Source: https://www.nhconstructionlaw.com/blog/archives/07-2015
Timestamp: 2019-04-25 12:11:50+00:00

Document:
Defective construction often has a domino effect, as poor workmanship in one area can damage perfectly good work in others. A steel beam atop a multi-story steel-framed building, if welded improperly, can fall on and damage properly welded beams below. The law is clear that a standard commercial general liability policy won’t cover the cost of replacing the poorly-welded beam. But what about the others?
Consider this scenario: a contractor builds a home, and months later gets a call from the homeowner complaining of water infiltration where the deck meets the house. The contractor investigates, and finds out that improper flashing is the culprit and will have to be redone. The adjacent sills were installed correctly, but they are now damaged and need replacing as well.
When the insurance carrier receives the contractor’s claim, however, it is unimpressed by the Cogswell Farm ruling, and denies coverage on the ground that there has been no “occurrence” – defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions“ – to trigger coverage in the first place. It notes that Cogswell Farm declined to consider whether there had been a triggering “occurrence” because the insurance carriers in that case raised the issue too late. And it points to the Supreme Court’s admonition in Brown v. Concord Group Ins. Co., 163 N.H. 522, 528 (2012), that “to constitute an ‘occurrence,’ the damage at issue must have been to property other than [the contractor's] work product.” For this purpose, the carrier maintains, the contractor’s “work product” means all of its work, not just the defective work.
Is the carrier right? A definitive answer must await a case squarely presenting the issue that Brown did not present: whether damage to elements of the construction that were not defective is considered damage to a different work product for purposes of defining “occurrence.” But contractors have reason to be optimistic. A popular treatise on insurance law, quoted in Concord General Mutual Ins. Co. v. Green & Co. Bldg. and Development Corp., 160 N.H. 690, 693 (2010), states that “an occurrence is an accident caused by or resulting from faulty workmanship, including damage to any property other than the work product and damage to the work product other than the defective workmanship." 9A S. Plitt, D. Maldonado & J. Rogers, Couch on Insurance 3d § 129:4, at 129-13 to 129-14 (2005) (my emphasis).
Unless all the subsequent dominoes are insured, CGL policies have diminished value. As the Alabama Supreme Court recently observed in Owners Insurance Co. v. Jim Carr Homebuilder, LLC, 157 So.3d 148, 155 (2014), “to read into the term ‘occurrence’ the limitations urged by [the carrier] would mean that, in a case like this one, where the insured contractor is engaged in constructing an entirely new building, or in a case where the insured contractor is completely renovating a building, coverage for accidents resulting from some generally harmful condition would be illusory. There would be no portion of the project that, if damaged as a result of exposure to such a condition arising out of faulty workmanship of the insured, would be covered under the policy.” The court found coverage for the subsequent dominos. Perhaps our Supreme Court will do likewise.
The concept of termination of a contract for breach (usually referred to as “cause”) is as old as contract law. If one party materially breaches a contract, the other party is excused from further performance and can end the contract without liability. “Materiality” is the key here. “Only a breach that is sufficiently material and important to justify ending the whole transaction is a total breach that discharges the injured party's duties.” Fitz v. Coutinho, 136 N.H. 721, 725 (1993).
From the contractor’s perspective, a failure to get paid always feels like a “material” breach. But that is not necessarily the case. The Fitz case just mentioned held that “[w]hether a delay in payments is a material breach is a question for the trier of fact to determine from the facts and circumstances of the case,” and affirmed a trial court finding that a failure to make the weekly payments prescribed by the parties’ contract did not qualify as “material.” Conversely, from the owner’s perspective, a contractor’s poor workmanship feels like a “material” breach. But that is not necessarily the case either. McNeal v. Lebel, 157 N.H. 458, 465 (2008) (“so long as any flaws in Lebel's performance did not amount to a material breach . . . the plaintiffs were contractually obligated to allow him to finish the job.”).
Because the materiality of a breach is often debatable, contracting parties may prefer to specify in their written agreement the defaults that will justify termination. For example, the AIA form A201 (2007) General Conditions of the Contract for Construction allows a contractor to suspend work on 7 days notice if not paid within 7 days after payment falls due (§9.7), and terminate the contract if the work remains suspended for an additional 30 days on account of that nonpayment (§14.1.1). The Owner may terminate the contract if the contractor fails to supply enough workers or materials, fails to pay subs and suppliers, or repeatedly disregards applicable laws or regulations (§14.2.1).
A termination for convenience clause allows termination of a contract without cause, and specifies the compensation to which the contractor (or subcontractor) will then be entitled. For example, the AIA form A201 (2007) provides in §14.4.3 that upon termination for the owner’s convenience, “the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.” Some contracts have a less charitable measure of recovery for convenience terminations, limiting the terminated party to payment for work performed and denying any lost profits on work not performed. In such a case, automatic conversion of a botched termination for cause into a termination for convenience not only insulates the terminating party from breach, but is a real money saver.
When contractors agree with owners (or subcontractors agree with contractors) to such reduced compensation upon termination for convenience, a peculiar and perhaps unintended result is that the owner or contractor can continue to shop the contractor’s or subcontractor’s price throughout the project, and if it finds someone willing to complete the work for less money, it can simply terminate the higher-priced contract and make a change. Implied obligations of good faith and fair dealing are theoretical restraints against such a practice. So are transaction costs. But it can happen.

References: v. 
 v. 
 § 129
 v. 
 v. 
 v. 
 §14