Source: https://www.nailingdownthelaw.com/
Timestamp: 2019-04-23 05:57:22+00:00

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Engineering, procurement, and construction agreements, commonly known as “EPC agreements,” are used for the construction of facilities intended to carry out a process, with the potential process being anything from manufacturing a product to generating electricity to treating wastewater. An EPC agreement is similar to a design-build contract where the owner engages one entity to design and construct the desired facility, except an EPC agreement goes one step further in that the contractor must not only design and build the desired facility but also must design and build the facility so that it produces some guaranteed level of output.
A trend, and now common practice, in the construction industry is for an owner or contractor to require contractors and subcontractors to name it as an additional insured (“AI”) on their commercial general liability (“CGL”) insurance policies. The goal is to shift risk to those performing the work by having a subcontractor’s insurance policy, rather than a contractor’s own policy, pay for defense costs and satisfy a claim in the event of a loss. The process typically occurs through a contractual requirement that a subcontractor name a contractor as an AI and produce a certificate of insurance showing it was named as an AI on the policy before permitting the subcontractor to begin work.
Contractors all too often assume that because they have a certificate of insurance listing them as an AI, some of the project risk shifted to subcontractors, but the devil is in the details. Construction lawyers defending claims through the use of AI status regularly see carriers use technicalities to deny coverage to contractors who thought they were additional insureds. The denial of AI coverage harms a contractor in relation to a particular claim, but it also means the contractor paid the subcontractor for the cost of AI status and does not get the benefit of what it paid for. Based on experience wrangling with insurers over AI coverage, the following tips are designed to help contractors ensure the effort and money expended to have subcontractors name them as an AI actually results in AI coverage when claims arise.
Construction projects often result in damages claims for construction defects. Securing insurance coverage for those claims will depend on many factors, including the specific facts and damages at issue, and which state’s law governs. The standard commercial general liability policy (“CGL”) provides coverage for “property damage” that is caused by an “occurrence.” Courts across the nation disagree on whether property damage caused by defective construction work is an “occurrence” as that term is defined in standard CGL policies.
Over recent years and after a push from construction trade groups, states across the county adopted notice and opportunity to repair (“NOR”) statutes. The statutes generally provide that before a property owner initiates an action in court against a builder, the owner should give the builder notice of the alleged defect, permit the builder to inspect the property, and allow the builder to either reject the claim or offer to settle the claim through repairs or a payment. The purpose of the statutes is to allow builders and owners to quickly and cheaply resolve construction defect claims without getting bogged down in litigation.
The effectiveness of these statutes has been hampered by their interplay, or lack thereof, with builders’ commercial general liability (“CGL”) insurance policies. Builders typically rely on CGL policies and the defense and indemnity they provide, to respond to, assess, defend against, and resolve construction defect claims. Responding to and assessing an owner’s notice under a NOR statute requires personnel and legal and technical expertise that builders often do not have on staff and do not wish to pay for when a CGL carrier will cover those expenses should litigation ensure. Also, a builder may be reluctant to offer to repair or settle a claim in response to a NOR notice without the builder’s CGL carrier covering the loss. In addition to those issues, builders may need the assistance of legal counsel in responding to a NOR notice because in many states the builder’s response to the notice has important effects in any future litigation.
For these reasons, builders and their CGL insurers have been litigating whether a builder’s receipt of notice under a NOR statute triggers its CGL insurer’s duty to defend it. A CGL policy typically provides that the insurer must defend the insured whenever there is a “suit,” and to date four courts—California, Colorado, the United States Court of Appeals for the Tenth Circuit applying Utah law, and the United States District Court for the Southern District of Florida applying Florida law—have addressed whether a NOR notice constitutes a suit triggering the insurer’s duty to defend.
In the Florida case, the district court found a NOR notice was not a suit and the insurer had no duty to defend the insured contractor. The contractor appealed to the United States Court of Appeals for the Eleventh Circuit, and in August, the Eleventh Circuit issued a decision certifying the question to the Florida Supreme Court. The certified question means that the Florida Supreme Court will ultimately decide whether a NOR notice triggers the duty to defend under Florida law, but in certifying the question, the Eleventh Circuit gave a strong indication of its opinion that a NOR notice constitutes a suit triggering the duty to defend, and the Eleventh Circuit’s indication of its opinion will likely influence the Florida Supreme Court and other courts addressing this issue.
