Construction Claims Summer 2020

CONSTRUCTION SUMMER 2020 CLAIMS BUILDING ISSUE 2 • VOLUME 5 BETTER OUTCOMES THE UNINTENDED CONSEQUENCES OF GOING GREEN DON’T GET OUT-SMARTED COVID-19 Hits the Construction Industry For Construction Contracts, Is Force Majeure an Available Excuse of Performance? A publication of TheCLM.org

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THE BONES SUMMER 2020 10 ON THE COVER COVID-19 HITS THE CONSTRUCTION INDUSTRY For Construction Contracts, Is Force Majeure an Available Excuse of Performance? FEATURES 22 26 30 THE UNINTENDED CONSEQUENCES DON’T GET OUT-SMARTED KNOWING THE CODE OF GOING GREEN As Smart Building Technology Takes An Overview of Ordinance and Noble Goals and High Expectations Meet Off, Construction Defect Litigation Is Law Coverage Sure to Follow Incomplete Information DEPARTMENTS STATE-BY-STATE 4 Inside Counsel The Elephant In the Room 14 Texas 18 New York Contracts, Coronavirus, and the Courts Close Quarters 6 Ask the Expert COVID Conundrum 16 Wisconsin 20 Florida 8 Survey This Unwaivering Decision An Ounce of Prevention Super Smart 33 Back to School 34 Foundations Steve Lokus, Vice President, Construction Practice Group at Navigators, a brand of The Hartford SUMMER 2020 | 3

INSIDE COUNSEL THE ELEPHANT IN THE ROOM It seems like a lot longer than two-and- state-by-state columns—some of the issues that are likely to arise half months ago (as of this writing) when and the wide-ranging impacts they will have on the industry. my wife and I decided to get a head start on spring and begin our major outdoor And the situation is evolving about as quickly as our re- project for the year. We wanted to regrade sponses to COVID-19 in general. Consider that the construc- our backyard so the lawn slopes away from tion industry, which had been in the midst of a skilled-labor the house, and then, while we were having shortage before the pandemic, shed 975,000 jobs in April due everything torn up anyway, we were going to “deteriorating demand for construction,” according to the to have a patio installed. Associated General Contractors of America. As of this writ- ing, states are beginning to “open up” in phases. How will that Our lawn had been dug up and the area where the patio would impact demand? Will a sudden spike in demand exacerbate go was being prepped when Gov. Andrew Cuomo issued an order the skilled-labor shortage the industry had been experiencing? halting “non-essential” construction, with fines of up to $10,000 What types of claims might we see as stalled projects restart per violation for those who did not comply. The order came after and as workers return to job sites in greater numbers? As news reports told of construction workers in New York City work- answers emerge, we’ll keep our members informed! ing in close quarters and riding in packed elevators to the upper floors of towers, risking the health of those on job sites. Foundations Be sure to check out our new department in this issue, “Foun- Since then, my back window has overlooked a half-finished dations,” which focuses on, well, you! Each issue, we’ll profile a project and a yard of dirt and rocks as our contractor waits for the CLM member or fellow who is active in the construction claims go-ahead from the state to resume work. When I look at the yard, community. For this edition, we highlight Navigators’ Steve I think about how many other projects our contractor has been Lokus and his involvement in CLM’s Claims College. You can unable to begin this spring, how that’s impacting his business, read all about it on pg. 34. K how many other contractors around the state find themselves in a similar position, and the overall impact COVID-19 and shutdown PHIL GUSMAN orders have had on the construction industry as a whole. Editor [email protected] In this edition of Construction Claims, we examine—in our cover feature, in our “Ask the Expert” column, and in a pair of CHIEF EXECUTIVE OFFICER SPRING 2020 Construction Claims is published four times a year Anne Blume and covers all aspects of construction-related claims, ISSUE 2 • VOLUME 5 including construction defect, site accidents/injuries, EXECUTIVE GROUP PUBLISHER insurance coverage, subcontractor issues, and new Harry Rosenthal ADVERTISING technologies that address both national and regional/ Harry Rosenthal at [email protected] statewide audiences. PUBLISHER or 513-608-4221. Bryan Pifer Copyright© 2020 by the Claims and Litigation Bryan Pifer at [email protected] Management (CLM) Alliance. All rights reserved. No part EDITOR or 513-444-4560. of this publication may be reproduced or transmitted Phil Gusman in any form or by any means, electronic, mechanical, EDITORIAL SUBMISSIONS photocopying, recording or otherwise, without EXECUTIVE EDITOR & QUESTIONS prior written permission of the Claims and Litigation Eric Gilkey Phil Gusman at [email protected] Management (CLM) Alliance. ART DIRECTOR REPRINTS The views expressed in the articles are solely those of the Jason T. Williams For reprints and licensing authors and do not necessarily reflect the views or opinions please contact Harry Rosenthal at of the Claims and Litigation Management (CLM) Alliance or the [email protected] companies in which the authors are employed. or 513-608-4221. 4 | CONSTRUCTION CLAIMS TheCLM.org

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ASK THE EXPERT COVID CONUNDRUM QUESTION: What are some of the significant impacts COVID-19 has had on the construction industry? Dennis J. Cotter A: From a financial, contractual, and project- they are both statistically and epidemiologically Partner management standpoint, contractors are more likely to be exposed by being in contact SmithAmundsen dealing with delay, suspension, and termination with others at work when many in the country issues, as well as the very real and rarely used are sheltering. Notwithstanding, proving that Jack Sanker option of assessing and seeking to enforce “force the virus was contracted in the workplace, when Associate majeure” clauses to escape pandemic-driven most workers spend twice as much time away SmithAmundsen economic hardships. For work that is continu- from the job site, may prove difficult, so many ing—construction in many states is considered state legislatures are considering adopting legis- “essential” business—OSHA, the CDC, as well lation similar to a rule that the Illinois Workers’ as state and local regulations have required Compensation Commission recently unilater- contractors to stay on top of developments and ally adopted—that if a worker in an essential remain safe and in compliance by adopting site- industry (including construction) contracts specific safety plans and programs. COVID-19, the rebuttable presumption will be that the worker contracted it in the workplace. To date, OSHA has not required PPE or This would shift the burden to the employer masks for construction workers, who have been to disprove the workplace-causation conclu- classified as “low risk” for COVID-19 transmis- sion. A swift legal challenge caused the Illinois sion. However, OSHA is requiring employers Commission to retract that rule change, but the to record and report employee infections in Illinois legislature is now considering it. certain circumstances: if an employee tests posi- tive for COVID-19; if the case is work-related It is simply a matter of time before we start (i.e., infected on the job); or if the case involves seeing third-party liability claims and lawsuits one or more of the general recording or report- filed on behalf of construction workers against ing criteria that OSHA normally imposes on contractors on the site other than their employ- workplace injuries, such as medical treatment ers, claiming that they contracted COVID-19 beyond first aid, hospitalization, or death. on the job site due to either the failure of the defendant-contractor to adopt a credible Trade unions, building commissions, local COVID-19 prevention and safety plan, or, if municipalities, and state agencies are encourag- one has been adopted, failing to vigorously and ing contractors to develop and enforce their consistently enforce it. Contractors must remain own protocols for how best to prevent infection current regarding industry recommendations in the workplace. At the time of publication, and continue to enforce plans after societal and OSHA has not yet required employers to devel- governmental restrictions begin to ease. op and adopt COVID-19 infection-prevention plans, though draft legislation in the U.S. House The focus in insurance-coverage discussions of Representatives may soon address this. will be on whether the contraction of the virus constitutes an “occurrence” and, if so, whether Regardless, proactive contractors are utilizing any exclusions apply. With “occurrence” fre- national resources—such as the AGC, ASA, and quently defined as “an accident, including con- ABC—and local trade and construction safety tinuous and repeated exposure to substantially associations as resources to develop and adopt the same harmful condition,” one can envision company-wide and job site COVID-19 safety plans. a dispute over whether contracting the virus constituted an accident, and whether there was Workers compensation laws differ from continuous and repeated exposure. Potential ex- state to state, but, generally speaking, construc- clusions to coverage that could be raised include tion, as an “essential” industry operating while communicable disease exclusions (if the policy others are sheltering-in-place, is uniquely is so endorsed), mold exclusions, and exclusion exposed to workers compensation and other li- for expected or intended injury. K ability claims because construction workers can claim, as a preliminary evidentiary matter, that 6 | CONSTRUCTION CLAIMS TheCLM.org

