Insurance Issues for Construction Projects: the Court of Appeals takes a stab at CGL policies

Posted on August 31, 2011 by Melissa Dewey Brumback

Update 3/9/2017: George’s blog is no longer active on the web. Therefore, I have edited this post to include my full article below.

Recently, I had the honor and privilege of guest posting on George Simpson’s blog, entitled North Carolina Insurance Law. George’s blog is a gold mine of information for those concerned with insurance issues~~, and it is a staple of my blogroll~~.

My post is entitled: “Court of Appeals Finds Applicable Coverage Under CGL Policies Despite Exclusionary Language”

The Court of Appeals has been busy this summer deciding two somewhat similar CGL policy cases, both of which the insurance professional should keep an eye on.

1. Damage to Property Other than Work Product

First out of the gate, Builders Mutual Ins. Co. v. Mitchell, a case involving a declaratory judgment action between two CGL carriers for the same insured. In that case, Umstead Construction Company was insured, at various times, by both Builders Mutual and by Maryland Casualty Co. Umstead performed some renovation and repair work on a house on Figure Eight Island, and poor workmanship caused the home to experience water drainage issues and rot, damaging the home’s interior, marble terraces, and decks.

Builders Mutual settled the underlying claim at mediation, and sought contribution from Maryland Casualty. In the declaratory judgment action, Maryland Casualty claimed that there was no coverage because there was no “occurrence” as defined in the policy. However, the Court noted that “an occurrence” under the policy could include accidents resulting from faulty workmanship that caused damage to any property other than the work product.

Here, because there was damage to previously undamaged portions of the house that were not being worked on, an occurrence had arisen. The Court also noted that the fact that the accident may have arisen from Umstead’s negligence did not prohibit coverage.

The Court held that Maryland Casualty’s definition of “your work”, to include all damage, even that of property other than the work product itself, was too broad to be upheld.

2. Coverage of Consequential Damages and Lost Profit

Even more recently, the Court addressed CGL policies in Alliance Mutual Insurance Co. v. Glen Dove. In that case, a grain elevator ignited moments after some repair welding was conducted. The mill owner sued for, among other things, cost to repair the elevator, cost to repair the grain bucket, and for lost business and revenue.

Alliance argued that since coverage for damage to the elevator itself was excluded under the “your work” exception, the portion of lost revenue and other consequential damages attributable to the loss of use of the elevator should also be excluded. The Court, however, held that the “your work” exclusion does not cover lost revenue and other consequential damages. The Court noted:

to adopt the plaintiff’s very broad reading of the exclusion clause would result in the exclusion clause swallowing up the whole of the commercial liability policy, and render any coverage contained therein illusory.

The Court therefore held that there was coverage for the loss of use and consequential damages flowing from damage to the specific property the insured was working on.

Insurance coverage issues are important to all design professionals, because if the general contractor doesn’t have applicable coverage, the A/E may be left holding the bag.

What are your thoughts as to what CGL insurance policies should and should not cover? Obviously, CGL policies are not meant to be performance bonds, but where does the line between coverage and non-coverage get drawn? Share your thoughts in the comments.

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Photo: “insurance” by Alan Cleaver via Creative Commons license.

Don’t Go Changing (My Date of First Work): The NC Court of Appeals Upholds Contractor Lien Rights (Guest Post)

Posted on August 17, 2011 by Melissa Dewey Brumback

Today, a guest post by Bonnie Keith Green, a construction lawyer and litigator with Shumaker, Loop & Kendrick, LLP, in Charlotte, North Carolina. Bonnie represents general contractors, subcontractors, materialmen, suppliers, and sureties in construction disputes.

Through her involvement with the National Association of Women in Construction and the ACE Mentor Program, Bonnie developed a particular interest in representing minority and women-owned construction companies. She currently chairs a joint committee of the North Carolina Bar Association’s Construction Law Section and the United Minority Contractors of North Carolina.

Bonnie and the firm of Shumaker, Loop & Kendrick, LLP, represented Superior Construction Corporation from the beginning of the case (discussed below) through the appeal.

In a recent victory for contractors, a unanimous three-judge panel of the North Carolina Court of Appeals held that a contractor’s signing of a partial, interim lien waiver did not change the contractor’s date of first furnishing and that the contractor’s lien rights continued to relate back to the date of first furnishing, or first work on the project.

The decision is Wachovia Bank National Association, LLC and Preserve Holdings, LLC v. Superior Construction Corporation and Western Surety Company.

Superior was the general contractor and contracted with the original owner, Intracoastal Living, LLC, to construct a condominium development known as “The Preserve” in Oak Island, North Carolina. Superior began work on April 22, 2005. Approximately one month later, Intracoastal, the owner, and Wachovia, the construction lender, executed a loan agreement and promissory note and recorded a deed of trust on the property. During construction, Superior submitted regular pay applications, including its first two pay applications, dated May 11, 2005 and June 9, 2005. Consistent with industry practice, these pay applications contained partial lien waivers.

