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Construction & Real Estate News Summer 2011

Posted by attorney Peter Bauman


Ensuring Insurance Agreements with Second Tier Subcontractors.

An Illinois Court in Westfield Insurance Co. v. FCL Builders, Inc., ruled against the General Contractor (“GC") on the GC’s claim that the sub-subcontractors’ insurer failed to defend and indemnify. Pursuant to the GC-Subcontractor contract, each subcontractor was required to procure certain specified insurance and list the GC as an additional insured. The subcontractor then subcontracted with a sub-subcontractor, with the contractual requirement that the sub-subcontractor be bound by the terms of the GC-subcontractor contract. Thereafter, a workplace injury prompted a lawsuit, and the GC tendered the case to the insurer for the sub-subcontractor, who denied coverage. The GC brought suit against the sub-subcontractor’s insurer. The Court found against the GC, based upon the lack of a direct communication, written agreement, or privity between the GC and sub-subcontractor, and the sub-subcontractors insurers’ policy requiring a direct written contract between the second-tier subcontractor and the entity seeking insurance coverage.

Even though this case dealt with an Illinois court and a manuscript insurance policy, it is a perfect reminder that contractors need to constantly monitor and manage their contractual insurance requirements and compliance.

California’s Lawmakers Expand the Prohibition of Type I Indemnity Agreements.

In 2007, California lawmakers prohibited Type I indemnity agreements for residential projects. On June 1, 2011, the California Senate passed Senate Bill 474 (“SB 474") to further amend Civil Code § 2782 to prohibit Type I indemnity agreements for private commercial projects starting after January 1, 2013. The revisions in SB 474 state that agreements that attempt to have another person indemnify, hold harmless, and defend another for their negligence or other fault is against public policy and void, and cannot be waived. Further a provision in a contract requiring additional insured coverage is also void and unenforceable to the extent it requires such indemnification. These revisions do not apply to WRAP insurance policies or breach of contract causes of action that are separate from the indemnity requirements.

This new legislation appears to be a direct response to Crawford v. Weathershield and its progeny of case law now developing. Lawmakers appear intent on leveling the playing field between developers, general contractors, subcontractors, and artisan trades.

Is This The Beginning of The End For The 10-Year Statute of Repose?

Developers and contractors in California currently enjoy certainty to their liability exposure to defect suits; after 10 years, all liability is likely cut off, with a couple exceptions. However, current Assembly Bill 1207 (“AB 1207") is challenging this comfort zone for specific cases concerning hazardous or toxic waste. For these cases, AB 1207 wants to increase the defendant pool to which would ordinarily be limited to the prior property owner. Important concerns regarding the AB 1207 include: will this erosion lead to further degradation of the protections afforded developers and contractors? How will this affect the recovery of the current construction economy and the insurers who underwrite the industry?

The trigger for this revision lies inAcosta v. Shell Oil Company which involved a group of homeowners in Southern California who attempted to sue Shell Oil Company and those involved in constructing their homes for contamination. The homeowners’ case was dismissed against the builders since the suit was brought nearly 50 years after the construction was completed. In response, AB 1207 was prepared to add a further exception to the 10 year statute of repose for damages from exposure to hazardous or toxic materials."

The Statute of Repose, CCP § 337.15, and the cases which flow from it create and maintain the balance between the consumer homeowner buying a very complex product, and the developers and contractors who would otherwise face open ended liability that would eventually shrink the industry and further drive up housing costs. This balance is important and an increase in the protections afforded the consumers would likely lead to further pressure on an already stressed industry. Further concerns are that this amendment would lead to further exceptions being carved out in the upcoming years.

California Courts Uphold Krusi – Homeowner Standing To Bring Suit

In an unpublished opinion, the California Courts in Kizor v. BRU Architects (2011) upheld Kruzi, which states, absent an assignment, the owner of house at the time a defect is observable is the real party in interest with standing to bring suit, not a subsequent owner. In Kizor, the current homeowners brought suit against the architect, contractor, and others involved in the design and construction of the home he purchased from the original owners. The trial court ruled, and the appellate court affirmed, that since the defects accrued during the original owners ownership of the house, they were the only party with standing absent an assignment.

Primary Liability Insurer’s Indemnity Obligations For Continuing Injuries Is Not Subject to Annual Stacking.

Primary insurer filed an action against its insured for declaratory relief seeking a finding that the insurer’s policies were exhausted and that the insurer had no further duty to defend or indemnify. The insured cross-complained against the excess carrier for coverage. The trial court found that the excess coverage would “drop down" upon exhaustion of the per-occurrence limit of a single primary policy. The appellate court reversed.

The appellate court found that the insured purchased primary policies from four carriers over the span of 40 years. In each year, the insured also purchased an excess policy. The insured was sued for asbestos claims covering multiple policy periods and the insured selected one particular primary policy from Truck for coverage, which had a $500,000 per occurrence limit; the policies with the other three primary carriers were exhausted. The primary insurer eventually paid the $500,000 per claim limit. The insured then tendered to the excess carrier. The excess carrier claimed that all of Truck’s primary policies must be stacked such that all primary policies at risk due to the continuing loss during the 40 years (i.e. Truck’s other policies) be exhausted before the excess policy be activated. The appellate court disagreed and found that since the primary insurer’s liability was limited per occurrence, the primary insurer is liable for no more than $500,000 per claim, and that the multiple primary policies cannot be stacked, before the excess insurance is triggered. Truck’s policy specifically read that the insured may collect up to the policy limits of only one policy for each occurrence.


Green Construction – Solar Energy Litigation

Firm Associate Peter Bauman and Partner Robert Freedman recently obtained a victory in a binding arbitration on behalf of a commercial property owner in a case of first impression involving defective installation and performance of a voltaic solar panel alternative energy system. Cutting edge “green" energy issues that were litigated include contract terms, permitting and approvals, contractor licensing requirements, energy cost savings estimates, and mandated warranties by the California Solar Initiative. In addition to receiving damages, the arbitrator awarded the Firm’s client attorneys’ fees and interest which survived an appeal.

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