California Court Finds Coverage When “Property Damage” Doesn’t Require Physical Injury By Definition

Although it may seem strange at first, the recent ruling by the California Fourth Appellate District Court in Thee Sombrero, Inc. v. Scottsdale Co., (2018 EL 5292072), holding that an insurer must pay for a claim where there was no actual physical property damage, is not as odd as it may seem to non-insurance coverage lawyers.  The reason?  It all depends on the policy language and the definition of “Property Damage” where there is an “occurrence.”

The underlying facts are noteworthy in that there was no dispute that the plaintiff-claimant, Thee Sombrero, Inc. (Sombrero), lost revenue and the value of its real estate (diminished value) when the security company it hired to provide security guards failed to keep guns out of Sombrero’s nightclub.  A fatal shooting due to that alleged negligence (“an occurrence”) resulted in a lost ability by Sombrero to operate its property as a nightclub.  That specific loss of use totaled almost a million dollars in diminished value of the Sombrero property.  Sombrero sued the security company for the lost value, and the security company defaulted.  Sombrero then pursued the security company’s insurer, Scottsdale, under California Insurance Code section 11580, which allows a prevailing claimant to file a direct action against the insurer for coverage under the applicable insurance policy.

Scottsdale filed a motion for summary judgment not long after the section 11580 action was filed against it, arguing that the loss of the “use permit” for a nightclub was not lost use of tangible property, but merely the loss of an intangible right to use property in a certain way, and really economic loss that is not covered as property damage under the policy. The trial court agreed.  Sombrero appealed and argued in essence that “[t]he loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’” To which the appellate court commented, “It defies common sense to argue otherwise.”  At the same time, however, the appellate court identified contrary authority involving Scottsdale (albeit in Washington State) that was “strikingly similar” to the present case, yet distinguished the prior Scottsdale decision on three grounds:  1) the focus should be on the loss of use of the tangible property that results from the loss of the entitlement, not just the entitlement, 2) the loss is not defined in the policy as requiring a “total loss” and therefore under normal interpretation standards “any significant use” lost would be within the reasonable expectation of the insured for coverage, and 3) acknowledging that a leasehold of a specific type of property is an actual property right, and the loss of such use of a property right is therefore a loss of use of tangible property.   In stating the “correct principal,” the appellate court held that “losses that are exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”  Here, because the Scottsdale policy “expressly defined property damage as including” ‘[l]oss of use of tangible property that is not physically injured,” the appellate court disregarded the distinguishable California cases with differing policy language under consideration.

While this case did not arise out of a construction defect dispute, the points of insurance coverage may be applicable in a future construction defect context where there has been an “occurrence” but no physical injury to the property, only a valuable loss of use of that property.  Of course, it will always depend on the specific language of the insurance policy, which is why it is so important to understand the insurance policies and potential for coverage in any dispute.

Dispute Resolution for Developers

The nearly 60 cranes towering over Seattle’s skyline may be a sign of the building boom in the city, but they also could portend a flood of construction claims arising from the projects they help build. Despite the frequency of construction claims, many developers are not familiar with the dispute resolution methods available to them and the impact they have on the outcomes of their construction claims, projects, and businesses. In my latest article for the Seattle Daily Journal of Commerce, I look at the most popular dispute resolution methods and provide developers with a guide to selecting the best dispute resolution method(s) for their construction contracts so they have a blueprint for how to handle construction claims when they arise. Read the full article here.

Originally published as “Dispute resolution tips for developers to use in handling construction claims” on November 1, 2018, by the Seattle Daily Journal of Commerce.

Cross-Laminated Timber Projects: The Pacific Northwest’s Next Big Timber Development

Cross-laminated timber (“CLT”) is a leading building technology that has been employed by European developers for decades, but the product’s use in the United States only recently took hold after its adoption by the 2015 International Building Code. A type of structural timber product composed of dimensional timber layers bonded together with structural adhesives, CLT can have the structural integrity of steel, and its use can reduce construction schedules by as much as half. In my latest article for the Seattle Daily Journal of Commerce, I look at several steps the owner of a project should consider before starting any project utilizing innovative and developing technologies like CLT.   Read the full article here.

