Is Your CGL Carrier Obligated to Indemnify You for Your Costs to Address Third-Party Property Damage Claims?...Maybe

A common inquiry among contractors is whether costs incurred to address third-party property damage claims such as inspection costs, personnel costs, overhead costs and attorneys’ fees are recoverable under Commercial General Liability (“CGL”) policies. Unfortunately, there is no clear-cut answer—coverage for these costs is unique to each policy and each jurisdiction’s interpretation of those policies. Traditionally, unless the out-of-pocket expenses qualify for coverage under a policy provision such as a “Supplementary Payments” provision or the insurer has breached its duty to defend, these types of costs are generally not covered by the standard CGL policy. This issue was addressed in Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651, 679-680 (Tex. App. Houston, 14 Dist. 2006), which is a case stemmed from the insured’s application of Exterior Insulated Finishing Systems (“EIFS”) to residential homes. Allegedly, the EIFS trapped moisture that caused damage to some of the homes. Lennar presented three types of claims to its CGL carrier for reimbursement: (1) the costs to repair the damage; (2) the cost to remove and replace EIFS as a preventive measure; and (3) overhead costs, inspection costs, personnel costs, and attorneys’ fees to assess damage in the homes—claiming that these costs and fees constituted “damages because of” property damage within the meaning of the policy’s insuring clause and, thus, should be covered. But the Texas appeals court disagreed, citing the “legally obligated to pay” language in the insuring agreement. The court held that “legally obligated to pay” means “an obligation imposed by law, such as an obligation to pay pursuant to a judgment, settlement, contract, or statute,” and that Lennar was not legally obligated to pay these costs as “damages because of . . . property damage.”

But in Desert Mountain Properties v. Liberty Mutual Fire Ins. Co., 1 CA-CV 08-0802 (Ariz. App. 8-3-2010), the Arizona Court of Appeals ruled exactly opposite. Desert Mountain involved soils movement resulting in damage to 50 residential homes in North Scottsdale. Desert Mountain was the developer of the community and paid an average of $200,000 per home to have the soil issues corrected and the damage repaired. Citing the same “legally obligated to pay” language used by the Texas Lennar court to reject the insured’s indemnity claim, Arizona’s Court of Appeals used it to hold that Desert Mountain was legally obligated to repair the soil issues and damages and, therefore, Liberty Mutual was obligated to indemnify Desert Mountain for its out-of-pocket expenses incurred to address the third-party property damage claims.

The moral of the story—as usual—is not to assume coverage or non-coverage, but to immediately read the insuring agreement and/or consult counsel to make sure that you understand all of your indemnity and defense rights.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

Lien Law: Using Templates to Anticipate and Control Litigation Costs

Michael Hyatt (CEO of Thomas Nelson Publishing) has posted several excellent recommendations about using templates for greater efficiency on tasks that are often repeated. Mr. Hyatt has written: “For years, I have used the concept of ‘templating’ to improve my productivity. The idea is that you create a template for any task that you find yourself doing repeatedly. So instead of ‘reinventing the wheel’ every time, you do it once, save it as a template, and then reuse it.”

In my construction litigation practice, I have used various templates to make my life easier during various stages of construction disputes.

One of the templates that I use is a mechanic’s lien information sheet that outlines the background information that is needed for me to file a Notice of Lien or Lien on behalf of a client. The type of information that I need to file a lien includes the following:

• Is the project residential or commercial?
• Is the project public or private?
• Is the Contract with the owner of the property or the prime contractor?
• Was a 20-Day Preliminary Lien Notice filed? If so, when?
• Name and address of property owner, prime contractor, and lender, if any.
• Name of project/subdivision; property location map; and property address and/or lot number.
• Type of service/material/labor supplied to the project.
• Commencement date (ground breaking) of the project.
• Beginning date of your work on the project.
• Total amount invoiced to date with a copies of the invoices.
• Amount owed or unpaid on the project.
• Last date of your work on the project.
• Date entire project was completed.
• Any “Notice of Completion” recorded?
• Any payment bonds issued?

