ANAHEIM CALIFORNIA CONSTRUCTION EXPERT WITNESS
DIRECTORY AND CAPABILITIES

Ensuing Loss Found Ambiguous, Allowing Coverage

The court determined the ensuing loss provision was ambiguous and found coverage for the home owners in Platek v. Town of Hamburg, 2012 N.Y. App. Div. LEXIS 5371 (N.Y. App. Div. July 6, 2012).

The burst of a water main caused water damage to the insureds' basement. Allstate disclaimed coverage under exclusion 4 for losses caused by "[w]ater . . . on or below the surface of the ground, regardless of its source . . . [,] includ[ing] water . . . which exerts pressure on or flows, seeps or leaks through any part of the residence premises."

Another policy provision covered "sudden and accidental direct physical loss caused by fire, explosion or theft resulting from item []. . . 4 . . . ." Plaintiffs argued that this exception applied because their claimed loss was caused by an "explosion" of the water main.

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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com

Georgia Supreme Court Rules Construction Defects Can Constitute an Occurrence in CGL Policies

Recently, the Supreme Court of Georgia reversed the decision in American Empire Surplus Lines Insurance Company v Hathaway Development Company, Inc. stating that because Whisnant’s faulty workmanship caused damage to the surrounding properties, the construction defects constituted “occurrences” under the Commercial General Liability (CGL) policy. Unlike the South Carolina Supreme court ruling in the case of Crossman Communities v Harleysville Mutual, the Georgia Supreme Court stated that an accident can happen intentionally if the effect is not the intended result.

Interestingly, the only dissenting judge, J. Melton, disagreed with his colleagues on the basis that “although the term ‘accident’ is not specifically defined in the policy, it is axiomatic that an ‘accident’ cannot result from ‘intentional’ behavior.” It is clear that what constitutes an occurrence in CGL policies is still being hotly debated.

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Builder Cannot Receive Setoff in Construction Defect Case

The California Court of Appeals has dismissed an appeal in a San Diego construction defect case. In Smith v. Walters Group, Christopher and Maud Smith sued The Walters Group, a real estate developer, and Galen C. Pavelko, Inc, the builder of their home. Walters had bought five lots and hired Pavelko to build houses on them, selling one of these homes to the Smiths. “After moving in, the Smiths noticed a strong and obnoxious odor permeating the house.” The Smiths sued but were ordered to arbitrate instead, pursuant to a clause in the purchase contract. The Smiths were awarded $1.5 million at arbitration.

Walters requested that the arbitration remain open to determine if Walters was entitled to a setoff for settlements from defendants not involved in the arbitration. During this time, Pavelko made a settlement with the Smiths, which the court found was in good faith. At the same time, the arbitrator “reached the opposite conclusion.” The arbitrator concluded that “only settlements made ‘in good faith before verdict or judgment’ qualified for setoff.”

Walters moved that the trial court “‘correct’ the award,” but the trial court declined to do so and confirmed the award. In the appeal, Walters raised the issue of “whether Pavelko’s settlement occurred ‘before verdict or judgment.’” The appeals court dismissed the appeal, noting that “Walters would not be entitled to a $500,000 setoff if we reversed the trial court’s order determining the Smith-Pavelko settlement was made in good faith because Pavelko’s $500,000 payment was expressly conditioned on such an order.” They add that “were we to reverse the trial court’s order, Pavelko would have no obligation to pay the Smiths the $500,000.” This would then “deprive Walters of the corresponding statutory right to a setoff.”

Read the court’s decision…

Public Relations Battle over Harmon Tower

Tutor Pernini claims that CityCenter is portraying the construction firm as “the scum of the earth” in an attempt to influence eventual jurors, according to an article at Vegas Inc. The contractor’s attorneys have requested information regarding the public relations efforts of MGM Resorts and CityCenter, characterizing CityCenter’s PR as a “litigation spin doctor.”

