Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: Ingram, Yuzek, Gainen, Carroll & Bertolotti, LLP
(Larry F. Gainen, Melissa T. Billig, Jessica L. Rothman,
Peter M. Canty, Kimberly L. Quintano)

May 2016

1.  In New York, “justice requires” a developer to pay contemporaneous license fees for access to an adjacent neighbor’s property. DDG Warren LLC v Assouline Ritz 1, LLC 2016 NY Slip Op 02926; 2016 N.Y. App. Div. LEXIS 2805 (1st Dep’t) (decided April 19, 2016).

*  What the Court Considered: When an adjacent neighbor refused to give the adjacent building developer access to its property, on the terms insisted upon by the developer, the developer commenced a Section 881 Real Property Actions and Proceedings Law (“RPAPL 881”) petition seeking a court order for the access sought. The lower court granted access to the developer and directed the developer to pay a license fee for the access because the neighbor was losing use of its terrace during the developer’s 30 month project. However, the lower court declined to set the amount of the license fee until after the project was completed, 30 months too late.

*  What the Court Said: While RPAPL 881 provides that a court may grant a developer access to a neighbor’s property in an appropriate case, it must do so upon “such terms as justice requires.” See, e.g., Matter of North 7-8 Inves., LLC v. Newgarden, 43 Misc. 3d 623 (Kings Co. 2014). Because the adjacent neighbor did not seek out this intrusion, the neighbor should not be required to bear costs resulting from the access, including license fees and legal fees. Id. Significantly, "(w)here the granted license will entail substantial interference with the use and enjoyment of the neighboring property," the license fees awarded to the neighbor should not be postponed. The court determined that the lower court improvidently refused to require that contemporaneous license fee payments be made to the neighbor. In addition, the court confirmed that a developer may be ordered to post a bond to secure the license fees awarded to the neighbor and possible damages, even where the neighbor is covered by the developer’s insurance.

*  What the Opinion Means: The court confirmed that the adjacent neighbor was properly awarded license fees and legal fees under “such terms as justice requires.” Significantly, the license fee payment is contemporaneous with the access. The take away? Developers should not force access on terms that are not just and neighbors should give the access reasonably requested by the developer (and supported by access plans and a schedule) and be reasonable in conditions for the access. Work it out – you will be neighbors.

Melissa T. Billig is a Partner in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti LLP. Melissa represents owners, architects, engineers, construction managers and contractors by drafting and negotiating design and construction agreements and license agreements, providing advice and counsel in connection with multi-party contract disputes and defective construction claims, and resolving construction disputes, both prior to and during litigation and alternate dispute resolution.

2. Ohio Supreme Court rules non-employer sub-contractors are immune from tort claims under the Ohio Worker’s Compensation Law if they are enrolled in a worker’s compensation self-insurance program covering a construction project. . Stolz v. J & B Steel Erectors, Inc., 2016-Ohio-1567; 2016 Ohio LEXIS 955 (decided April 19, 2016).

*  What the Court Considered: Plaintiff, a construction worker, brought a negligence action in the United States District Court for the Southern District of Ohio against a general contractor and several subcontractors for injuries he sustained on a construction project. On the subject project, the general contractor had obtained a worker’s compensation self-insurance plan which covered its own employees as well as the employees of the sub-contractors enrolled in the plan. The project’s subcontractors participated in the plan and paid for it by deducting the amounts of worker’s compensation premiums from their bids. After denying motions for summary judgment by three subcontractors (none of which were plaintiff’s employer on the project), the district court certified a question to the Ohio Supreme Court of whether the Ohio Worker’s Compensation Law (Ohio Rev. Code §§ 4123.35 and 4123.74) provides immunity for tort claims to non-employer subcontractors that are enrolled in a worker’s compensation self-insurance plan covering a project where a worker is injured.

*  What the Court Said: The Ohio Supreme Court reversed the district court’s ruling and granted summary judgment to the subcontractors, over a lengthy dissent by two of the seven justices. The Court found that the applicable code provisions create the “legal fiction” that, for purposes of worker’s compensation, there is but a single employer on a project that is covered by a self-insurance plan. Thus, all subcontractors included in such a self-insurance plan should be entitled to its statutory protections, including immunity from tort claims.