Reviewing the district court’s conclusion that the term “suit” in the CGL policy was not ambiguous, the Eleventh Circuit expressed its opinion that “we are not as sure.” The Eleventh Circuit went on to note that “there are reasonable arguments presented by both sides” as to whether a NOR notice constitutes a suit, the existence of different reasonable interpretations of a term often indicates ambiguity, and ambiguity in an insurance policy is to be construed in favor of the insured. Resolution of this issue in Florida awaits a decision from the Florida Supreme Court and even then, this issue will continue to play out on a state-by-state basis across the country, but the Eleventh Circuit’s recent statements place one more weight on the scale on the side of requiring CGL carriers to defend their insureds upon receipt on a NOR notice.
 Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 13-80831, 2015 WL 3539755 (S.D. Fl., June 4, 2015).
 Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 15-12816 (11th Cir., Aug. 2, 2016).
As noted previously on this blog, South Carolina courts are routinely hostile to arbitration agreements. However, in a decision issued in August, Parsons v. John Wieland Homes & Neighborhoods of the Carolinas, Inc., the South Carolina Supreme Court found a residential builder’s arbitration agreement enforceable and potentially did away with and certainly narrowed the Court’s “outrageous torts” exception to enforcing arbitration agreements. The decision also rejected an unconscionability challenge to the arbitration agreement, and in doing so raised questions as to the scope of recent decisions refusing to enforce arbitration, particularly Smith v. D.R. Horton, Inc. which found an arbitration provision unenforceable because unconscionable.
In Parsons, the builder constructed a residential development on a brownfield site on which it thought it had removed all contamination. The plaintiffs found a box filled with hazardous sludge on the property they purchased from the builder and filed suit against the builder. The builder moved to compel arbitration based on an arbitration provision in the purchase agreement and warranty, and the circuit court denied the motion.
On appeal, in a plurality opinion, the Supreme Court held the outrageous torts exception, under which a party can avoid arbitration where the party’s claims arise out of outrageous tortious conduct unforeseeable at the time the parties entered into an arbitration agreement, did not bar arbitration. Two of the Court’s five justices expressed their opinions that the outrageous torts exception was created solely for avoiding arbitration agreements and that it accordingly violates federal law on the enforceability of arbitration agreements, and therefore, they would abolish the exception.
Two other justices expressed their opinion that the outrageous torts exception remains a valid basis for refusing to enforce an arbitration agreement but concluded the exception did not apply to the plaintiffs’ claims. In doing so, the justices set out a narrow conception of the outrageous torts exception and thereby effectively narrowed the exception to the point that it will no longer serve as a serious obstacle to enforcing arbitration agreements. These two justices’ conception of the exception is that it bars arbitration of “a claim that does not fall within the scope of the arbitration agreement” and bars arbitration when there is no “significant relationship between the claims and the contract in which the arbitration agreement is contained.” However, this view of the outrageous torts exception essentially gives it the same parameters of and collapses it into the existing determination of whether a claim falls within the scope of an arbitration provision. Therefore, while a majority of the justices were not willing to outright abolish the outrageous torts exception, the constrained construction given to the exception likely renders it a nullity moving forward.
 Parsons v. John Wieland Homes & Neighborhoods of the Carolinas, Inc., Op. No. 27655 (S.C. Sup. Ct. filed Aug. 17, 2016) (Shearouse Adv. Sh. No. 33 at 28).
The Dodge Momentum Index increased by 1.3% in August, marking the fifth consecutive month in which the index grew. The Index measures non-residential construction projects entering the planning stages and generally serves as an indicator of construction spending one year in the future. At the end of August, the Index was 16% above where it was one year ago.
Dodge Data & Analytics also reported that total construction starts experienced a strong 21% increase in August. Dodge’s chief economist concludes “the construction industry still has room for further expansion despite some recent deceleration.” The rise in construction starts was lead by non-residential building construction with a 42% increase, followed by non-building construction with a 25% increase. Residential construction starts registered a smaller 5% increase.
In South Carolina, construction contributes 4.5% of the State’s GDP which is higher than construction’s 4% share of the national GDP.
South Carolina’s construction employment increased by 6.3% from July 2015 to July 2016 which exceeds the national average of 3.2%.
From July 2015 to July 2016, the metropolitan areas experiencing the greatest increase in construction employment were Charleston (5%), followed by Columbia (4%), Greenville (4%), and Myrtle Beach (4%).
In North Carolina, construction contributes 3.5% of the State’s GDP which is less than construction’s 4% share of the national GDP.
North Carolina’s construction employment increased by 4.4% from July 2015 to July 2016 which exceeds the national average of 3.2%.
From July 2015 to July 2016, the metropolitan areas experiencing the greatest increase in construction employment were Charlotte (7%), Durham-Chapel Hill (5%), and Greensboro (4%), while Raleigh experienced a decrease in construction employment (-2%).
In Georgia, construction contributes 3.7% of the State’s GDP, less than construction’s 4% share of the national GDP.
Construction employment in Georgia increased by 7.5% from July 2015 to July 2016, far exceeding the national average of 3.2%.