Originally published as “Thinking of building with CLT? Here are some things to consider before starting” on October 4, 2018, by the Seattle Daily Journal of Commerce.

“Is Mike M. Johnson Here to Stay?”—Recent Washington Supreme Court Case Upholds Contractual Waiver of Claims Provision

In Nova Contracting, Inc. v. City of Olympia, No. 94711-2 (Wash. Sept. 29, 2018), the Washington Supreme Court, sitting en banc, ruled in favor of a municipality on the issue of whether the general contractor complied with a contract’s notice of claim provision.  Relying on Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, 78 P.3d 161 (2003), the court in Nova Contracting held that a broad notice of claim provision (waiving “any claims” for noncompliance) (a) mandates written, rather than actual, notice of claims and (b) applies not only to claims for cost of work performed, but also to claims for (i) expectancy and consequential damages and (ii) breach of the covenant of good faith and fair dealing.  Slip op. at 2-3, 15.

The case arose from certain disputes between the City of Olympia (the “City”) and a contractor (“NOVA”) in connection with a public works contract in which the contractor agreed to replace an aging cement culvert. The contract contained a “notice of protest” provision from the Washington State Department of Transportation’s standard specifications.  This provision required the contractor to “‘give a signed written notice of protest’ ‘[i]mmediately’ if it ‘disagree[d] with anything required in a change order, another written order, or an oral order from the [City] Engineer, including any direction, instruction, interpretation, or determination by the Engineer.’” Id. at 1-2. Continue Reading

California Labor Commissioner Issues $1.9 Million Citation to Contractor for Wage Theft

Continuing its aggressive enforcement of California wage and hour laws, the Labor Commission issued wage theft citations of $1.9 million to Fullerton Pacific Interiors, Inc. for failing to pay minimum wage and overtime and failing to provide rest periods to 472 workers on 26 construction projects throughout Southern California.

Fullerton Pacific Interiors provided drywall work at commercial projects throughout southern California.  The company paid its taping and drywall installation crew a flat daily rate.  Thus, regardless of the number of hours actually worked, employees received the same daily pay.  Workers were permitted the legally required 30-minute meal period, but did not receive mandated rest breaks. On July 9, 2018, the Labor Commissioner also determined that the company failed to provide employees accurate itemized wage statements as required by law. The $1,964,679 citation includes $1,892,279 payable to the workers for owed wages, liquidated damages and waiting time penalties, as well as $72,400 in civil penalties.

Since being appointed Labor Commissioner by Governor Brown in 2011, Julie A. Sue has been very public about her intention to dramatically increase enforcement of California’s Wage Theft Protection Act that went into effect in January 2012.  “Wage theft” is defined as any instance when an employer fails to provide an employee full pay for all hours worked, including paying less than minimum wage, failing to provide overtime pay, requiring workers to perform off-the-clock work, and failing to provide meal and rest breaks. The Act and subsequent legislation have given the Labor Commissioner more legal tools and financial resources to enforce California’s myriad wage and hour laws. Under Su’s leadership, the California Division of Labor Standards Enforcement has focused its enforcement efforts on low wage workers, particularly those in the construction industry.

Takeaway for Employers:

This citation should be a wake-up call for California employers that failing to comply with California wage and hour laws can be extremely costly.   These laws are notoriously complex and counter-intuitive.  To ensure compliance, an employer may wish to conduct a self-audit under the direction of legal counsel.

A New Architectural Icon Opens in Seattle

The dramatic “Spheres” at the new Amazon headquarters in downtown Seattle have joined the Space Needle, downtown Seattle Library, Smith Tower, and Pacific Science Center as architectural icons of the city. The project includes meeting spaces for Amazon employees and a botanical garden with over 40,000 plants.  Information about the building and its contents can be obtained at the “SeattleSpheres” website.

A partial list of firms involved in creating the Spheres follows: NBBJ (architectural design); Magnusson Klemencic Associates (structural design); Sellen Construction (general contractor); Front, Inc. (structural details and analysis); Canron Western Constructors/Supreme Steel (steel fabricator and erector); Mohawk Metal (steel fabricator); Albina Co. (steel bending and rolling); Enclos (glazing contractor); Northwestern Industries, Inc. (glass fabricator); and Vitro Architectural Glass (glass supplier).  Further information about the design and construction challenges overcome on the project can be found on these firms’ websites.

