Legislatures Shouldn’t Try to Do the Courts’ Job
March 1, 2012 — CDJ Staff
David Thamann, writing in Property Casualty 360, argues that current actions by legislatures on insurance coverage amount to “legislative interference or overreach.” He notes that under current Colorado law, “a court shall presume that the work of a construction professional that results in property damage — including damage to the work itself or other work — is an accident unless the property damage is intended and expected by the insured.” He argues that here legislators are stepping into the role of the courts. “Insureds and insurers are not always going to be pleased with a court ruling, but that is the system we have.”
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No Coverage For Construction Defects When Complaint Alleges Contractual Damages
September 1, 2011 — Tred Eyerley, Insurance Law Hawaii
The underlying plaintiff’s allegations contended the contractor was in breach of contract for construction defects caused in building her home. Accordingly, the court found no coverage.See Nat’l Builders and Contractors Ins. Co. v. Slocum, 2011 U.S. Dist. LEXIS 81694 (S.D. Miss. July 26, 2011).
Slocum Construction LLC sold a home it built to Laura Peterson. Subsequently, Peterson filed suit, alleging a breach of the contract and seeking rescission and cancellation of the contract. Peterson further alleged at least thirty-three specific defects in the construction of the house.
Slocum tendered to its insurer, National Builders and Contractors Insurance Company (NBCI). NBCI filed suit for a declaratory judgment.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Insurer Has Duty to Defend Despite Construction Defects
January 6, 2012 — CDJ Staff
In a case the judge attributed to “shoddy masonry work,” the US District Court of Illinois has rendered a decision in AMCO Insurance Company v. Northern Heritage Builders. Northern Heritage built a home in Chicago for Michael McGrath (who joined Northern Heritage as a defendant). According to the decision, “seven months after he moved into the house, McGrath noticed water coming in the house and warped millwork.” This was attributed to porous block, installed by the mason with Northern Heritage’s knowledge.
McGrath sued National Heritage for both the damage to his house and its contents. The court rejected his claim for the contents. For the damages to his house, he was awarded $601,570.50 in damages. He also sued his homeowner’s insurance carrier for damages not covered in his suit against National Heritage. There he was awarded $1,130,680.16.
AMCO informed National Heritage that it had neither duty to defend nor duty to indemnify. The judge considered whether AMCO had a duty to defend. Under Illinois law, “damage to a construction project resulting from construction defects is not an ‘accident’ or ‘occurrence’ because it represents the natural and ordinary consequence of faulty construction.” However, it is noted that while if the defects lead only to damage to the project itself, there is no occurrence, “if the building owner asserts damages to other property besides the construction itself, there is an ‘occurrence’ and ‘property damage.’” The judge further noted that were construction defects an occurrence, “shoddy work” would be rewarded by double pay, once by the homeowner and a second time by the insurer. Judge Kendall concluded that as McGrath had alleged damage to the contents of his house, AMCO had a duty to defend National Heritage.
She then looked at the issue of whether AMCO had a duty to indemnify. Should they pay the $601,570.50? Judge Kendall noted that “the duty to indemnify is narrower than the duty to defend.” The key point here was that once McGrath’s insurance carrier covered him for the damage to the contents of his house, “AMCO’s duty to defend ended.” Once McGrath “only sought damages for the natural consequences of faulty workmanship” there was no occurrence, hence nothing for AMCO to cover.
Judge Kendall granted a summary dismissal of AMCO’s claim that they had no duty to defend while upholding their claim that they had no duty to indemnify.
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Harmon Towers Duty to Defend Question Must Wait, Says Court
March 1, 2012 — CDJ Staff
The Harmon Towers project in Las Vegas was eventually halted short of the planned forty-seven stories after “it was determined that there was substantial defective construction, including defective installation of reinforcing steel throughout the Harmon.” The American Home Insurance Company and Lexington Insurance Company put forth a claim that they had no duty to defend Perini Construction, the builder of the defective Harmon Towers. Further, American Home seeks to recover the monies American reimbursed Perini. The United States District Court of Nevada ruled in the case of American Home Assurance Co. v. Perini Building on February 3, 2012.
