP by endorsement.

Cyber
Cyber risk insurance provides both first-party loss and third-party liability coverage for data breach events, privacy violations, and cyber-attacks. There are variations in the types of cyber insurance policies available; however, cyber insurance generally provides risk shifting for costs associated with having to respond, investigate, defend, and mitigate loss arising from a cyber-attack.

Inland Marine
Originally covering ocean materials and vessels, inland marine insurance has expanded to cover various types of property, including tools and mobile equipment at or in transit to a project site.

“Rip and Tear”
Third-party coverage insuring contractors from costs to remove and replace defective work.

Crisis Management
First-party coverage that protects the contractor for professional responsibility and response costs in a publicized event.

IV. Conclusion
In any given construction project, policyholders are faced with a multitude of potential risks. It is critical that policyholders carefully consider and evaluate potential risks in determining which types and amounts of insurance coverage will provide the best protection from those risks. Parties to a construction contract should first obtain some form of first-party insurance: generally, a builder’s risk policy, to protect the property of the insured during the project, and some form of third-party insurance, generally in the form of a CGL policy, to protect parties in the case of third-party claims In addition to those policies, policyholders should consider the advantages of obtaining additional insurance, such as (1) excess coverage to cover losses that exceed the limits of the primary policy; (2) professional liability coverage, to cover risks relating to the performance of a specialized or design-related nature; (3) pollution liability coverage, to cover any risks associated with the release of contaminants and/or mold; (4) a performance bond, to ensure completion of the project; and/or (5) SDI insurance to cover risks associated with subcontractor default.

Once policyholders have obtained coverage for their construction project, they should carefully maintain records evidencing that coverage. Because most third-party coverage is “occurrence” based, policies may still hold value years after the construction project is completed. If policyholders do not carefully maintain records, they may find themselves in a position, years after project completion, where they are forced to pay out-of-pocket because there is no record of the policy in place for that year. Thus, policyholders should carefully evaluate what coverage is necessary and maintain records of that coverage in case of future claims.

Click here to watch a related video.