The Spheres are open to the public two Saturdays a month by reservation only. A display area on the ground floor, called Spheres Discovery at Understory, is open to the public daily.

Developers and Builders Gain Time from Permit Expiration in California with AB 2913

After decades of dealing with a hodgepodge of local adoption (or not) of administrative codes relating to building permit extensions, California Governor Brown’s September 21, 2018 signature on AB 2913 is a welcome addition of at least six months to the existing statutory commencement of work period. AB 2913 allows a uniform 12-month period across the entire state for commencement of work after permit issuance, doubling the prior period. 

Because of the confluence of market demand and significant labor shortages in construction, the previously existing six-month expiration of building permits caused further hardship to developers and builders in their efforts to bring projects to market.  Since state law mandates that a permit require all projects to be built according to the code in existence at the time of the first permit issuance, this hardship was particularly acute where a building code change was adopted after the original permit date, and the permit then expired. In this market, the cost of code changes (and any redesign, cost of compliance, and rebidding potentially) could significantly impact the project cost and timeline. 

There is a further benefit to the amended statute: it expressly provides “good cause” for an additional six-month extension (which would be in addition to the 12 months for new permits) by local jurisdictions, something not previously adopted by all local jurisdictions or clearly available to developers and builders before. 

The amendment applies prospectively, not retroactively; only permits issued after September 21, 2018 will benefit from the new 12-month period.

Managing Risk from Gaps in Your Construction Project

Experienced project developers know that managing risk on a major project involves initial planning, design, construction, and commissioning. These tasks call for different skill sets — making it tempting to think of them as separate — but they need to be coordinated to prevent the creation of troublesome gaps in areas of responsibility. In my latest article for the Daily Journal of Commerce, I examine where these gaps may occur — in planning for code compliance, assigning scopes of work, procuring construction materials and other areas — and I look at ways to manage the risk presented by such gaps. Read the full article here.

“Teamwork is needed during each stage of a project: supply, delivery, installation, testing” was originally published by the Seattle Daily Journal of Commerce on September 6, 2018.

The Owner’s Guide to Negotiating Construction Contracts During Volatile Trade Negotiations

President Trump’s new tariffs and ongoing trade negotiations concerning building commodities like steel, aluminum, and lumber have resulted in uncertain market conditions for those in the construction industry, making it nearly impossible for owners, developers, contractors, and suppliers to accurately analyze and allocate risks during construction contract negotiations. In my latest article for the Daily Journal of Commerce, I provide owners and developers with an overview of the new tariffs on building materials and the key contract provisions they should review and revise to hedge against the risks associated with the uncertain market conditions. Read the full article here.

Originally published as “New tariffs on building materials have owners revising construction contracts” on August 23, 2018, by the Seattle Daily Journal of Commerce.

Legislative Update: House Bill 4154

In February 2018, the Oregon Legislature attempted to push through House Bill 4154, which would have made a general contractor liable for unpaid wages, including benefit payments and contributions, of an employee of a subcontractor at any tier, after that employee files a wage claim and the Commissioner of the Bureau of Labor and Industries (“BOLI”) makes a determination that the claim is valid but cannot be enforced against the subcontractor. The only way that the general contractor would not be held liable for unpaid wages was if it had paid the subcontract in full prior to the BOLI determination.

HB 4154 passed in the House 31-26 on February 26, 2018, and it was referred to the Senate on February 27, 2018. The Senate met on March 3, 2018, and HB 4154 died on the Senate floor without a vote. Although the bill did not pass, a similar bill could reappear in the coming legislative sessions.

HB 4154 was presented as a solution to a “wage theft” problem in the construction industry, and it closely modeled a recently passed California bill, Assembly Bill 1701. AB 1701, sponsored by unions that represent carpenters and other building trades, allows construction workers who have not been paid for a job to seek their back wages and benefits, with interest, from the general contractor. The general contractor’s liability does not extend to penalties or liquidated damages. AB 1701 only impacts construction contracts that are entered into after January 1, 2018.

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