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SURVEY THIS SUPER SMART The Edge, in Amsterdam, was called “the smartest building in the world” in a 2015 Bloomberg feature, was designed as a building for the digital age, and has won numerous awards for its innovations and environmentally conscious design. Smart technology has become increasingly popular and provides many benefits for both building owners and occupants. However, as our feature, “Don’t Get Out-Smarted,” on pg. 26 notes, claims involving smart technology present unique challenges that should be carefully considered before problems arise. PHOTO BY PLP ARCHITECTURE 8 | CONSTRUCTION CLAIMS TheCLM.org



COVID-19 Hits the Construction Industry For Construction Contracts, Is Force Majeure an Available Excuse of Performance? By Stephen Henning and Keith Smith Much like the global impact from COVID-19, not all occurrences can be foreseen. This is why many contracts contain a provision known as a force majeure clause. Force majeure clauses are especially important in times like these—when businesses are shutting down, the govern- ment is ordering the labor force to stay home, and supply chains are interrupted or non-existent. The question many in the construction industry and beyond are asking is whether the COVID-19 pandemic excuses performance under a contract. As usual when it comes to the law, it depends. Background of COVID-19 and the “Pandemic” For most people, COVID-19 causes mild to moderate respiratory illness, and they will recover without re- quiring special treatment. Older people and those with underlying medical problems like cardiovascular disease, diabetes, chronic respiratory disease, and cancer are more likely to develop serious illness. On Jan. 30, 2020, the World Health Organization (WHO) designated the COVID-19 outbreak a Public Health Emergency of International Concern. Thereafter, due to the significant spread of COVID-19, the WHO designated it as a pandemic on March 11, 2020. On March 13, President Donald Trump declared a state of emergency. Many states had previously declared states of emergency, including California and New York, and subsequently, governors of other states have been issuing executive orders requiring citizens to stay at home, subject to certain limited exceptions for essential workers. Suffice to say that COVID-19 has had a significant and immeasurable impact on the global economy and the ability of parties to perform under contract. 10 | CONSTRUCTION CLAIMS TheCLM.org



COVID-19 Hits the Construction Industry Force Majeure Clauses but not limited to, conduct, actions, tions documented in accordance with Force majeure, commonly referred to as omissions and delays by the authority Section 15.1.6.2, or other causes beyond an “act of God,” is a contract provision that having jurisdiction over the Project; the Contractor’s control; (4) by delay au- excuses or delays performance when un- (4) epidemics or quarantine restric- thorized by the Owner pending media- foreseeable circumstances occur. An “act of tions; (5) strikes, other than those tion and binding dispute resolution; or God” is commonly defined as “[a]n over- resulting from a violation by Contrac- (5) by other causes that the Contractor whelming, unpreventable event caused tor or any of its Agents of Laws or asserts, and the Architect determines, exclusively by forces of nature,” such as applicable collective bargaining agree- justify delay, then the Contract Time an earthquake, flood, or tornado. The ments, resulting in the unavailability shall be extended for such reasonable definition has been statutorily broadened of workers or replacement workers; or time as the Architect may determine.” to include all natural phenomena that are, (6) unusual shortages in materials.” as defined by Black’s Law Dictionary (11th For example, in federal government As for the ConsensusDocs, Section ed. 2019), “exceptional, inevitable, and ir- contracts, Federal Acquisition Regulation 6.3.1 dealing with “Delays and Extensions resistible; the effects of which could not be 52.212-4(f), defining excusable delays, of Time” specifically includes “epidemics” prevented or avoided by the exercise of due provides (emphasis added): and “adverse governmental actions” as care or foresight, as well as governmental “Excusable delays. The Contrac- grounds for the contractor to receive an action.” The fact of the matter is that there tor shall be liable for default unless extension of the contract time. is no one-size-fits-all definition of force nonperformance is caused by an majeure, and it depends on the specific occurrence beyond the reasonable Is COVID-19 a Qualifying Force language of the force majeure clause. control of the Contractor and without Majeure Event? its fault or negligence such as, acts of As outlined above, the WHO has identi- In practical terms, the qualify- God or the public enemy, acts of the fied COVID-19 as a pandemic, and the ing event must be solely the result of a Government in either its sovereign state and federal governments in the U.S. superhuman cause that was unforeseeable or contractual capacity, fires, floods, have declared states of emergency. Local and could not have been prevented by the epidemics, quarantine restrictions, cities and counties have issued orders for exercise of prudence, diligence, and care. strikes, unusually severe weather, persons to shelter in place and to stay at When the event that triggers the force and delays of common carriers. The home. Therefore, contract clauses that majeure clause does occur, timely and Contractor shall notify the Contract- excuse performance due to a pandemic reasonable notice must be provided. ing Officer in writing as soon as it is or an epidemic are likely triggered under reasonably possible after the com- the circumstances involving COVID-19. Sample Provisions mencement of any excusable delay, However, where the force majeure clause, Many construction contracts contain setting forth the full particulars in or other excuse of performance clause, express force majeure clauses. However, connection therewith, shall remedy does not specifically identify a pandemic other federal, state, and industry-created such occurrence with all reasonable or an epidemic, the contractor would contracts (such as the AIA and Consen- dispatch, and shall promptly give writ- need to rely on other language in the susDocs) do not contain express force ten notice to the Contracting Officer clause that refers to government action or majeure provisions, but rather include of the cessation of such occurrence.” unforeseeable events beyond the control provisions that excuse performance Similarly, the AIA A201 General Con- of the contractor. (e.g., delays and extensions of time) for ditions at Section 8.3.1, states as follows: qualifying events. It is standard and cus- “If the Contractor is delayed at If your operations have been inter- tomary in the industry for the owner to any time in the commencement or rupted or delayed by the government’s grant the contractor an excusable delay progress of the Work by (1) an act or actions in response to COVID-19, you for a force majeure event. A standard neglect of the Owner or Architect, of may be fortunate enough to find that the definition of force majeure is provided an employee of either, or of a Separate phrase “government action” has been below (emphasis added): Contractor; (2) by changes ordered in included in the force majeure clause. This the Work; (3) by labor disputes, fire, type of “government action” is happening “Force Majeure Event means, and is unusual delay in deliveries, unavoid- all over the world, with many govern- restricted to, any the following: (1) able casualties, adverse weather condi- mental entities banning all non-essential Acts of God; (2) terrorism or other operations and ordering citizens to stay acts of public enemy; (3) acts or omis- at home. So long as these types of delays sions of a Governmental Agency can be directly attributed to government beyond the reasonable foreseeability actions, they may be considered as trig- and control of Contractor, including gering events under force majeure clauses. 12 | CONSTRUCTION CLAIMS TheCLM.org

COVID-19 Hits the Construction Industry A party that declares force majeure but does of its obligation to perform, other not actually have the contractual right to do contract arguments do remain. These include the contract law principles of so may find itself in breach of contract. frustration of purpose, impossibility, or impracticability. Notwithstanding the above, there longer intends to perform its contractual is some gray area, and pushback can be obligations and constitutes an anticipa- Under the doctrine of frustration anticipated in light of recent outbreaks tory breach of the contract. This could of purpose, where a party’s principal involving SARS, Ebola, and H1N1. An potentially amount to a repudiation of purpose for entering into the contract is argument could be made that these events the contract and gives the opposing party substantially frustrated without his fault are not truly “unforeseeable.” We expect a right to recover damages. As a result, by the occurrence of an event—the non- to see litigation on this subject stemming before sending the letter declaring a force occurrence of which was a basic assump- from the COVID-19 pandemic, with majeure event has occurred, a detailed tion on which the contract was made— arguments over foreseeability and inter- review of the contract is necessary and the party’s duty to render performance pretations regarding what was made more guidance from counsel is recommended. is discharged, as outlined in Restatement difficult versus impossible. (Second) of the Law of Contracts § 265 (1981). California Civil Code sections Before declaring force majeure, it When No Force Majeure 3531 and 3526 state that “[t]he law never is imperative to understand all risks requires impossibilities” and that “[n] involved. A party that declares force Clause Exists o man is responsible for that which no majeure but does not actually have the If there is no force majeure clause, are man can control.” contractual right to do so may find itself there other contract arguments to be in breach of contract. An erroneous made? The short answer is yes. While As a result, where a party’s perfor- declaration of force majeure may be used reliance on a force majeure clause is mance is truly impossible, and not just against a party as evidence that it no preferred since it provides the most more difficult or more expensive, perfor- enforceable provision to relieve a party mance is excused [noted in Williston on Contracts § 77:1 (4th ed.)]. Courts typi- cally narrowly construe these provisions and the burden is on the party seeking to avoid the contractual obligation to es- tablish a true frustration of the contract’s purpose, or that performance is actually impossible or impracticable. The specific terms of your contract will dictate whether COVID-19 qualifies as force majeure or other form of excuse of performance and should therefore be analyzed on a case-by-case basis. On a go- ing-forward basis, specific care should be utilized in reviewing contracts to ensure that force majeure clauses are included and that the clause specifically covers events such as pandemics, epidemics, quarantines, emergency declarations, and government orders. Force majeure clauses should no longer be treated as throw-in provision at the end of the contract that only refer to “acts of God.” K Steve Henning is a founding partner, and Keith Smith is a partner, at Wood, Smith, Henning & Berman. [email protected], [email protected] SUMMER 2020 | 13