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1See, e.g., Zurich Am. Ins. Co. v. Keating Bldg. Corp., 513 F. Supp. 2d 55 (D.N.J. 2007).
2See BARRY R. OSTRAGER & THOMAS R. NEWMAN, HANDBOOK ON INSURANCE COVERAGE DISPUTES, at 1307 (13th ed. 2006); see also Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724 (N.J. App. Div. 2009) (finding Shop Rite stores suffered physical damage due to loss of electricity, even though no actual damage sustained to power grid); Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226, 235-36 (3d Cir. 2002) (explaining that “sources unnoticeable to the naked eye,” such as asbestos in the air, can be direct physical loss if the asbestos makes a building “uninhabitable or unusable.”).
3See, e.g., Keating Bldg. Corp., 513 F. Supp. 2d at 68-69.
4See, e.g., Fabozzi v. Lexington Ins. Co., 23 F. Supp. 3d 120, 125 (E.D.N.Y. 2014).
5See 5JAMES P. BOBOTEK & STEPHEN S. ASAY, NEWAPPLEMAN ON INSURANCE LAW § 50.01 (library ed. 2021).
6See, e.g., Ind. Erectors, Inc. v. Trs. of Ind. Univ., 686 N.E.2d 878 (Ind. Ct. App. 1997).
7RABEH M.A. SOOFI, THE REFERENCE HANDBOOK ON THE COMPREHENSIVE GENERAL LIABILITY POLICY, Chapter 1 (citing London Mkt. Insurers v. Superior Court, 53 Cal. Rptr. 3d 154, 166 (Cal. Ct. App. 2007)).
8CG 00 01 04 13.
9See, e.g., Voorhees v. Preferred Mut. Ins. Co., 588 A.2d 417 (N.J. Super. Ct. App. Div. 1991).
10See, e.g., Armstrong Cleaners, Inc. v. Erie Ins. Exch., 364 F. Supp. 2d 797 (S.D. Ind. 2005) (discussing conflicts of interest when an insurer assumes defense of a claim for which it has reserved its rights).
11Cont’l Cas. Co. v. Rapid-Am. Corp., 609 N.E.2d 506, 509 (N.Y. 1993). 
12See, e.g., Hartford Cas. Ins. Co. v. Litchfield Mut. Fire Ins. Co., 876 A.2d 1139 (Conn. 2005).
13See, e.g., Hall v. Allstate Ins. Co., 880 F.2d 394, 399 (11th Cir. 1989)
14See, e.g., Bankwest v. Fid. & Deposit Co. of Md., 63 F.3d 974, 978 (10th Cir. 1995)
15John Beaudette, Inc. v. Sentry Ins., 94 F. Supp. 2d 77, 100 (D. Mass. 1999) (citing Travelers Ins. Co. v. Waltham Indus. Labs. Corp., 883 F.2d 1092, 1099-1100 (1st Cir. 1989).
16The most common triggering language in use today is liability “caused, in whole or in part by,” the named insured’s operations. Thus, the additional insured will be entitled to coverage under the named insured’s CGL policy for all covered injury or damage that is caused, in whole or in part by, the named insured’s work on the project.
17Scott M. Seaman & Charlene Kittredge, Excess Liability Insurance: Law and Litigation, 32 Tort & Ins. L.J. 653 (1997).
18Id.
19See 4 DAN A. BAILEY & TIMOTHY W. BURNS, NEW APPLEMAN ON INSURANCE LAW § 26.09 (library ed. 2021).
20Id. at 660 (citing Cont’l Cas. Co. v. Roper Corp., 527 N.E.2d 998 (Ill. App. Ct. 1988); Garmany v. Mission Ins. Co., 785 F.2d 941, 948 (11th Cir. 1986)).
21See James P. Bobotek & Ruth Kochenderfer, Construction Wrap-Up Policies: Analysis of Selected Coverage Issues, in 2011 EMERGING ISSUES 5919 (2011).
22Most wrap-up policies will exclude coverage for certain “high risk” insureds, such as hazardous materials remediation contractors or transport companies, as well as those project participants who do not perform any actual work or labor at the project site (e.g., suppliers, truckers, etc.). Design professionals are also usually excluded from participation in wrap-up programs.
23CG 22 79 07 98.
24See Wimberly Allison Tong & Goo, Inc. v. Travelers Prop. Cas. Co. of Am., 352 F. App’x. 642, 647 (3d Cir. 2009).
25See 4 PHILLIP L. BURNER & PATRICK J. O’CONNOR, JR., BRUNER & O’CONNOR CONSTRUCTION LAW § 11:300, Westlaw (database updated August 2020).
26See 1 JOHN DEMBECK & JAMES F. JOHNSON, NEW APPLEMAN NEW YORK INSURANCE LAW § 17.09 (2021).
27See, e.g., Chi. Ins. Co. v. Borsody, 165 F. Supp. 2d 592, 596-97 (S.D.N.Y. 2001) (“’Claim’ means a demand for money or services, or the filing of suit . . ..”).  

Identifying and Accessing Coverage in Complex Construction Claims

Jeffrey J. Vita and Michael V. Pepe | Saxe Doernberger & Vita

I. Introduction

First-party, third-party, builder’s risk, professional liability, commercial general liability, wrap-ups, and additional insured status are all potential sources of insurance coverage for a large construction loss. Therefore, it is critical for construction industry participants, from owners and developers to general contractors and their subcontractors, to have a functional knowledge of the different types of insurance coverage available to them and how those coverages intersect to respond to a loss. This paper presents a brief overview of the various types of coverage available to contractors, construction managers, and owners in a large construction loss and the risks each coverage is designed to insure.

In general, there are two forms of coverage: (1) First-party liability coverage, which protects an insured’s own losses on a project during construction; and (2) Third-party liability coverage, which insures the project participants for losses that become the subject of claims or suits brought against the project participants by third parties. When a loss occurs, such as property damage, both types of coverage can be implicated. For example, if a fire burns down a building under construction, the contractor likely would incur first-party losses such as cleanup costs. The contractor may also have third-party exposure if the owner alleges that the contractor was responsible for the fire. On the other hand, when a bodily injury occurs, all losses to the contractor will be third-party losses. A broad overview of each of these policies is provided below.

II. First-Party Insurance Coverage for Construction Projects

First-party coverage protects the insured or its property against a covered loss.

A. Builder’s Risk Builder’s risk is a form of commercial property policy that provides coverage for direct physical loss to the construction project while it is being built. Unlike liability policies, builder’s risk coverage does not require a claim or suit to be brought against the insured to trigger coverage. Rather, builder’s risk policies provide first-party coverage, i.e., coverage for the insured’s own property (the building that is being constructed), typically along with any materials and fixtures to be incorporated into the finished project.