While this information appears to be a no-brainer request for those contractors who file liens on a regular basis, I have found over the years that my clients appreciate the template that I send them. This way, there is no confusion about what information I need from them and I am able to more efficiently help my clients pursue their rights.

Using templates in the manner suggested by Mr. Hyatt has also allowed me to be able to provide my clients with a Flat-Fee Cost Sheet for lien litigation. The Flat-Fee Cost Sheet “fixes” costs for repetitive tasks that are part of lien litigation like filing liens, stop notices, foreclosure complaints, and basic motions for summary judgment related to lien litigation and foreclosure. And it allows clients to anticipate costs and feel more comfortable with costs associated with protecting their rights through the lien process. If you are interested in obtaining a copy of my Flat-Fee Cost sheet for lien litigation, please feel free to contact me by phone or email.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

Arizona Supreme Court Imposes Major Restriction on Tort Claims in Construction Cases

By Kirk H. Hays

The Arizona Supreme Court recently handed down a landmark decision limiting both an owner and contractor’s rights to sue design professionals for malpractice. In Flagstaff Affordable Housing L.P. v. Design Alliance, Inc. (SCt. CV-09-0117-PR), Flagstaff contracted with Design Alliance to design eight apartment buildings. The plans were allegedly defective because they did not provide for ADA access and the cost of correcting the all-ready built defective work was significant. Flagstaff sued Design Alliance for professional malpractice in tort and for breach of contract but then dismissed the contract claim because it was outside the statute of repose.

The Supreme Court extended the “Economic Loss Doctrine” to construction cases. The Doctrine says that you cannot recover in tort for a negligence claim unless there is some accompanying personal injury or property damage. In other words there has to be some damage to something other than the building itself. For example, if a chimney falls down the cost of repairing it is not recoverable in tort. But if the chimney hits your car, then there is some other property damage and you can sue in tort for negligence. To recover economic damages you must sue in contract. The Court reasoned that negotiated contracts better allocate risks between the parties than the implied at law default rules of tort.

This decision has some important ramifications. First, it may limit recoverability in cases where the building is older than 8 years. The statute of repose prevents bringing a contract claim concerning most buildings older than that, but a tort claim can still be brought. After Flagstaff the type of damages recoverable in cases concerning older buildings is now limited to secondary property damage.

Second, it may have serious implications for insurance coverage. Generally, tort claims are covered by insurance but contract claims are not. By forcing some damages to be recovered only in contract, the decision may make it easier for insurers to deny coverage for construction defect claims.

Third, the Supreme Court invited parties to contract around the case by including a provision in their contracts making wholly economic damages recoverable in tort. Owners should consider modifying their contracts to do so.

For more information on these cases contact Kirk H. Hays khays@holmwright.com or (480) 961-0586.

Putting the ‘Pay’ Back into Paycheck

Are you using Textura? If not—and you execute or require lien waivers on your projects—then you might want to consider it. Textura is considered the bill-pay site of the construction industry, and uses the internet to remove the physical—and painfully repetitive—exchanges of paper that take place when contractors receive paychecks and issue lien waivers. Basically, it eliminates the inefficiencies of the construction payment and management process by replacing the mountains of paper payment documents with an internet-based computer program. Using the computer program, it electronically connects everyone involved in the payment process, including owners, general contractors, and subcontractors. According to http://www.texturallc.com/, it reduces the process of filling out forms, obtaining signatures, and transporting documents that used to take days, into a few simple clicks on the computer.

Textura claims to serve more than 25% of the top 400 contractors in the United States, thousands more subcontractors, and a growing list of owners. More than 20,000 firms are using it to get paid faster and save as much as 20,000 per project.

Some industry insiders also believe that Textura may eventually become a new kind of social network. Textura’s chairman and CEO, Patrick Allin, says that “Textura has the potential to explode like Facebook.” And already, a dozen general contractors and 6,000 subcontractors are using it as such.

Just something to keep in mind if you’re interested in getting paid faster, saving thousands of dollars in back-office costs, or networking with thousands of other contractors—all through your computer.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.