The two insurance companies covered Perini and its subcontractors, Century Steel, Pacific Coast Steel, and Ceco Concrete Construction. Century Steel was the initial subcontractor for the reinforcing steel; they were later acquired by Pacific Coast Steel. In this current case, Perini Construction is the sole defendant.
Perini sought a dismissal of these claims, arguing that without the subcontractors joined to the case, “the Court cannot afford complete relief among existing parties.” The court rejected this claim, noting that the court can determine the duties of the insurance companies to Perini, which the court described as “separate and distinct from those of the subcontractors.” The subcontractors “have not claimed an interest in the subject matter of the action.” The court concluded that it could determine whether Perini was entitled or not to coverage without affecting the subcontractors. The court rejected Perini’s claim.
Perini also asked the court to abstain from the case, arguing that it was better heard in a state court. The court noted that several considerations cover whether a case is heard in state or federal courts. The court noted that if the case weighed heavily on state law, the state courts would be the obvious location. Further, if there were a parallel action in the state courts, “there is a presumption that the whole suit should be heard in state courts.” This is, however, no parallel state suit, although the court noted that Perini has “threatened” to do so.
However, the issue of who is to blame for the problems at Harmon Towers has not been resolved. The court concluded that until the “underlying action” was concluded, it was premature to consider the issues raised in this case while the earlier lawsuit was still in progress. The court denied Perini’s motion to dismiss the case. Given that the outcome of the earlier construction defect case may lead to further litigation in state court, the District Court granted Perini’s motion to abstain, but staying their judgment until the construction defect case is resolved.
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Ceiling Collapse Attributed to Construction Defect
May 19, 2011 — May 16, 2011 - CDJ Staff
WSMV, Nashville reports that the ceiling collapse in a Franklin, Tennessee Kohl’s was attributed to a construction defect by fire officials. The officials noted that the ceiling was renovated at the time. No injuries were reported.
The report notes that “inspectors were supposed to look at the renovations next week, but fire officials said that will have to be delayed until another time.”
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Insurer Must Defend Claims for Diminution in Value of Damaged Property
June 19, 2012 — Tred Eyerly, Insurance Law Hawaii
The insurer’s duty to defend a developer sued by purchasers of homes for damages for diminution in value of homes was at issue in Mid-Continent Cas. Co. v. Academy Dev., Inc., 2012 WL 1382459 (5th Cir. April 20, 2012).
In the underlying action, plaintiffs alleged the developer knew when it sold the homes that the lake walls were falling and that water was leaking from the lakes onto adjacent home sites. They sought damages for diminution in the value of their homes resulting from the defective lakes. The action was tried in 2008, and the jury returned a verdict for the developer.
Mid-Continent initially defended under a reservation of rights.
Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
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OSHA Extends Temporary Fall Protection Rules
March 1, 2012 — CDJ Staff
OSHA announced that its current rules on fall protection for residential construction will remain in place until September 15, 2012. The current measures became effective in June 2011. Under the new rules, falls must be prevented by fall protection measures unless the measures can be shown to be unfeasible or even hazardous.
Under the extension of the temporary enforcement measures, contractors who ask for compliance assistance with OSHA are given top priority and penalties can be reduced. OSHA has conducted more than 1,000 outreach sessions on the new rules.
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Negligent Misrepresentation in Sale of Building Altered without Permits
September 30, 2011 — CDJ Staff
The Supreme Court of New Hampshire has ruled in the case Wyle v. Lees. The Leeses owned a two-unit apartment building in North Conway, New Hampshire. They hired a contractor to add a third, larger apartment, including a two-car garage. The Leeses and their contractor submitted a building permit application. They were informed that site plan review was required. After receiving approval on the site plan, construction started. At no point did they obtain a building permit and the construction was never inspected. The Leeses subsequently added more space to the unit, reducing parking spaces below the minimum required. Again, they did not obtain a building permit.
In 2007, three years after all these changes were complete, the Leeses sold their building to Mr. Wyle. To the question “are you aware of any modifications or repairs made without the necessary permits?” they answered “no.” About six weeks after closing, Wyle “received a letter from the town code enforcement officer regarding the legality of the removal of a garage door from the new unit.” A subsequent inspection revealed “numerous building and life safety code violations.”
Mr. Wyle brought a claim against the Leeses for negligent misrepresentation. The defendants filed a motion “seeking to preclude economic loss damages.” At a two-day bench trial, Mr. Wyle won. The Leeses appealed.
