Hovnanian Increases Construction Defect Reserves for 2012
January 6, 2012 — CDJ Staff
In their fourth quarter earnings call, executives of Hovnanian Enterprises made some projections for investors, covering the company’s plans for 2012. During the call, Ara K. Hovnanian, the firm’s CEO, discussed their reserves to meet construction defect claims. The firm does an annual actuarial study of their construction defect reserves.
Mr. Hovnanian noted that there have been no changes for the past several years, but this year they are increasing their reserves by about $6.3 million. Additionally, the firm has added $2.5 million to their legal reserves. Mr. Hovnanian stated “we do not anticipate that changes of this magnitude will be recurring as we look forward to 2012.”
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Mortar Insufficient to Insure Summary Judgment in Construction Defect Case
January 6, 2012 — CDJ Staff
The US District Court of Nevada issued a summary judgment in the case of R&O Construction Company V. Rox Pro International Group, Ltd. on December 19, 2011. The case involved the installation of stone veneer at a Home Depot location (Home Depot was not involved in the case). R&O’s subcontractor, New Creation Masonry, purchased the stone veneer from Arizona Stone. Judge Larry Hicks noted that “the stone veneer failed and R&O was forced to make substantial structural repairs to the Home Depot store.”
Rox Pro asked the court for a summary judgment, which the court granted only in part. The court looked at two issues in the case, whether the installation instructions constituted a breach of implied warranty of merchantability, and whether there was a breach of an implied warranty of fitness for a particular purpose.
Judge Hicks found that there was a breach of implied warranty of merchantability. The instructions drafted by Real Stone and distributed by Arizona Stone were not sufficient for affixing the supplied stones, according to R&O’s expert, a claim the plaintiffs dispute. “Because there is an issue of material fact concerning the installation guidelines, the court shall deny Arizona Stone’s motion for a summary judgment on this issue.”
On the other hand, the judge did not find that the instructions had any bearing as to whether R&O bought the stone, since the stone was selected by the shopping center developer. This issue was, in the view of the judge, appropriately dismissed.
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Insurer Has Duty to Defend in Water Intrusion Case
July 10, 2012 — CDJ Staff
The Seventh Circuit Court of Appeals has upheld a summary judgment against an insurance company in a construction defect suit. Lagestee-Mulder, Incorporated (LMI) was hired by Crown Centre to construct a multi-story office building in Franfort, Illinois. LMI hired Frontrunner Glass & Metal to supply and install windows and doors. Frontrunner purchased an insurance policy from Consolidated which named LMI as an additional insured. The project experienced water intrusion and other construction defects and Crown sued LMI. Consolidated denied coverage. LMI sued Consolidated and the US District Court granted a summary judgment against Consolidated.
The appeals court reviewed the grounds for summary judgment and determined that under Illinois law, Consolidated had a duty to defend. The court cited an earlier opinion that “if the underlying compliant alleges facts within or potentially within policy coverage, an insurer is obligated to defend its insured even if the allegations are groundless, false, or fraudulent.”
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Federal District Court Continues to Find Construction Defects do Not Arise From An Occurrence
May 10, 2012 — CDJ Staff
Coverage for construction defects continues to be hotly contested in Hawaii state and federal courts. In a recent decision, Judge Mollway felt bound to follow the Ninth Circuit’s decision in Burlington Ins. Co. v. Oceanic Design & Constr., Inc., 383 F.3d 940, 944 (9th Cir. 2004), where the court found construction defect claims arise from breach of contract, not from an occurrence. Judge Mollway’s most recent decision on the issue is Illinois Nat. Ins. Co. v. Nordic PCL Constr., Inc., 2012 U.S. Dist. LEXIS 58464 (D. Haw. April 26, 2012).
Nordic constructed a grocery store for Safeway. In addition to the grocery store, Nordic built a 165-space rooftop parking deck, retail shops and related improvements. After opening for business in 2007, Safeway experienced significant leaks. Safeway demanded that Nordic repair the parking deck. Nordic sent the demand letter to the insurer, who agreed to appoint counsel subject to a reservation of rights.