State-By-State TEXAS CONTRACTS, CORONAVIRUS, AND THE COURTS With Varying Orders Throughout the State, A Look at the Impact on Contracts and How Courts May Rule By Anna DeMaggio Anna On March 13, 2020, Gov. Gregg Abbott declared a take to reduce the risk of exposure to COV- DeMaggio State of Emergency in Texas due to COVID-19. As ID-19, to ensure a safe working environment for a result, specific counties adopted orders mandat- employees, and, ultimately, to minimize liability ing closure of all but essential businesses. exposure for employers. Following the recommendation from the On April 3, 2020, Harris County also issued federal government, on March 29, 2020, Dallas a shelter-in-place order, naming construction County adopted construction-industry rules, titled, services as essential. However, the order by the “Stay Home Stay Safe, Rules for the Construction mayor of Austin excluded construction from Industry,” that provided guidance on the meaning essential businesses. As a result, construction and application of the shelter-in-place order by companies and developers have been seeking Dallas County, which classified construction as an legal guidance on how to address the multifac- essential business. eted issues that inevitably become intertwined when implementing a shutdown process in The purpose of these rules is to outline the compliance. steps that every employer and employee must 14 | CONSTRUCTION CLAIMS TheCLM.org

State-By-State TEXAS It is likely that the party opposing contract termination will try to show that there was an intervening cause of the suspension unrelated to the pandemic. A general contractor whose job site be considered an “emergency” within the at each contract’s language. Contractors was put on hold due to the agencies’ meaning of Article 10.4. may also request additional time in case orders may claim damages for delay or of delay in delivery of materials, per Ar- extension of time as a result of CO- If the court or the parties mutu- ticles 8.3.1 and 15.1.6.1, for a reasonable VID-19. First, Article 10.4 of AIA form ally agree that the suspension was due time determined by the architect. A201-2017 states as follows: to an emergency, Articles 7 and 15 of AIA will apply. Article 15 allows However, in the past, courts have In an emergency affecting safety of contractors to make a claim for an found it: “[d]ifficult to allege that perfor- persons or property, the Contractor increase in the contract price, without mance is excused simply because one or shall act, at the Contractor’s discretion, giving prior notice. Article 7.3.4 gives more key personnel were affected by an to prevent threatened damage, injury architects a discretion to determine epidemic”; required contractors to “estab- or loss. Additional compensation a reasonable adjustment in price in lish the actual extent of the delay caused or extension of time claimed by the case a contractor disagrees with the by the epidemic” [see Ace Electronics Contractor on account of an emer- adjusted price or simply does not Associates, Inc., ASBCA No. 11496, 67-2 gency shall be determined as provided respond promptly for an execution of BCA 6456 (July 18, 1967)]; and found in Article 15 [Claims] and Article 7 a change order. that “[f]ailure to establish reasons for not [Changes in the Work]. obtaining materials from another source However, there is an argument that Second, Article 14.1.1 allows contrac- can result in denial of excusable delay AIA had a purpose of compensating tors to terminate the contract if the work and an extension of the time.” (see Cryer contractors for short-term emergencies, is stopped for a period of 30 consecu- & Parker Elecs., Inc., ASBCA 15150, 71‐2 as opposed to a global months-long pan- tive days through no act or fault of the BCA ¶ 8943) demic, and, as such, COVID-19 may not contractor, a subcontractor, a sub-subcon- tractor, or their agents or employees: Finally, per Article 8.3.3, recovery 1. Due to the issuance of an order of a of damages for delay is also available based on other provisions of each court or other public authority having specific contract. Thus, if Texas courts jurisdiction that requires all work to are posed with a challenge of ruling on be stopped; or a construction claim due to COVID-19, 2. Due to an act of government, such as they will create precedent law during a declaration of national emergency, unprecedented times. that requires all work to be stopped. Thus, a Texas contractor may be Overall, in Texas, most counties have able to terminate contracts if it is able classified construction as an “essential” to show that that the reason for the business during the COVID-19 pan- suspension of work was either item demic. While the government restricted one or two above. It is likely that the the safety terms of construction contracts, party opposing contract termination it will be up to the courts to determine will try to show that there was an whether potential contract delays could intervening cause of the suspension be excused or warrant claims for extra unrelated to the pandemic. time and compensation. K A force majeure clause or the doc- Anna DeMaggio is an attorney in the trine of impossibility may become cen- Houston office of Wilson Elser Moskowitz ter of disputes. Courts will have to look Edelman & Dicker LLP. Anna.demaggio@ wilsonelser.com SUMMER 2020 | 15

State-By-State WISCONSIN UNWAIVERING DECISION Wisconsin Joins Other States in Endorsing Waiver of Subrogation Provisions By Patricia A. Stone and Kevin A. Christensen Patricia A. Parties to construction contracts seeking to manage The insurance company filed suit against the Stone risk through waiver of subrogation provisions got builder to recover the amount paid under the a boost in Wisconsin with a key Supreme Court insurance policy. The builder filed a motion for Kevin A. ruling last year. summary judgment, arguing the waiver of subroga- Christensen tion precluded the insurance company’s claim. The In Rural Mut. Ins. Co. v. Lester Buildings, LLC, et insurance company’s argument in opposition was al., 387 Wis.2d 414, 929 N.W.2d 180 (Wis. 2019), an two-fold: First, that Wisconsin Statute § 895.447— insurance company issued a property insurance pol- which states, in relevant part, that “any provision icy covering a barn that was constructed by a builder. to limit or eliminate tort liability as a part of any When a severe wind event caused the barn to collapse, contract…relating to the construction…of a build- the insurance company paid for the loss under the ing…is against public policy and void”—applied subject policy, and then initiated a subrogation action to void the waiver; and second, that the waiver was against the builder. For the purpose of constructing void as an unenforceable exculpatory contract. the barn, however, the insured and the builder entered into a construction contract that, among other things, After maneuvering through the trial court required both parties to waive subrogation rights for and court of appeals, the Wisconsin Supreme damages otherwise covered by insurance. Court disagreed, holding the statute did not void 16 | CONSTRUCTION CLAIMS TheCLM.org

