Note to “Additional Insureds” Relying on Builders’ Risk Insurance: Federal Court Decision Evaluates Extent of Coverage

Ken Sherman | Construction Law Zone

The United States District Court for the District of Massachusetts has provided construction project owners, developers, general contractors, sub-contractors, suppliers, and vendors with a helpful reminder about obtaining effective additional insurance coverage on construction projects.

In Factory Mut. Ins. Co. v. Skanska United States Bldg., No. 18-cv-11700-DLC, 2020. U.S. Dist. LEXIS 95403, the District Court held that a construction project’s general contractor and sub-contractor were not additional insureds under the construction project’s owner’s Builders Risk insurance policy (“the Policy”). The construction project’s general contractor and its sub-contractor contended they were additional insureds as a defense based on Massachusetts’ anti-subrogation doctrine, which prevents insurers from subrogating against their own insureds for the type of risk the insurer provided to such insureds. The two contractors moved for summary judgment in the subrogation recovery action brought against them claiming they were both additional insureds under the Policy. The District Court, in dismissing the project’s general contractor’s and its sub-contractor’s motions for summary judgment based on their anti-subrogation defenses, determined that the project’s general contractor and its sub-contractor did not qualify as additional insureds under the Policy because: (1) additional insureds under the Policy are those whose liability would be purely vicarious “to the extent of the insured’s legal liability for insured physical loss or damage,” which the District Court determined was not applicable to the undisputed facts pled in the subrogation recovery action and (2) the language of the policy itself seemed to indicate that it applied to only one (and not multiple) insureds, which, in the District Court’s opinion, applied only the construction project’s owner. As a result, the subrogation lawsuit against both the project’s general contractor and its sub-contractor may proceed as the anti-subrogation rule did not apply.

The facts, circumstances, and result of Factory Mutual are unique to the dispute among the matter’s construction project owner, general contractor, and sub-contractor, but its lesson is universal to any party to a construction project. When it comes to securing additional insurance coverage under another party’s insurance policy, interested parties should proceed with care, including insisting on a receiving a copy of the underlying insurance policy, having that insurance policy reviewed by a professional (e.g., an insurance broker, a risk manager, and/or an attorney), and obtaining an opinion as to whether such additional insurance coverage shall be afforded. Parties interested in assuring that they are in fact additional insureds pursuant to another’s insurance policy are not well-served by merely accepting a Certificate of Insurance in which that party is listed as an “additional insured” or relying on language within a contract, agreement, or purchase order in which a party obligates itself to provide such additional insurance.

As we see from Factory Mutual, failing to confirm insurance coverage in advance of an otherwise insurable event may leave a party exposed to having its additional insured coverage determined by a judge instead of among the construction project participants and their respective insurance carriers, as intended.

When Does the Statute of Repose Begin to Run in Phased Development Projects?

Christopher Sweeney | Conn Kavanaugh

The Massachusetts Statute of Repose requires litigants to assert within six years all tort claims arising out of the design, construction, or administration of improvements to real property. The Statute begins to run upon the earlier of: (1) the opening of the improvement to use; and (2) substantial completion and the owner’s taking of possession. It acts as an absolute bar to tort claims filed more than six years after the earlier of these two milestones. These principles are well-accepted.

But what happens when a project involves phased development – where, for example, a developer constructs condominium buildings over a series of years? Does the Statute of Repose begin to run only upon substantial completion of the entire project? Or is each phase considered a distinct improvement for purposes of triggering the Statute?

Last month, a Massachusetts federal judge asked the Supreme Judicial Court for guidance on this issue. In that case, the trustees of a 28-unit condo association brought suit against the condo’s developer for negligent construction of the condo’s common areas. The developer moved for partial summary judgment, arguing that it substantially completed six of the condo units more than six years before the trustees brought suit, and that the Statute of Repose therefore barred claims as to those units. The court rejected that argument, and held that the condo project constituted a single improvement – as opposed to a series of distinct improvements – under the Statute of Repose. But, noting a total lack of appellate authority on the issue, the Court granted the developer’s motion to certify the question to the SJC.

The SJC’s ruling on this issue will have significant implications for landowners and construction-industry professionals. If the court adopts the developer’s view of the Statute of Repose, condo owners will need to move more quickly to preserve their rights. On the other hand, if the condo trustees prevail, developers and other construction professionals will need to be prepared to defend latent claims that could be a decade or more old by the time they are filed.