The appeals court found that “the defendants negligently misrepresented that the premises were licensed for immediate occupancy and that the defendants had obtained all necessary permits,” and thus upheld the lower court’s finding of negligent misrepresentation. The appeals court also rejected the Leeses’ argument that damages must be apportioned on all parties, including “the plaintiff himself, the plaintiff’s building inspector, and the defendant’s contractor,” finding a lack of “adequate evidence.”
The Leeses further argued that they were unaware that modifications and repairs were accomplished without the required permits. The appeals court noted that “the trial court found that both the conditional approval and final approval for the site plan stated that a building permit and a certificate of occupancy were required prior to any use.” The court concluded that the Leeses “knew or should have known of the falsity of their representation.”
The appeals affirmed the findings of the trial court.
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Construction Jobs Expected to Rise in Post-Hurricane Rebuilding
November 7, 2012 — CDJ Staff
Businessweek reports that construction jobs and materials will see increased demand as property owners in New York and New Jersey rebuild after hurricane Sandy. Tom Jeffery, of Irvine, California-based CoreLogic, a real estate information service, noted that “a high percent of damaged properties are going to be repaired.” Experts estimate property damage to total anywhere from $7 billion to $40 billion.
It is also estimated that about 739,000 properties in the area are underwater in the way that has nothing to do with flooding, with negative equity of 25 percent or more. Many of these homeowners are likely to walk away from their mortgages.
Ken Simonson, chief economist of the Associated General Contractors of America, expects “localized spikes in construction employment throughout November and the winter.” Martin Connor, the chief financial officer of Toll Brothers, expects to see more a rise in labor costs than in materials.
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Another Colorado District Court Refuses to Apply HB 10-1394 Retroactively
October 28, 2011 — David M. McLain, Colorado Construction Litigation
In Martinez v. Mike Wells Construction Company, 09CV227, Teller County District Court Judge Edward S. Colt refused to apply C.R.S. § 13-20-808 retroactively to provide coverage for the underlying construction defect allegations. According to the recitation of facts in Judge Colt’s March 2011 order, Martinez contracted with Mike Wells Construction to serve as the general contractor for the construction of a home. At that time, Mike Wells Construction was insured through ProBuilders Specialty Insurance Company, RRG. Disputes arose between Martinez and Mike Wells Construction, resulting in Martinez ordering it off of the project in mid-November 2007 and terminating its right to work there by letter dated November 28, 2007.
Mike Wells, the owner of the corporation, subsequently died. Martinez sued Mike Wells Construction in July 2009 for breach of contract and various claims relating to alleged defecting workmanship. Martinez provided notice of the suit to the special administrator of the probate estate. No answer having been filed, the court entered a default judgment against Mike Wells Construction and Martinez sought to garnish Mike Wells Construction’s ProBuilders insurance policy.
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Reprinted courtesy of Higgins, Hopkins, McLain & Roswell, LLC. Mr. McClain can be contacted at mclain@hhmrlaw.com
Lawsuit over Construction Defects Not a Federal Case
August 16, 2012 — CDJ Staff
The United State District Court in California has dismissed the claims of a contractor against the United States government, on the grounds that it was not within the subject matter jurisdiction of the court. The origins of the case are in a related construction defect claim. The current plaintiff, Performance Contracting, Inc., did the lath and plaster work for a building for the Department of Veterans Affairs. After the building was completed, the Veterans Affairs complained to the general contractor, Wynema, Inc., of water intrusion problems.
Wyema and Performance conducted testing and the water intrusion was found to be due to “a variety of design defects and omissions, including: 1) omission of proper window flashing; 2) inadequate waterproof membrane around the windows; 3) inadequate T-molding around the windows; 4) lack of a window sill pan for the windows; 5) lack of any backing in the window framing; 6) lack of any backing for the stucco expansion joints and seams; and 7) failure to require that a performance mock-up of the window assembly and adjacent areas be built and water tested.” Wyema filed a construction defect action against Performance and other subcontractors.
In the current case, Performance claims that Veteran Affairs was negligent, that it “breached its duty to Plaintiff when it provided deficient plants and specifications” and “failed to properly oversee construction and inspect Project work.” The court determined that it could not hear this case, noting that “Federal Courts are presumptively without jurisdiction over civil actions.”