State-By-State WISCONSIN The court did not address whether it would still deem the waiver of subrogation provision enforceable where the associated insurance policy explicitly barred the insured from agreeing to waive its subrogation rights. the waiver and, importantly, declared Waiver of subrogation provisions are to waive recovery rights. that waiver of subrogation provisions attractive to parties to a contract because More generally, and for the purpose are not unenforceable exculpatory con- they avoid protracted litigation that could tracts under Wisconsin law. Such provi- hold up the progress of a construction of addressing the entirety of a company’s sions do not fall within the confines project. They allow the parties to remain risk allocation scheme, companies should of being an unenforceable exculpatory focused on a project, and transfer the risk ensure the applicable provisions in the contract, the court concluded, because to insurers—entities that exist exclusively contract documents are comprehensive, the “victim,” i.e. the party to whom the as a way for companies to manage such explicit, and unambiguous. To do this, harm was done by the tortfeasor’s con- risk. They also protect the assets and key terms must be defined and consistent duct, is “made whole” through payment viability of businesses that cannot absorb across all documents governing the rela- under the insurance policy. significant losses—businesses that are tionship. Acquiring insurance covering often family-owned home builders and the project should be mandated. Waiver of Subrogation Provisions small architectural firms. Waiver of subrogation provisions are A survey of waiver of subrogation pro- an often-used tool by parties—to con- Questions remain, however, even af- visions shows distinct differences in the struction contracts in particular—as ter this ruling, regarding the enforceabil- waivers’ scope. Some apply to losses only a means to manage risk at the outset ity of waiver of subrogation provisions sustained during the course of a project, of a project. Such provisions, along in other instances. The insurance policy while others extend the waiver to apply to with clauses addressing indemnity issued by Rural Mutual explicitly permit- losses that could be sustained, as in Rural, and damages limitations, allow parties ted the insured to waive its subrogation after the project is complete. Clarity in to limit exposure in the event of an rights. In doing so, the court surmised, the language is key and, based on that, the unexpected occurrence as a result of “[The insurance company] received a required insurance could be in the form services provided on a project. benefit, in the form of premium pay- of a builders risk policy, a comprehensive ments, for expressly allowing its insured general liability policy, or, as in the case of to allocate risk in this way. We will not Rural, a property insurance policy. rewrite [the insurer’s] policy to exonerate it from a risk that it contemplated and For certain, Wisconsin’s Supreme for which it received a premium.” Court has now formally endorsed the use of these provisions in contracts The court did not address whether it covering projects in the state. A vast ma- would still deem the waiver of subroga- jority of states elsewhere have similarly tion provision enforceable where the endorsed the use of these provisions. associated insurance policy explicitly Given this, companies can continue barred the insured from agreeing to waive operating with confidence that such its subrogation rights. Even more ambigu- provisions, when precisely crafted, effec- ous are instances where the insurance tively manage the risk associating with policy is silent on the issue altogether. As operating a construction business in a such, to accomplish the goal of having world of uncertainties. K an effective waiver, the waiver should Patricia A. Stone and Kevin A. entail two separate provisions: A waiver Christensen are partners at Wilson Elser of subrogation clause contained in the Moskowitz Edelman & Dicker LLP. contract, and a provision in the insurance [email protected], policy granting permission to the insured [email protected] SUMMER 2020 | 17

State-By-State NEW YORK CLOSE QUARTERS Limiting a Tortfeasor’s Exposure to Third Parties with Economic Loss Doctrine and Espinal By John P. Kelly John P. In densely populated areas such as New York City, A petitioner seeking access to another’s real Kelly construction projects often take place close to a property can evoke New York’s Real Property neighboring property, and sometimes access to Actions & Proceedings Law (RPA) § 881 to gain another’s property is required. Access and license access from recalcitrant owners who unreasonably agreements are frequently—but not always—en- withhold consent. Yet, RPA § 881 only provides a tered into between adjacent property owners/les- limited and discretionary framework for address- sees to mitigate and transfer risk. ing potential future damages that may be incurred by a neighbor stemming from construction activity Even when these agreements are in effect, there near or on their property. is no shortage of litigation arising out of damages caused by construction activity in these scenarios. Hence, tortfeasors such as building owners, Moreover, contractors and subcontractors often are developers, and contractors often defend claims not parties to these agreements. for a variety of damages brought under negligence 18 | CONSTRUCTION CLAIMS TheCLM.org

State-By-State NEW YORK theories after the damage occurs with Any practitioner defending a tortfeasor in New no direct statutory guidance for who is York under this type of scenario would be prudent responsible and what is compensable. to consider both the economic loss doctrine and Any practitioner defending a tortfeasor the holding in Espinal v. Melville Snow Contrs. in New York under this type of scenario would be prudent to consider both the a contractor’s, should not be evaluated personal injury or property damage in economic loss doctrine and the holding in under an Espinal analysis but defined by a addition to economic loss. Further, the Espinal v. Melville Snow Contrs., 98 NY.3d different standard. economic loss defense may not apply in 136, 773 N.E.2d 485, 746 N.Y.S.2d 120 instances of gross negligence or when (2002) when representing a client. Both Namely, a landowner who engages damage is caused by disastrous events concepts could limit a tortfeasor’s exposure in activities that may cause injury to such as an explosion. to third parties such as a neighbor. adjoining premises owes a duty to take reasonable precautions to avoid injury, as When considering a motion for sum- Specifically, Espinal limits when a outlined, for example, in 905 5th Ave. As- mary judgment to dismiss negligence contractor will owe a duty to a non- soc, Inc. v. Weintraub, 85 A.D.3d 667 (1st claims solely for economic damages, courts contracting plaintiff such as an adjacent Dept. 2011). Still, the duty of a landowner also will evaluate whether a contractor property owner or tenant. And even is not limitless. Courts, for instance, have owes a separate duty that would support when an access agreement is in effect, the held that a landowner owes no duty to an action for negligence. A separate duty economic loss doctrine could limit the protect an entire neighborhood against could be one of the three exceptions out- type of damages that a plaintiff recov- purely economic damages, such as in 532 lined above in the Espinal decision. There- ers under a negligence theory such as Madison Avenue Gourmet Foods, Inc. v. fore, the case law suggests that a contractor lost rent, diminution of business income Finlandia Ctr. Inc., 96 N.Y.2d 280 (2001). defendant who “launched an instrument of and fees for professionals hired to assess harm” could be liable for economic dam- damage. The interplay between these two The Economic Loss Doctrine ages even in the absence of personal injury recognized concepts can shed light on In essence, the economic loss doctrine holds or property damage. whether a negligence cause of action is that, absent personal injury or property viable or if the plaintiff will need to rely damage, a plaintiff cannot recover for pure Overall, there is no hard-and-fast rule on other counts to recover. economic loss under a theory of negligence. establishing what types of damages are re- While the doctrine is used predominantly coverable under a negligence theory when The Espinal Holding in product-liability cases, courts have dis- a construction project causes damages to The Espinal decision is one of the most missed negligence claims for pure economic a neighbor. Similarly, there is no defined frequently cited cases when a contractor loss arising out of construction activities class of defendants that owes a duty under is sued for negligence and there is no con- where there was no accompanying personal a negligence theory to a neighbor dam- tract between the plaintiff and the alleged injury or property damage. aged by nearby construction. tortfeasor contractor. The court in Espinal held that a contractor cannot be found to For illustrative purposes, if a store’s sole Plaintiffs rarely rely solely on have a duty to the plaintiff unless one of damages were declining sales due to con- breach of contract or nuisance claims three exceptions applies: struction activity performed by an adjacent when bringing a construction lawsuit. property owner, this type of damage may not Instead, negligence claims are usually • Where the contracting party, in fail- be recoverable against the owner-defendant asserted, too. Hence, practitioners rep- ing to exercise reasonable care in the under a negligence theory alone, as loss of resenting owners, contractors, devel- performance of its duties, launches a revenue is likely to be found to be a pure opers, and other construction profes- force or instrument of harm. economic loss. However, if there is a question sionals would be wise to consider the of whether other defendants, such as contrac- implications and limitations of Espinal • Where the plaintiff detrimentally tors or design professionals, are responsible and the economic loss doctrine when relies on the continued performance for the alleged economic loss, then it must be evaluating negligence claims. K of the contacting party’s duties. considered in the context of Espinal. John P. Kelly is a partner in the New York of- fice of Wilson Elser Moskowitz Edelman & • Where the contracting party has en- The economic loss doctrine often Dicker LLP. [email protected] tirely displaced the other party’s duty will not apply in cases that involve to maintain the premises safely. SUMMER 2020 | 19 Courts in New York have wrestled with a diverse set of fact patterns when determining if the aforementioned excep- tions apply. Yet, the case law suggests that a landowner’s potential exposure, unlike

State-By-State FLORIDA AN OUNCE OF PREVENTION Preparing for the Present, and Future, Impact of COVID-19 and Related Orders By George Truitt, Jr. and Kéran Billaud George On April 3, Florida Governor Ron DeSantis is- Defining Essential Services Truitt, Jr. sued Executive Order 20-91, the Safer At Home Section 2 of Order 20-91 defines “essential services” Order, restricting all “movements and personal based on the U.S. Department of Homeland Kéran interactions outside of [the] home to only those Security’s (DHS) “Guidance on the Essential Criti- Billaud necessary to obtain or provide essential services cal Infrastructure Workforce,” v.2 (issued March or conduct essential activities” through April 30. 28, 2020) as well as those listed by Miami-Dade The order was later extended to May 4, followed County in multiple local orders. DeSantis refers by a plan for a phased-in re-opening. to Florida’s Division of Emergency Management’s website for the most recent list of essential services The effects may be far-reaching for Florida’s exempted from the order. construction industry. And, with scientists, govern-ment, and health providers concerned Regarding construction-related services, DHS about the virus rebounding in the fall, planning considers the following as essential critical infra- ahead will be key to a successful project. structure workforce: In 2018, Florida’s real estate industry ac- • Residential/Shelter Facilities and Services— counted for $227.3 billion, or 21.9 percent of “Workers performing housing construction- Florida’s gross state product, with more than related activities to ensure additional units half coming from new home construction. can be made available to combat the nation’s Protracted local lockdown of planning and existing housing supply shortage” and “[w] permitting could cause substantial damage to orkers supporting the construction of hous- Florida’s economy, particularly if it occurs in ing, including those supporting government densely populated areas. 20 | CONSTRUCTION CLAIMS TheCLM.org

