Source: https://www.constructionrisk.com/2010/01/january-2010-vol-12-no-1/
Timestamp: 2019-04-19 13:15:41+00:00

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Where an insurance carrier brought a subrogation claim against a engineering firm and its subconsultants to recover insurance monies it had paid under its property policy to its insured townhouse owner as a result of damages to a party wall that occurred during remodeling, summary judgment was properly granted to the engineer due to failure of the property carrier to file an expert affidavit with its complaint, and also due to lack of any evidence of malpractice.
About the author: 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. This article is published in ConstructionRisk.com Report, Vol. 12 No. 1 (January 2010).
In O’Brien v. Miller, 876 N.Y.S. 2d 23 (2009), it was held that the state’s long arm statute does not support the exercise of personal jurisdiction over an architect that performed services in New Jersey pursuant to a contract he personally entered into in New Jersey – apparently moonlighting. The individual’s regular employer, a New York architectural firm, was not involved in the services, and was unrelated to the contract between the individual which had “he had entered into personally in New Jersey , and not on behalf of his employer.” In dismissing the case, the court quoted previous case law for the proposition that “Essential to the maintenance of this action against [the individual architect] are some purposeful activities with the State and a substantial relationship between those activities and the transaction out of which the cause of action arose.” And because there was no evidence that the individual architect was acting as the architectural firm’s agent when he entered into the agreement with plaintiffs, the claims against the firm must also fail.
Comment: This case demonstrates that firms should have moonlighting prohibitions or guidance in place. A firm’s professional liability insurance only covers the firm for liability arising out of individuals working on behalf of the firm. The firm’s policy would generally also cover claims against individual employees –provided they are being sued for services they provided on behalf of their insured employer. In this case, since the architect was working under an individual contract in his individual capacity and not on behalf of this regular employer, neither the employer nor he would have coverage for his actions under the firm’s professional liability policy.
The prime contract between the project owner and general contractor included a provision stating that the statute of limitations for filing all claims would accrue on the date of substantial completion. Since the contract between the prime and its subcontractors included a flow down provision incorporating the terms of the owner’s prime contract, the statute of limitations for any suit by the prime contractor against its subcontractor also accrued as of the date of substantial completion. The fact that the project owner did not formally reject the subcontractor’s masonry work until eight months after substantial completion of the project did not delay the accrual date of the statute of limitations.
In Steadfast Insurance Company a/s/o Skanska USA Building, Inc. v. Brodie Contractors, Inc. (U.S. D.C. W.D. VA, (Case No. 4:07CV00058, October 2008)(memorandum opinion), the plaintiff filed suit against a masonry subcontractor for breach of contract and breach of warranty. The defendant moved for summary judgment, arguing that the flow down provision in the subcontract required the suit to have been filed within five years of the date of substantial completion – based on the Virginia five year statute of limitations period applicable to breach of contract.
This flow-down provision effectively incorporated the following language from the prime contractor pertaining to when suits must be filed: “As to acts or failures to act occurring prior to the relevant date of substantial completion, any applicable statute of limitations shall commence to run [and] any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of substantial completion.” Since the subcontract did not contain a statute of limitations period, the prime contract provision was held by the court to govern.
The court then considered whether the fact that the project owner sent a formal rejection letter concerning the subcontractor’s masonry work 8 months after the date of substantial completion delayed the accrual of the statute of limitations. [The prime contractor and owner had both expressed objections to the work prior to this as well]. The court found that “Under Virginia contract law and section 13.7.1 of the Prime Contract, a rejection letter does not establish when the statute of limitations accrues.” Since the only relevant accrual date, according to the contract, was the date of substantial completion, this is the date the court concluded must be applied. The complaint by the prime contractor against its subcontractor was therefore found to have been filed four months past the five year statute of limitations. For this reason, summary judgment was granted – dismissing the complaint.
Comment: Specifying an easy to determine date, such as the date of substantial completion, for the accrual of the statute of limitations is sound contract drafting. It eliminates uncertainty and ambiguity over when a cause of action accrues. It avoids having parties bringing law suits years after a project is completed based upon their allegations that they only belatedly discovered their damages.