Generally, builder’s risk policies are written on either an “all-risk” (often referred to as “special form” policies) or “named peril” basis. All-risk policies provide the broadest coverage. All-risk policies typically insure against all risks of loss except those specifically excluded. Most jurisdictions that have analyzed all-risk policies have held that all-risk policies cover all fortuitous losses, which cause some form of physical alteration to covered property.1 Some courts have gone a step further by not requiring any actual physical damage or alteration of property to trigger coverage.2 Courts agree that the initial burden of showing that coverage is triggered is on the insured. This is generally satisfied by proving that there was a fortuitous loss to covered property. Then the burden shifts to the insurer to prove that an exclusion unambiguously applies.3

In contrast, “named peril” policies insure against only those losses caused by a specifically listed peril or cause of loss. Named peril policies typically include coverage for fire, windstorms and hail, flood, earthquake, and other specific risks. The insured has the burden of proving that one of the listed perils caused its loss to obtain coverage.4 Generally speaking, policyholders prefer broad all-risk coverage for construction projects; however, all-risk coverage is more costly than named peril coverage and may not be feasible for every project.

Builder’s risk insurance policies vary widely. Insurance Services Office (“ISO”) has developed a standardized builder’s risk form (CP 00 20), but most carriers nonetheless choose to write builder’s risk policies on their own forms. Also, many policyholders look to the London markets for coverage. Because of the variation in terms, policyholders must carefully review their policies to ensure that they receive the coverage they expect.5

One area to pay particular attention to is who is insured under a builder’s risk policy. An owner may choose not to insure any contractors or only the prime contractor, when the owner purchases a builder’s risk policy. When an owner negotiates with the prime contractor for the prime contractor to purchase a builder’s risk policy, the prime contractor will often require that the owner, as well as upstream parties and lenders, be added as additional insureds. It is possible that a builder’s risk policy may insure only the party that purchased the policy or every party in the contractual chain from the landowner to the lowest tier subcontractor. In addition, most policies limit an insured’s status to the scope of their insurable interest in the project. Thus, a subcontractor may only have coverage for its own work or materials.

Perhaps one of the biggest impacts of who is an insured under a builder’s risk policy is related to subrogation. Parties must be very careful in drafting waivers of claims and waivers of subrogation with respect to first-party losses covered under a builder’s risk policy. Suppose a party that is an insured under a builder’s risk policy has not waived claims against a downstream party, and the downstream party is not an insured under the builder’s risk policy. In that case, the builder’s risk insurer may bring a subrogation claim against the downstream party if the downstream party caused the property damage for which a claim was paid.6 In this situation, the downstream party may be surprised to find out it has liability even though a builder’s risk policy was in place. This example illustrates the importance of carefully drafting risk transfer provisions and reviewing them in conjunction with the insurance that is purchased to ensure the risk transfer mechanisms work as intended.

Finally, it is important to be mindful of the temporary nature of builder’s risk insurance. Builder’s risk coverage ceases once construction is completed. Thereafter, the owner must procure appropriate property insurance to cover operations at its new premises. Some policies call for a specific expiration date of coverage, while others automatically terminate upon occupancy of the project, whether in whole or in part. This may cause a coverage issue if the project contemplates a phased roll-out or if the owner otherwise decides to start its business operations in one area of the project before the entire project is complete. Therefore, builder’s risk policyholders must work with their insurers to ensure that there is no gap in coverage in these scenarios. If there is an overlap, there are appropriate “other insurance” provisions to establish priority clearly.

B. Subcontractor Default Insurance Subcontractor Default Insurance (“SDI”) is a first-party coverage that indemnifies an insured contractor for losses resulting from a subcontractor’s default. SDI insures the cost of completing the work, the cost of correcting defective/non-conforming work, legal and other professional expenses, costs incurred in the investigation, adjustment, litigation, and defense of disputes related to the default and other expenses as set forth in the policy. SDI is often considered an alternative product to performance bonds and differs from such bonds in several respects:

SDI is a two-party insurance agreement between Contractor and Insured as opposed to a three-party guarantee arrangement between bonding company, subcontractor, and contractor. The Contractor prequalifies the subcontractors as opposed to the bonding company. Coverage extends to the policy limit, unlike a bond which is limited to the value of the contract. The insurer responds quickly to the claim as opposed to the bonding company, which can take considerable time to investigate the claim.

