Archive for the 'Litigation' Category

Indiana Supreme Court Interprets AIA’s Waiver of Subrogation Clause

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

A waiver of subrogation clause is a typical (but often overlooked) contract provision in design and construction contracts, especially for parties using standard form contracts, such as the American Institute of Architects (AIA) forms.  In general, the term “subrogation” refers to situations where an insurance company pays for damages covered under its policy, then, in turn, seeks to recoup some or all of those damages from other entities that may have caused or contributed to the loss.  For example, the insurance company for a property owner pays for damages caused by a water leak, and then seeks to recoup those damages from contractors who may have caused the water leak through their construction activities.  The insurance company stands in the shoes of its insured, and has no greater rights than the insured would have.  Therefore, if the insured has already waived certain claims by contract or other agreement, then the insurance company cannot pursue those waived claims.

The waiver of subrogation clause refers to an agreement between contracting parties, whereby the parties agree they will not sue each other for certain classes of claims covered by insurance.  So, in the water leak example, the waiver might apply to bar the insurance company from recovering from the contractor, even if the water leak was partially caused by construction defects.  In that instance, the owner’s insurance company would pay for the damages, and the contractor might have no liability to the owner or insurance company for the amounts paid for damages under the insurance policy.

There have been multiple cases involving this contract language, and Indiana courts have split in their interpretation of that clause.  The major issue?  Interpreting the scope of the waiver.  Or, in other words, what claims have been waived and what claims are still viable.  Several court decisions from across the country (Indiana included) have been divided into two camps on the issue of the scope of the waiver.

In the first camp, some courts have interpreted the waiver of subrogation to hinge on a “work vs. non-work” analysis.  Under that analysis, the waiver would apply to damages to the contractor’s work, but it would not apply to damages to property outside the scope of the contractor’s work.  In the second camp, other courts interpret the waiver of subrogation to hinge on the “any insurance” analysis.  Under this approach, if the damages at issue are covered by “any insurance”, namely property insurance maintained by the owner for the project, then subrogation claims for those damages are waived.

The Indiana Supreme Court has now weighed in on interpretation of the AIA contractual waiver of subrogation clause to provide some clarity on this issue.  In Board of Commissioners of the County of Jefferson v. Teton Corporation, issued on May 13, 2015, the Indiana Supreme Court analyzed the waiver of subrogation clause in the AIA A101-1987 and A201-1987 contract forms, and it formally adopted the “any insurance” approach.  The case involved a fire that occurred during renovations to the Jefferson County (Indiana) courthouse.  The Indiana Supreme Court noted that the owner (Jefferson County) procured an “all risk” property insurance policy that covered not only the existing property at the courthouse, but also the ongoing construction operations.

The parties apparently agreed that the damages at issue in the fire were all covered and paid by the property insurance company for Jefferson County under the “all risk” insurance policy.  Nonetheless, the owner and its insurance company argued that the waiver of subrogation only applied to damages to the contractor’s work, since the construction contract only required the owner to purchase builder’s risk insurance for the construction work at issue.  However, the Indiana Supreme Court noted that the waiver of subrogation was broader than just the coverage for the “work” on the project, and specifically applied to all damages paid by under any property insurance policy maintained by the owner.  Even though the owner had broader insurance coverage than required under the contract, the waiver still applied to all covered damages, since the waiver language specially applied to damages “to the extent covered by property insurance obtained pursuant to this Paragraph 11.2 or other property insurance applicable to the Work…”  The Supreme Court also noted that this language clearly only applied to property insurance maintained by the owner, and was not so broad to also include damages covered under the liability insurance policies that the parties agreed to maintain for the project.

The takeaway from this case is that contractors, owners, and designers should focus on risk-shifting contract language.  Parties can cover certain risks by agreeing that one party will assume the risk and defend others for any claims that may arise (e.g., indemnity clauses), and also through agreements to purchase specific insurance products for the project, which shifts the risk to the insurance companies involved.  Where parties have agreed to cover certain risks through insurance, and further where the parties agree to waive claims against each other for claims covered by insurance, the Indiana Supreme Court’s decision makes clear that Indiana law favors enforcement of those waivers.  Further, the waiver language under the typical AIA contract form will be interpreted to cover all damages covered by property insurance, regardless of whether the scope of coverage is broader than what is contractually required.  The policy behind this decision is that Indiana law supports avoidance of protracted litigation for claims where parties have already agreed to waive those claims and to instead cover the risk through property insurance.

All parties involved in negotiation of design and construction contracts should carefully review the insurance requirements in those contracts, and develop an understanding of the scope and purpose of risk shifting clauses such as the waiver of subrogation clause.