*  What the Opinion Means: This decision is very significant for Ohio’s subcontracting trades, as it essentially eliminates very costly tort litigation and potentially high jury verdicts for all subcontractors who enroll in such a plan. Based on this decision, there will likely be a significant increase in these types of self-insurance plans for construction projects in Ohio.

Peter M. Canty is an associate in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti LLP. Peter primarily represents property owners and contractors in construction-related litigation, with a particular focus on cases involving violations of the New York State Labor Law. He also represents design professionals in a variety of property damage and professional malpractice actions.

3. In New York, an insurer owes no duty to defend or indemnify a subcontractor under a commercial general liability policy with an endorsement that specifically provided that the insurance does not apply to claims or suits for breach of contract, where a condominium sponsor sued the subcontractor for both breach of contract and negligence stemming from the same allegations of faulty workmanship. . Maxum Indemnity Company v. A One Testing Laboratories, Inc., 2015 U.S. Dist. LEXIS 165756 (S.D.N.Y.) (decided December 10, 2015).

*  What the Court Considered: In this case, plaintiff, Maxum Indemnity Company, sought a declaration that it did not owe a duty to defend or indemnify its insured, A-1 Testing Laboratories, in an action against A-1 arising from A-1’s work at a project to build condominiums. In the underlying action, the condominium sponsor alleged that A-1, who had been hired to perform controlled inspections in connection with fire stops, failed to detect or correct defective work performed by the drywall and carpentry subcontractor, causing the sponsor to incur remediation and repair costs. The sponsor brought causes of action against A-1 for both breach of contract and negligence, alleging that A-1 breached its duties to the sponsor by failing to perform its inspections with reasonable care, and by performing its services in a negligent fashion. Maxum provided A-1 with a commercial general liability policy, under which Maxum would provide coverage for property damage caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” during the policy period. The policy also included an endorsement which specifically provided that coverage does not apply to claims or suits for breach of contract.

*  What the Court Said: The U.S. District Court for the Southern District of New York Court held that Maxum was not obligated to indemnify or defend A-1 under the commercial general liability policy, based on its findings that the allegations against A-1 all related exclusively to the insured’s failure to satisfy its contractual obligations and the underlying action sought purely economic damages, notwithstanding the fact that the plaintiff in the underlying action also asserted a claim that the A-1 negligently performed its contractual obligations. The Court also held that it is the character of the underlying allegations, not their merits, that determines whether an insurer owes a duty to indemnify or defend its insured.

*  What the Opinion Means: In New York, a subcontractor may not be covered in a lawsuit seeking damages due to the subcontractor’s alleged negligence and breach of contract where, as here, the subcontractor’s commercial general liability insurance policy specifically excludes coverage for breach of contract claims, if the only negligence alleged is the subcontractor’s performance of its contractual obligations in a negligent fashion. This decision highlights the fact that a policy exclusion barring coverage for breach of contract claims may, in reality, preclude coverage for certain negligence actions as well.

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.

4. In Illinois, construction defects cannot give rise to coverage for an “occurrence” under a Commercial General Liability (CGL) Policy. . Allied Property & Casualty Insurance Co. v. Metro North Condominium Associates, 2016 U.S. Dist. LEXIS 43952 (N.D. Ill.) (decided March 31, 2016).

*  What the Court Considered: Plaintiffs, Allied Property & Casualty Insurance Company and AMCO Insurance Company sought a declaration that certain commercial liability insurance policies they issued to a subcontractor who participated in the construction of a condominium project do not cover an underlying claim against the subcontractor stemming from its defective workmanship. Defendant Metro North Condominium Association (“Metro North”), to whom the subcontractor assigned its right to recover the insurance proceeds in settlement of the underlying lawsuit for damage caused by water infiltration due to the subcontractor’s improper installation of the windows in the building, counterclaimed, seeking a declaration that the underlying claim is covered and further, that plaintiffs owed Metro North the amount due under the settlement. Upon the parties’ cross-motions for summary judgment, the court considered whether Metro North’s settlement with the subcontractor was made “in reasonable anticipation of liability for damages that fall within the policies’ definition of ‘property damage’ caused by an ‘occurrence.’”