Safeway filed suit against Nordic in state court alleging, among other things, breach of contract and negligence. The insurer provided Nordic with a defense, but Nordic hired independent counsel.
The insurer filed for declaratory relief in federal district court.
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Contractors with Ties to Trustees Reaped Benefits from LA Community College Modernization Program
March 3, 2011 — Original reporting by Gale Holland, Michael Finnegan and Doug Smith, Los Angeles Times
In the latest installment of the “Billions To Spend” series of investigative reports focused on construction defects, management, and cost issues relevant to LACC’s Community College Modernization Projects, the LA Times examines the costs associated with the various layers of construction management and benefits that accrued to contractors with ties to LACC trustees.
The reporting by the Times is seemingly critical of the project’s utilization of “body shops” an industry term for companies that function as employers of record. The article segment published today cites a number of circumstances wherein their utilization appears to have escalated costs substantially.
“To gauge the cost of the staffing system, The Times reviewed thousands of pages of financial records from April 2007, when URS began managing the program, to July 2010. Reporters identified two dozen contractors serving as conduits for pay and benefits for employees they did not supervise.
At least 230 people were employed in this manner, at a total cost of about $40 million, the records show.
Approximately $18 million of the total was paid to the employees, according to the Times analysis. The remaining $22 million went to profit and overhead for contractors, the records indicate.
For employees on its own payroll, the district says that medical and other benefits increase compensation costs 40% above base salaries. So if the district had employed its construction staff directly, the total cost for the period studied would have been $25 million instead of $40 million, a savings of $15 million, The Times calculated.”
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Colorado “occurrence”
January 6, 2012 — CDCoverage.com
In Greystone Construction, Inc. v. National Fire & Marine Insurance Co., No. 09-1412 (10th Cir. November 1, 2011), general contractors Greystone and Branan were each sued by purchases of homes built by each alleging defective construction performed by subcontractors. CGL insurer American Family Mutual Insurance Company defended both Greystone and Brannon while co-insurer National Fire & Marine Insurance Company denied a defense. Greystone, Branan, and American Family sued National Fire for contribution towards defense costs. The federal district trial court entered summary judgment for National Fire.
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Reprinted courtesy of CDCoverage.com
Insurance Company Must Show that Lead Came from Building Materials
August 17, 2011 — CDJ Staff
The Fourth Circuit Court of Appeals for Louisiana has reversed the summary judgment of a lower court in the case of Widder v. Louisiana Citizens Property Insurance Company. Judge Roland L. Belsome wrote the opinion for the panel of three judges. Ms. Widder discovered that her home and its content were contaminated by lead. She applied to her insurer, Louisiana Citizens Property Insurance, which denied her claim.
In response to Ms. Widder’s suit, LCPIC applied for a summary judgment on the grounds that there was no physical loss and that the policy did not cover defective material, latents defects, and pollution damage.
The appeals court found that the lead contamination of Widder’s home did meet the standards of a direct physical loss, citing a recent Chinese Drywall case. There, it was found, “when a home has been rendered unusable or uninhabitable, physical damage is not necessary.”
The lower court addressed only one of LCPIC’s exclusions, addressing only the exclusion on basis of “faulty, inadequate or defective material.” The appeals court noted that the evidence offered at trial does not show that the building materials were the source of the lead. This provided the appeals court with a matter of fact to remand to the lower court.
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Construction Upturn in Silicon Valley
August 17, 2011 — CDJ Staff
Work resumed after nearly three years on an office tower in Santa Clara, according to the San Jose Mercury News. Work had stalled on the building due to the economy, but now the developer is planning a second five-story building on the site. Other dormant projects in the area are also getting restarted. Santa Clara County saw the addition of 1,800 construction jobs in June.