State-By-State FLORIDA With scientists, government, and health providers concerned about the virus rebounding in the fall, planning ahead will be key to a successful project. functions related to the building and conflicting orders of local officials, and Government Outsourcing: Primar- development process, such as inspec- those entities may not relax the restric- ily under the authority of the Municipal tions; permitting; and plan-review tions. However, local governments are Home Rules Power Act (MHRPA), codi- services that can be modified to free to restrict “essential activities” further fied in Chapter 166 of the Florida Statutes, protect the public health, but funda- based on local conditions. some local governments have taken to mentally should continue and serve outsourcing Building Department func- the construction of housing (e.g., And even “essential services” can tions, including plan review, permitting, allow qualified private third-party be prohibited if they involve known and inspection services. For local govern- inspections in case of government exposure to the virus. Building Depart- ments that have pre-existing professional- shutdown).” ment functions for unincorporated service contracts with design-professional • Commercial Facilities—“Workers Miami-Dade County are one example. firms that include performance of Build- who support the supply chain of On March 19, that Building Department ing Department functions, those firms building materials from production was temporarily shut down because an are de facto building departments. To through application/installation….” employee tested positive for COVID-19. keep current projects active and new ones The Safer at Home Order includes Without a chief building official—or her moving towards permitting, local govern- as essential those services defined designee—reviewing plans and issu- ments may consider engaging firms to in Miami-Dade’s Emergency Order ing permits, nascent projects cannot be bridge the gap. 07-20. In the local order, Miami-Dade pushed forward into active construction. County exempts “contractors and In either of the above scenarios, the other tradesmen…who provide ser- When projects stall, the economic building official maintains police power vices that are necessary to maintaining impact ripples through many sectors of to shut down a construction site that the safety, sanitation, and essential the economy, including lending, devel- presents a heightened risk for spreading operation of residences and other opment, design, contracting, manufac- COVID-19. Those officials must first structures,” as well as “open construc- turing, distribution, supply, and govern- determine that COVID-19 is “a condi- tion sites, irrespective of the type of ment agencies that rely on fees and taxes. tion on the building site” that “constitutes building,” and “architectural, engineer- Fortunately, Florida law provides at least an immediate threat to public safety and ing, or land surveying services.” two potential solutions—private provid- welfare” before they can issue a stop-work The statewide order supersedes any ers and government outsourcing. Each is order, per Florida Statute 553.791 (15)(c). discussed briefly below. Thus, a stop-work order is possible but unlikely so long as there are no infected Private Providers: For Building people on the building site. Department plan review and inspection functions, plan review and inspection Following CDC guidelines on services may be provided by Florida- COVID-19 prevention will help protect registered architects and engineers, in one’s project from a stop-work order. The lieu of building officials. Private providers alternatives outlined in this article may may then step in to process permits and well provide an antidote to a collapsing inspections, in accordance with Florida construction economy in Florida. K Statute 553.791, which is titled, “Alterna- George Truitt is a partner in the Miami tive Plans Review and Inspections.” office of Cole, Scott & Kissane. [email protected] In construction hot-spots, the practice Kéran Billaud is an associate in the Ft. is more common, allowing developers to Lauderdale, Fla. office of Cole, Scott & move projects forward by avoiding back- Kissane. [email protected] logged local building departments. This same process is available to transition a SUMMER 2020 | 21 project that has stalled in government plan review and permitting.

The Unintended ♻Going GreenConsequencesof Noble Goals and By Mark Hopkins, Brian Kahn, High Expectations Mark Oertel, and Jason Jurado Meet Incomplete Information 22 | CONSTRUCTION CLAIMS TheCLM.org

“Green” building has become more mainstream, and even cumulate points based on the materials used, the orientation mandated by local state and federal codes throughout the U.S. As and shading of the building, and the means and methods used going “green” expands, there is also a correlation in construction during construction. The certification level is a reflection of claims unique to “green” construction. the number of points that project accumulated. There is no connection between LEED-certification levels and building The greening of construction and improvements to the operational efficiency. operational efficiency of our housing and infrastructure are im- portant ideals. Leadership in Energy and Environmental Design, The problem faced by design professionals is that it is very dif- or LEED, is one of the first organizations to standardize green- ficult to model the impact of a particular product selection in the building criteria and establish a certification process for build- performance of the building. For example, how a wall is framed, ings. This is the “green” standard with which most people are the type of insulation used, the exterior finishes, and the control familiar. So, if one builds a LEED-certified building using green system for HVAC all impact the energy usage of the building. The products and green techniques, what is the problem? LEED certification is based on a system where a project can ac-

The Unintended Consequences of Going Green difficulty of providing accurate perfor- Many of these products are mance models increases as the amount recent developments, and long-term of new “green” products are utilized, installations do not exist to help us particularly if the products interact with understand their expected lifespans. each other. ly, solar panels must be washed twice a Panels are typically installed on metal rails Many of these products are marketed year to maintain optimal performance. If that expand and contract over time. This with claims such as, “Up to 40 percent the panels are on the roof, then you need puts stress on these watertight connec- energy savings.” If you purchased one of to have access them, as well as a source tion points and can cause problems if these products and only got one percent of water and the ability to safely scrub these stresses are not managed. The rails energy savings, is that considered good each panel clean. These panels use glass themselves are hollow tubes, or pipes, enough? Or even if the savings are five to protect the cell, which is black. Be which can conduct water under the roof percent, 20 percent, or 30 percent? One careful to not wash the panels in direct membranes if not installed correctly. must ask, “What are the building owners’ sunlight as they can shatter. expectations with regard to energy usage On large commercial flat roofs, bal- for the building for, say, a LEED Platinum Additionally, keep in mind that, in lasted systems are used due to their ease building?” Problems and claims are aris- many cases, solar panels are being se- of installation. A ballasted system is not ing when these expectations, or percep- cured to what should be a watertight roof. secured to the roof by anchors, but rather tions, are not being met. Will the attachment points create a leak? by weight alone. This eliminates the risk For example, in a recent claim involv- ing a large single-family home located in the Hollywood Hills of California, the homeowners installed solar panels on their roof and expected their energy costs to drop to zero. When costs remained the same, threats of litigation ensued against the solar-installation company. After ana- lyzing the energy usage, it was found that the homeowners changed their behavior after the solar panels were installed. Prior to getting the solar panels, they kept the thermostat low for heating and high for cooling, lights were turned off, and electronics like computers were powered down when not in use. Post-solar panels, these energy-saving measures were aban- doned, ostensibly on the presumption that power was now free. The reality is that these homeowners were using more power, and that was why their expectation for energy savings was not realized. Shedding Light on Solar Staying with solar panels, the typical installation is on the roof. The location of the building and orientation of the roof relative to the sun’s path year-round can significantly impact a solar panel system’s performance. Some roofs may have reduced energy production as they are not optimal (installations along the coast with heavy fog, for example). Maintenance is an issue as well. Typical- 24 | CONSTRUCTION CLAIMS TheCLM.org