*  What the Court Said: Under Illinois law, a construction defect is not an “occurrence” or an “accident,” which Illinois courts have defined as “an event that is unforeseen and neither expected nor intended”; rather, it is the natural and ordinary consequence of poor workmanship. CGL policies do not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident. So, the plaintiffs’ policies did not cover the subcontractor’s settlement of Metro North’s claims that its defective work resulted in water damage to Metro North’s building.

*  What the Opinion Means: Construction companies, property owners and developers should understand how CGL policies which cover “occurrences” are interpreted, and should consider alternative means for insuring their risks. Parties should also pay close attention to the choice-of-law provisions in their policies because different states may have different rules.

Jessica L. Rothman is a Partner in the Construction & Design Group of Ingram Yuzek Gainen Carroll & Bertolotti LLP. Jessica handles litigation involving all aspects of construction projects including breach of contract, mechanic’s liens, negligence and professional malpractice issues. She has represented a wide range of property owners, contractors, architects and engineers in multi-party litigation concerning the performance of construction and design agreements, and in negotiating and drafting construction and design agreements.

5. In California, an architecture firm proved the existence of a subcontract for consulting services with a landscape architecture firm, even though the written form of the agreement was not signed by either party, by establishing a course of performance pursuant to the unsigned agreement. However, the foreign firm was unable to avail itself of a choice of forum provision contained in the unsigned writing. . Vita Planning and Landscape Architecture, Inc. v. HKS Architects, Inc., 240 Cal. App. 4th 763 (Cal. App. 1st Dist.) (decided September 25, 2015).

*  What the Court Considered: Plaintiff, Vita Planning and Landscape Architecture, Inc., sued HKS Architects, Inc. (“HKS”) for fees and other costs it claimed it had earned under a consultant agreement it entered into with the defendant architecture firm in connection with the design and construction of a luxury hotel project in California. HKS argued that the fees claimed by plaintiff were not owed because the owner had not paid HKS for those landscape architecture fees. HKS also argued that the forum selection clause contained in the parties’ agreement required litigation to be brought in Texas. HKS argued that the sub-consulting agreement with plaintiff was enforceable, even though it had not been signed by neither party.

*  What the Court Said: The Court of Appeals of California held that the plaintiff’s pleadings, which alleged that there was a contractual agreement and that the parties conducted themselves as though they had formed an agreement, the existence of an agreement would be found by the trier of fact. The parties’ agreement contained a forum selection clause requiring litigation to be commenced in Texas. However, the Court refused to enforce the forum selection clause because it violated a section of California law which was intended to provide California subcontractors with the protection of California courts and California law, including prompt payment statues. Interpreting the term contractor broadly to include not just those who construct improvements to real property, but rather, as those who contract to do work or provide supplies for another, the Court held that the landscape architect consultant was a contractor and thus entitled to the protection of the California law which mandated that the choice of law provision not be enforced.

*  What the Opinion Means: Where the parties operate under an unsigned agreement, the agreement will be found valid, as if it were signed. Choice of forum provisions may not be always enforced where there exists a state policy of not doing so under certain circumstances to protect local citizens. Design professionals should be aware that there are instances where the definition of contractor may include a design professional for purposes of certain statutes.

Larry F. Gainen is a founding partner of Ingram Yuzek Gainen Carroll & Bertolotti LLP and a member of the Construction & Design Group. Larry represents architects, engineers, contractors, construction managers, and owners. Larry has tried numerous cases in state and federal court involving design and construction disputes; he has arbitrated and mediated many others. In addition, Larry focuses on negotiating and drafting construction and design agreements. He is also extensively involved in counseling the participants in the construction process in project management and the ongoing operation of their businesses.