CityCenter has requested that at least one subpoena be canceled. Judge Elizabeth Gonzales has already allowed one to go through, although she has noted that Perini cannot request documents from CityCenter’s lawyers to the litigation consultants under attorney/client privilege. Tutor Perini claims that in 2010, Patricia Glaser, who has represented CityCenter, said her goal was to portray Perini as “the scum of the earth,” and make that certain that judges and juries would not “adopt the world view espoused by the opposing party.”

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District Court Awards Summary Judgment to Insurance Firm in Framing Case

In the case of Continental Western Insurance Company v. Shay Construction Inc., Judge Walker Miller has granted a summary judgment against Shay Construction and their co-defendant, Milender White Construction Company.

Shay was the framing subcontractor for Milender White on what the court described as “a major construction project in Grand County, Colorado.” Two of Shay’s subcontractors, Wood Source Inc. and Chase Lumber Company furnished materials, labor, and equipment to Shay. They subsequently sued for nonpayment and sought to enforce mechanic’s liens, naming both Shay and Milender as defendants. Milender White alleged that Shay had “breached its obligation under its subcontracts with Milender White.”

Shay’s insurance provider, Continental Western, stated that its coverage did not include “the dispute between Shay, its subcontractors, particularly the cross claims asserted by Milender White.” Shay then sued Continental Western, alleging breach of contract and statutory bad faith.

The court, however, has found with Continental Western and has granted them a summary judgment. They found “no genuine issue as to any material fact.” The judge did not side with Continental Western on their interpretation of the phrase “those sums that the insured becomes legally obligated to pay as damages.” The court found that the Colorado courts have not limited this to tort actions only. However, as Milender’s cross claim included claims of faulty workmanship on the part of Shay, Judge Miller found for Continental.

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No Third-Quarter Gain for Construction

The Associated Builders and Contractors released their analysis of construction work under contract and found that there was no increase in construction backlog from the second quarter of 2011. There was still improvement, however, over 2010, as the third quarter backlog is 16.3 percent higher than that of a year ago.

The current backlog is 8.1 months, which according to Anirban Basu, the chief economist of the ABC, “is consistent with flat construction spending.” He noted that less than 8 months indicated a decline.

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Flooded Courtroom May be Due to Construction Defect

The General Services Administration wouldn’t pin it on a construction defect, but a spokesperson said that a pipe that was misaligned during installation was the likely cause of a flood in the Thomas F. Eagleton US Courthouse on August 23. According to the St. Louis Dispatch, the burst pipe caused a 17-story waterfall in the courthouse, soaking ceilings and floors, and drenching the building’s contents.

The building was dedicated eleven years ago. During the nearly ten years before the building was complete, there were construction disputes and soil contamination issues.

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An Upward Trend in Commercial Construction?

Year-end economic indicators demonstrate that private commercial construction may be increasing in 2012, primarily as demand grows for new projects built in the United States.

According to an article in Businessweek, the Architecture Billings Index held at 52 in December, indicating a modest expansion in the market. The American Institute of Architects said that the commercial and industrial component of the number climbed to 54.1 in December, the highest in 10 months.

The monthly survey of U.S.-based architecture firms is one of the main indicators of nonresidential construction, and these numbers suggest that modest improvement may be on the horizon.

The information is confirmed by data from the Census Bureau that shows that spending on lodging, office, commercial and manufacturing buildings grew 8.2 percent in November to $9.2 billion from a year ago. These types of commercial and industrial projects are historically canaries in the mine and are usually the first part of the industry to improve as the economy expands.

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Reprinted courtesy of Melissa Dewey Brumback of Ragsdale Liggett PLLC. Ms. Brumback can be contacted at mbrumback@rl-law.com.

Coverage Rejected Under Owned Property and Alienated Property Exclusions

The insured’s request for a defense when sued in a construction defect action was denied under the owned property exclusion and the alienated property exclusion in1777 Lafayette Partners v. Golden Gate Ins. Co., 2011 U.S. Dist. LEXIS 48562 (N.D. Cal. April 29, 2011).