The Unintended Consequences of Going Green of a leak due to penetrations in the roof Actual installations in the field membrane. However, these system ride have found failures of synthetic roofing on flat pads. When the metal rails ex- pand and contract, these pads move back in as few as five-to-10 years. and forth, riding on the roof membrane. Over time, it is possible for these pads to are recent developments, and long-term this does not seem like a significant drop, wear holes in the roof membrane. One installations do not exist to help us un- when the building involved is a large manufacturer glued solar panels to inter- derstand their expected lifespans. warehouse with 2,000 panels, this perfor- locking foam panels, eliminating the rail mance decline can be costly. system. However, the type of foam used This is especially true of products that was not compatible with the PVC roof are manufactured from recycled materi- In addition, consider that solar panels, membrane and chemically reacted with als—many green or synthetic roofing when installed, are linked together like it, causing leaks. materials are manufactured from 100 Christmas lights, and, like those lights, percent recycled materials, and, from an when one goes out they all go out. So Ballasted systems have another environmental standpoint, this is a huge even a small drop in reliability can have a unique risk: If a seismic event were to benefit. However, the expected lifespan large impact on power production. War- occur, there is nothing to hold these of roofing materials varies from 50 years ranty and product replacement can be racks in place. Solar systems run at high when manufactured from virgin materials problematic with overseas suppliers, and voltage, and the panels do not include versus 35 years for recycled. Actual instal- it is not possible to link different manu- an “off ” switch. After a seismic event, lations in the field have found failures of factured panels together. the energized equipment may bump into synthetic roofing in as few as five-to-10 other energized solar-system equipment years. LEED awards zero points for Going green is here to stay, and it or parts of the building. virgin-produced products, but if the syn- makes sense both economically and thetic products end up in a landfill after a for the environment. But it is critical The lack of an “off” switch also pres- short period of time, then they were not that design professionals and contrac- ents a problem with regards to firefighting. necessarily “green.” tors manage customer expectations Energized electrical equipment and water with regard to these types of products. do not mix. Fire department personnel Apart from variability in a product’s Understanding the risks associated will not access roofs with solar panels for lifespan based on the type of the raw ma- with a product’s longevity and installed fear of electrocution. As such, firefighting terials used to produce them, the country performance cannot be underestimated. techniques are changed and could result in of origin can also be a factor when con- Fail on one these points, and claims are additional damage to the structure. sidering a product’s actual performance. sure to follow. K The construction industry is keenly Mark Hopkins, PE, AIA is vice president The common rectangular Solar Panel aware of numerous product failures from and head of Construction Defect practice has a long performance history. These overseas suppliers, and the green industry for Guardian Group, Inc. types of panels use glass to protect the is not immune from this phenomenon. [email protected] solar cells and have a life expectancy in Examples can include items such as wood Brian Kahn is a partner with Chapman excess of 40 years. These panels, and the flooring that is labeled to be compliant Glucksman Dean & Roeb. associated racks they are typically mount- with indoor air-quality standards, but, in [email protected] ed on, are not the most attractive objects reality, contains high levels of formalde- Mark Oertel is a partner at Lewis Brisbois to look at. Manufactures have responded hyde; and electrical equipment with the Bisgaard & Smith, LLP. with solar shingles—a solar cell built into Underwriters Labs (UL) label that is really [email protected] a shingle. The majority of these shingles not UL-compliant. Jason Jurado is is the senior managing use thin film technology to protect the director for the Western Region of Old solar cell. Essentially, a thin liquid coating, Besides non-compliant products, the Republic Contractors Insurance Group. similar to a clear finish, is applied over overall performance can be diminished. [email protected] wood. These types of coatings are prone The rectangular solar panel previously to cracking and yellowing over time, with discussed typically has a 98-99 percent SUMMER 2020 | 25 a typical lifespan of only 10 years. reliability rating from U.S. suppliers. For some overseas suppliers, that reliability Additional Products; rating can drop to 92 percent. Although Additional Considerations Like thin-film technology, proven longevity is a problem for a number of green materials. Many of these products

26 | CONSTRUCTION CLAIMS TheCLM.org

DON’T GET OUT-SMARTED AS SMART BUILDING TECHNOLOGY TAKES OFF, CONSTRUCTION DEFECT LITIGATION IS SURE TO FOLLOW By Marie Cheung-Truslow; William L. Keville, Jr.; and Jason Randle New building technologies continue to advance within the build- ing environment, from smart and advanced structural com- ponents; to energy and water management; to data-collecting building and HVAC controls; to security and facility-manage- ment systems; to advanced sensor use and smartphone/multi- media interfaces; to autonomous robot facility managers and 3D building component printing. To see the future of these technologies in construction, we can look to our European counterparts; in particular, Amsterdam, where The Edge is the greenest building in the world, according to British rating agency BREEAM. The Edge has also been called the smartest building in the world. It uses 28,000 sensors for light, motion, temperature, and humidity controls; as well as infrared sensors allowing wireless flat screens throughout the building to be synced to users’ smartphones; robot security patrol; and smart technology in bathrooms. These technologies offer advancements useful in building market- ability, energy savings, and building longevity. According to a 2015 Bloomberg feature on The Edge, “It knows where you live. It knows what car you drive. It knows who you’re meeting with today and how much sugar you take in your coffee…. A day at [T]he Edge in Amster- dam starts with a smartphone app developed with the building’s main tenant, consulting firm Deloitte. From the minute you wake up, you’re connected. The app checks your schedule, and the building recognizes your car when you ar- rive and directs you to a parking spot. Then the app finds you a desk. Because at [T]he Edge, you don’t have one. No one does. Workspaces are based on your schedule: sitting desk, standing desk, work booth, meeting room, balcony seat, or ‘concentration room.’ Wherever you go, the app knows your preferences for light and temperature, and it tweaks the environment accordingly.” To a lesser degree, PNC Plaza, in Pittsburgh, includes numerous sustain- able attributes such as an operable double-skin facade, an onsite greywater reuse system, and heating and cooling systems designed to operate in a “net- zero-energy state” for up to 30 percent of the year. SUMMER 2020 | 27

Don’t Get Out-Smarted Foreseeable Issues the failure. This series of tasks requires documented, preserved, and available After the initial development and con- a team approach. Understanding the for review. struction, facility management, tenants, roles and relationships between the • The chain of custody must be and end-users are tasked with operating different parties—building owners, maintained. and maintaining these technology-filled facility-management groups (71 per- Understanding the myriad issues smart buildings. Turnover of the build- cent of total building lifespan costs are in the fast-moving world of technolo- ing will require further IT integration associated with operations), end users, gies is key to success. No investigation of the operations and maintenance pro- tenants, manufacturers, suppliers, should begin with a preconceived cesses, requiring advanced technological general and specialty contractors and conclusion about the evidence. The skills and knowledge beyond the abilities installers, programmers, and software strength of factual, evidentiary basis of many traditional facility-management designers—is critical. for each expert opinion is just as cru- staffs. Continuing education on software cial as the opinion itself. Experts must updates and planned system mainte- Expert retention may need to include understand the importance of properly nance is a must—and an obstacle when those with software design and network- obtaining and securing any evidence, you consider how many older buildings ing expertise. Experts will need to be including digital versions. exist right now with fire alarm or HVAC able to communicate clearly to a jury, Restraining Orders—If you learn warnings that go unanalyzed. helping them understand how the smart that data is about to be destroyed, and device in question is meant to work, what that data is critical to the case, a motion As technologies multiply, malfunc- went wrong, and how it might have gone seeking a restraining order should be tions leading to personal injury or prop- differently. Finding these experts may be filed. The motion should be done via an erty damage multiply as well, and are a challenge—will they be available and emergency basis and the opposing party more likely to occur. Malfunctions may current in the market? should be given notice. involve attacks from bad actors; pre- A preservation notice should also scribed building materials not meeting When claims involving smart build- be served, as it has the added benefit of planned performance; building-material ing technologies are made, techniques to court’s oversight. However, timely access manufacturers going out of business, properly collect, preserve, analyze, and to the court can be an issue of which leading to the inability to replace dam- report digital evidence must be in place. claims professionals need to be wary. aged components; and personal security Understanding these principles will assist Discovery Complaint—Pre-suit or becoming compromised from non- the claims professional in ethically analyz- pre-complaint discovery is available in working smart lights, sensors, motion ing and evaluating claims. some jurisdictions. Pre-complaint dis- sensors, elevators, and escalators—a covery for the purpose of perpetuation of problem that can be exacerbated by Preservation Notices—When faced testimony is generally permitted in most the lack of real-life human security or with a claim involving a smart building jurisdictions in both state and federal trained administration personnel. where critical evidence may be altered or courts. Pre-complaint discovery, however, destroyed, a timely preservation notice may also be a tool for fleshing out facts Examples of common issues are should be sent to all parties in control of and witnesses prior to filing a formal temperature sensor failures—which can the evidence. The letter should be simple, complaint. Federal Rules of Civil Proce- causing freeze events resulting in water direct, and to the point. The recipient dure Rule 27, Depositions to Perpetuate damage—and gate sensors causing injury. should be placed on notice that the elec- Testimony states: tronic data and evidence should be pre- (a) BEFORE AN ACTION IS FILED. Security and privacy hacks can also served, and the notice should inform the (1) Petition. A person who wants to compromise patient data at hospitals and recipient that if the data is not preserved, information about students at universi- she may face a claim of spoliation. perpetuate testimony about any ties. Software and sensor failures can dis- matter cogniza-ble in a United able the use of spaces, creating downtime To be successful when dealing with States court may file a verified for businesses. Water-intrusion system securing information through technol- petition in the district court for failures, and failures of multiple systems ogy—and to avoid spoliation of valuable the district where any expected that cooperate with each other, can also evidence—claims professionals must adverse party resides. The petition cause property damage, personal injury, understand that: must ask for an order authoriz- and invasion of privacy. • Actions taken to secure and col- ing the petitioner to depose the lect evidence should not change the Tackling the Issues evidence. Once a failure does occur, claims profes- • Activity relating to collection, sionals must identify what went wrong, examination, storage, or transfer of the cause, and damages flowing from electronic evidence should be fully 28 | CONSTRUCTION CLAIMS TheCLM.org

