Source: https://www.constructionrisk.com/2010/11/constructionrisk-com-report-november-2010/
Timestamp: 2019-04-19 12:33:11+00:00

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All articles in this issue of the ConstructionRisk.Com Report are written by J. Kent Holland, a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. These article is published in ConstructionRisk.com Report, Vol. 12 No. 7 (Nov 2010).
With the signing into law of California Senate Bill SB 972, California amended Section 2782.8 of its Civil Code, thereby limiting the enforcement of indemnification clauses upon design professionals working for public agencies. Much positive hype and commentary has been written by some firms and organizations stating: “This is a significant legislative victory for design professionals in California.” These commentators seem to suggest that they believe the new law prevents clients from demanding design professionals provide a defense as part of its indemnification obligations until a finding has been made that the design professional was negligent. That, of course, would be an absurd result and it is not what the legislation accomplishes. You can’t defend someone after the battle is over. To defend someone means you must get into the litigation and put up a fight to prove that someone was not damaged as a result of your negligence.
The two California court decisions that have caused so much angst among design professionals are Crawford v. Weathershield and UDC v. CH2M Hill. These decisions hold that when a party agrees by contract to indemnify another, the indemnity obligation automatically includes a duty to defend, even if the agreement does not specifically say so. The courts noted, however, that all the indemnitee must do to avoid this duty to defend is expressly state in the contract that it will not defend the indemnitee. The court will honor the contract language that is clear and unambiguous.
The two decisions also explain that the duty to defend (unless expressly excluded from the indemnity clause) is triggered as soon as a claim is made against the indemnitee, and that duty is owed even if the indemnitor is not ultimately found to be liable for the actual damages claimed by the third party claim that was made against the indemnitee. In the case of CH2M Hill, the court expressly concluded that despite the fact that a jury found the engineer was not negligent and was not otherwise liable for damages, the engineer nevertheless owed its client a duty to defend.
The courts explained that the defense duty aspect of an indemnification agreement is virtually the same as the duty that an insurance carrier owes to its insured to provide a defense in addition to whatever indemnity obligations it may have. They are two separate and distinct duties as explained by the courts in these cases, and as explained in scores of cases around the country that have addressed the duty as it applies to insurance policies. Nobody would seriously argue that their insurance carrier did not have to defend them when a claim is first made but could instead await a final verdict on liability before deciding whether to defend. Why then are otherwise reasonable people arguing that the courts were wrong to require the indemnitors to provide their clients with a defense before the indemnification obligation was proved? I submit that argument is fundamentally flawed.
“2782.8. (a) For all contracts, and amendments thereto, entered into on or after January 1, 2007, with a public agency for design professional services, all provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any such contract, and amendments thereto, that purport to indemnify, including the duty and the cost to defend, the public agency, are unenforceable, except for claims that arise out of, pertain to, or relate to the negligence, recklessness, or willful misconduct of the design professional….” (emphasis added).
1) It only applies to contracts with public agencies. For firms working for private clients this statute does nothing.
2) There is a critical exception to the prohibition on enforcing the duty to defend. So long as a claim has been made and it alleges that there was design professional negligence, the client can require a duty to defend as part of the indemnification contractually agreed to by the design professional. It sometimes happens that a claim is made that does not allege negligence along with the rest of the kitchen sink such as breach of contract, breach of warranty, fraud, misrepresentation, tortious interference with contract and on and on. But that is the exception not the rule. Consequently in the vast majority of cases, since there will be an allegation of negligence, the statute really offers no protection for the design professional.
3) The statute only applies to “design professionals” which are defined in the statute to include ONLY the following four classes of “individuals” and “entities” offering these services. These are (1)” architect,” (2) “landscape architect,” (3) “professional engineer,” and (4) “professional land surveyor.” Many services of a professional nature, such as property condition assessments (PCAs), environmental site assessments (ESAs), LEED services, and many other services do not fall within the four categories defined as “design professionals.” In addition, many engineers that have engineering degrees and perform engineering services are not licensed as P.E.s. Are they excluded from the protection (limited as it may be) found under this statute?