Performance raised its claims under the Federal Tort Claims Act. The judge was not persuaded by this claim, noting that the FTCA does not apply to purported breach of the General Contract. The FTCA waives the government’s sovereign immunity in cases of “injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of an employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.”
Performance was unable to pursue its claims in the Court of Federal Claims as there was no contract between Performance and the government. However, the court noted that Performance’s inability to file suit in the Court of Federal Claims does not open up a path to the District Court. “Litigants are not guaranteed a forum in which to sue the United States.” The court further noted that “if this Court were to accept Plaintiff’s logic, non-parties to contracts, but not parties, would be free to pursue contract claims in the fora of their choosing.”
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Important Information Regarding Colorado Mechanic’s Lien Rights.
November 7, 2012 — David McLain, Colorado Construction Litigation
With payment problems in the construction economy having accelerated over the past few years, there has been a substantial increase in mechanic’s lien activity and associated litigation. The typical mechanic’s lien claimant is a material supplier, a trade subcontractor, or even a general contractor that has not been paid by the developer/owner of the construction project. The reason for filing a mechanic’s lien claim is that it offers the prospect in many cases to make the unpaid construction professional a priority creditor, with a lien on the real estate that is superior to the construction lender.
One of the primary rules governing a mechanic’s lien claim is that the creditor’s formal written “Notice of Intent to File a Mechanic’s Lien” (hereafter “Lien Notice”) must be (1) served on the owner of the property for which the work was done or the materials used, and (2) served at the same time on the general contractor who has handled the construction project. After the creditor has made service of the lien claim by USPS certified mail (using the green return receipt card for proof of service) or separate personal delivery of the notice to the property owner and general contractor, ten full days must pass (not including the date of mailing of the notices) before the lien notice is filed in the public records.
After ten days have expired following the date of mailing using certified mail, or personal delivery of the notice to the property owner and the general contractor, the lien notice can be filed to make the lien valid.
Reprinted courtesy of David M. McLain, Higgins, Hopkins, McLain & Roswell, LLC. Mr. McLain can be contacted at mclain@hhmrlaw.com
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Colorado “occurrence”
January 6, 2012 — CDCoverage.com
In Greystone Construction, Inc. v. National Fire & Marine Insurance Co., No. 09-1412 (10th Cir. November 1, 2011), general contractors Greystone and Branan were each sued by purchases of homes built by each alleging defective construction performed by subcontractors. CGL insurer American Family Mutual Insurance Company defended both Greystone and Brannon while co-insurer National Fire & Marine Insurance Company denied a defense. Greystone, Branan, and American Family sued National Fire for contribution towards defense costs. The federal district trial court entered summary judgment for National Fire.
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Reprinted courtesy of CDCoverage.com
Ensuing Loss Found Ambiguous, Allowing Coverage
August 16, 2012 — Tred Eyerly, Insurance Law Hawaii
The court determined the ensuing loss provision was ambiguous and found coverage for the home owners in Platek v. Town of Hamburg, 2012 N.Y. App. Div. LEXIS 5371 (N.Y. App. Div. July 6, 2012).
The burst of a water main caused water damage to the insureds' basement. Allstate disclaimed coverage under exclusion 4 for losses caused by "[w]ater . . . on or below the surface of the ground, regardless of its source . . . [,] includ[ing] water . . . which exerts pressure on or flows, seeps or leaks through any part of the residence premises."
Another policy provision covered "sudden and accidental direct physical loss caused by fire, explosion or theft resulting from item []. . . 4 . . . ." Plaintiffs argued that this exception applied because their claimed loss was caused by an "explosion" of the water main.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
The Colorado Court of Appeals Rules that a Statutory Notice of Claim Triggers an Insurer’s Duty to Defend.
October 23, 2012 — David M. McLain, Higgins, Hopkins, McLain & Roswell
Gene and Diane Melssen d/b/a Melssen Construction (“Melssen”) built a custom home for the Holleys, during which period of time Melssen retained a CGL insurance coverage from Auto Owners Insurance Company. Soon after completion of the house, the Holleys noticed cracks in the drywall and, eventually, large cracks developed in the exterior stucco and basement slab. Thereafter, the Holleys contacted Melssen, the structural engineer, an attorney, and Auto-Owners, which assigned a claims adjuster to investigate the claim.
