Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: Ingram Yuzek Gainen Carroll & Bertolotti, LLP
(Kimberly L. Quintano, Joseph M. Conley, Maurizio Anglani)

December 2016

1.  When a general contractor/construction manager makes a general request that its insurance broker obtain coverage for its practice, the insurance broker satisfies its duties to the insured even where it obtains a general liability policy with a construction management exclusion. Houston Cas. Co. v. Cavan Corp. of NY, 2016 N.Y. Misc. LEXIS 3843 (Sup. Ct. NY County, Oct. 17, 2016).

*  What the Court Considered: In this case, Cavan Corp. of New York (“Cavan”) performed work as the general contractor/construction manager on a project at which an employee of a subcontractor of Cavan’s was injured. In its contract for the project, Cavan was described as the construction manager. Prior to the project, Cavan made a general request to its insurance broker, Ducey, to obtain coverage for Cavan for the project. Cavan did not specifically state to Ducey that it was acting in the role of construction manager at the project or specifically request coverage for construction management activities. Ducey obtained a general liability policy for Cavan through Houston Casualty Company (“HCC”) which covered general contractor activities, but which contained a construction management exclusion. After the injured worker brought a lawsuit against Cavan, among others, HCC commenced the instant declaratory judgment action to determine whether it was required to defend and/or indemnify Cavan despite the construction management exclusion. In this declaratory judgment action, Cavan argued that Ducey had failed to satisfy its duty to obtain the coverage Cavan had requested.

*  What the Court Said: The Supreme Court of New York, New York County held that Ducey had satisfied its duty to obtain the requested coverage for Cavan. The Court explained that insurance brokers have a common law duty to obtain requested coverage for a client within a reasonable amount of time (or inform the client that the broker is unable to do so). The broker, however, has no continuing duty to advise, guide, or direct a client to obtain further coverage. Moreover, an insurance broker is not obligated to obtain any specific coverage for its client unless the client makes a specific request for that type of coverage.

*  What the Opinion Means: In New York, even though a general contractor/construction manager may request that its insurance broker obtain for it coverage for a particular project, the broker is only required to obtain general coverage for the client, which may be subject to certain exclusions, unless the insured specifically asks for a particular type of coverage, such as coverage for construction management activities.

Kimberly L. Quintano is an associate in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti LLP. Kimberly represents owners, architects, engineers, construction managers and contractors in a variety of aspects of the construction & design process.

2. The Second District Illinois Appellate Court affirmed the dismissal of a subcontractor’s mechanic’s lien claim for work done on a wind energy project. AUI Constr. Grp., LLC v. Vaessen, 2016 IL App (2d) 160009.

*  What the Court Considered: This case involved a dispute stemming from the construction of a wind energy tower on private property by a developer of wind energy. Prior to the construction of the tower, the developer and property owners entered into a windpark easement agreement that gave the developer the exclusive right to construct, maintain and operate wind energy conversion systems on the property. After the tower was completed, one of the subcontractors that worked on the tower filed a complaint to foreclose on a mechanic’s lien against the property and sought to recover over $3 million. The subcontractor argued that the easement should not be binding against it because it performed work before the easement was recorded.

The central issue considered by the Court was whether the subcontractor’s worker constituted improvement to real property, which is lienable, as opposed to improvement to a trade fixture, which is not. In deciding whether equipment added to property constitutes a land improvement and is thus lienable, the court considered three factors: (1) the nature of its attachment to the realty, (2) its adaptation to and necessity for the purposes to which the premises are devoted, and (3) whether it was intended that the item in question should be considered part of the realty. The Court further noted that intent is the preeminent factor, and the other considerations are primarily evidences of intent.

*  What the Court Said: While the first two factors suggest that the tower is lienable, the Court found that the third factor, intent, “is the most important factor in determining whether an item is a removable trade fixture or a permanent improvement.” The agreement between the developer and the property owner provided that the tower would remain the property of the developer and would be removable by the developer upon three months’ notice to the owner, thus establishing it as a trade fixture.

*  What the Opinion Means: This decision is important because it clarifies to some extent whether wind energy construction projects (and potentially other renewable energy projects) are categorized as non-lienable trade fixtures. Contractors looking to work on wind energy projects should pay particularly close attention to the terms of the agreement between the real property owner and developer to ascertain if the contractor will be able to enforce a lien if a payment default occurs.

Joseph M. Conley is an associate in the Construction & Design Practice Group of Ingram Yuzek Gainen Carroll & Bertolotti, LLP. Joe represents property owners and contractors in construction-related litigation with a particular focus on cases involving violations of the New York State Labor Law.

3. An Owner is Unlikely to Succeed in Defective Work Claim Against Contractor Hired Under Design Specification Contract. CGM Constr., Inc. v Sydor, ___AD3d___, 2016 NY Slip Op 07895 (2016).

*  What the Court Considered: Plaintiff, CGM Construction, Inc. (“CGM”) filed suit against the owner (“Owner”) of a historical building in the Village of Waterford, Saratoga County. In the lawsuit, CGM claimed $80,032.70, plus interest, for work it had completed at the property under a contract with the Owner. The Owner counterclaimed and alleged that CGM charged him for labor not performed, as well as materials and equipment not used. The Owner further claimed that CGM performed defective work. The contract between the parties provided that Owner would pay CGM on a time and material basis and a retainer fee.

*  What the Court Said: The Court held that the Owner was not allowed to recover for the allegedly defective work. The Court explained that under New York law there is a distinction between a performance specification contract, which affords a contractor the freedom to choose the materials and methods employed to achieve a specified result, and a design specification contract, which requires a contractor to use the materials, methods and design dictated by the owner, without bearing any responsibility if the design proves inadequate to achieve the intended result. The Court noted that the parties had entered into a design specification contract, even though the written contract between them was silent. The Court reasoned that the Owner (an architect) imposed his own plans and specifications, was involved in every decision on the job site, required permission for work on new aspects of the project, had the final word on materials used, and would inspect the work. As such, the contractor was not responsible for defects resulting from the Owner’s designs, plans and specifications.

*  What the Opinion Means: The decision limits a contractor’s liability for defective work performed under a design specification contract. Additionally, the decision is a reminder that where the contract is silent, New York courts will interpret the conduct of the parties to determine the nature of the contract and, ultimately, any liability thereunder.

Maurizio Anglani is an associate in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti LLP. Maurizio represents owners, architects, engineers, construction managers and contractors in a variety of commercial matters, including litigation and contract drafting. His primary focus is on prosecuting and defending commercial cases involving construction issues such as defective construction, delays, breach of contract, negligent design, payment disputes, mechanic’s liens, and suretyship.