Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

January 2010

1.      Absent “Operational Control,” Owner Is Not Liable for the Negligent Acts of Independent Contractor, Iglesias v. Chevron U.S.A., Inc., 2009 U.S. Dist. LEXIS 73147 (E.D. La. 2009). 

*     What the Court Considered: An owner hired a contractor to construct scaffolding on an offshore oil platform in the Gulf of Mexico.  An employee of the contractor (“Plaintiff”) was injured unloading drinking water onto the platform from a supply boat.  At the time of the injury, an employee of the owner was present on the platform to supervise the contractor’s construction of the scaffolding.  The Plaintiff sued the owner, arguing that the owner’s employee’s supervision of the construction project rendered the owner liable for the Plaintiff’s injuries.  The owner moved for summary judgment on the basis that it had not exercised control over the Plaintiff sufficient to render it liable for the consequences of the Plaintiff’s acts.  

*     What the Court Said: Applying Louisiana law, the court granted the owner’s motion for summary judgment, holding that the owner had not exercised “operational control” over the Plaintiff such that the owner was legally liable for the consequences of the Plaintiff’s negligence.  Noting that “there is no operational control unless the principal retains control over the methods and manner of the work, i.e., gives ‘how to’ instructions to the independent contractor” and that the owner’s supervisor had not provided the Plaintiff with specific instructions “how to” offload the water onto the platform, the court found for the owner.    

*     What the Opinion Means: Louisiana courts, like those of many jurisdictions, determine liability for the negligence of independent contractors based of the degree of control exercised by the owner over the independent contractor.  In Louisiana, retention of control over the methods and manner by which a contractor performs its work will generally render the owner liable for the negligence of the contractor.  Absent such “operational control,” the owner will avoid liability as in Iglesias.          

2.      Insurer’s Untenable Interpretation of Business-Risk Exclusion Results in Loss of Case, Imposition of Sanctions, Transportation Insurance Co. v. Piedmont Construction Group, LLC, Nos. A09A1200, A09A1201, A09A1202 (Ga. Ct. App. 2009).      

*     What the Court Considered: An owner sued a GC after a fire resulting from a plumbing sub’s work extensively damaged the historic building in which the work was being performed.  The GC sought coverage and a defense from its CGL insurer, which denied the GC’s claim on the basis of a business-risk exclusion in its policy.  The insurer contended that the exclusion relieved it of an obligation to cover damage to the building because the GC was performing work throughout the building, and the damage to the structure was, in essence, only damage to the GC’s work.  After the denial of its claim, the GC sued the insurer.  At the trial of the GC’s suit, the court ruled that the business-risk exclusion applied only to the room in and plumbing on which the sub was working.  The trial court found for the GC and imposed bad-faith penalties against the insurer.     

*     What the Court Said: In addition to upholding the trial court’s decision based largely on the reasoning articulated by the trial court, the appeals court imposed penalties against the insurer for filing a frivolous appeal.  The appeals court agreed that the insurer’s interpretation of the scope of the business-risk exclusion was ridiculous, as such an interpretation would mean the insurer was obligated to cover an extraordinarily narrow range of claims. 

*     What the Opinion Means: In Georgia, business risk exclusions contained in CGL policies continue to be construed such that insurers cannot use the exclusions to deny coverage in cases where accidents result in damage clearly extending beyond a contractor’s work.   

3.      Owner’s Negligence Claims Against Project Subcontractors Barred by Economic Loss Doctrine, American Stores Properties, Inc. v. Spotts, Stevens & McCoy, Inc., 2009 U.S. Dist. LEXIS 71217 (E.D. Pa. 2009).

*     What the Court Considered: An owner filed negligence claims against several subs, sub-subs and a supplier (together, the “Defendants”) after the failure or near failure of several retaining walls.  The owner was forced to assert negligence claims against the Defendants as it lacked the privity necessary to sue in contract.  The Defendants all moved for summary judgment, arguing that the owner’s claims were barred by the economic loss doctrine because the alleged failure of the walls resulted in no damage other than to the walls themselves.       

*     What the Court Said: The court granted the Defendants’ motions to dismiss, finding that the economic loss doctrine was applicable to the owner’s claims despite the lack of privity between the owner and Defendants.  Absent injury to some person or property other than the walls themselves, the owner’s claims were barred by the doctrine. 

*     What the Opinion Means: In Pennsylvania, like a number of other states, application of the economic loss doctrine is not limited to claims against parties with whom the claimant has contractual privity. 

4.      Georgia Court Upholds Contractual Limitation on Engineering Firm’s Liability to Developer, RSN Properties, Ltd. v. Engineering Consulting Services, Ltd., Case. A09A0872 (Ga. Ct. App. 2009).

*     What the Court Considered: A developer hired an engineering firm to conduct soil testing and render an opinion as to whether septic systems would be suitable for use in a residential subdivision under development.  The engineering firm concluded that all of the proposed lots in the subdivision could be served by septic systems.  After the county rejected the developer’s subdivision plans due in part to the unsuitability of many of the proposed lots for septic systems, the developer sued the engineering firm, seeking damages in excess of $100,000.  The engineering firm defended against the suit and moved for partial summary judgment based on a provision in the contract between the developer and firm limiting the firm’s liability to the value of the engineering services or the sum of $50,000, whichever was greater.  The developer argued that the liability-limiting provision violated public policy and was therefore unenforceable.  Disagreeing with the developer, the trial court granted the engineering firm’s motion.  The developer appealed.

*     What the Court Said: Finding that the parties were not statutorily prohibited from contracting for a limitation on the engineering firm’s liability to the developer and that the firm was not insulated from liability to third parties, the appeals court upheld the lower court’s ruling. 

*     What the Opinion Means: In Georgia, it remains the general rule that “a party may contract away liability to the other party for the consequences of his own negligence without contravening public policy, except when such as agreement is prohibited by statute.”

5.      Architect’s Insurance Claim Held Properly Rejected Given CGL Policy’s Professional-Services Exclusion, Wimberly Allison Tong & Goo, Inc. v. Travelers Property Casualty Company of America, No. 08-2976 (3d Cir. 2009).

*     What the Court Considered: A parking garage outside of an Atlantic City casino collapsed during construction, killing or injuring a number of workers.  Several lawsuits were filed against the project architect, which both designed the garage and supervised its construction.  The architect sought coverage under its CGL policy, which the insurer denied based on a professional-services exclusion contained in the policy.  The exclusion explicitly provided that the policy did not cover injuries or property damage resulting from a “failure to render any professional services.”  The architect and insurer filed cross-motions for summary judgment.  The district court ruled for the insurer, finding that the professional-services exclusion relieved the insurer of any obligation to cover the architect’s claim.  The architect appealed. 

*     What the Court Said: Finding that the conduct of the architect giving rise to the lawsuits “flowed directly” from the architect’s “professional activity,” the circuit court upheld the lower court’s decision in favor of the insurer.

*     What the Opinion Means: In New Jersey, the question of whether an insurance claim falls within a professional-services exclusion is answered by examining the nature of the conduct giving rise to the claim.  If conduct is “professional in nature” and potential liability “flowed directly” from the conduct, a claim based on the conduct will fall within the exclusion.  This case serves as a reminder that owners and developers need to be sure that architects with whom they contract maintain sufficient professional liability insurance in addition to adequate CGL coverage.

Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia.  Cory Menees is an Associate at Troutman Sanders LLP.  For more information, or if you have any questions, contact us at hlk@constructionchannel.net.