DEDICATED TO STRATEGIC BUSINESS ISSUES FACING OWNERS, DEVELOPERS,
& THE Project

Home | 2004 Edition 

DEPARTMENTS

From the Editor-in-Chief
Captains of the Industry
Business Management
Insurance & Bonding
Recent Court Decisions
Taxes & Accounting
Public-Private Ventures
Calendar of Events

COLUMNS

Finance
Technology
Labor
Federal Watch
International
Washington, D.C.
Environment
Law

Archive

About

Order

Advertising

Let Us Hear From You

Editorial Advisory
board

CBR Staff

Recent Court Decisions

The U.S. Court of Appeals, Eighth Circuit, recently held that insurance coverage for "property damage" did not include costs incurred to repair defects in welded steel pipe sections that had been used in a construction project after the insured inspection company had negligently approved the pipe sections for use at a California hydroelectric plant.

The prime contractor had purchased the defective pipe sections in Missouri and then installed them in the field after the insured inspecting company had inspected and approved them at the fabricator’s shop. The project owner suspended work at the site when he discovered the defects and then required the prime contractor to invade integrated pipe sections in order to repair the preexisting weld defects. The prime contractor allegedly incurred over $3 million in costs, based largely on the expense of repairing the defective welds and the damage caused by invasion of the partially completed pipe system which was required in order to reach and repair the defects. The inspecting company’s insurer refused to pay the prime contractor and the latter sued the insurer.

The insurance policy extended coverage for "property damage," defined in part as "physical injury to tangible property." The plaintiff argued that the diminution in the structure's value caused by the incorporation of the defective pipe sections constituted property damage. The court rejected that theory under Missouri common law and on the basis of decisions in other states which held that the mere incorporation of a defect within a structure does not, by itself, constitute "physical injury." The court also rejected the argument that property damage should include the costs of repairing the defects. The court held that those costs were not covered. Instead, the insurer was responsible only for the minor costs attributable to the damage caused by the necessary invasion of the partially completed pipe system.

Esicorp, Inc. v. Liberty Mutual Insurance Co., 2001 WL 1082346 (8th Cir. 2001).

In March 2001, a federal district court in New York held that a con-tractual, mutual waiver of liability, between an architectural firm and the property owner whose premises were being developed, extended to property damaged through negligence but could not apply to damages caused by gross negligence under applicable New York law.

The architectural firm had entered into an agreement with the property owner to provide it with a construction project design for a school gymnasium, to conduct necessary inspections, and to protect the owner against defects and construction deficiencies. The agreement also included a mutual waiver whereby the firm and owner waived all rights against each other for any damages covered by property insurance during construction. The owner purchased insurance that covered the construction. During construction, two of five trusses failed and the insurer paid over $800,000 to the owner, its insured. The insurer, as subrogee, then sued the architectural firm for negligence and gross negligence.

The court explained that the owner's insurer, as subrogee, had the same rights, under the contract, as the owner had against the architectural firm. Since the insured owner waived its right to a claim of property damage against the architectural firm, the insurer could not assert such a claim under New York law, even though the effect of the waiver was to absolve the architectural firm from its own negligence. The court held that such contractual waivers cannot, however, absolve a party from liability for gross negligence, and the court stated that a jury would have to decide whether the firm had been grossly negligent.

Travelers Indemnity Company of Connecticut v. The Losco Group, Inc., 136 F. Supp. 2nd 253 (S.D. N.Y. 2001).