A spokesperson for the Operating Engineers Local 3 in Alameda told the paper, “two years ago we had five thousand folks on the out-of-work list. It’s now down to about 1,700.”
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Massachusetts Couple Seek to Recuse Judge in Construction Defect Case
September 30, 2011 — CDJ Staff
After seeing their $1 million jury award overturned on appeal by a judge who called the award “against the weight of evidence and likely due to misapprehension, confusion or passion,” Kathryn and Christian Culley are seeking to have him removed from the case. The Massachusetts Supreme Judicial Court has rejected their claim.
The Culleys claim that Judge Thomas R. Murtagh’s decision was influence by him membership in the Andover Country Club which is represented by the opposing counsel in their construction defect case. Justice Margot G. Botsford had denied the Culley’s request, ruling that they had other remedies available to them.
The SJC noted in their ruling that if the Culleys are alleging judicial misconduct a request must be made to the Commission on Judicial Conduct. Their lawyer plans to file a new motion for recusal with the SJC.
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Construction on the Rise in Washington Town
June 16, 2011 — CDJ Staff
The Kitsap Sun reports that Gig Harbor, a town in the area near Tacoma, Washington, has had a 60% increase in building permit applications as compared to 2010. May, 2011 had as many permits issued for single-family residences in Gig Harbor as were issued for all of 2010. Additionally, a Safeway shopping center on Point Fosdick is described by Dick Bower, Gig Harbor Building and Fire Safety Director, as “a huge project and it’s going to bring in quite a bit of revenue.” He called the increase in building “economic recovery at the grassroots level.”
Bower said that the building officials in other towns have also seen upswings in construction. He anticipates more activity in the future.
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Texas contractual liability exclusion
May 18, 2011 — May 18, 2011 - CDCoverage.com
In Ewing Construction Co., Inc. v. Amerisure Ins. Co., No. C-10-256 (S.D. Tex. April 28, 2011), insured Ewing was the general contractor for an athletic facility constructed for a school district. The school district sued Ewing alleging defective construction of the project. The underlying complaint included contract and negligence causes of action, and sought damages for the repair of the damages and loss of the use of the project. The complaint did not allege damage to any property other than the project itself. Ewing tendered its defense to its CGL insurer Amerisure. Amerisure denied a defense and Ewing filed suit against Amerisure. The federal district trial court entered summary judgment for Amerisure. Applying Texas law, the court held that all of the damages fell within the “contractual liability†exclusion precluding any duty to defend or indemnify.
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Reprinted courtesy of CDCoverage.com
Ceiling Collapse Attributed to Construction Defect
May 19, 2011 — May 16, 2011 - CDJ Staff
WSMV, Nashville reports that the ceiling collapse in a Franklin, Tennessee Kohl’s was attributed to a construction defect by fire officials. The officials noted that the ceiling was renovated at the time. No injuries were reported.
The report notes that “inspectors were supposed to look at the renovations next week, but fire officials said that will have to be delayed until another time.”
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Save A Legal Fee? Sometimes You Better Talk With Your Construction Attorney
May 10, 2012 — Douglas Reiser, Builders Counsel
I love writing this column, because I think it’s refreshing for contractors to hear that they don’t always need an attorney. Today’s post is the “Un-Save a Legal Fee” because I want to point out a specific illustration of when you definitely need your attorney. Using a construction contract template can be fine, but you always need to consider its application to each project ? or it could bite you in the rear.
Seattle attorney Paul Cressman published a prime depiction of bad contract management, last week. A Florida appellate court struck down a general contractor’s “pay if paid” clause when it became ambiguous because of some incorporated language from its prime contract. Specifically, a clause in the prime contract required the general contractor to pay all subcontractors before receiving payment from the owner, while the general contractor’s “pay if paid” clause required its subcontractors to wait for payment until it arrived from the owner.