Don’t Get Out-Smarted named persons in order to perpet- AS TECHNOLOGIES MULTIPLY, uate their testimony. The petition MALFUNCTIONS LEADING TO must be titled in the petitioner’s PERSONAL INJURY OR PROPERTY name and must show: DAMAGE MULTIPLY AS WELL, AND (A) that the petitioner expects to be ARE MORE LIKELYTO OCCUR. a party to an action cognizable in a United States court but can- litigation, id. …Evidence is deemed and system data held by others—your not presently bring it or cause it ‘lost’ when it is ‘beyond the posses- experts will need them. to be brought; sion and custody of its owner and not • Be sure to provide your expert with all (B) the subject matter of the expected locatable by diligent search’….” relevant data to protect her on cross action and the petitioner’s interest; examination. (C) the facts that the petitioner wants To guard against spoliation, ensure • Communicate early and often to to establish by the proposed that experts carefully observe legal proto- avoid spoliation. testimony and the reasons to cols concerning the preservation of evi- • Make sure that all portions of the perpetuate it; dence and data when removing evidence piece of evidence to be shown to the (D) the names or a description of for the scene and during subsequent jury have proper foundations. the persons whom the petitioner storage and testing. Written agreements With the advent of smart building expects to be ad-verse parties and should be obtained among all potentially technology-driven failures, claims profes- their addresses, so far as known; interested parties, whenever feasible, sionals will be faced with novel issues while and prior to alteration of evidence (including also having to: decipher complex inter-re- (E) the name, address, and expected removal from scene). lationships of potential responsible parties, substance of the testimony of each assemble a qualified team of professionals deponent. Obtain a court protective order when that specializes in the specific technology, Rule 27 has limited applicability, but it agreement cannot be reached. Consult and preserve evidence for future analysis. is still a helpful tool to obtain information with legal counsel and your experts early Assembling the right team, securing the of critical information without filing a on about this crucial issue. The cred- proper material/evidence, and drafting a complaint on the merits of the claim. ibility of your expert testimony can be clear plan will enable professionals to build Spoliation of Evidence—The most weakened or destroyed by the mishan- a solid case that will last until the claim is critical aspect of any successful investiga- dling of evidence. resolved. Even though the issues my be tion is the preservation of evidence for novel, the methodology for investigation use at trial. In Landry v. Charlotte Motors Be Prepared failures remains the same. K Cars, LLC, District Court of Appeal of Even in untested smart building failure Marie Cheung-Truslow is principal Florida, Second District (2017), the court claims, tested sound legal practice still and owner of the Law Offices of Marie reiterated the severe sanctions for spolia- applies. Claims professionals can best Cheung-Truslow. tion of evidence: protect themselves by adhering to the [email protected] “Generally speaking, sanctions may following practical pointers: William L. Keville, Jr. is a partner at be appropriate when a party has spo- Melick & Porter, LLP. liated, lost, or misplaced evidence. • Put together the right team upon the [email protected] League of Women Voters of Fla. v. notice of a claim. Jason Randle is forensic civil engineer at Detzner, 172 So. 3d 363, 391 (Fla. Robson Forensic, Inc. 2015). Spoliation is defined as ‘[t]he • Consider retaining experts early on [email protected] destruction, or significant and mean- to guide investigation, weigh in on ingful alteration of [evidence],’ Vega discovery, and assist in the develop- SUMMER 2020 | 29 v. CSCS Int’l, N.V., 795 So. 2d 164, ment of a theme. 167 n.2 (Fla. 3d DCA 2001) [quot- ing Black’s Law Dictionary 728 (5th • Be thorough in your investigation and ed. 1983)]; or ‘the failure to preserve document retention practices. property for another’s use as evidence in pending’ or reasonably foreseeable • Be thorough in obtaining security

CODEKNOWING THE AN OVERVIEW OF ORDINANCE AND LAW COVERAGE BY MICHAEL MCLAUGHLIN A fter a lengthy adjustment involving numerous in- On the other hand, the courts in two other cases—Consol. spections, intense negotiations, and supplemental Rail Corp, and Regents of Mercersburg Coll. v. Republic Franklin payments, a claims professional is about to close a par- Ins. Co., 458 F.3d 159, 170 (3d Cir. 2006)—held an “affirmative ticularly grueling file. Then a fax arrives: The insured enforcement action” is not required before a party may seek to re- submits a supplemental claim in excess of $1 million for cover under a “law or ordinance” contract clause, and instead, “an “code upgrades” involving new electrical wiring, thicker enforceable legal requirement suffices to trigger that coverage.” concrete foundations, and new HVAC systems. None of these areas were damaged in the incident or previously raised in the claim. According to these courts, the law and ordinance provision Aghast, the claims professional turns to the “ordinance or law” requires that “the renovation or modification was necessary coverage to find out what exactly is covered by the policy. under the law” and that it mandates changes. The portion of the Americans with Disabilities Act (ADA) at issue in Regents of Mer- The term “ordinance or law” in code-upgrade provisions gener- cersburg, for example, specifically required that any alterations to ally encompasses government-mandated requirements only. This the facility be “readily accessible to and usable by individuals with includes statutes or building codes adopted at the state, federal, city, disabilities,” and detailed the requirements. The ADA is also ac- or local level. However, the mere existence of a building code, such companied by very specific regulations that explain, among other as the BOCA standards and the National Fire Protection Association things, what constitutes a covered “alteration.” The court held that (NFPA) guidelines, are not ordinances or laws within the scope of the existence of the requirements was an enforcement sufficient coverage if they are not adopted by a governing body. The same is to trigger coverage. true for communications and recommendations by a government body regarding the construction. [See Consol. Rail Corp. v. Aspen Ultimately, there is no bright line rule as to what constitutes Specialty Ins. Co., 2019 WL 2425118, at *8 (D.N.J. June 10, 2019)]. an enforcement, as the answer varies by jurisdiction. Defining “Enforcement” Undamaged Areas In most circumstances, the local code official will not visit If an area of the building is damaged by a covered loss, and the property and submit a detailed list of the required code the building code requires that the repair or replacement of upgrades. An insured or the insurer may each retain its own the damaged areas conform to current code, then the typical engineer to evaluate the scope of repairs, and there may be great ordinance or law grant of coverage pays for the cost. But when disparities in how each expert views the scope of repairs. a loss occurs and a local code enforcement officer inspects the proposed area of area of repair, the officer may notice other Some states focus not on what the code technically says, but non-compliant areas in undamaged sections that must be rather on what building officials actually require. According to brought up to code. Courts in different jurisdictions have ap- the court in St. Luke’s Episcopal Health System Corp. v. Factory plied a variety of tests in such cases. Mut. Ins. Co., 2007 WL 1217763 (S.D.Tex. Apr. 24, 2007), an “enforcement” occurs when the local government body withholds Where the insured voluntary repairs undamaged areas to permits for construction in violation of those standards. Since the code following a loss, the question becomes whether these costs city officials didn’t undertake any actions and the insured was not are a “loss” as defined by the insurance policy. The court in sanctioned as a result of the alleged non-compliance, the code- Regents of Mercersburg held that voluntary repairs undertaken to upgrade coverage did not apply. undamaged portions of the building are not a loss unless required by a law or ordinance. Rather, for coverage to apply, there must 30 | CONSTRUCTION CLAIMS TheCLM.org



