Archive for the 'Litigation' Category

Waiver of Subrogation Applies to All Damages, Regardless of Whether Owner Secures Required Insurance

By: William E. Kelley, Jr., LEED AP BD+C

The Indiana Court of Appeals, in a split decision, recently held that a waiver of subrogation clause in a construction contract serves to waive all claims for damage, where those damages are covered—or should be covered—by the contractually required insurance to be procured by the Project Owner.  In The Board of Commissioners of the County of Jefferson v. Teton Corporation, the Indiana Court of Appeals addressed interpretation of several American Institute of Architect (AIA) contract provisions relating to the procurement of insurance by the owner and the associated waiver of claims for damages covered by that insurance.

The case involved a repair and renovation project to the Jefferson County courthouse in Madison, Indiana.  During the course of the project, a fire occurred that caused over $6 Million in damages.  The property insurer for the Project Owner made payments for damages caused by the fire.  The Project Owner then sued several of the contractors involved in the project, alleging negligence, breach of implied warranties, and breach of contract in relation to the fire and the resulting damages.

The Project Owner’s contract was an AIA contract form that included several provisions relating to insurance.  The contract provided:

  •  The Project Owner would purchase and maintain property insurance;
  •  The property insurance would be “all risk” to insure against the perils of fire;
  •  If the Project Owner decided not to purchase the required insurance, then the Project Owner agreed to notify the Contractor, so that Contractor could procure the insurance and pass the cost to the Project Owner through a Change Order;
  •  The Project Owner and Contractor mutually waived all rights against each other for damages caused by fire or other perils “to the extent covered by property insurance obtained pursuant to [the Contract]…”

The Project Owner argued that (1) the waiver of subrogation only applied to the “Work” as defined in the construction contract, and not to “non-Work” or other property not part of the project; and (2) the damages sought against the contractors included both damages covered by the Project Owner’s property insurance and damages that were not covered by the property insurance.

On the first argument, the Indiana Court of Appeals held that the “majority view” on application of the waiver of subrogation clause in the AIA contract is that the waiver applies to all damages covered by property insurance, regardless of whether those damages were to the “Work” or “non-Work” on the Project.  The Court noted that requiring the parties to determine what damages were “Work” and what damages were “non-Work” would lead to more litigation and expenses for the parties.  Therefore, the Court settled on what it deemed to be the clear intent of the AIA waiver of subrogation clause—to waive all claims for damages, where those damages were covered by property insurance, without requiring proof of whether the damages were to the “Work” or to other property.

On the second argument, the Court held that the Project Owner was contractually required to obtain “all risk” insurance for the Project, or, if it chose not to purchase that insurance, then to notify Contractor so that Contractor could procure the insurance.  The Court stated that the insurance procured by the Project Owner was property insurance, but was not builder’s risk insurance with the required “all risk” coverage.  The Court further stated that the Project Owner breached the contract by failing to notify the Contractor that it had not procured the insurance required under the contract.  In light of this breach, the Court held that since the Project Owner did not secure the contractually-required insurance, that it still waived its subrogation rights for any loss described within the AIA contract provisions.

Procedurally, the parties to the The Board of Commissioners of the County of Jefferson v. Teton Corporation case may seek a rehearing or even review by the Indiana Supreme Court.  We will have to wait and see whether there are any further proceedings on this issue.  But in the meantime, the lesson for project owners, contractors, and architects is clear:  Be very aware of the insurance requirements in your contracts, and make sure that you (and the other project participants with whom you are dealing) have the necessary insurance policies and coverages in place.  While the waiver of subrogation clause is an important risk sharing tool for the parties, it can have dire consequences for parties that fail to follow the insurance requirements in the contract.

Unavailable Arbitrators May Void Your Arbitration Clause

By: William E. Kelley, Jr., LEED AP BD+C

Is an arbitration clause unenforceable if the selected arbitrator or arbitration provider is unavailable?  That is the question recently addressed by the Indiana Court of Appeals in two recent cases, both of which resulted in an arbitration clause being rendered void.  In Geneva-Roth Capital, Inc. v. Edwards, 956 N.E.2d 1195 (Ind. Ct. App. 2011), r’hng denied and Apex 1 Processing, Inc. v. Edwards, 2012 WL 169251 (Ind. Ct. App. 2012), the Indiana Court of Appeals addressed nearly identical situations involving “payday loan” agreements that required arbitration to be administered through the National Arbitration Forum (NAF).  In both cases, a consumer electronically signed an online agreement with the payday loan company, and both agreements contained clauses that provided that the parties agreed to resolve any claims by binding arbitration to be administered through the NAF.

