Construction Channel Cases of the Month August 2003 1

Construction Channel

Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry

BY: Ira Genberg

August 2003

1. Waiver of Insurance Claims for Toxic Mold Remediation
Tulane Property, L.P. v. General Star Indemnity Co., 2003 WL 1824705 (E.D. La. 2003).

* What the Court Considered: The court considered whether an owner waived its right to make an insurance claim for toxic mold abatement where the owner signed a settlement agreement with its insurance company to cover damage from a hail storm. The owner did not discover mold at its property until after it signed the agreement.

* What the Court Said: Even though the owner was not aware of mold at the property until after the settlement agreement was signed, the court found that the owner was prohibited from making a supplemental claim for mold remediation expenses because the owner waived all claims in the settlement agreement.

* What the Opinion Means: When settling insurance claims for damage to property, an owner should consider carefully whether all potential claims have been addressed in the settlement agreement. The Tulane Property owner argued that mold remediation claims were outside the scope of the settlement agreement because the mold had not been observed when the agreement was signed. However, the court found that the agreement clearly released the insurance company "from any and all claims" arising out of the hail storm, "whether known or unknown, and whether they have occurred or may occur or become manifest at some future date." Consequently, prior to signing an insurance settlement agreement, an owner should consider having toxic mold abatement inspectors determine whether mold is present in damaged property.

2. Limits on Damages for Construction Defects
American United Logistics, Inc. v. Catellus Dev. Corp., 319 F.3d 921 (7th Cir. 2003).

* What the Court Considered: The "economic loss doctrine," in states where it is followed, prohibits a plaintiff from recovering damages for certain claims, such as negligence, when the obligations sued upon are contractual. In such circumstances, the plaintiff is limited to recovering only for breach of contract unless the plaintiff suffers personal injury or property damage that is outside the scope of the contract. In this case, the court considered whether a plaintiff could recover damages for negligence when a chemical used in the construction of a food storage warehouse caused the plaintiff's food products to become contaminated and unfit for commercial sale.

* What the Court Said: The court found that the $30 million in damages sought by the plaintiff were based solely upon its contractual expectation that its food products would be adequately protected from contamination. Also, the court determined that no recognized exception to the "economic loss doctrine" applied to the plaintiff's claims. Therefore, the plaintiff could not recover more than $1 million in damages because its warehousing contract contained a limit on such damages.

* What the Opinion Means: If an owner receives contractual protection against a certain type of harm, the owner generally may not seek additional damages if that harm arises from sources other than a breach of the contract, such as through negligence that results in a construction defect. For example, the plaintiff in Catellus had addressed the potential effects of food contamination by including a provision in its warehousing contract that set the damages for such contamination. The existence of a contractual limit on this category of damages barred the plaintiff from any additional recovery, such as damages from subcontractors who negligently used the chemical at issue when constructing the warehouse.

3. Notice Requirements under AIA A311 and A312 Performance Bonds
Walter Concrete Constr. Corp. v. Lederle Labs., 788 N.E.2d 609 (N.Y. 2003).

* What the Court Considered: The court considered whether notice of a subcontractor's default must be given by a general contractor to the subcontractor's surety under the AIA A311 performance bond.

* What the Court Said: The court found that AIA A311 does not require notice of default. Instead, all that is required is that an action on the bond be brought within the time period provided by the bond.

* What the Opinion Means: There is a significant difference in the notice requirements under the AIA A311 and A312 performance bonds. When using an A311 performance bond, an owner or general contractor may complete the remaining work when a contractor or subcontractor defaults on its contract. Then the owner or general contractor can request payment from the surety for the costs of completing the breached contract. By contrast, when using an A312 performance bond, an owner or general contractor must give the surety notice of a contractor's or subcontractor's default, and allow the surety an opportunity to complete the work, before the owner or general contractor is allowed to finish the job itself.

Ira Genberg is a Senior Partner at the Smith , Gambrell & Russell law firm in Atlanta, Georgia, and also General Counsel for Associated Owners & Developers (AOD), McLean, Virginia. For more information or if you have any questions, contact us at: hlk@constructionchannel.net