In 1999, Lafayette Partners purchased an abandoned walnut processing factory to convert into living and working units. The property was developed into a rental property from 2000-2001, and thereafter rented. In May 2003, Lafayette Partners entered into a sales agreement with Wolff Enterprises LLC. The sale closed in February 2005. Wolff then converted the rental units into condominiums.

In December 2007, the Walnut Factory Owners Association sued Wolff for construction defects. In Lafayette Partners was added to the suit in 2009. The suit alleged a variety of defective conditions, including the roofs, exteriors, windows, electrical , plumbing, and mechanical components and systems.

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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com

Save A Legal Fee? Sometimes You Better Talk With Your Construction Attorney

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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Faulty Workmanship Causing Damage to Other Property Covered as Construction Defect

In yet another recent construction defect case, the Illinois Court of Appeal found for coverage. See Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., 2011 Ill. App. Ct. LEXIS 872 (Ill. Ct. App. Aug. 15, 2011).

Weather-Tite, Inc. hired Larson as a subcontractor to apply sealant to windows installed by Weather-Tite in a condominium building. The windows subsequently leaked and caused water damage. The homeowner’s association sued Weather-Tite for breach of express and implied warranties. Weather-Tite filed a third-party complaint against Larsen alleging that, if it was liable to the association for breach of warranty, Larsen was liable for contribution as a joint tortfeasor. Weather-Tite and Larsen both tendered defenses to Milwaukee Insurance. The tenders were denied and Milwaukee Insurance filed suit to determine rights under the policy.

Cross-motions for summary judgment were filed by all parties. The trial court granted Milwaukee Insurance’s summary judgment motion as to Weather-Tite, but granted Larsen’s cross-motion against Milwaukee Insurance.

On appeal, the appellate court considered whether the underlying pleadings alleged facts demonstrating "property damage" resulting from an "occurrence" within the terms of the policy.

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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com

Homeowner’s Policy Excludes Coverage for Loss Caused by Chinese Drywall

Exclusions barred the homeowners from recovering for losses caused by Chinese drywall in their home. Ross v. C. Adams Const. & Design, L.L.C., 2011 La. App. LEXIS 769 (La. Ct. App., released for publication Oct. 5, 2011).

Two years after purchasing their home, the Rosses began experiencing chronic malfunctions in the heating, ventilation and air conditioning system. After discovering the presence of gypsum drywall, or "Chinese drywall", they submitted a claim to their insurer, Louisiana Citizens Property Insurance Company, for damages caused by the Chinese drywall. Louisiana Citizens denied the claim.

The Rosses sued. The trial court granted summary judgment to Louisiana Citizens based upon exclusions in the policy.

On appeal, the appellate court first agreed the Rosses had sustained a direct physical loss. The inherent qualities of the Chinese drywall created a physical loss to the home and the drywall had to be removed and replaced.

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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com

Pipes May Be Defective, But Owners Lack Standing

The United States District Court in Minnesota has determined that Steven and Cecilia Thundander cannot make a class-action claim against Uponor, Inc. over the plumbing in their home, as they do not have Article III standing. In this situation, the alleged defect is that Uponor made fraudulent claims that the pipes met National Sanitation Foundation (NSF) standards for use in potable water systems. Uponor submitted samples of other pipes, and their substitution was discovered when the NSF made an inspection of the manufacturing facility. The court noted that “the Thunanders contend that Uponor failed to inform homeowners, plumbers and consumers that it had been selling pipe that failed to meet NSF toxicity requirements at the time of sale and installation.”

The Court noted that the Thunanders have not tested their piping to determine if they “demonstrate toxicity or lack of compliance with the NSF 61 standards,” noting also that the Complaint seeks to require Uponor to instruct the plaintiffs on “how to test the piping and water to determine the level of risk.” Lacking testing, the Court could not find that the Thundanders have defective pipes. The Court found that the “Plaintiffs have failed to adequately plead an injury in fact sufficient to confer standing as to their product liability claims.”

