Insurance Coverage for Defective Construction: Litigation, Legislation and Reaction

Barbara A. Reeves Neal, Esq.

Barbara A. Reeves Neal, Esq.

By Barbara A. Reeves Neal, Esq.

If you have ever remodeled or built a house, you can begin to understand a significant issue that has generated both litigation and legislation arising out of defective construction:  Do comprehensive general liability (“CGL”) policies provide coverage for construction defects?

Contractors typically purchase performance bonds to cover their work, but these bonds generally have higher premiums than liability policies.  While it is not surprising that consumers would prefer the availability of the lower-priced coverage if provided by CGL policies, the cost of those policies may increase if courts and legislatures mandate constructive defect coverage under CGL policies.

A CGL policy covers potential liability for property damage caused by an “occurrence,” typically defined as an “accident,” including gradual accidental harm. In construction defect coverage, courts across the country have handed down opinions with varying interpretations of the “occurrence” issue, with most being divided on the issue as to whether coverage is available for construction defects.

One approach takes the position that defective construction work—and resulting damage—is not covered under liability insurance policies because neither was the result of an “accident” (i.e., an “occurrence”).  Pennsylvania, New Jersey, New York, Arizona, Ohio and Kentucky courts, among others, have adopted this position, while courts in Colorado and Hawaii were split within the state.  The analysis is that construction defects are the natural consequence of performing (substandard) work and liability policies do not protect against foreseeable business risks.  They conclude that CGL policies are not performance bonds and liability insurers did not sign up to be guarantors of a contractor’s work.

Other jurisdictions, including Florida, Wisconsin, and Alabama, among others, have held that faulty or defective workmanship is considered an “accident” and therefore an “occurrence,” or that even if the defective construction work itself is not an “occurrence,” the resulting damage is covered because it was fortuitous and unintended.  (“Your substandard work may not have been an accident, but the resulting mess was.”)

For the rest of this discussion on Insurance Coverage for Defective Construction, please read the full article from Law.com by clicking here.

Drafting Arbitration Clauses in Construction Contracts

 

Harvey J. Kirsh, Esq.

Harvey J. Kirsh is an arbitrator and mediator based in the JAMS Toronto Resolution Center. He is also a member of the JAMS Global Engineering and Construction Group.

Most construction lawyers who specialize in transaction work acknowledge that they do not spend much time considering or negotiating arbitration clauses.  Should an arbitration clause be just a boilerplate provision, taken “off the shelf,” or should it be specifically negotiated and crafted for the particular construction project and to accommodate the parties’ requirements?

Some questions to consider:

  • Should arbitration be mandatory or permissive?
  • Should there be one or three arbitrators?
  • Should the arbitration clause reference the Rules of a particular ADR institutional service provider, or should it be “ad hoc”?
  • Should the clause cover claims by or against the parents or subsidiaries of the contracting corporate parties?
  • Should the clause simply provide that all disputes will be arbitrated, or should it set out a detailed regime for the mechanics of the process?

One of the delicate balancing acts is between the “sin” of omission (i.e., omitting a crucial or useful element from an arbitration clause), and the “sin” of over-specificity (i.e., providing too much detail, which could produce a clause that is extremely difficult to put into practice).

Arbitration clauses may dictate which set of institutional arbitration rules are to be used, and parties are often reluctant to change them, even if they know they could likely negotiate something different or better.

Anecdotal but informative studies appear to indicate that many clients feel that negotiation is not open-ended, and that arbitration clauses are not a priority, particularly since there are often many other more significant business terms and conditions usually in play.

Ideally, arbitration clauses could and should be used to specify guidelines which would facilitate better and efficient management of the process. They can also include a fair but abbreviated timeline, and limitations on discovery and motions, all of which would serve to diminish delays and reduce cost. With more options on rules and expedited procedures available with nearly every ADR provider, clients can create a process the meets all their needs, both from a budget and time standpoint.

Muscular Arbitration

Harvey J. Kirsh, Esq.

Today’s guest post comes from Harvey J. Kirsh, Esq., a JAMS panelist and recognized authority in construction law with 40 years of experience. He can be reached at hkirsh@jamsadr.com.