The legislative history addressing the intent of the drafters of the amendment to the statute makes it clear that the legislation is not intended to prohibit indemnitees from being indemnified by design professionals when there has been an allegation of negligence. They did not intend that proof and a final determination of negligence was reached before the duty to defend would be triggered.
What should have been done with the statute and what can be done now in contracts?
Answer Number 1: Insert language in the indemnity provision expressly stating that there is no duty to defend.
Again, this clause would be interpreted in most states to require only indemnification after the fact, and there would be no duty to defend since the clause does not expressly say there is a duty.
In California, however, the civil statute, as interpreted and applied by the courts, would find a duty to defend in both of the above quoted clauses because the clause does not expressly say that there will be no duty to defend. The answer to that problem seems pretty easy. Just add a sentence or even just a short phrase or parenthetical expressly stating that the design professional will not defend the indemnitee. Note that in the clause that follows, I take the original clause quoted above and add a short parenthetical that I hope will fix the problem.
“Indemnification. Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant’s only obligation with regard to indemnification shall be to indemnify and hold harmless (but not defend) the Client, its officer, directors, and employees from and against those damages and costs (including reasonable attorneys fees and cost of defense) that Client is legally obligated to pay as a result of a third party claim due to death or bodily injury to any person or the destruction or damage to any property, to the extent caused by the willful misconduct or negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement.” (emphasis added).
When I first read the proposed language for the statute I wondered why the proponents didn’t take this more straight forward, streamlined, and unambiguous approach. After all it gets to the point that we just want the contract to be interpreted as written and intended. If we don’t say we intend to defend the indemnitee, then a statute and a court should not create a duty where not intended by the contract.
The convoluted, and preposterous interpretation given to the SB972 amendment to the California statute by those who assert that it means a design professional is not required to defend its client unless and until found negligent is contrary to our more typical and respected argument that courts should enforce the clear meaning of contracts without playing games with the words or the policies to try to revise the outcome of the contract to fit the courts notion of fairness. If you want a fair and reasonable contract then negotiate one with clear and ambiguous terms that does not require a duty to defend. The court in Crawford v. Weathershield stated it would honor that contractual intent so long as it is expressly stated.
A question that is asked with increasing frequency is whether attorneys fees incurred pursuant to an indemnity clause are insurable where they are not incurred due to a duty to defend (i.e., paid on behalf of the indemnitee) but are instead paid after the litigation is complete and the indemnitor (e.g., engineer) is found liable for damages due to its negligence. The short answer is that unless the court would have awarded the attorneys fees against the engineer in the absence of the contractual obligation to pay attorneys that was created by the indemnification provision, the attorneys fees will not be covered by the professional liability policy. The contractual liability exclusion of the policy applies to such contractually created attorneys fees obligation.
Although this clause may look innocuous in that the indemnification is limited to negligence, it may nevertheless create uninsurable loss by virtue of the attorneys fees that are included in the indemnification. Under American Jurisprudence, the courts do not award attorneys fees to the prevailing party unless the contract creates such a duty or unless there is some legal basis such as a civil statute that would establish the basis for the award of attorneys fees.
If this contract was for a project subject to the California statute discussed in the first article of this ConstructionRisk.com Report, perhaps the intent was to meet the admonition of the Crawford v. Weathershield decision to expressly disavow a duty to defend since the parties did not intend such a duty to be automatically created. The clause would effectively accomplish that goal but it would still potentially create uninsurable attorneys fees.
I agree with the broker that, unless the award is limited to the sum “recoverable under applicable law on account of negligence,” the indemnity of legal costs is not fully insured. Specifically, an award of legal costs in favor of the indemnitee against the engineer that is based on the contractual indemnity alone is excluded from coverage by the contractual liability exclusion of the policy. The amount of the award that is made under applicable law respecting recovery of plaintiff’s legal costs, apart from the contractual indemnity, could be covered under the policy depending upon terms and conditions of the policy.