The Court also concluded that it could not determine if the Plaintiff’s warranty actions could not be applied, as they “have failed to allege a plausible defect.” Even in the presence of a defect, the Court noted that more than eight years had passed before the filing of the suit, when the warranties under both Indiana and Minnesota law have a four-year statute of limitations. The Court also rejected the Thunanders tort claims, once again because “Plaintiffs have not tested their pipes,” noting that “a tort requires the existence of an injury.”

In conclusion, Judge Nelson rejected the entirety of the complaint, granting the motions to dismiss by the defendants. However, despite the problems with the Thunanders’ claims, she found that they were not “patently frivolous or groundless.” Therefore, she denied attorney fees requested by one of the defendants.

Read the court’s decision…

High School Gym Closed by Construction Defects

The high school gym in Lake Oswego, Oregon has been shut down because testing has revealed that the construction defects have lead to deterioration of the structural integrity of the roof. The school district noted that there was a chance of collapse if there were a “significant seismic event or heavy rain and winds and snow.” The school district has been in a lawsuit with the builders since 2008, which was recently settled for $600,000.

The school board is still determining whether the original contractor will be asked to correct the defect or if they will bid the job out.

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Crane Dangles and So Do Insurance Questions

Hurricane Sandy sent a construction crane dangling from the top of One57, a condo construction project in New York City. In response to the risk, the nearby Parker Meridian and other nearby buildings were evacuated until the crane could be stabilized. Businessweek reports that One57 involves “a tangle of companies,” including the developer, Extell Development and the contractor, Lend Lease Construction. Pinnacle Industries was responsible for providing and operating the crane.

The insurance claims are yet to be made, but they will likely include the costs of evacuating nearby buildings and to cover any damage to the building itself. David DeLaRue, a vice president in construction practice at Willis Group Holdings said there would be two questions: “Did our insured do anything to cause that loss? Does this policy cover it?”

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Water Drainage Case Lacks Standing

The Texas Court of Appeals has ruled in the case La Tierra de Simmons Familia Ltd. V. Main Event Entertainment, LP. The trial court had found for Main Event. On appeal, the court threw out some of the grounds on which the trial court had reached its decision.

The case involved two commercial lots in northwest Austin, Texas. The uphill tract (Phase III of the Anderson Arbor development) diverts its runoff onto the lower tract (the “Ballard tract”). The owners of the Ballard tract claim that “the drainage system was designed or constructed in a manner that has damaged and continues to damage the Ballard tract.”

Both tracts have undergone changes of ownership since the construction of the drainage system in 2004. At the time the drainage system was constructed, the parcel was owned by Sears Roebuck and Co. Sears later sold the property. Main Event Entertainment is the current tenant. Likewise, the Ballard tract was previously owned by the Ballard Estate which sold the property to La Tierra on an “as is” basis in 2007.

After La Tierra bought the Ballard tract, La Tierra’s engineer “witnessed and videotaped what he described as ‘flooding’ on the Ballard tract caused by storm water discharge from the Anderson Arbor drainage system during a rainfall event.” La Tierra determined that an adequate drainage system would cost about $204,000. Development plans were put on hold.

La Tierra sued Main Event and various other parties associated with the uphill tract, seeking “actual damages for (1) decrease and loss in rental income due to delay in obtaining the development permit, (2) interest on carrying costs during that time period, (3) the cost to build a water conveyance system on the Ballard tract, (4) engineering fees incurred to redesign the water conveyance system, (5) unspecified out-of-pocket real estate expenses, and (6) property devaluation occasioned by the need to construct an expensive water conveyance system.” The trial court never reached these claims, ruling instead that La Tierra lacked standing, that its claims were barred under the statute of limitations, and that there was no evidence of damage.