Two years later, after failing to receive all payments due from the owner,Superiorfiled a claim of lien on the property, stating that it first furnished labor and materials to the project on April 22, 2005.

Wachovia eventually foreclosed on the project, also due to non-payment by Intracoastal. In a separate lawsuit, Wachovia brought a declaratory judgment action, asking the court to rule that its deed of trust had priority overSuperior’s lien. The case was transferred to theNorth Carolina Business Court.

Preserve Holdings, which was formed by a prior owner of Intracoastal, placed an upset bid during Wachovia’s foreclosure, and obtained title to the property, along with all of improvements made bySuperior. Preserve Holdings was required to post a cash bond in the amount of approximately $950,000.00, because the status of Superior’s lien was uncertain. After its purchase, Preserve Holdings replaced Wachovia as the plaintiff in the declaratory judgment litigation. Superior’s bonding company, Western Surety, also claimed entitlement to the cash bond because of payments it made to subcontractors on Superior’s behalf.

The issue for the North Carolina Business Court in the declaratory judgment action was whether Superior’s lien related back to its date of first work and had priority over Wachovia’s subsequently-recorded deed of trust, thus entitling Superior to the cash bond; or alternatively, whether Superior had waived its lien rights by signing the partial, interim lien waivers along with its pay applications, placing its lien behind the deed of trust in priority, and thus entitling Preserve Holdings to the cash bond.

The North Carolina Business Court considered the language of the interim lien waivers and held that they unambiguously waived Superior’s right to lien the property for any work “up to and including” the date of signing the waiver. The Business Court held that this language resulted in a change to Superior’s date of first work and placed Superior’s lien after Wachovia’s deed of trust.

The Court of Appeals reversed, ruling that Superior’s date of first work did not change because of the execution of partial, interim lien waivers. Interestingly, the Court of Appeals looked at the exact same language as the Business Court, and also held that the lien waivers were unambiguous. The Court of Appeals, however, held that the lien waivers unambiguously did not change the date of first furnishing.

The Court of Appeals focused on the language “on account of” contained in the lien waivers, holding that the “on account of” language indicated a causal connection between the contractor’s lien waiver and the specific payment being received by the contractor in exchange for its lien rights. This causal connection meant that the lien waiver was only for that particular payment and did not waive Superior’s rights as to future work or retainage.

The Court of Appeals’ holding is more consistent with the construction industry’s long-standing practice of using partial, interim lien waivers—and the parties’ (at least the contractor’s)—intent in this instance. The Court of Appeals’ decision may well be viewed as controlling precedent in any future cases involving similar lien waivers. There is a need for caution, however. Contractors, subcontractors, materialmen, and suppliers are cautioned to have lien waivers reviewed by their lawyers and to add language explicitly stating that the partial waiver of lien rights in exchange for payment does not alter or change the date of first furnishing and does not waive lien rights for future work or retainage.

The ruling comes at a time when the status of legislation to overhaul North Carolina’s lien laws is uncertain. House Bill 489, which was introduced during the 2011 General Assembly, and would have required all parties to use standard, form lien waivers, has been referred to a Study Commission. It may be considered for passage later this year, or possibly during the short session in 2012. While the legislation is on hold at the moment, the Court of Appeals’ decision is favorable for contractors. In these difficult economic times, any victory such as this in favor of the enforcement of contractors’ lien rights is a welcome development.

Bonnie and I welcome your thoughts and opinions on the case in the comments section, below.

Get Your Flu Here! (aka: Don’t Miscommunicate on Your Construction Project!) (Tue Tip)

Posted on August 16, 2011 by Melissa Dewey Brumback

Continuing our theme from last week’s donkey sign about communicating clearly with your client, today we have another sign to add to our growing collection. This one is an example of marketing-gone-awry, and comes to us from the good folks at Target:

Now, I’m sure the marketing folks though that “Flu HQ” was a nice little rhyme. However, I’m not sure Target really wants to be known as the headquarters of the annoying, damaging, and sometimes fatal disease called the flu.

I’m sure what Target meant by “Flu HQ” was that it carried all of the supplies and medicines needed to help alleviate flu symptoms. But that’s not exactly what it is saying by this sign.

I can hear some of you now saying that I’m arguing semantics, which is typical for a lawyer. Remember, though, when it comes to large construction disputes– everyone has a lawyer (or two, or three) and semantics will come into play.

Consider this another fair warning to have your construction contracts in place, and vetted by both your attorney and your insurance carrier to prevent miscommunication.

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Photo in this post:

Safe Harbors- not just for Sailors anymore (or, why advance planning can prevent claims of defective plans & specs) (law note)

Posted on August 11, 2011 by Melissa Dewey Brumback

Have you ever considered a “Safe Harbor Provision” for your Owner-Architect or Owner-Engineer contract? Maybe it is time that you do.