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Arbitration Clause Found Ambiguous in Construction Defect Case
October 28, 2011 — CDJ Staff
The California Court of Appeals ruled on September 28 in the case of Burch v. Premier Homes. Ms. Burch bought a home after negotiating various addendums to the contract. The contract was a standard California Association of Realtors contract to which both the buyer and seller made additions. At issue in this case was paragraph 17 of the contract which included that “Buyer and Seller agree that any dispute or claim in Law or equity arising between them out of this Agreement or resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration.”
The seller/defendant’s Addendum 2 “included provisions relating to the arbitration of disputes that may arise.” Ms. Burch’s realtor, Lisa Morrin, told Burch that “she had never seen a proposed contractual provision that would require a home buyer to agree to arbitrate with a builder over construction defects.” Ms. Burch told Morrin that she did not want to buy the property if she would have to give up her rights under California law.
As part of Addendum 2, the buyer had to buy a warranty from the Home Buyers Warranty Corporation. The sale was held up for a while, as Ms. Burch waited for a copy of the warranty. When she received it, she took further exception to Addendum 2. Scott Warren of Premier Homes said he could not sell the property without Addendum 2. Ms. Burch told her realtor that despite the claims made by Mr. Warren that this was for her benefit, she felt it was more to the benefit of Premier Homes. Don Aberbrook of HBW agreed to the clause, contained in the final sentence of Addendum 2, being struck.
Subsequent to buying the home, Burch submitted a claim concerning construction defects. HBW denied the claim and Burch began an action against the defendants. Premier filed a motion to compel arbitration which Burch opposed.
The trial court ruled that the striking out of the arbitration clause at the end of Addendum 2 “created a conflict with respect to the parties’ intent as to the scope of arbitration.” The trial court found that “the parties’ intention was to preserve Burch’s right to make state law claims including her right to a jury trial for any non-warranty claims against the builder.”
The appeals court in their ruling looked at the standard of review and concluded that the purchase agreement was ambiguous and that extrinsic evidence was required to resolve that ambiguity. As the contract contained contradictory provisions as to whether or not arbitration was required, it was necessary for the trial court to examine these claims. The appeals court found that the evidence supported the conclusions of the trial court.
Finally, the appeals court found that “there was no valid agreement to arbitrate disputes.” The court noted that arbitration can only happen by mutual consent and “it is clear that Burch did not enter into an agreement to arbitrate any construction defect disputes she might have.”
Read the court’s decision…
Nevada Supreme Court Reverses Decision against Grader in Drainage Case
June 30, 2011 — CDJ Staff
The Nevada Supreme Court has issued an opinion in the case of Rayburn Lawn & Landscape Designers v. Plaster Development Corporation, reversing the decision of the lower court and remanding the case for a new trial.
The case originated in a construction defect suit in which Plaster Development Corporation was sued by homeowners. Plaster filed a third-party complaint against its subcontractor, Reyburn. The testimony of Reyburn’s owner was considered to be admission of liability and so the court limited the scope of Reyburn’s closing argument and did not allow the jury to determine the extent of Reyburn’s liability. Reyburn appealed.
Plaster, in their case, cited California’s Crawford v. Weather Sheild MFG, Inc. The court held the application of these standards, but noted that the “an indemnitor’s duty to defend an indemnitee is limited to those claims directly attributed to the indemnitor’s scope of work and does not include defending against claims arising from the negligence of other subcontractors and the indemnittee’s own negligence.”
On the matter of law against Reyburn, the court concluded, “Given the conflicting evidence at trial as to whether Reyburn’s work was implicated in the defective retaining walls and sidewalls, and viewing the evidence and inferences in Reyburn’s favor, we conclude that a reasonable jury could have granted relief in favor of Reyburn.” The Nevada Supreme Court conduced that the district court should not have granted Plaster’s motion for judgement.
Further, the Nevada Supreme Court found that the district court should have apportioned the fees and costs to those claims directly attributed to Reyburn’s scope of work, “if any,” and should not have assigned all attorney costs and court fees to Reyburn.