III. Third-Party Liability Insurance for Construction Projects

Third-party coverage protects the insured against claims made against it. The person or entity making the claim is the third party that suffered some loss for which it seeks to hold the insured liable.

A. Commercial General Liability Insurance Commercial General Liability (“CGL”) insurance is the most common form of third-party liability insurance purchased by businesses, including those operating in the construction industry. CGL policies are meant to provide the policyholder “with the broadest possible spectrum of protection and to transfer to the insurer the risk of all liabilities for unintentional and unexpected personal injury or property damage arising out of the conduct of the insured’s business.”7

CGL policies are primarily a standardized product, written on a form drafted (and periodically revised) by the ISO (form number CG 00 01). The standard policy form provides coverage for “those sums that the insured becomes legally obligated to pay as damages” because of “bodily injury” or “property damage” caused by an “occurrence,” or because of “personal and advertising injury,” which takes place within the coverage territory during the policy period.8 Standard CGL coverage applies to the insured’s operations nationwide. It is common, however, for construction project participants to purchase a specific CGL policy to cover a single project, such as wrap-up insurance policies which are discussed in more detail below.

CGL insurers have two key duties to their insureds in the event of a covered loss. The first key duty is the insurer’s duty to defend. In practice, the insurer’s duty to defend means that it will retain an attorney on the insured’s behalf when the insured is made party to a lawsuit or claim. This duty to defend may convert to a duty to reimburse,9 or the insured may have the right to select their own counsel, which the insurer pays in cases of a conflict of interest.10 The duty to defend, which essentially functions as “litigation insurance,”11 is typically provided outside of the policy’s limits of liability, meaning that all costs the insurer expends in defense of its insured will not count towards reducing or exhausting the per-occurrence or aggregate limits of liability. Whether an insurer has a duty to defend a given claim is dependent on the policy terms and state law. Most jurisdictions recognize that the duty is broad and is triggered whenever a claim is alleged against the insured that has the potential to invoke coverage under the policy, including those claims which may appear groundless, fraudulent, or false.12

The second key duty is the insurer’s duty to indemnify their insureds from any covered legal liability. Whereas the duty to defend depends on filing a suit against the insured,13 the duty to indemnify is typically triggered by entry of a final judgment, settlement, or other means of final resolution.14 “In short, whereas the duty to defend is measured by the allegations of the underlying complaint, the duty to indemnify is measured by the facts as they unfold at trial or are inherent in the settlement agreement.”15

Parties to construction contracts also may shift their risk by requiring “additional insured” status on another party’s CGL insurance. More specifically, an “upstream” party (e.g., an owner or general contractor) will require in its subcontracts that all “downstream” parties (e.g., subcontractors and suppliers) provide the upstream party with additional insured status on the downstream parties’ CGL insurance. Parties may specify terms such as limits of liability, coverage triggers, and scope of additional insured status. There are several benefits to additional insured status. First, the additional insured is typically entitled to the same coverages under the CGL policy as the named insured, subject to the “triggering” language of the additional insured endorsement, which usually requires some causal connection between the named insured’s work and the additional insured’s liability.16 Second, the upstream party protects its own insurance program by shifting risk from the upstream party’s insurance to the downstream party’s insurance. The upstream party’s limits are not exhausted, and the loss does not count against its loss/claim history. This benefits the upstream party because it avoids the possible negative impact on insurability or increased premiums on future policies.

B. Excess Liability and Umbrella Coverage For many construction projects, the project participants’ risk of potential liability exceeds the amount of coverage available on a primary basis. Accordingly, policyholders often purchase excess and umbrella insurance policies, which provide coverage over and above the insured’s primary insurance. Excess and umbrella coverage responds only once the primary policy or policies have paid their limits of insurance.17 Excess and umbrella insurance, though both purchased to meet this need, differ in function.18

Excess insurance applies only after a set amount of primary insurance exhausts. There are many types of excess forms. Some excess policies strictly “follow form” to the designated underlying policy, except for items specific to the excess policy (e.g., limits and policy period). The policyholder enjoys the same or substantially similar coverage from the first dollar of primary coverage to the last dollar of excess coverage. Other excess policies may only follow form for specific items but not for others. For example, excess policies may contain their own terms that apply to the excess coverage, which may not match all terms of the primary policy.19 As a general rule, excess coverage will not be broader than the underlying primary coverage.

