A Rose by any Other Name.... But Are You Really Insured?
Do you think you have adequate insurance protection for your project under an “additional insured endorsement” to another entity’s policy? Or through a “wrap” policy, known as either an Owner’s Controlled Insurance Policy (OCIP) or Contractor’s Controlled Insurance Policy (CCIP), because you are listed as “an insured”? Perhaps not under more recent policies. Check the latest policy language carefully, and you may not like what you find. Many recent insurance policies now include limiting language that restricts the self-insured retention (SIR) provision to payments made only by “The Named Insured,” e.g., “Payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention. Satisfaction of the self-insured retention as a condition precedent to our liability applies regardless of insolvency or bankruptcy by you.” This past year we have noted a few published decisions that have supported such limiting policy language, allowing an insurer to restrict and ultimately refuse to accept SIR payments from any other insured but “the Named Insured.” What is the result of that interpretation if “The Named Insured” is M.I.A.? The policy is never triggered, thereby precluding coverage and the benefits of the policy to all other insureds. The potential effect on risk management and business protection for your project make those policies worthy of a second look.
Be careful what you ask for Idaho
In the last two decades, the Idaho State Legislature has authorized design-build contracting for many different types of public projects. It appears that the Legislature will continue this trend for highway projects. In February, a House committee voted to print a bill that would allow the Idaho Transportation Department (IDT) to award design-build contracts for highway projects. A similar measure nearly became law last year.
For the most part, the Legislature’s acceptance of the design-build process is good thing. Several years ago, I worked for a commercial contractor. In 2001, I visited our largest project at that time -- a $500 M design-build facility in California. When I asked the project lead whether he liked design-build projects, he was quick to praise the process. He believed that design-build projects equated to fast results, decreased change orders, and less litigation. To him, it was a no-brainer. Many of my colleagues agree.
Since then, I have been involved with several design-build and design-bid-build projects. Although some design-build projects have been successful, that’s not always the case. The moment an owner enters into a design-build contract, it loses something that can be very important to a successful construction project: control. This lack of control – which is caused in large part by undefined design requirements – can lead to significant cost overruns and delays.
To avoid such results, owners should focus on two important actions: careful planning and diligent execution. On the topic of planning, design-build owners should spend significant time defining the project requirements. The design-build contract documents must include, among other things, detailed project design criteria, program requirements, performance specifications, and deliverables. Absent such defined requirements, design-builders are free to run wild.
Professional execution of the plan is equally important. Owners must prudently monitor the design-builder’s work. Too often, owners in design-build projects overlook this task, believing that such role is limited in design-build projects. In fact, the opposite is true. Because the design-builder has more flexibility in design-build projects, owners must arduously monitor the budget and schedule.
Design-build projects present many benefits. IDT, however, should know that it will not be less work for them. The key is for IDT to clearly define the project programs and performance requirements before the contracts are signed, and to monitor the design-builder’s compliance with these requirements throughout the project.
Negligence Claims Take Another Twist in Oregon
Just when you thought it was safe to go back into the water, the Oregon Court of Appeals strikes again with another iteration of the “economic loss doctrine” which defines when parties can sue each other in negligence for construction defects. In Abraham v. Henry (September 2, 2009) the Court held that parties to a contract can sue each other in negligence if a rule, code or standard “independent of the contract” has been violated. A prime source for independent rules, held the Court, is the Oregon Building Code. From now on, we can expect to see plaintiffs including in their complaints that one or more provisions of the Oregon Building Code have been violated. It will be easy to find such violations in most construction defect claims.
The prior standard, enunciated in the Jones v. Emerald case, held that there must be a “special relationship” between the contracting parties in order to support a negligence claim. No one really knew what a special relationship was, but most believed that alleging in the complaint that the owner relied on the contractor’s expertise was sufficient to create such a relationship and thus a right to sue in negligence. Abraham may have changed that belief by pointing out that, at least in that case, there was nothing “special” about the arms-length owner/contractor relationship, and, with or without reliance on the “expertise” of the contractor, each party was acting on its own behalf and for its own benefit.
Other decisions from Oregon courts support the argument that the economic loss doctrine does not bar negligence claims if there is physical property damage, but this argument was not made or at least not addressed by the Abraham court.
The principal reason – if not the only reason – why the economic loss rule is relevant is that Oregon’s statute of limitations for breach of contract is six years from the date of breach (which, at the latest, is usually the date of substantial completion or failure to honor extended warranties). For claims discovered and/or brought after six years, you must be able to assert a negligence theory for the claim to be viable, because the negligence period runs two years from the date of discovery of the claim (as opposed to the date of breach), capped by the 10 year statute of repose (which states that all claims must be brought regardless of discovery within 10 years from substantial completion). Thus, if you cannot assert a negligence claim, you may have no other claim to assert.
The vast amount of time and fees generated in litigating statute of limitations issues in Oregon construction cases is fueled by (1) disparate limitations periods for breach and negligence claims, (2) disparate limitations periods for claims against designers versus contractors, and (3) the every changing – and arguably inconsistent – decisions from Oregon courts on what the rules of the game really are. Oregon needs a “Construction Defect Reform Act” with one limitations period for all claims against all parties on a construction project, governed by a discovery rule and capped by a statute of respose, with a clear statutory answer to the economic loss rule. Until then, uncertainty and high legal fees will continue to be the norm.
Oregon Court of Appeals Provides Clarification to Contractor Negligence Claims
The Oregon Court of Appeals recently issued an opinion in Abraham v. T. Henry Construction, Inc., et al., a residential construction defect case, that helps clarify the circumstances under which a contractor may be sued for negligence. The issue of whether a contractor may be sued for negligence, as opposed to breach of contract is, in many cases, relevant to a determination of whether the owner’s claims are barred by the statute of limitations. Owners often need to rely upon a negligence claim to get past the six-year statute of limitations that applies to claims for breach of contract.
In Jones v. Emerald Pacific Homes, Inc., which was decided in 2003, the Oregon Court of Appeals held that an owner who had a contract with a contractor could sue the contractor in negligence if the contractor had breached a standard of care that was independent of any contractual duty or standard of care. Some courts generally referred to the non-contractual duty or standard of care as a “special relationship.” The Jones opinion then only begged the question of what constituted a special relationship.
In Abraham, the court held that, among other possibilities, a contractor’s duty to comply with the applicable building code constituted a duty independent of the contract and thereby created the type of special relationship necessary for asserting a negligence claim.
Abraham will be an important tool for owners seeking to pursue construction defect claims in situations in which the owner’s contract claim has expired due to the six-year statute of limitations, but only in certain types of cases. The Oregon Legislature recently passed legislation shortening the statute of ultimate repose (which is different from the statute of limitations) to six years, for medium to large commercial projects. As a result, the issue of whether a contractor may be sued for negligence, as opposed to breach of contract, will be relevant only to residential and small commercial projects and the Abraham case will be relevant only to those situations.