Read the court’s decision…
Parking Garage Collapse May Be Due to Construction Defect
November 7, 2012 — CDJ Staff
A parking garage under construction at the Doral campus of Miami Dade College collapsed on October 9. Experts state that the collapse may have been due to errors in the construction process, either in the fabrication of the pre-cast components or in their assembly. The Bradenton Herald quotes Mark Santos, a structural engineer, who “would look at erection procedures ?Äì that’s probably the one question to ask first.”
During the failure, floors separated from the south wall of the structure. The contractor responsible for the garage, Ajax Building Corp, said there was “no indication of any potential cause.”
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Insurer Not Liable for Construction Defect Revealed by Woodpecker
September 13, 2012 — CDJ Staff
The Eighth Circuit Court of Appeals has ruled that an insurance provision that excluded construction defects must stand in Friedberg v. Chubb, granting a summary judgment to the insurance firm.
The Friedbergs discovered extensive water damage to their home after a woodpecker drilled a hole in a vertical support. They sought insurance coverage under their Chubb “Masterpiece” policy. The decision quotes the policy as covering “all risk of physical loss” “unless stated otherwise or an exclusion applies.” These exclusions included “gradual or sudden loss,” “structural movement,” and “faulty planning, construction or maintenance,” but the policy covered “ensuing covered loss unless another exclusion applies.”
Chubb’s expert determined that the Friedbergs’ home had defective construction, and “attributed the damage to the beams and walls below the beam to a failure to install control joints.” After Chubb denied coverage, the Friedbergs sued, although the court ruled that “even under the Friedbergs’ theory, the water damage was a loss caused by faulty construction and therefore excluded under the policy.”
On appeal, the Friedbergs argued that “the loss resulted from the combination of both faulty construction and the presence of water” and that Minnesota’s “concurrent causation” doctrine must apply, which according to the decision, “when a loss results from both a covered peril and an excluded peril, coverage exists unless the excluded peril is the ‘overriding cause’ of the loss.” The court rejected this reasoning, noting that “once the house was plagued with faulty construction, it was a foreseeable and natural consequence that water would enter.”
The Friedbergs also contended that “the damage caused by the intrusion of water into their home is an ‘ensuing covered loss’ for which they are due coverage.” The court also rejected this claim, noting that Minnesota law excludes defective construction from the ensuing loss provision. The court said that “the Friedbergs’ reading of their ensuing-loss clause, by contrast, would dramatically limit their policy’s faulty-construction exclusion, because almost ‘any loss cause by’ faulty construction could also be characterized as an ensuing loss under an all-risk policy.”
Read the court’ decision…
Federal Court Denies Summary Judgment in Leaky Condo Conversion
August 4, 2011 — CDJ Staff
In the US District Court for Illinois, Judge William Hibber has rejected the request for summary judgment sought by the developers of a condominium building in the case of Nautilus Ins. Co. v. 1735 W. Diversey, LLC (the insureds). The insureds renovated a building at 1735 W. Diversey, Chicago, converting it into condominiums. After the project was completed and all units sold, and a condominium association form, one of the owners found that unit suffered leaks during rainstorms. The condo board hired a firm, CRI, to investigate the cause of the leakage. CRI found “water infiltration through the exterior brick masonry walls, build-up of efflorescence on the interior surfaces of the masonry, and periodic spalling of portions of the brick masonry.”
The redevelopment firm had purchased coverage from Nautilus. “Shortly after the Board filed its first complaint, the Insureds tendered the mater to Nautilus and requested that it indemnify and defend them from the Board's underlying claims. Nautilus, however, rejected the Insureds’ tender and denied coverage under both insurance policies.” Nautilus stated that the water leakage did not constitute an occurrence under the policies. The court cited these policies in which an occurrence is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Illinois courts have determined that construction defects are not accidents.
The court concluded that the insured did not bring forth claims within the coverage of the policies and denied the motion for summary judgment.
Read the court’s decision…