Umbrella insurance is a subset of excess insurance that provides potentially broader coverage than what is provided by the underlying policy. An umbrella policy performs two key functions: (1) it provides an additional layer of insurance for losses that are generally covered by primary insurance; and (2) it provides additional coverage for those less common liabilities that are not usually covered by primary CGL insurance (e.g., malpractice coverage). Thus, umbrella coverage is often considered a hybrid contract, which combines “aspects of both a primary contract and a following form excess insurance contract.”20

C. Wrap-Up Insurance Policies It has become increasingly common for contractors and owners to purchase some form of consolidated or “wrap-up” insurance policy covering the project and all or some of the project participants. Wrap-ups consolidate what would otherwise be multiple policies held by the owner, general contractor/construction managers, and subcontractors into a single, unified insurance program.21 Most often, a wrap-up includes CGL and excess/umbrella insurance; although, a wrap-up may also include workers’ compensation insurance. A wrap-up is usually procured by either the owner (an “Owner Controlled Insurance Program” or “OCIP”) or the general contractor (a “Contractor Controlled Insurance Program” or “CCIP”). All project participants performing on-site work, with a few notable exceptions,22 are typically included as insureds on the wrap-up policies and have equal rights to coverage thereunder. Wrap-up policies provide many advantages to both the entity procuring the coverage and the other project participants. Given the economies of scale involved, the procuring party typically has greater bargaining power with potential insurers. As a result, it can often secure better coverage terms than any one party could obtain on its own. This is particularly important in jurisdictions where subcontractors struggle to procure quality coverage (whether due to poor insurance markets or lack of sophistication). In a “traditional” (i.e., non-wrap) project, the upstream parties must rely on downstream parties to secure appropriate coverage that will protect them as an additional insured. Procuring a wrap-up alleviates this concern. The party sponsoring the wrap-up controls the coverage it procures.

D. Professional Liability Insurance Professional liability insurance is another type of third-party liability coverage that is particularly important to construction project participants performing some form of design or engineering services. Most CGL policies specifically exclude, by endorsement, coverage for bodily injury or property damage “arising out of the rendering of or failure to render professional services.”23 Professional liability insurance is intended to dovetail with this exclusion, providing broad coverage for any kind of act or service that arises out of specialized knowledge, skill, or labor that is predominantly intellectual.24 Although design professionals are not generally required by law to purchase and maintain professional liability insurance; most project owners require that they do to ensure there is an adequate means to respond to a loss caused by a breach of their professional services contract.25

Typically, professional liability insurance is supplied on a “claims-made” basis. This means that the policy will respond to claims first made against the insured during the period when the policy is in effect.26 When a claim is “made” for purposes of triggering coverage, it is often defined as when the insured receives a demand for money or services or is made party to a lawsuit.27 Professional liability policies frequently include a “retroactive date,” a date in the past that cuts off coverage for claims that result from wrongful acts or omissions which took place prior to that date, regardless of whether the claim is made during the policy period. It is critical that construction industry policyholders ensure the retroactive date pre-dates the start of their services or work on the project to avoid incurring a gap in coverage.

Finally, additional insured status is not available on professional liability insurance, so upstream parties should not expect that project consultants can supply the upstream parties with that coverage. There are, however, specialized products available for those project participants who may be concerned about incurring liability on a vicarious basis for the errors and omissions of their consultants. Those products are known as owner’s or contractor’s protective indemnity policies. These protective indemnity policies are a source of recovery for losses incurred by a contractor or owner because of a consultant’s professional negligence.

E. Other types of Coverage Other lines of insurance coverage that may be implicated in a large construction project include, but are not limited to:

Pollution Liability Protects against injury or damage caused by pollution, which is generally excluded under CGL policies. Pollution liability policies can provide coverage for both first-party and third-party losses. Pollution liability policies are often “claims-made” policies, meaning that coverage expires when the project is completed. However, insureds can often purchase a “tail” to provide continued coverage after project completion.

Workers Compensation Worker’s compensation is a type of first-party insurance that protects an insured’s injured workers and limits the insured’s liability for claims.

Business Auto Policy The Business Auto Policy (“BAP”) is an ISO commercial auto policy that provides coverage for both auto liability and physical damage. Auto liability insurance covers third-party loss resulting from accidents caused by vehicles used in the policyholder’s business. Auto physical damage insurance covers first-party loss resulting from loss events, which include, but are not limited to, collisions, hail, theft, and vandalism.