In other words, if a state has a law for recovery of plaintiff’s legal costs against the engineer, an award under that law based upon negligence might be covered under the professional liability policy, but any part of an award of attorneys fees that results only from a contractual indemnity obligation to indemnify a plaintiff’s legal fees will run afoul of the contractual liability exclusion of the policy and, therefore, be excluded from coverage.
As previously stated, in the United States, the laws of the individual states do not provide, routinely, for an award of plaintiff’s legal costs. That is the genesis of contractual indemnity of legal costs. Contractual indemnity “fills in” what the law does not otherwise order. Likewise, that is the reason the engineer would limit the contractual indemnity to the sum that state law would award. The “fill in” to enforce the contractual indemnity is not a liability that would have attached to the “insured” in the absence of such contract, warranty, guaranty or promise, to quote from the contractual liability exclusion contained in one insurance carrier’s policy. For the reasons explained in this article, a party that agrees to indemnify another should beware that agreeing to reimburse the indemnitee for attorneys fees will likely create an uninsurable risk where those fees would not have been awarded by a court in the absence of the contractual obligation.
About the author and the opinions expressed herein: The views expressed in this article are those of Kent Holland and are not stated on behalf of, nor are they to be attributed to, any law firm, consulting firm or insurance carrier with whom Mr. Holland may serve or be affiliated in any capacity.
In this case, the court considered the scope of an assignee’s right to recover damages from an engineer that breached a contract made with the assignor. The engineer argued that while it may have breached a contract or duty before the assignment occurred, the assignee could not recover damages sustained after the date of the assignment. The court held that an assignee may recover damages that flow from a breach of an assigned contract regardless of when the actual damages occur. What led to this dispute was a faulty geological survey by the engineering firm that failed to adequately address the seriousness of geologic faults on the property. After much of the development had been designed, a problem with the geologic faults was determined by the State Geological Survey department. Due to those conditions, the City government required changes in the development design that resulted in the loss of the ability to build fourteen of the planned units. The question for the court was (1) whether the Developer who was assigned the property could recover damages for the loss of the 14 units due to the required redesign of the development and (2) whether the Developer who assigned the development was precluded from recovery against the engineer due to the economic loss rule. The Court ruled that the Developer who was assigned the development was not precluded from recovery, but that the economic loss doctrine prevented the Developer who assigned the development from recovering.
After receiving the engineering reports the individual developer, Mr. Stewart, formed a new development company to develop the land and he testified that his original development company transferred the property to the new company and assigned all rights and claims under the engineering contracts. Sometime after design of the development commenced, the Utah Geologic Survey sent the City of Provo, Utah a letter expressing concern over some geologic faults not addressed in the surveys conducted by the engineer.
In response to the findings, the City mandated that the development be scaled back. The site revisions required by the city resulted in a loss of fourteen units, amounting to a claimed loss of over one million dollars. The original developer (assignor) and the second developer (assignee) filed suit against the engineer to recover their alleged loss. The trial court granted summary judgment for the engineer on the negligence claims, concluding that the economic loss doctrine barred any recovery in negligence.
The court also granted summary judgment against the Assignee, developer, on a breach of contract claim because the way it understood the law was that, since the engineer had fully performed its contracts with the original developer, the assignment from that developer to the new developer only transferred the assignor’s rights to pursue remedies for existing, not future, breaches of those contracts. Since the loss of the fourteen units occurred after the assignment, the court reasoned that the assignee developer could not recover those damages from the engineer because the assignor didn’t have the right to recover such damages. The court further concluded that the assignment did not establish privity between the assignee and the engineer or otherwise entitle the assignee to pursue its alleged damages.