Where a homeowner sought to recover under his homeowners insurance policy for mold damage that occurred from water from a burst pipe, the insurer denied the claim on the basis of a mold exclusion in the policy. The homeowner filed suit against the insurer seeking a declaratory judgment that the policy covered mold. The trial court found that the mold damage was subject to a clearly worded, and broad exclusion that specifically addressed mold. Mold was excluded from coverage even if it resulted from an otherwise covered event such as a water line break.
In DeVore v. American Family Mut. Ins., 891 N.E.2d 505 (Ill. App. 2008), the homeowner appealed from the trial court’s judgment. The appellate court affirmed that there was no coverage based on a careful review and analysis of the policy exclusion that included a discussion of decisions by other state jurisdictions that have found coverage for homeowners under similar language.
We do not understand how much clearer American Family could have been in excluding coverage relating to an event such as this one, wherein water caused damage to a home and created mold in the home.
The homeowner argued that the trial court should have recognized a distinction between mold that results from an otherwise covered event and mold that results from some other source or event. Courts in some jurisdictions have recognized such a distinction. According to the homeowner, the mold damage was not a loss excluded under the policy since it was damage caused by a covered loss. A case cited by the homeowner in support of that proposition was an Arizona case of Liristis v. American Family Mut. Ins. Co., No. 1 CA-CV 00-0539 (Ariz. App. 2002), a case which interestingly enough addressed the exact same exclusionary language from the same insurance company’s policy.
[D]oes not exclude all mold. Rather, it excludes loss “resulting directly or indirectly from or caused by” mold. If American Family had intended to exclude not only losses caused by mold but also mold itself, it could have easily expressed that intention. * * * If American Family had added the words “either consisting of, or …” to its exclusionary language, then loss “consisting of” mold as well as loss caused by mold would be subject to this restrictive language.
The Illinois appellate court in the DeVore case stated: “We respectfully reject this reasoning.” The court went on to explain that it found the language of the exclusion is “clear and unambiguously indicates that a loss from mold from any cause at any time is excluded.” “The losses in this case were twofold: (1) water damage; and (2) mold damage. Under the plain terms of the policy, the former was covered and the latter expressly was not.” For these reasons, the court held in favor of the insurance company to exclude coverage for mold.
The Arizona court did linguistic gymnastics to create a convoluted interpretation of the policy to hold that “only losses caused by mold” are excluded, but that the actual “mold” in and of itself is not excluded. To reach that conclusion, the court must have affirmatively chosen to ignore what the Illinois court calls the “plain, ordinary, popular meaning” of the policy language, in perhaps a subconscious effort to rewrite the contract to make it read the way it would prefer to have it applied to help out the homeowner. The Illinois court, in contrast, chose to honor the obvious intent of a contract (insurance policy).
This article was originally written by Kent Holland for the International Risk Management Institute (IRMI) and published in the IRMI expert commentary as an article dated May 2009. See http://www.irmi.com/expert/topics/insurancelaw/environmental.aspx for additional environmental insurance law articles by Mr. Holland.
A tornado tore the roof of Haney’s house. Haney hired a contractor to repair the damage and filed a claim for damages with his homeowner’s insurer. Before the repairs were completed, rains further damaged the house.
FIE did not warn the contractors working for homeowner about the mold that had been discovered in the house or about the risks the mold could pose. Several employees of the contractor subsequently filed suit against FIE, the claims adjuster, and the environmental consulting firm, alleging that they had sustained personal injuries due to mold exposure. The trial court dismissed all the claims. That decision was affirmed on appeal.
The court concluded that although the complaint described a dangerous mold condition, it was not a condition that was caused by the insurer or adjuster. Neither the insurer nor the adjuster owned or controlled the property. They “had no relationship with Plaintiffs that would impose any duty to warn of or rectify the condition….” The court found that the plaintiffs’ claims were based on “premises liability” rather than general negligence. “Premises liability,” says the court, is triggered by assertions that “the cause of the injury or damage was an unsafe or defective condition of the property itself.” Such liability is limited to those who own or control the property.
A defendant who contracts with another generally owes no duty to a plaintiff who is not a party to that agreement, nor can a non-party sue for negligent performance of the contract.