Policyholders may expand coverage available under a BAP by endorsement.

Cyber Cyber risk insurance provides both first-party loss and third-party liability coverage for data breach events, privacy violations, and cyber-attacks. There are variations in the types of cyber insurance policies available; however, cyber insurance generally provides risk shifting for costs associated with having to respond, investigate, defend, and mitigate loss arising from a cyber-attack.

Inland Marine Originally covering ocean materials and vessels, inland marine insurance has expanded to cover various types of property, including tools and mobile equipment at or in transit to a project site.

“Rip and Tear” Third-party coverage insuring contractors from costs to remove and replace defective work.

Crisis Management First-party coverage that protects the contractor for professional responsibility and response costs in a publicized event.

IV. Conclusion In any given construction project, policyholders are faced with a multitude of potential risks. It is critical that policyholders carefully consider and evaluate potential risks in determining which types and amounts of insurance coverage will provide the best protection from those risks. Parties to a construction contract should first obtain some form of first-party insurance: generally, a builder’s risk policy, to protect the property of the insured during the project, and some form of third-party insurance, generally in the form of a CGL policy, to protect parties in the case of third-party claims In addition to those policies, policyholders should consider the advantages of obtaining additional insurance, such as (1) excess coverage to cover losses that exceed the limits of the primary policy; (2) professional liability coverage, to cover risks relating to the performance of a specialized or design-related nature; (3) pollution liability coverage, to cover any risks associated with the release of contaminants and/or mold; (4) a performance bond, to ensure completion of the project; and/or (5) SDI insurance to cover risks associated with subcontractor default.

Once policyholders have obtained coverage for their construction project, they should carefully maintain records evidencing that coverage. Because most third-party coverage is “occurrence” based, policies may still hold value years after the construction project is completed. If policyholders do not carefully maintain records, they may find themselves in a position, years after project completion, where they are forced to pay out-of-pocket because there is no record of the policy in place for that year. Thus, policyholders should carefully evaluate what coverage is necessary and maintain records of that coverage in case of future claims.

Risk Assessment — Construction Claims: How to Calculate the Recoverable Costs and Damages

Amandeep Kahlon | Bradley Arant Boult Cummings

When negotiating a complex change order or preparing to litigate a claim, calculating actual recoverable costs incurred can be a difficult exercise. You will want to first review your contract to determine what kinds of costs are compensable. For example, the change order provision of your contract may provide a specific markup that can be included in a change request or limit the recovery of indirect costs and overhead associated with a change. Similarly, a termination for convenience provision may prohibit recovery of profit or provide a defined demobilization fee. Your contract may also include liability caps or waivers of certain types of damages (e.g., consequential damages). Damages waivers may try and limit exposure of both parties to indirect, hard-to-determine costs.

ECONOMIC LOSS DOCTRINE

Beyond the contract terms, recoverable costs will also be limited by the different methodologies or approaches used by various courts. One of the primary limitations on recovery in contract disputes, including those involving construction, is the economic loss doctrine. Most states have adopted the economic loss doctrine in some form. While a detailed discussion could fill up several pages, the basic premise of the doctrine is that a party cannot avoid contractual limitations on recovery by alleging a tort (e.g., negligence) for purely economic losses.

The size and credibility of your damages claim will likely factor into the risk assessment that your company makes in pursuing a claim in arbitration or litigation.

ACCOUNTING METHODOLOGIES

Other challenges to calculating recoverable costs relate to the accounting methodologies used by a party in developing a claim. When things go wrong on a construction project,
it may be difficult to adequately track costs or assign costs to particular impacts. Concurrent delays, acceleration directives, interference with the work, and other issues all complicate the cost accounting exercise. Even the most sophisticated contractors, can have a hard time tracking their costs. Courts are not always forgiving of the complexity involved in tracking construction costs, so be careful about trying to submit your claim as a total cost claim (i.e., here’s what we bid and here’s what it actually cost to build the project; pay us the difference). If you cannot adequately connect your damages to the claimed impacts and demonstrate their reasonableness, many jurisdictions will not permit recovery based on this total cost exercise, although there are exceptions and caveats.