The problem was that the NAF was no longer available to administer the arbitration process by virtue of a consent judgment in which NAF agreed to longer administer, process or in any manner participate in arbitrations of consumer disputes.  The Plaintiffs argued that the unavailability of NAF to administer the agreed-upon arbitration process rendered the entire agreement to arbitrate unenforceable under the doctrine of impossibility.  Conversely, both lenders argued that the unavailability of the NAF did not render void the agreement to participate in arbitration; instead, they argued that 9 U.S.C.A. §5 (Section 5) of the Federal Arbitration Act (FAA) provided a viable process for the trial court to appoint a replacement arbitrator.  Thus, the Plaintiffs sought to litigate the disputes, while the lenders asked the trial court to compel arbitration and to appoint replacement arbitrators pursuant to Section 5.

The Indiana Court of Appeals held in both cases that the arbitrations clauses were void as a matter of law, finding that the selection of the NAF was an “integral” part of the arbitration clause.  Since the NAF was no longer available to administer the arbitrations, the Court held that the arbitration clauses were null and void as a matter of law on grounds of impossibility.  The Court further held that Section 5 could not be used to save an arbitration provision where the chosen, but unavailable, arbitrator is determined to be “integral” to the agreement; consequently, Section 5 could not be used as a mechanism to appoint a substitute arbitrator in either case.  The result in both cases is that the disputes were ordered to proceed in litigation, rather than arbitration, despite the existence of an arbitration provision in the original agreement between the parties.

In the construction industry, parties often use arbitration clauses that specifically designate use of the American Arbitration Association (AAA) in accordance with its Construction Industry Arbitration Rules.  What would happen if the AAA was no longer available (probably a long shot) or if there were no longer any specific Construction Industry Arbitration Rules (equally a long shot)?  The agreement to arbitrate would not necessarily be void per se, but the Indiana Court of Appeals has made clear that “an express designation of a single arbitration provider weighs in favor of finding the designated provider is integral to the agreement to arbitrate.”  More troubling may be clauses that identify specific arbitration providers other than the AAA, or even specific arbitrators or pools of arbitrators.  If those arbitrators or arbitration providers become unavailable, you risk voiding the entire agreement to arbitration.  You should take a moment to review your contractual dispute resolution provisions and consult your legal counsel to discuss how best to address these risks so that you do not inadvertently lose your right to arbitrate.

Imprelis Lawsuits: The Intersection Between Products Liability and Construction Services

By: Sean T. Devenney

DuPont™, the maker of the lawn care product Imprelis™ has been dealing with claims that its product is harming trees in the area in which Imprelis™ was applied.  See, for example, this article, which outlines the claims and allegations being made in the various lawsuits against DuPont. This case, like the Chinese Drywall issue that first arose a few years ago, serves as a prime example of what can happen to contractors caught in the middle between a manufacturer and the end user.

In claims involving allegations of a defective product, like the Imprelis™ example, the end user homeowner or property owner may first look to the contractor/lawn care professional to remedy the problem allegedly caused by the product.  From the owner’s perspective, owners typically contract for a completed service or end result, while leaving it to the contractor’s discretion as to what products to utilize in order to deliver that result.  Thus, even where the problem potentially lies with the product used, as opposed to the service provided, the owner looks to the contractor for a remedy.  There can, of course, be defenses available to the contractor, especially when the owner directs or agrees with the contractor on use of a specific product.  These types of claims also raise insurance coverage issues for the contractor, especially in situations where the damage is to the product itself, rather than damage to “other property”.

When the contractor notifies the manufacturer of the potential issues, the manufacturer may take the position that the product was misused and perhaps assign blame to the contractor for the issues.   Thus, the contractor can be stuck in the middle between the owner and the manufacturer, without an easy remedy in sight.  This scenario places the contractor at significant risk for extensive legal costs and the very immediate potential for a loss of business.

It is issues like these that keep contractors and lawyers up at night.   The contractor, perhaps despite its best efforts to investigate the products it is utilizing, is brought to the brink of disaster by something it could not control or even foresee.  To lawyers and contractors alike there is nothing worse than a situation in which the existence of the company is called into doubt for something that may be outside their control.

This is the kind of risk that must be managed through proper contracting and insurance.  For instance, the contractor might be able to control its exposure through limitation of damages clauses or indemnity language in its contract with the homeowner, or through use of limited warranties and waivers of implied warranties.  In addition, the contractor should explore insurance options to shift the products risk to an insurance carrier, if possible.

Are Commercial Lien Filing Services Engaged in the Unauthorized Practice of Law?