According to the court, the “factual allegations warrant no finding that [Consultant] undertook to provide services for anyone except FIE.” For these reasons, the court affirmed the trial court’s dismissal of the action against the insurer.
This general rule of privity is designed to protect contractual parties from exposure to unlimited liability and to prevent burdening the parties with obligations they have not voluntarily assumed.
For these reasons, the court held there was no basis for a claim to be filed by the contractors against the insurance company, its adjuster, or its environmental consultant. Haney v. Fire Ins. Exch., 277 S.W.3d 789 ( Mo. 2009).
This article was originally written by Kent Holland for the International Risk Management Institute (IRMI) and published in the IRMI expert commentary as an article dated July 2009. See http://www.irmi.com/expert/topics/insurancelaw/environmental.aspx for additional environmental insurance law articles by Mr. Holland.
The engineer filed motions for summary judgment, asserting that the economic loss doctrine barred the builder’s claims. This doctrine precludes a party from recovering in tort (for a negligence claim) if the party has suffered only an economic loss and, therefore, should pursue its remedy in contract instead of tort. (Note that the decision does not explain what contractual relationship existed between the builder and the engineer such that the economic loss doctrine would apply under any circumstances). The trial court granted summary judgment—concluding that the economic loss doctrine precluded the claims because they did not allege any personal injury or secondary property loss resulting from the engineer’s alleged negligence or breach of implied warranty.
On appeal, in the case of Hughes Custom Building v. Davey, 221 Ariz. 527, 212 P.3d 865 (2009),the builder argued that the economic loss doctrine does not apply to its negligence claim because there is an exception to the doctrine under Arizona case law for negligence by design professionals. The court distinguished the facts of this case from those involved in the decision earlier in the year in the case of Flagstaff Affordable Housing, Ltd v. Design Alliance, Inc, 212 P.3d 125 (2009). That decision held the economic loss doctrine did not bar recovery in a negligence action against an architect for defects in design, as opposed to defects in construction.
The court stated that to the extent the claims are based on negligent design, “the economic loss doctrine arguably does not apply” to bar the builder’s claim. The builder’s claims here, however, were not limited to negligent design, but rather also asserted that the engineer had a duty to determine whether the lots were suitable for their intended use-construction of single family residences-and also had a duty to advise the public of any conditions that would prevent that use.
The court stated that it did not need to determine whether the builder’s claim should be characterized as one for negligent design, construction, inspection, or some combination of these. In addition, the court stated that it did not need to decide whether those distinctions would be meaningful in determining whether the economic loss doctrine applies, because it found that even if the doctrine applies to design services, it does not apply the particular claim in this case. Determination of whether the economic loss doctrine applies does not rest solely on whether there was a personal injury or damage secondary property, says the court, but instead should be made on a case-by-case basis to evaluate whether a claim sounds in tort or in contract.
Having decided to conduct a case-specific analysis in this case, the court found the economic loss was accompanied by physical damage to secondary property. It stated that in such a case the parties’ interests generally will be realized best by the imposition of tort liability. Key to deciding that the economic loss doctrine would not apply here was the court’s determination that the houses that were constructed by the builder constitute “secondary property” separate from the lots upon which they were built.
The builder had purchased only empty lots. The houses were subsequently built on the lots and suffered damage because of the condition of the lots. The key to the claim was that the engineer’s negligence in planning and inspecting the fill dirt used in the lots resulted in building sites unsuitable for construction. Thus, the defect alleged against the engineer concerns the soil of the lots – not the construction of the houses. Houses and lots remained separate types of property and the houses did not become integrated with the lots such that they would be considered a single item of property for application of the economic loss doctrine.
Defects in the lots caused subsidence resulting in damage to the other property—the houses. Providing subdivision lots that are unsuitable for construction, concludes the court, “plainly creates an unreasonable danger to property.” For these reasons, the court held that a claim for damage to the houses was property brought in tort.
Comment: It is not clear from the text of the decision what contractual relationship the builder had with the engineer. From the factual description it seems that the engineer was under contract to a subdivision developer that bore no relationship to the home builder who purchased two individual building lots from the developer. There must have been a contractual relationship between the builder and the engineer, however, in order for the court to address the applicability of the economic loss doctrine to the facts of the case.

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