The metropolitan area most responsible for the increased construction employment and experiencing the greatest increase was, not surprisingly, the Atlanta metro area (7%). The Augusta and Savannah metro areas each experienced only a 2% employment growth and Columbus experienced a 2% decrease in construction employment.
The AGC also released a report at the end of September showing construction employment continues to grow across the United States but the rate of growth slowed.  The report attributes the slowed growth to the skilled labor shortage, not to any decline in the volume of work available. The report states “the new construction employment figures, combined with recent data on job openings in the sector, make it clear that firms in many parts of the country are having a hard time finding enough workers to hire” and finds that job openings have hit a ten year high.
 Dodge Data & Analytics, Dodge Momentum Index Continues Ascent in August, available at: http://construction.com/about-us/press/Dodge-Momentum-Index-Continues-Ascent-in-August.asp.
 Dodge Data & Analytics, August Construction Starts Jump 21 Percent, available at: http://construction.com/about-us/press/August-Construction-Starts-Jump-21-Percent.asp.
 The Associated General Contractors of America, The Economic Impact of Construction in the United States and South Carolina, available at: http://files.agc.org/files/economic_state_facts/SCstim.pdf.
 The Associated General Contractors of America, The Economic Impact of Construction in the United States and North Carolina, available at: http://files.agc.org/files/economic_state_facts/NCstim.pdf.
 The Associated General Contractors of America, The Economic Impact of Construction in the United States and Georgia, available at: http://files.agc.org/files/economic_state_facts/GAstim.pdf.
 The Associated General Contractors of America, Construction Employment Increases in Three-Fifths of Nation’s Metro Areas Between August 2015 and August 2016 As Industry Job Openings Hit 10-Year High, available at: https://www.agc.org/news/2016/09/28/construction-employment-increases-three-fifths-nation%E2%80%99s-metro-areas-between-august.
Smith v. D.R. Horton, Inc.: The End of Arbitration for Residential Developers and Builders in South Carolina?
Mark Twain famously wrote that the reports of his death were exaggerated. Following the South Carolina Supreme Court’s decision in Smith v. D.R. Horton, Inc. last month, you may have heard arbitration is dead for South Carolina residential builders. In that decision, the Court found an arbitration agreement unconscionable and therefore unenforceable. While the decision makes clear that South Carolina courts remain hostile to arbitration, reports of arbitration’s death are greatly exaggerated. Despite the D.R. Horton decision, we believe residential builders can still use arbitration provisions so long as builders carefully draft the provisions to avoid the problems with the arbitration provision at issue in the D.R. Horton case.
When moving to enforce arbitration agreements, the most common challenge we see is an argument that an arbitration agreement is unconscionable. For an agreement to be unconscionable, it must lack a meaningful choice by the party entering into it and contain oppressive, one-sided terms. The D.R. Horton decision appears to make it easier for parties opposing arbitration agreements in contracts for the construction and sale of residences to establish both requirements. First, the decision seems to create a presumption that such contracts do not provide a meaningful choice. Second, the decision purports to expand courts’ consideration of whether oppressive, one-sided terms exist from just the arbitration terms to any related terms and to provide that disclaimers and limitation of liability provisions can be oppressive terms creating unconscionability.
Provide an option for purchasers to opt out of the arbitration provision in order to create a “meaningful choice,” but place the burden of opting out on the purchaser.
Recognize that broad disclaimers and limitation of liability provisions are potentially unenforceable and may impact the enforceability of an arbitration provision. Draft narrow disclaimers and limitations that do not restrict the purchaser’s remedies exclusively to a limited warranty provided by the builder and do not eliminate the purchaser’s ability to recover direct damages.
Locate the arbitration provision in a separate, distinct portion of the contract from all other provisions. Do not include any references in the arbitration provision to other portions of the contract.
Include a severability clause providing that if a court finds any term unenforceable, the court is to sever that provision and enforce the remainder such that the parties’ intent to submit disputes to arbitration is still carried out.
Implied in every government contract is a requirement of “good faith and fair dealing” regardless of whether the written terms state such a requirement. Therefore, contractors should be careful to avoid conduct that the written terms of the contract may not address but that would violate the implied good faith obligation. The problem for contractors is the amorphous term “good faith” creates uncertainty as to what conduct violates the good faith obligation. The Civilian Board of Contract Appeals provided helpful guidance in its recent decision in CAE USA, Inc. v. Department of Homeland Security.
There a contractor claimed the government breached the implied duty of good faith, and the Board found it necessary to first define the duty of good faith before it could apply it to the contractor’s claim. The Board noted that the duty of good faith “encompasses numerous concepts” and cannot be reduced to a single definition.

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