An assignee, such as Enterprises, is somewhat restricted in the scope of the claims it seeks to bring that arise after the assignment. As a general rule “an assignee cannot stand in a better position than its assignor.” However, an assignee can nevertheless litigate claims that arise after the assignment. Such rights to litigate need to be transferred down from the assignor (SDC in this case).
It is well recognized that the assignee stands in the shoes of the assignor. Therefore, the assignee is subject to any defenses that would have been good against the assignor; the assignee cannot recover more than the assignor could recover; and the assignee never stands in a better position than the assignor. An assignee gains nothing more, and acquires no greater interest than his assignor. In other words, the common law puts the assignee in the assignor’s shoes, whatever the shoe size.
The essential purpose of the [rule] is to protect the obligor, the party who must perform the correlative duty of the assigned right (RB & G in this case), so that the risk to the obligor is not materially enlarged over the risk created by its agreement with the assignor. In other words, the purpose behind the rule is that an assignee has rights and liabilities identical to those of its assignor.
In reversing an appellate court decision that had affirmed the trial court summary judgment, the state supreme court held that although an assignee cannot stand in a better position than the assignor, that fact does not prevent the assignee from bringing a suit to recover damages stemming from the alleged breach of the contract that occurred after the assignment of the contract. The court found that it doesn’t matter when the claim arose, but rather whether the assignee has a right to bring suit under the rights conveyed to it in the contract. Therefore, the Court determined that the second developer, as an assignee, had a right to bring suit for the loss of the fourteen units. The correct inquiry, says the court, must look at the assignor’s rights and liabilities under the contract rather than solely whether a claim for damages arose before or after the date of the assignment.
The developers argued that if the assignment did not enable breach of contract claim to be filed against the engineer, as had been concluded by the trial judge, then the original developer (assignor) should be able to sue the engineer for negligence since the assignor had lost its privity of contract with the engineer pursuant to the assignment to the second developer. It is important to note here that the assignee did not appeal the dismissal of its negligence claim. Only the original developer (assignor) appealed that issue, arguing that its own action against the engineer for negligence should be permitted to go forward. Its theory was that since it had assigned its contract rights to the assignee, it no longer itself had privity of contract with the engineer and could therefore sue the engineer in a tort action for a breach of an independent duty. It argued “that an engineer who issues a faulty geological report may be liable in negligence despite an absence of damage to other property.” The state supreme court disagreed.
The state supreme court concluded that when the assignor originally negotiated its contract with the engineer it had an opportunity to bargain for the allocation of risk and benefits with the engineer and should not now be able to circumvent its bargain by claiming that it had assigned the contract to someone else and could sue for negligence as if it had no contract. The court reasoned that “an assignor who contracts with an obligor cannot subsequently invoke an assignment of the contract to escape the implications of the economic loss rule. Petitioners are incorrect in their argument that when [assignor] assigned the contracts to [assignees], all prior history between [assignor] and [engineer] vanished.” The court held that “ a party cannot simply avoid the implications of the economic loss rule by claiming that it assigned the underlying contract.” Sunridge Development Corp. v. RB & G Engineering, Inc., 230 P.3d 1000, (Utah, 2010).
Where a contractor filed suit alleging that an engineering firm was negligent in designing, engineering and surveying land where a group of homes were planned to be built, the trial court granted summary judgment for the engineer because expert testimony offered by the contractor was insufficient to establish a standard of care that the engineering firm could be judged by to determine negligence. The dismissal was granted without prejudice, however, and the engineer filed an appeal to require the dismissal be granted with prejudice to assure finality of the decision.
This case involves construction design defects relating to water-table or drainage. Pond Hollow Homeowner’s Association, which owned a group of homes plagued by such defects, sued Ryland, the general contractor on the project. In an attempt to indemnify itself against suit by the association, the contractor then filed suit for negligence against Pioneer Engineering, which was responsible for designing, engineering and surveying the site.
The trial court ruled that this testimony was inadequate in establishing the standard of care and granted summary judgment for the engineering firm. However, the court’s decision was granted without prejudice; therefore, the contractor could bring another suit putting forth the same claims. Both rulings of the trial court were appealed to the Minnesota appellate court.