U.S. Supreme Court Justice Anthony Kennedy recently told reporters at a legal conference that the Supreme Court’s docket is more heavily oriented towards criminal and First Amendment cases, and that “a lot of big civil cases are going to arbitration.”  In Canada, the Chief Justice of the Supreme Court of Canada, Rt. Hon. Beverley McLachlin, has written that “the trend is clear: fewer and fewer construction cases are reaching the courts where the law is developed.  Increasingly, instead of being resolved by judges, construction disputes are being sent to mediation, arbitration, or other forms of alternative dispute resolution.”

However, despite what appears to be a trend, much has also been written about the shortcomings of arbitration.  In 2010, the College of Commercial Arbitrators (CCA) undertook a study of arbitration, and produced its landmark booklet, “Protocols for Expeditious, Cost-Effective Commercial Arbitration.” (In the interest of full disclosure, a number of JAMS panelists were involved in editing the Protocols.) Essentially, the Protocols observed that trial practices were being imported into the arbitration process and that arbitration was beginning to look just like litigation

The Editors of the Protocols ultimately concluded that lengthy discovery, excessive claims for document production, multiple depositions of witnesses, and numerous motions contribute to greater expense and delays in the arbitration process.  The primary recommendation was that “arbitrators must aggressively manage the process from day one of their appointment.”  The notion of “control,” particularly over the discovery process and the schedule, was paramount among their recommendations

In line with the CCA protocols, JAMS recently instituted new procedural options that allow the crafting of a process that is commensurate with the dispute. With JAMS new Optional Expedited Arbitration Procedures, parties can choose a process that limits depositions, document requests and e-discovery

At its recent Annual Meeting, the CCA characterized the controlled case management technique as “muscular arbitration.”  By way of contrast, however, a colleague recently gave an account of an arbitration where both he and the opposing counsel, as well as the arbitral panel, were content to proceed at a leisurely pace.  In response to my comment about muscular arbitration, he humorously coined the countervailing term “flaccid arbitration,” stating that, if that is what the parties want, then the arbitrators should respect and accommodate that approach.  I leave it to the reader to decide; but the weight of all recent literature seems to support the view that, in order to really make arbitration different than litigation, it is necessary for the arbitrators to manage the process efficiently and to move it forward.

The White and Case Survey

2010 was also the year that White & Case, in conjunction with the University of London, undertook an empirical survey of international arbitration.  The survey was based on questionnaires and in-depth face-to-face interviews of in-house counsel, who were found by the survey to have made most of the important strategic decisions.   The following were two of the interesting findings of the survey:

  1. The respondents were asked their views about the cause of delays and who was responsible.  Most of them answered that it was the parties who contributed most to the length of the proceedings.  Delays, they responded, were caused by excessive discovery of documents, by the initial constitution of the panel, and by the arbitration hearings.  The respondents also stated, interestingly, that the arbitral tribunal should exert control over the parties to keep the process moving quickly.  The survey respondents wanted a disciplined, “muscular” process; an
  1. A section of the survey dealt with the selection of arbitrators, and found that the most important factors were open-mindedness and fairness, and well as prior experience, availability, knowledge of the applicable law, and reputation.  But 50 percent of those surveyed stated that they were disappointed with arbitrator performance.

The Tarullo Survey

Another recent survey of a broad spectrum of construction project stakeholders, described in Michael Tarullo’s article (which will appear in the January 2012 issue of the JAMS Global Engineering and Construction newsletter), observes that, although arbitration is not without its faults, the majority of the respondents expressed the view that it is considerably more cost-effective than litigation in resolving construction claims.  They also stated that the process would be more appealing if it were managed more effectively, with limited motions and discovery, and with a reasonable but abbreviated timeline

Muscular arbitration” may be an acquired taste; but it clearly appears that a “flaccid arbitration” process is not the preferred route to follow.

ABA Construction Forum Coming Next Week

The American Bar Association’s Construction Fall Forum is taking place next week in Atlanta, GA from October 13-14, 2011. This forum brings together people with diverse construction backgrounds from around the U.S. and focuses on strategies that can lead to both better results for clients and results more efficiently achieved.

JAMS neutrals Hon. James Rosenbaum (Ret.) from Minneapolis and Douglas Oles, Esq. from Seattle will all participate in the interactive sessions along with other construction industry professionals. We’re proud our neutrals will participate and add to the discussion.

Topics include:

  • The Shifting Sands of Contract Drafting, Interpretation and Application
  • Strategies for Technical Defenses
  • The Moonscape of DRBS/DABS
  • Comparative Challenges Obtaining Third-Party Discovery
  • Ethics: Mediation and Settlement Negotiations