The SJC is soliciting amicus briefs on this issue. A decision is expected sometime this summer.

Massachusetts Court Clarifies Statute of Repose Trigger for Multi-Phase Construction Projects

Kyle Rice | White and Williams LLP

In D’Allesandro v. Lennar Hingham Holdings, LLC, C.A. No. 17-cv-12567-IT, 2019 U.S. Dist. LEXIS 185874, the United States District Court for the District of Massachusetts recently discussed a case against a general contractor and its related entities, all of whom were involved in the construction of a multi-phase construction project. The court held that, in this context, completion of the “improvement” – which was the whole project, rather than each individual phase – triggered the six-year statute of repose. The court also held that the plaintiffs’ misrepresentation, breach of fiduciary duty and unfair business practices claims were not claims based on the design and construction of the improvement and, thus, were not subject to the statute of repose. 

In D’Allesandro, the action arose out of the construction, marketing, sale and management of the Hewitts Landing Condominium (the Condominium) project. Ultimately, 150 units in 28 different buildings were constructed over 24 phases of construction. While construction was ongoing, the project’s architect submitted declarations to the Town of Hingham swearing that the individual units were “substantially complete” and could be occupied for their intended use. Shortly thereafter, the Town of Hingham issued certificates of occupancy for the units or buildings. 

Lennar Northeast Properties, Inc. d/b/a Lennar Northeast Urban was the developer and Lennar Higanham Holdings, LLC was the contractor and construction manager. Hewitts Landing Trustee, LLC (Lennar Trustee) acted as the trustee for the Hewitt Landing Condominium Trust between 2010 and 2015. On June 25, 2010, the Master Deed of the Condominium was recorded with the Plymouth County Registry of Deeds. On the same date, defendant Lennar Trustee executed a Declaration of Trust, establishing the Condominium Trust. In December of 2015, the unit owners of the Condominium took control of the Condominium Trust. On November 3, 2017, the Trustees of the Condominium Trust brought their action, alleging that a number of deficiencies and code violations were discovered in the design and/or construction of the common areas of the buildings. The Lennar-related entities moved for partial summary judgment arguing that, with respect to six of the buildings, the plaintiffs’ claims were barred by the statute of repose. The statute of repose bars tort claims arising out of any deficiency or neglect in the designing, planning or construction of an improvement to real property commenced more than six years after the earlier of: 1) the opening of the improvement to use; or 2) substantial completion of the improvement and the taking of possession for occupancy by the owner. Mass. Gen. Laws ch. 260, § 2B. For the six buildings at issue, the architect signed affidavits of substantial completion more than six years before the plaintiffs filed their action. For five of these buildings, the Town of Hingham issued certificates of occupancy for the buildings and all of their units more than six years before the plaintiffs filed their action.

The court found that only two of the plaintiffs’ seven claims, Counts V and VI (alleging negligence and a breach of implied warranty) were subject to the statute of repose. With respect to Counts III, IV and VII, which alleged intentional misrepresentation, negligent misrepresentation and a violation of Massachusetts’ unfair business practices statute, the court held that these claims were not subject to the statute of repose. These claims were not subject to the statute of repose because, as alleged, the actions arose from distinct facts and alleged distinct wrongdoing associated with representing the property to prospective buyers. Similarly, because Counts I and II (alleging breach of the Condominium documents and a breach of fiduciary duty) related to the Lennar Trustee failing to investigate and address construction problems and not the construction itself, these claims were not subject to the statute of repose.

With respect to the plaintiff’s negligence and breach of implied warranty claims, the defendants argued that because each building constituted an improvement to real property, the filing of the architects’ certificates of substantial completion for each building began the running of the statute of repose for that building. The plaintiffs contended the development was not conceived as 150 different subplots for each unit or 28 different projects for each building, but rather that the project should be taken as a whole. Therefore, the plaintiffs argued that the statute of repose did not begin to run until the entire construction project was completed.

The court sided with the plaintiffs. The court found that the 150 units were conceived as the potential scope of the project from the onset, that the same general contractor and architect were used throughout and that the project was legally defined as a single condominium with a single Trust maintaining exclusive control over the common and limited common elements of the entire condominium. Taking all of these factors together, the court found that the Condominium was not a series of improvements, but one improvement. Therefore, the repose period began to run upon completion of the entire improvement, not when the architect or township signed off on the individual buildings.