Because the requisite standard was not put forth through adequate expert testimony, the appellate court agreed that the trial court should have granted summary judgment but held that the summary judgment should have constituted a final judgment in favor of the engineer.
The Trial Court’s Error in failing to dismiss the case with Prejudice.
The engineering firm argued the trial court should have dismissed the contractor’s claims with prejudice. In rendering its decision, the trial court concluded that while it granted summary judgment for the engineering firm, the judgment was without prejudice since separate litigation existed with another entity that originally owned the property.
The appellate court found the trial court erred in dismissing the case without prejudice. The court reasoned that since the testimony attempting to establish negligence was inadequate, there was no legal basis for the contractor’s claims. Therefore, the dismissal constituted a determination on the merits and the case should have been dismissed with prejudice. Such a dismissal prevents the same claims against the engineering firm from being relitigated. Thus, the trial court’s ruling on this issue was overturned and judgment was entered in favor of the engineering firm. Pond Hollow Homeowners Association v. The Ryland Group, Inc., 779 N.W.2d 920 (Minn. App. 2010).
The mold exclusion in a builder’s risk insurance policy was held to be applicable to mold damage that resulted from covered watered damages that resulted when vandals turned on water taps of a new house just after substantial construction had been completed. Although the water damage was a covered loss and was the concurrent cause of the mold damage, the mold was nevertheless barred from coverage due to a clearly stated anti-concurrent causation clause of the policy. The anti-concurrent causation clause excluded coverage for mold even where the mold resulted from an otherwise covered loss such as water damage from vandalism.
Builders Mutual Insurance Company (“Carrier”) brought a declaratory judgment action to declare that mold damage was not covered under a builder’s risk policy. The insured was a property development company that completed construction of a house and later discovered that following the construction, vandals had broken in and left water taps running. This caused extensive damage to the house. The carrier paid approximately $102,000 for the property damage claim for water damage.
Subsequently, the developer discovered that mold had developed as a result of the water damage, and it incurred an $39,000 to remediate the mold damage. When it submitted its claim for indemnity under the policy for the mold damage, the carrier denied the claim on the basis that a specific mold exclusion in the policy applied regardless of whether the underlying cause of the damage (water tap vandalism) was itself covered.
A. Coverage. We will pay for direct physical “loss” . . . from any Covered Cause of Loss[.]. . .
3. Covered Cause of Loss means risks of direct physical loss . . . except those causes of loss listed in the Exclusions.
This type of exclusionary language is referred to as an “anti-concurrent causation” clause because it excludes coverage for certain losses, regardless of whether the loss arises from more than one cause of sequence of events that might otherwise be themselves a covered loss. The carrier argued that this clause excludes coverage for the mold remediation costs. The trial court agreed and found that the policy did not cover mold and that the above anti-concurrent causation clause entitled the carrier to summary judgment. The appellate court agreed and affirmed the decision accordingly.
An anti-concurrent causation clause “excludes coverage for certain losses, regardless of whether the loss arises from more than one cause or sequence of events.” The insurance company argued that because mold remediation was specifically excluded from coverage under the policy, every occurrence of mold damage was excluded from coverage regardless of whether it flowed from other causes, such as the water damage, that were covered under the policy.
Even though the non-covered mold damage was caused by the covered vandalism claim, a strict interpretation of the Clause in the Defendant’s Policy prevented the Defendant’s mold claim from being covered. Although as a general rule under North Carolina law, coverage will extend to other areas of damage when such damage results from a cause that is covered, the court’s honor an anti-concurrent clause specifically excluding coverage. Where there is an anti-concurrent clause such as the one here, coverage will be excluded regardless of the cause of the uncovered loss. Builders Mutual Ins. Co v. Glasscarr Properties, Inc., 688 S.E.2d 508 (N.C. 2010).

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