Appellate Court Reviews Indiana’s Rules Governing Spoliation of Evidence

By: David L. Simmons

The Indiana Court of Appeals considered the principles governing the spoliation of evidence in the recent case of Wesco Distribution, Inc. v. ArcelorMittal Indiana Harbor, LLC, —N.E. 3rd—, 2014 WL 5819375 (Ind. App.), which was issued on November 10, 2014. In Wesco, ArcelorMittal sued Wesco for breach of implied warranties and breach of contract resulting from the failure of the braking system on an overhead crane. The failure of the crane caused molten iron to be spilled across the floor of the plant, igniting a fire that caused extensive damage to the facility. A jury found in favor of ArcelorMittal and awarded damages in the amount of $36,134,477. Wesco appealed the verdict on several grounds, including the failure of the trial court to impose sanctions on ArcelorMittal for destruction of evidence that was critical to its defense.

After the accident, ArcelorMittal removed fractured blowout coils from the crane and subsequently determined that the blowout coils likely caused the failure. Wesco was able to inspect the blowout coils during its investigation and preparation for trial. However, ArcelorMittal did not photograph or otherwise document the blowout coils in place within the contactors before removing them. The controller was disassembled after the incident, and several internal components were replaced and discarded. In addition, Wesco failed to document the condition of the controller, contactors, and mechanical brakes at the time of the incident. While the crane was down due to the incident, ArcelorMittal employees performed routine periodic maintenance on the brakes.

ArcelorMittal filed a motion for sanctions against Wesco pursuant to Trial Rule 37, claiming that it was prejudiced by virtue of not being able to examine the discarded parts. The trial court declined to impose sanctions on Wesco and further declined to instruct the jury regarding inferences that could be drawn.

On the issue of spoliation, the Indiana Court of Appeals upheld the decision of the trial court, finding that sanctions against ArcelorMittal were not appropriate under the circumstances. In reviewing the appeal, the court noted that Trial Rule 37 provides a trial court with all the necessary tools to enforce compliance with the discovery process. This rule provides that a trial court may impose a range of sanctions, including dismissal, if a party fails to comply with an order to compel discovery. The determination of the appropriate sanction is left to the trial court’s discretion, and an appellate court reviews the decision only for an abuse of that discretion. Although there was no apparent order that Wesco was seeking to enforce, it is undisputed that the evidence at issue had been altered and disposed of by ArcelorMittal.

The Court stated that there must first be a determination that spoliation of evidence occurred before reaching the issue of possible sanctions. Spoliation of evidence is the intentional destruction, mutilation, alteration, or concealment of evidence. Relying on the opinion of the Indiana Supreme Court in Howard Reg’l Health Sys. v. Gordon, 952 N.E.2d 182 (Ind., 2011), the court described various principles that govern the spoliation of evidence and the sanctions that may be applied.

The courts uniformly condemn spoliation, and the intentional destruction of potential evidence in order to disrupt or defeat another person’s right of recovery is highly improper and cannot be justified. Once spoliation is found, potent responses exist under Indiana Trial Rule 37(B) authorizing trial courts to respond to discovery violations with such sanctions “as are just,” which may include dismissal of all or any part of an action. Determining whether sanctions are warranted and, if so, what they should include, requires a court to consider both the spoliating party’s culpability and the level of prejudice to the party seeking discovery.

Culpability can range along a continuum from destruction intended to make evidence unavailable in litigation to inadvertent loss of information for reasons unrelated to the litigation. Prejudice can range along a continuum from an inability to prove claims or defenses to little or no impact on the presentation of proof. A court’s response to the loss of evidence depends on both the degree of culpability and the extent of prejudice. Even if there is intentional destruction of potentially relevant evidence, the sanctions may be limited if there is no prejudice to the opposing party. In addition, even if there is an inadvertent loss of evidence but severe prejudice to the opposing party, that too will influence the appropriate response, recognizing that sanctions require some degree of culpability.

The Court concluded that ArcelorMittal did not destroy the evidence for an improper purpose. Both parties’ witnesses agreed it would have been better for their evaluation to have the additional evidence, but the Court of Appeals upheld the trial court’s finding that ArcelorMittal did not realize the importance of the evidence for some time after it was altered and discarded, and therefore did not act with intent to prejudice Wesco in this litigation. Moreover, because the evidence was destroyed before either side had a chance to inspect it, the prejudice to the parties was approximately equal: Wesco could not conclusively prove the screws on the controller were tight on the day of the incident, and ArcelorMittal could not prove they were loose. Both sides were required to prove their theory of causation by logical inference and deduction. Therefore, the trial court did not abuse its discretion in declining to sanction ArcelorMittal for the failure to preserve the evidence, especially with the extreme sanction of dismissal.

The legal doctrine of spoliation has become a significant threat to destroy or limit claims in litigation over the last 10 years. While Indiana has not yet recognized a first-party duty to preserve evidence, parties should make reasonable efforts to preserve evidence that relates to any litigation in which they may be involved, whether as a plaintiff or a defendant. The failure to do may result in having valuable claims and defenses limited or dismissed altogether.

This case is a good reminder that any party involved in a claim or lawsuit should consult with their attorneys regarding the protection of potential evidence. The party should meet with counsel early on to prepare a preservation plan for all relevant evidence and determine the length of time that may be required to allow inspection by third parties.

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:

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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