In April 2008, the Holleys sent Melssen a statutory notice of claim pursuant to C.R.S. § 13-20-803.5 (“NOC”). In this NOC, the Holleys claimed approximately $300,000 in damages related to design and construction defects. The Holleys also provided a list of claimed damages and estimated repairs, accompanied by two reports from the Holleys’ consultant regarding the claimed design and construction defects. In June 2008, Melssen tendered the defense and indemnity of the claim to Auto-Owners. While Auto-Owners did not deny the claim at that time, it did not inspect the property or otherwise adjust the claim. Thereafter, in October 2008, Auto-Owners sent Melssen a letter denying coverage on the basis that the damage occurred outside of the applicable policy period.
Ultimately, Melssen settled the claims against it for $140,000.
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Reprinted courtesy of David McLain, Higgins, Hopkins, McLain & Roswell, LLC. Mr. McLain can be contacted at mclain@hhmrlaw.com
Faulty Workmanship Causing Damage to Other Property Covered as Construction Defect
September 30, 2011 — Tred Eyerley, Insurance Law Hawaii
In yet another recent construction defect case, the Illinois Court of Appeal found for coverage. See Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., 2011 Ill. App. Ct. LEXIS 872 (Ill. Ct. App. Aug. 15, 2011).
Weather-Tite, Inc. hired Larson as a subcontractor to apply sealant to windows installed by Weather-Tite in a condominium building. The windows subsequently leaked and caused water damage. The homeowner’s association sued Weather-Tite for breach of express and implied warranties. Weather-Tite filed a third-party complaint against Larsen alleging that, if it was liable to the association for breach of warranty, Larsen was liable for contribution as a joint tortfeasor. Weather-Tite and Larsen both tendered defenses to Milwaukee Insurance. The tenders were denied and Milwaukee Insurance filed suit to determine rights under the policy.
Cross-motions for summary judgment were filed by all parties. The trial court granted Milwaukee Insurance’s summary judgment motion as to Weather-Tite, but granted Larsen’s cross-motion against Milwaukee Insurance.
On appeal, the appellate court considered whether the underlying pleadings alleged facts demonstrating "property damage" resulting from an "occurrence" within the terms of the policy.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Texas Law Bars Coverage under Homeowner’s Policy for Mold Damage
July 13, 2011 — Tred R. Eyerly, Insurance Law Hawaii
Although the insurer paid for some of the mold damage at the insured’s home, the Fifth Circuit eventually determined the homeowner’s policy did not cover such damage. Rooters v. State Farm Lloyds, 2011 U.S. App. LEXIS 12306 (5th Cir. June 15, 2011).
The policy excluded loss caused by hail to personal property unless the direct force of wind or hail made an opening in the roof allowing rain to enter. Further, the policy excluded loss caused by mold or other fungi.
In 1999, hail and rain caused water damage to the roof and interior of the residence. State Farm paid $19,000 to repair the roof. Another $1,800 was paid for repairs to the interior of the building. In 2002, the insured noticed black mold. State Farm issued an additional check for $4,402 for mold abatement.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Construction Defect Not a RICO Case, Says Court
August 4, 2011 — CDJ Staff
The US District Court of North Carolina has rejected an attempt by a homeowner to restart her construction defect claim by turning it into a RICO lawsuit. Linda Sharp, the plaintiff in the case of Sharp v. Town of Kitty Hawk, attempted to amend a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO) and argued that her case belonged in the federal courts.
Ms. Sharp sued in November, 2010 claiming construction defects. She sued in federal court, although the court noted that as she and most of the defendants are citizens of North Carolina, the state court would have been the appropriate jurisdiction. Further, the court noted that one federal claim Sharp made was dismissed with prejudice, leaving only the state law claims. These the court dismissed without prejudice, declining to exercise jurisdiction over North Carolina law.
After the dismissal, Ms. Sharp attempted to amend her complaint after the deadline. To do so, according to the court, she would be required to obtain consent from defendants or leave of the court. She did neither.
In his opinion, Judge W. Earl Britt rejected her motion for leave to amend. He also granted the defendants’ motion to dismiss. The clerk was directed to close the case.
Read the court’s decision…
