Adopting Strategies to Minimize Liability Exposure
On Wednesday, February 29, 2012, Sean Gay will speak at a seminar sponsored by HalfMoon LLC entitled “Minimizing Engineering Liability Exposure.” Mr. Gay will speak about adopting strategies to minimize liability exposure. The seminar will be held at the Doubletree Hotel, 1000 NE Multnomah Street, Portland, Oregon from 8:30 a.m. to 4:15 p.m.
Click here to learn more and to register online.
Starting a New Project? Don't Forget to Send a Notice of Right to a Lien to Trust Deed Holders and Mortgagees
Under Oregon law, a construction lien generally has priority over a trust deed or mortgage on an improvement. ORS 87.025(1). If a construction lien claimant has priority over a trust deed or mortgage, the construction lien claimant will get paid from the proceeds of a foreclosure sale before the trust deed holder or mortgagee. Having priority is important because it often determines whether a construction lien claimant gets paid. Priority clearly is a legal right that a lien claimant will want if it becomes necessary to record and foreclose a construction lien.
Nevertheless, it is possible for a lien claimant to lose priority by mistakenly falling into one or both of two exceptions. The first exception involves notice to the trust deed holder, and the second exception involves the segregation of charges on the claim of lien. Under the first exception, if a lien claimant fails to send a trust deed holder a notice of right to a lien, or similar notice, then, in accordance with ORS 87.023, the trust deed has priority over the materials portion of a construction lien. ORS 87.025(3). The general rule regarding construction lien priority is subject to a second exception that involves the segregation of charges on the construction lien claim. Under that exception, if a lien claimant fails to provide the notice discussed above and fails to segregate materials charges from the other charges in its claim of lien, the entire construction lien loses priority to previously recorded mortgages and trust deeds on the improvement. Benj. Franklin Fed. Sav. & L. Ass’n v. Hallmark, Inc., 257 Or 436, 479 P2d 740 (1971); see also Cal-Roof Wholesale, Inc. v. Contractors West, Inc., 262 Or 343, 497 P2d 1181 (1972) (applying Benj. Franklin priority rule to a trust deed).
Contractors can maintain priority of their construction liens by taking three important steps:
(1) Perform a title search before materials are delivered to the property. A simple title search—often provided free of charge by title companies—should reveal the identity of any mortgagees or trust deed holders.
(2) Send any trust deed holders and mortgagees a notice of right to a lien. The notice of right to a lien should be sent eight days, not including Saturdays, Sundays and other legal holidays, after the date of delivery of materials or supplies for the project.
(3) Carefully segregate materials charges from other charges (labor, equipment, etc.) in the claim of construction lien. (This step is absolutely critical if you have failed to perform the first two steps.)
Utah Reverses Course on Apportioning Costs of Defense to Policyholders
A recent Utah Supreme Court decision could result in significant benefits to some policyholders in Utah’s construction industry. The case, Ohio Casualty Insurance Co. v. Unigard Insurance Co., 2012 UT 1, concerned a fight between two insurers about how to split the costs of defending a lawsuit brought against their policyholder, Cloud Nine. For policyholders, the most notable aspect of the decision centers on the fact that Cloud Nine was uninsured for about six months between the end of Ohio Casualty’s policy and the beginning of Unigard’s policy.
Ohio Casualty argued that Cloud Nine should have paid a portion of its defense costs based on the length of time it was uninsured. The court disagreed, noting that because both insurers reserved the right to control all aspects of the defense, “it would be inequitable to apportion any defense costs to an insured who has no power to select counsel or negotiate rates and no voice in deciding whether to settle the suit,” and therefore “it would be inequitable to hold the insured responsible for the share of defense costs attributable to the time period during which it was uninsured.”
The Ohio Casualty decision is significant because it effectively overrules part of the influential case of Sharon Steel Corp. v. Aetna Casualty & Surety Co., 931 P.2d 127 (Utah 1997), in which the court held that defense costs should be apportioned to an insured for those periods when it was without coverage.
For policyholders who have had a gap in liability coverage, the Ohio Casualty decision could provide a lifeline. Virtually all liability policies that obligate an insurer to defend its insured—including CGL, professional liability, employers’ liability, and pollution coverage policies—contain language that gives the insurer the right to control significant aspects of the defense. Thus, Ohio Casualty could apply in many coverage gap situations. Moreover, the complexity of many construction disputes makes an insurer’s duty to defend an extremely valuable aspect of coverage. Insurance industry statistics show that the cost of defending a complex commercial case can range as high as 77 cents for every 23 cents paid out to claimants. Scott C. Turner, Insurance Coverage of Construction Disputes § 7:1 (Nov. 2009). Depending on the complexity of the dispute and the length of the coverage gap at issue, the Ohio Casualty decision could spare construction industry policyholders from paying defense costs that could easily tally hundreds of thousands of dollars.