By: William E. Kelley, Jr., LEED AP

In a recent opinion, the Supreme Court of Ohio declared that non-lawyers who prepare affidavits for mechanic’s liens may unwittingly engage in the unauthorized practice of law in the State of Ohio.  In Ohio State Bar Association v. Lienguard, Inc., 934 N.E.2d 337 (Ohio 2010), the Supreme Court of Ohio addressed whether a commercial lien filing service company that prepared and filed an Affidavit for Mechanic’s Lien on behalf of a contractor involved in an Ohio construction project had impermissibly engaged in the unauthorized practice of law.  The Supreme Court of Ohio stated that under Ohio law, “advising others of their legal rights and responsibilities is the practice of law, as is the preparation of legal pleadings and other legal papers without the supervision of an attorney licensed in Ohio.”  Consequently, when a commercial lien filing company prepared, signed, filed and pursued affidavits of mechanic’s liens for third-parties in the State of Ohio, that company impermissibly engaged in the unauthorized practice of law.  What is not addressed in the Lienguard decision is what effect, if any, this ruling may have on the validity of mechanic’s liens prepared and recorded by commercial lien filing services using non-lawyers.

A mechanic’s lien is a powerful payment remedy for the construction industry.  However, because mechanic’s liens result in a burden on the owner’s real estate title, mechanic’s lien statutes are strictly interpreted, and the failure to comply with the statutory requirements can render liens invalid and unenforceable.  For those entities in the construction industry that are engaged in projects in multiple states, it is essential to be familiar with the mechanic’s lien and payment remedy statutes in each of those states.    Prudent companies should not only be familiar with those laws, but also the state-by-state rules and restrictions that may apply to use of non-lawyers for preparation and filing of mechanic’s liens.  Failure to properly review those requirements and to strictly comply with the lien statutes may result in losing the right to secure otherwise valid claims for payment.

Other states, including Indiana, have rules similar to Ohio that prohibit the unauthorized practice of law by non-lawyers.  What remains to be seen is whether Indiana and other states will follow suit with Ohio by declaring the preparation of mechanic’s lien affidavits and related documents to constitute the “practice of law”, and what the resulting effect may be on commercial lien filing services engaged in preparation of affidavits and lien documents.

Indiana Changes Course on Insurance Coverage for Construction Defects

By: Sean T. Devenney

In the recent case Sheehan Construction Company et. al. v. Continental Casualty Company et. al. the Indiana Supreme Court issued a game changing insurance opinion which will likely be interpreted as providing insurance coverage for construction defects for general contractors.  For the previous twenty plus years, the Indiana Courts have moved to eliminate or minimize coverage afforded general contractors dealing with construction defects claims under standard CGL insurance policies.  This case basically reverses the trend in Indiana and opens up coverage to general contractors whose subcontractor’s work on a project is alleged to be defective.  This opinion is a must read for general contractors, insurance agents, and construction industry participants because it will serve as the cornerstone to any discussion relating to coverage for a construction defect claim against a general contractor.  For a link to the opinion of the Indiana Supreme Court see: http://www.in.gov/judiciary/opinions/pdf/09301001rdr.pdf

Indiana Court of Appeals Opinion on Mechanic’s Liens

By: Daniel M. Drewry

The Indiana Court of Appeals has recently issued an opinion on mechanic’s liens focusing on the technical requirements of the mechanic’s lien statute.  In Capital Drywall Supply, Inc. v. Jai Jagdish, Inc. issued September 29, 2010 (http://www.in.gov/judiciary/opinions/pdf/09291001ewn.pdf) the Indiana Court of Appeals confirmed what construction lawyers have suspected for many years – the failure to properly identify the property owner on the notice of mechanic’s lien filed in the County recorders office will render a lien claim unenforceable.  In rendering the decision, the Court of Appeals strictly construed the statute and refused to accept the lien claimant’s arguments that the misidentification of the owner was the result of a County government official’s mistake in identifying the owner over the phone.  The Court also did not accept the lien claimant’s argument that the true owner received actual notice of the lien.

The Court focused on the two reasons why identifying the owner is so important to the mechanic’s lien process.  First, the notice is important because it gives the actual owner notice that a claim has been filed against his property.  Second, the notice filed in the County recorder’s office give “third-parties” who may be taking an interest in the real estate at issue after the lien is filed notice that the property is encumbered by a lien.   The Court found that while the actual owner of the property in Capital Drywall Supply, Inc. did receive actual notice, third parties would not have found the interest because the owner of the property was misidentified. Thus, the Court held the lien was invalid for failing to comply with the statute.

For construction industry participants this means that if the lien claimant wants to be certain of the validity of the lien, the claimant should consider a physical title search of the property in question to be sure to identify the proper owner.  Obviously, this decision increases the costs associated with making sure that the lien rights are perfected.  Thus, in determining the best course of action to get paid on a construction project the claimant may decide the level of diligence required based on the amount of the unpaid work – in making the decision to not conduct a physical search of County records, the claimant is taking the risk of misidentifying the owner rendering the lien claim void.


Daniel M. Drewry

Daniel M. Drewry

Daniel M. Drewry

About This Blog

The DSV Construction Law Blog is hosted by Daniel M. Drewry. Dan is a Partner with the law firm Drewry Simmons Vornehm, LLP and concentrates his practice in the areas of Construction Law and Litigation, and Labor & Employment Law.

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