ENSURE CLAIM IS CREDIBLE

Before you submit a claim, you should consult internally or with a lawyer to make sure you are adequately calculating your damages in way that you can later justify to a judge or arbitrator. The size and credibility of your damages claim will likely factor into the risk assessment that your company makes in pursuing a claim in arbitration or litigation.

The industry has a number of experts who address construction delay and accounting matters and can help you work through a difficult or complex claim.

For instance, if a project manager presents a claim that estimates total losses of $10 million, at first glance, that may appear like a sizable claim that is worth pursuing. However, if on further reflection, you recognize that the project manager failed to account for contractual limitations on recoverable costs or has not done a poor job of tracking and assigning costs to the particular impact giving rise to your claim, the actual amount of the claim you can legitimately support may be much smaller. If your $10 million claim turns out to really be worth only $1 million, the expected attorneys’ fees and uncertainty of the litigation process may cause you to re-think pursuing the matter aggressively.

Be careful about trying to submit your claim as a total cost claim.

CLOSING THOUGHT

This article touches very briefly on some of the complexities of determining construction damages, but this is not an exhaustive discussion. There are other methodologies and approaches contractors use to calculate their damages (e.g., loss productivity claims) that may be worth exploring depending on the type of claim you are pursuing. Aside from contacting your lawyer, you may also consider reaching out to a construction consultant. The industry has a number of experts who address construction delay and accounting matters and can help you work through a difficult or complex claim.

A New Roadmap to a Familiar Journey: The ASCE Standard on Loss of Productivity

Frederick E. Hedberg | American Bar Association

As the construction industry recovers from and adjusts to the effects of the COVID-19 pandemic and prepares for a new normal, post-COVID world, claims for losses of productivity on projects that were in progress when COVID-19 struck will likely increase due to contractors performing work under conditions far different than originally contemplated when they bid the project and signed the contract.  Consequently, as contractors pursue claims seeking compensation for adverse impacts to the productivity on projects shut down or slowed because of the COVID-19 pandemic, and owners defend such claims, documenting causation and accurately assessing loss of productivity will be vital to both parties.  While COVID-19 has changed our lives and the construction industry in many ways, it has not changed the fact that claims for loss of productivity remain some of the most contentious, and most difficult to quantify and prove.

Today, contractors must balance common, but often competing, goals of progressing the work to complete projects while at the same time taking unprecedented steps to protect the safety and health of their workers and the public.  In addition to impacts due to design errors and omissions, performing work out of sequence or in adverse weather conditions because of delays, or excessive overtime due to acceleration, contractors must recognize that a host of causes—impacts due to social distancing, labor unavailability due to illness, quarantine, owner restrictions and government restrictions, compliance with OSHA and other safety guidelines, medical testing, work stoppages and suspensions, and supply-chain challenges—may result in losses of productivity on projects.  To maintain this balancing act, contractors often expend more actual labor hours on the project than planned, resulting in losses of productivity.  Successfully identifying, quantifying and proving such losses is critical to a contractor’s financial success, especially in today’s economy.

While the right to recover for losses of productivity is well-settled, there is no universally accepted standard for calculating damages for these claims.  Contractors and their experts rely upon various treatises and studies on loss of productivity to present such claims in mediation, litigation and arbitration proceedings.  Over the years, courts have decided claims and awarded damages based on different methodologies for quantifying and proving such claims, often leading to inconsistent results.  The American Society of Civil Engineers (ASCE), in conjunction with its Construction Institute, seeks to develop consistency and provide guidance through its soon-to-be-published standard “Identifying, Quantifying and Proving Loss of Productivity”. 1

Different Methodologies

The methodology that a contractor ultimately employs to calculate damages for loss of productivity due to additional labor, material and equipment costs incurred owing to disruptions on a project is often the most critical issue in prevailing on a loss of productivity claim.  While courts do not require such claims to be proven with exactitude or precise calculations, proving that decreased productivity due to disruptions to the manner and/or timing of the work often requires the use of a generally accepted methodology and credible expert testimony; without a foundation of a generally accepted methodology, the expert’s analyses and testimony may be excluded at trial, especially from a jury trial.  Contractors must also closely review the contract to ensure it does not expressly exclude claims for loss of productivity due to site conditions, changed weather conditions or other anticipated events or conditions.  The methodology chosen also often depends on the facts of the case, and the contractor’s contemporaneous records related to its labor and equipment productivity.