As explained by the court, the question before it was not whether construction of an individual building or improvement could trigger the statute of repose, but rather whether the construction of a portion of a project constituted completion of an improvement, thereby triggering the repose period while the overall project remained underway. The court emphasized the concerns addressed by the statute of repose, i.e. that the contractor would be subject to unforeseen liability for an extended period, the possibility that documents/witnesses would no longer be available and that memory of witnesses would have faded. Here, the same contractor and architect oversaw the project from start to finish and the project had been completed 2½ years before the suit was filed. Therefore, the court found that the concerns addressed by the statute of repose were not applicable.

The court noted, however, that discrete obligations performed by subcontractors may constitute an improvement subject to the running of the six-year repose period. Additionally, the court noted that this suit applied specifically to common areas, rather than individual units, and stated that a failure in an individual unit may achieve a different result. However, because these hypothetical issues were not before the court, it did not decide when the statute of repose would be triggered in these situations. Based on the analysis in D’Allessandro, when faced with phased construction in multi-phase projects in Massachusetts, subrogation professionals should always be mindful of the specific circumstances of their claim. Similarly, subrogation professionals should be mindful that claims based on facts unrelated to the construction itself may not be subject to the statute of repose.

Contract Scope Limits Tort Liability

Stan Martin | Commonsense Construction Law LLC | October 26, 2018

From the Massachusetts Appeals Court comes a reminder that a contract scope of services may serve to control or limit the scope of tort liability.

New homeowners sued the contractor and designer, hired by the former homeowner for a replacement septic system, when that system failed only a few years after installation. Turns out the contractor had placed “construction and other debris in the leaching fields” (apparently as “filler”), instead of using only sand.

The designer moved for summary judgment, on the basis that its contract required the designer to view the work when the hole for the new leaching field had been dug (but before placement of the sand and laterals), and again once the leaching field had been completed. It did so. But of course the designer was not present, and did not see, when the contractor used improper materials.

The trial court dismissed the homeowners’ claims against the designer, and the Appeals Court upheld the dismissal. If the designer was obligated to view the site on two occasions, and did so, the new homeowners could not establish that the designer had any other duty to inspect or observe the conditions. And thus they could not establish that the designer had failed to carry out its duty, in a tort sense. Per the court: “we would conclude, given both the scope and the limitations of the Design Team’s contractual responsibilities, that laymen could not reasonably infer without expert evidence that its failure to learn of the deficiencies constituted professional malpractice.”

This is a reminder – more for designers than contractors – that the scope of services being undertaken may serve not only as a restriction on contract obligations, but also on tort liability or exposure. An important lesson to keep in mind. The case is Van Sicklin v. Nantucket Surveyors, LLC, 2018 Mass. App. Unpub. LEXIS 777 (Oct. 23, 2018).

Contract Scope Limits Tort Liability

Stan Martin | Commonsense Construction Law LLC | October 26, 2018

From the Massachusetts Appeals Court comes a reminder that a contract scope of services may serve to control or limit the scope of tort liability.

New homeowners sued the contractor and designer, hired by the former homeowner for a replacement septic system, when that system failed only a few years after installation. Turns out the contractor had placed “construction and other debris in the leaching fields” (apparently as “filler”), instead of using only sand.

The designer moved for summary judgment, on the basis that its contract required the designer to view the work when the hole for the new leaching field had been dug (but before placement of the sand and laterals), and again once the leaching field had been completed. It did so. But of course the designer was not present, and did not see, when the contractor used improper materials.

The trial court dismissed the homeowners’ claims against the designer, and the Appeals Court upheld the dismissal. If the designer was obligated to view the site on two occasions, and did so, the new homeowners could not establish that the designer had any other duty to inspect or observe the conditions. And thus they could not establish that the designer had failed to carry out its duty, in a tort sense. Per the court: “we would conclude, given both the scope and the limitations of the Design Team’s contractual responsibilities, that laymen could not reasonably infer without expert evidence that its failure to learn of the deficiencies constituted professional malpractice.”

This is a reminder – more for designers than contractors – that the scope of services being undertaken may serve not only as a restriction on contract obligations, but also on tort liability or exposure. An important lesson to keep in mind. The case is Van Sicklin v. Nantucket Surveyors, LLC, 2018 Mass. App. Unpub. LEXIS 777 (Oct. 23, 2018).