La Tierra appealed, arguing that “(1) the summary-judgment evidence does not conclusively establish that property damage claims accrued or were discovered prior to September 11, 2007, which is within the limitations period and was after La Tierra purchased the property; (2) even if the property was damaged before La Tierra acquired ownership of the Ballard tract, standing exists based on the assignments of interest from the Ballard Estate heirs, and the discovery rule tolls limitations until the injury was discovered on September 11, 2007; (3) limitations does not bar La Tierra's request for injunctive relief; (4) La Tierra's water code claim against Main Event and M.E.E.P. is viable based on their control over the drainage system, which makes them necessary and indispensable parties for injunctive relief; (5) La Tierra presented more than a scintilla of evidence to raise a fact issue on damages, causation, and other essential elements of its causes of action; and (6) the trial court abused its discretion when it sustained the defendants' objections to La Tierra's summary-judgment evidence.”

The appeals court concluded that La Tierra’s second claim was irrelevant to standing, as La Tierra “obtained assignments from the Ballard Estate heirs ? nearly one year after the lawsuit was initially filed.” Nor did the court accept their first point. The water system had been operating unaltered since January, 2004, with monthly maintenance and inspection to maintain its designed operation. Further, a feasibility report La Tierra received stated that “over sixteen acres drain into those ponds, and thus onto this site.” The court noted that “the underlying facts giving rise to a cause of action were known before La Tierra acquired ownership of the Ballard tract.”

The court concluded that the drainage issue is a permanent injury, but that it “accrued before La Tierra acquired an ownership interest in the property.” As La Tierra has standing, the appeals court ruled that it was improper for the trial court to rule on the issues. The appeals court dismissed the questions of whether the case was barred under the statute of limitation and also the question of whether or not La Tierra had damages.

As the issue of standing would not allow La Tierra to bring the suit, the appeals court found for the defendants, dismissing the case for this single reason, and otherwise affirming the ruling of the lower court.

Read the court’s decision…

Unit Owners Have No Standing to Sue under Condominium Association’s Policy

If a condominium owner suffers damage caused by a leak from another unit, may it sue the insurer for the Association of Apartment Owner (AOAO) for coverage? The federal district court for Hawaii said "no" in a decision by Judge Mollway. See Peters v. Lexington Ins. Co., 2011 U.S. Dist. LEXIS 148734 (D. Haw. December 27, 2011).

Two cases were consolidated. In each case, Plaintiffs owned condominium units at the Watercrest Resort on Molokai. Water leaking from another unit damaged Plaintiffs’ units.

Watercrest Resort was insured by Lexington pursuant to a policy maintained by the AOAO. Plaintiffs filed claims with Lexington. Lexington hired an adjustor.

Unhappy with the adjustment of their claims, Plaintiffs sued Lexington and the adjustor.

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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com

Seven Tips to Manage Construction Defect Risk

Jody T. Wright looks at “seven strategies being used around the country to identify, manage and mitigate your exposures” in a piece in Business Insurance. Wright, Senior VP, Construction Department Manager for Lockton Companies in Denver, gives seven simple steps from the perspective of a insurer.

His first step is to match your project to your insurance. He suggests keeping the riskier projects separate, noting that from an insurer’s point-of-view, “any project that creates a homeowners association carries a higher potential threat of future litigation.” This leads to his second point: you need to “determine what makes your liability insurer nervous.” In other words, talk with your insurer.

His third point suggests that builders look back and see if there is a pattern of problems that have lead to payouts from your insurer. Keep your insurer happier by making sure these areas don’t continue to be problems. Nor should you look for new problems. He suggests against leading in new technologies.

Three more points deal with being careful about with whom you associate. He tells builders to negotiate their contracts, avoiding clauses that would obligate a builder to “indemnify the owner for the negligent work of others that they did not control.” Avoid subcontractors “with loss patterns that might affect your project and reputation.” Builders should identify “owners with a pattern of suing contractors” adding that risk to the cost of the job. They should also identify “the most effective attorneys and expert witnesses” and get them involved before the litigation starts.

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