As you are (probably too well) aware, on every construction project there are changes. Some of these are due to the owner’s change of heart, value engineering concerns, contractor failures, and material substitutions. Some may be because of a design error, omission, or drawing conflict. It happens.

A “Safe Harbor Provision” is a provision that establishes an acceptable percentage of increased construction costs (that is, a percentage of the project’s contingency). The idea is that if the construction changes attributable to the designer is within this percentage, no claim will be made by the Owner for design defects.

An example provision is provided in the EJCDC documents (Exhibit I, Allocation of Risks, of Form E-500), which provides

Agreement Not to Claim for Cost of Certain Change Orders: Owner recognizes and expects that certain Change Orders may be required to be issued as the result in whole or part of imprecision, incompleteness, errors, omissions, ambiguities, or inconsistencies in

the Drawings, Specifications, and other design documentation furnished by Engineer or in the other professional services performed or furnished by Engineer under this Agreement (“Covered Change Orders”). Accordingly, Owner agrees not to sue or to make any claim directly or indirectly against Engineer on the basis of professional negligence, breach of contract, or otherwise with respect to the costs of approved Covered Change Orders unless the costs of such approved Covered Change Orders exceed __% of Construction Cost, and then only for an amount in excess of such percentage. Any responsibility of Engineer for the costs of Covered Change Orders in excess of such percentage will be determined on the basis of applicable contractual obligations and professional liability standards. For purposes of this paragraph, the cost of Covered Change Orders will not include any costs that Owner would have incurred if the Covered Change Order work had been included originally without any imprecision, incompleteness, error, omission, ambiguity, or inconsistency in the Contract Documents and without any other error or omission of Engineer related thereto. Nothing in this provision creates a presumption that, or changes the professional liability standard for determining if, Engineer is liable for the cost of Covered Change Orders in excess of the percentage of Construction Cost stated above or for any other Change Order. Wherever used in this paragraph, the term Engineer includes Engineer’s officers, directors, members, partners, agents, employees, and Consultants.

[NOTE TO — USER: The parties may wish to consider the additional limitation contained in the following sentence.]

Owner further agrees not to sue or to make any claim directly or indirectly against Engineer with respect to any Covered Change Order not in excess of such percentage stated above, and Owner agrees to hold Engineer harmless from and against any suit or claim made by the Contractor relating to any such Covered Change Order.

[Emphasis added to key provisions by me].

Essentially, the EJCDC safe harbor provision includes the following:

Owner’s acknowledgement that change orders are standard operating procedure on construction projects
Owner’s agreement not to sue or bring any claims against the engineer unless the costs of such exceed a negotiated percentage of the construction cost.
Owner’s acknowledgment that not all change orders over the allocated percentage are the designer’s responsibility, as the aggregate amount does not include costs that the project owner would have incurred if the work covered by the change order had been included originally (the “betterment” to the owner).
Owner’s acknowledgement that only the overages attributable to the design are compensable — notably, nothing changes the professional liability standard for determining if the engineer is liable in excess of the percentage.

Again, this is one of those “don’t try this at home” moments. A poorly written safe harbor provision could do more harm than good. It may be seen as establishing a warranty, and that would be an uninsurable loss. If not properly crafted, it may create the expectation that all overages fall on the designer. Proceed with caution!

When well-drafted, however, a safe harbor provision can provide you with some level of comfort for the inevitable discoveries that happen when the drawings hit the pavement.

Have you ever used a “safe harbor” provision in your Owner-Designer agreement? Did it work to your advantage, or did it create unreasonable expectations that change orders were capped at that amount? Share your experience below.

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Photo: Boats in safe harbor, Roseau, Dominica via teletypeturtle/Creative Commons license.

Sometimes, ya just gotta tell them the donkey is alive! (Tue Tip)

Posted on August 9, 2011 by Melissa Dewey Brumback

Recently, I saw a very amusing sign while visiting the farm animal section of the Museum of Life and Science in Durham on an extremely, blisteringly hot summer day. The sign said:

In case you can’t see the sign clearly, it reads:

Sometimes our donkey likes to lay [sic] flat out in the sun.

Don’t be alarmed. . . HE IS STILL ALIVE! (-:

I was very amused that the museum needed a sign proclaiming the non-deathness of its donkey. However, the sign also struck me as a good tip for all of us involved in the construction business. Sometimes, you just have to state the obvious. You may think that it is glaringly obvious that, for example, an extended construction duration will increase the scope of your contract administration fees accordingly. You might be wrong. Sometimes it is not obvious, or at least, not something the owner will admit is obvious. Don’t rely on common sense– go ahead and spell out everything you can in your contract with the Owner.

In the same way the donkey sign keeps the museum patrons from sounding the alarm, a detailed and thorough contract can keep you from having to answer and/or argue about scope of work issues later on.

Sometimes ya just gotta tell everyone in advance that the donkey is alive!