The Measured Mile approach is generally favored by courts and federal agencies as the preferred method of calculating losses of labor productivity.  It compares a contractor’s productivity levels between periods in which work was disrupted and periods without a disruption, thereby considering only the actual effects of a disruption and eliminating disputes over the validity of cost estimates or factors impacting productivity due to no fault of the owner.  As long as the work during the periods in comparison is reasonably similar, courts and the Board of Contract Appeals have permitted this methodology.  This approach, however, cannot be used if the contractor never performed the work efficiently and, therefore, does not have a baseline of unimpacted work for comparison.

Federal and state courts have also allowed contractors to prove their loss of productivity claims using cost-based methods such as “total cost” and “modified total cost.”  Under the total cost method, the difference between a contractor’s total actual costs and its estimated costs of completing construction is its “lost productivity damages.”  To prevail, a contractor must prove: (1) the nature of the loss makes it impossible or highly impractical to determine lost productivity damages with a reasonable degree of certainty; (2) its bid or cost estimate was realistic; (3) the actual costs it incurred were reasonable; and (4) it is not responsible for the added expenses. 2 Under the modified total cost method, courts will adjust a contractor’s recovery if it is unable to satisfy all four of these requirements.  Using the total cost method as a starting point, courts adjust the contractor’s award down to account for inaccurate bids or to eliminate cost overruns for which the contractor is responsible.  

Courts and the Board of Contract Appeals have further allowed the use of industry studies as an alternative means of calculating labor inefficiency. The Board of Contract Appeals accepted the Mechanical Contractors Association of America (MCAA) Manual as a means of measuring labor inefficiencies. 3   The MCAA Manual  4 lists 16 factors affecting labor productivity, stated as percentage losses to add onto labor costs for the contractor’s labor man-hours, with categories of minor, average and severe, typically determined by conducting fact-witness interviews and doing a complete review of the project records.

The New ASCE Standard

When published, the ASCE standard will be a useful resource for owners, developers, contractors, design professionals, consultants and attorneys for identifying, quantifying and proving loss of productivity claims.  It goes through the life cycle of such claims in the context of five distinct, but interrelated, categories: productivity basics; identifying productivity loss; establishing recoverable loss of productivity; quantifying productivity loss; and avoiding productivity loss.  Each category includes key principles that function as guidelines or recommended practices to be used by any project participant in prosecuting or defending loss of productivity claims.  The application of key principles to each category or phase provides the claimant with both a useful roadmap and a solid foundation for its claims.

From the onset, the standard provides useful guidance on collecting, storing and validating productivity data, which is a critical element of a claim of loss of productivity.  Next, it recommends best practices for identifying the causes of productivity loss as early as possible, recording those causes in the project records, taking steps to mitigate such losses and providing notice of such impacts in compliance with the contract.  After laying the predicate groundwork, the standard provides valuable guidance on recovering productivity loss by using project labor records, project participants and unbiased experts to validate that the actual conditions differed materially from those that should have been reasonably anticipated, and to estimate productivity losses with a reasonable degree of certainty, even for cumulative-impact changes.

Once a claimant has established causation and responsibility, the standard promulgates a preferred order of methods for quantifying productivity loss.  By segregating and ranking different, sometimes inconsistent, damage calculation methods into tiers, the standard should establish consistency.  The preferred order of such methods is expected to be: the most preferred approach—the Measured Mile (Tier 1); academic and industry productivity factors studies and modified total cost (Tier 2); and, lastly, the least preferred method—total cost (Tier 3).  Before moving to a lower tier, the standard recommends that it be shown with a reasonable degree of certainty that a higher-tier method could not have been used.  The standard also recommends using separate productivity analyses that do not overlap for different periods or areas of the project if doing so will improve the overall reliability of the damages estimate.

In Closing

The ASCE standard, developed from the perspective of various industry sectors, project participants, project delivery methods, project types and sizes, and which will be accredited by the American National Standards Institute (ANSI), has the potential to be a universally accepted, relied upon resource for prosecuting and defending loss of productivity claims.  The ANSI accreditation, along with the consensus process managed by the ASCE Codes and Standards Committee, will confer a certain level of credibility.  Only time will tell, however, the extent and manner that the standard is consulted and relied upon, and, if so, the extent to which the trier-of-fact finds expert testimony based on the standard to be credible. While it is only advisory, the standard provides key principles on all aspects of loss of productivity claims that, at the very least, provide sound, practical guidance regarding such claims.