Knowing the Code be some actual covered cause of loss that WHERE THE INSURED Tower ultimately reasoned that, if the damages the building—the repair of which VOLUNTARY REPAIRS rule was otherwise, “even an inspector’s must legally be accompanied by changes UNDAMAGED AREAS TO discovery of code violations resulting to the undamaged portion of the building. CODE FOLLOWING A LOSS, from shoddy original construction, Under this interpretation, the ordinance THE QUESTION BECOMES such as beams or pipes made of sub- and law coverage does not provide cover- WHETHER THESE COSTS ARE par materials, would leave the insur- age for renovations made to undamaged A “LOSS” AS DEFINED BY ance company liable for the necessary portions if not required by code. THE INSURANCE POLICY. replacement of those materials any time the problem happened to be uncovered Some courts have decided that if the The loss did not cause the code violations. in the course of damage remediation.” code violation exists independent of the The courts found no coverage for loss, then there is no enforcement of a Payment code. In Chattanooga Bank Associates v. areas that were not damaged in the loss The typical code-upgrade provision Fidelity & Deposit Co. of Maryland,. 301 and where the code did not require states that the insurer has no obliga- F. Supp. 2d 774, 776 (E.D. Tenn. 2004), upgrades to complete repairs to the tion to pay for code upgrades “until the although the violations might have covered damage. The court in St. George property is actually repaired or replaced.” remained undiscovered if not for the fire The Eastern District of Pennsylvania loss, the violations in question existed decision in Monarch, Inc. v. St. Paul Prop. independent of the fire and the fire did & Liab. Ins. Co., 2004 WL 1717618, at not cause the enforcement of a building *2 (E.D. Pa. July 30, 2004) is directly on code, because the code violation existed point to the question of whether plaintiff independent of the loss. can pursue a claim for ordinance or law coverage without actually having per- A different result was reached in formed the work. The court held that the Davidson Hotel Co. v. St. Paul Fire & insurer’s obligation under the contract Marine Ins. Co., 136 F. Supp. 2d 901, 910 becomes due only when the repair or (W.D. Tenn. 2001). There, a water leak in replacement is made. a hotel led to a thorough inspection by city building inspectors, who “required The ordinance or law coverage may compliance with numerous building provide that the insurer will not pay for code provisions” discovered during the such code upgrades unless the repairs or inspection, even in areas not damaged replacement are made within two years. in the loss. The court found coverage for Courts have held that the requirement the code upgrades since the inspection that repairs or replacement occur within occurred only because of the incident two years is a condition of performance giving rise to liability, and, secondly, the by the insurer regarding payment of thoroughness of the inspection was also proceeds under this provision. Where the a result of the incident. insured does not make the repairs within two years, courts have held that the in- Courts in New York have recently sured waited too long and its window for applied a more proximate-cause approach receiving code-upgrade proceeds expired. that there must be some direct connec- tion between the covered damage and the Presentation of a code claim involves enforcement of the ordinance. In two cas- complex issues and requires the adjuster es—St. George Tower v. Ins. Co. of Greater to review the policy language, the scope New York, 139 A.D.3d 200, 30 N.Y.S.3d of repairs, and review the governing law 60 (N.Y. App. Div. 2016) and Sanderson v. in the jurisdiction. It is advisable to bring First Liberty Ins. Corp., 2019 WL 2009332, in a consultant to review the damage, the at *6 (N.D.N.Y. May 7, 2019)—a cov- scope of repair, and the actual require- ered loss resulted in certain damage to ments of the local code. K buildings. The insured discovered code violations during the course of repairs in Michael McLaughlin is a partner at other parts of the building. The covered Butler Weihmuller Katz Craig LLP. work could not be completed until the [email protected] code-compliant repairs were performed. 32 | CONSTRUCTION CLAIMS TheCLM.org

BACK TO SCHOOL IS YOUR KNOWLEDGE OF CONSTRUCTION CLAIMS SHAKY OR STURDY? Find out with this issue’s quiz, which is based off the final exam for CLM’s Claims College’s School of Construction. 1. The following types of pipes can be routed around 6. Which of the following is not a defect created by other building elements without affecting their improper design or construction of the roofing and functionality: flashing systems? v A. Force lines. v A. Short termination of valley metal. v B. Gravity lines. v B. Inadequate slope at flat roof application. v C. Both force and gravity lines. v C. Inadequate fasteners of tile roof system. v D. Neither force nor gravity lines. v D. Cracked roof tile. 2. The difference between a window wall and a curtain 7. In a claim related to water intrusion through a wall is that a window wall is one continuous material window, which of the following trade(s) could be a forming the building envelope on the outside each potentially responsible party? floor slab, whereas a curtain wall is many individual v A. Window installation subcontractor. segments connected at each floor slab. v B. Framing subcontractor. v A. True v C. Window manufacturer. v B. False v D. All of the above. 3. Flashing is designed to: 8. Ultimate responsibility for safety typically falls on the: v A. Redirect rainwater. v A. Owner. v B. Enhance the building aesthetics at the intersection of materials. v B. Architect. v C. Connect various dissimilar building materials. v C. General contractor. v D. All of the above. v D. Individual subcontractor. 4. In order to be considered a “defect,” a deviation must: 9. The purpose of a construction contract is to: v A. Cause actual physical damage to the property, or potential to v A. Identify the roles and responsibilities of various parties. cause damage in the future. v B. Define terms used throughout the contract documents. v B. Cause a threat to life or safety. v C. Allocate each party’s responsibility for damages. v C. Render all or some portion of the property unfit for its intended use. v D. All of the above. v D. Impair the appearance of the property. v E. None of the above. v E. Any of the above. 10. Liquidated damages may also apply to owner- 5. The most effective phase to focus on the avoidance of caused delay. construction defects is: v A. True v A. During the pre-construction phase, before construction starts. v B. False v B. During the structural framing phase of the project. v C. During the building envelope phase of the project. v D. In the final phase of the project with effective final inspections and detailed punch lists. For more about the CLM Claims College’s School of Construction, go to TheCLM.org/claimscollege. SUMMER 2020 | 33 ANSWER KEY 1.) A; 2.) B; 3.) D; 4.) E; 5.) A; 6.) D; 7.) D; 8.) C; 9.) D; 10.) A

FOUNDATIONS STEVE LOKUS, Vice President, “I was born and bred as a Construction Practice Group at construction worker.” Navigators, a brand of The Hartford Lokus began working at his father’s construction company at age 13. After transitioning Steve Lokus values the positive impact to an insurance career and finding a perfect fit in claims, his construction experience he’s had on others’ careers. “I’ve had helped him forge a career path focused on construction claims. several people who have worked for me go on to become managers and take “I’m in Claims College for nothing on bigger roles and responsibilities. else than to pay it forward.” So I think that’s probably my proudest professional accomplishment.” Lokus’ first exposure to Claims College was when he was approached to substitute teach a course. The concept immediately appealed to him, he became more involved, It’s no wonder, then, that he’s taken such and he is now a dean in the School of Construction. an interest in CLM’s Claims College, where he is currently a dean at the “When you have a captive School of Construction. “I’ve seen audience, it allows students former students over the years who to understand why they do have come up to me and said how much what they do.” it’s helped them in their day-to-day jobs. And that is what drives my passion for At typical construction-related industry conferences, because of large audiences and the Claims College.” varied knowledge base of attendees, key learning topics are approached “from a 30,000- foot level.” Claims College goes many steps beyond, drilling down into the more technical Here, Lokus discusses his career in aspects of construction claims and teaching the “why” in addition to the “what.” construction claims and the value of Claims College, which will be offering its “We start from, literally, Level One curriculum virtually this year, the ground-up.” opening it up to a broader audience than in the past. Claims College’s School of Construction consists of three levels. Level One walks you through an actual construction project, teaching the details of construction 34 | CONSTRUCTION CLAIMS TheCLM.org and construction claims handling. Level Two takes the knowledge gained in Level One and puts it into every-day practice. Level Three covers advanced decision- making techniques. “I think it gives them a level of confidence.” Claims College helps young professionals grow into confident leaders by enhancing their technical knowledge and perspective on the business. They also gain valuable contacts in the insurance and legal worlds.

2020 Construction Conference SEPTEMBER 30 - OCTOBER 2 CHICAGO, IL REGISTRATION OPEN THANK YOU TO OUR SPONSORS DIAMOND We’re gathering experts in national and regional construction issues to share best practices about SERVING CLIENTS NATIONWIDE what’s facing you today on the job. Don’t miss this conference that promises to be a Who’s Who for EMERALD construction insurance professionals. INTERESTED IN SPEAKING? PLATINUM Contact Fran Clark | [email protected] INTERESTED IN SPONSORING? [email protected] #CLMConstruction

INSTITUTISM no. 132 When you think you know everything, you’ll know you don’t. There is no end date for learning. The more you know, the better— and the more you’ll crave additional knowledge. Stay ahead and be prepared for new risks and emerging loss exposures with The Institutes. From designations, certifications and continuing education, to networking and research that informs public policy, our name is all you need to know. Know more. Do more. TheInstitutes.org/KnowMore