July 2014

Claim Settlement Can Jeopardize Insurance Coverage

Most contractors look forward to the opportunity toMCN Podcast 130x130 Brown have a claim settled in a mutually agreeable fashion. However, a recent decision by The U.S. District Court of Maryland demonstrates the need to consult with your insurer before settling any claims on a project.

Joining us to discuss the particulars of the case Perini/Tompkins Joint Venture v. ACE American Ins. Co., and to explain why it is critical your insurance companies be made aware of any claim negotiations are two attorneys from the law firm of Ober|KalerJohn F. Morkan III is a co-chair of Ober|Kaler’s Construction Group and Jackson B. Boyd is an associate with Ober|Kaler’s Construction and Litigation Groups

The Case: Perini/Tompkins Joint Venture v. ACE American Ins. Co.

The Job: A $900 Million hotel & Convention center at National Harbor.

Case Background:

  • Developer Gaylord National, LLC hired Perini/Tompkins Joint Venture (PTJV) as a construction manager
  • Gaylord purchased and maintained an Owner Controlled Insurance Program (OCIP) from ACE American Insurance Co. (ACE)
    • Policy included commercial general liability (CGL) and excess liability policies
    • Both naming PTJV as an additional insured
    • Project also was insured by a builder’s risk policy
  • Part of an 18-story, 2,400 ton glass atrium collapsed during construction, causing damage and delaying final completion
  • After completion –
    • PTJV sued Gaylord to establish and enforce a mechanic’s lien and for breach of contract
    • Gaylord countersued
    • The parties ultimately settled the dispute in November 2008
    • PTJV did not seek ACE’s consent prior to entering into the settlement agreement with Gaylord
  • PTJV subsequently advised ACE that, to the extent the builder’s risk policy did not cover the claim related to the glass atrium collapse, PTJV would seek reimbursement under the CGL and excess liability policies
    • ACE issued a reservation of rights letter, citing several contractual clauses as possible grounds for coverage being denied
    • PTJV filed suit in the U.S. District Court against ACE for breach of contract, bad faith, and a declaratory judgment
    • After limited discovery, ACE filed a motion for summary judgment, since PTJV had failed to obtain ACE’s consent prior to entering into the settlement with Gaylord, breaching the Voluntary payment clause and No-action clause
    • The District Court sided with ACE and granted their motion for summary judgment
  • The District Court ruling was appealed
  • Upon appeal to the U.S. Court of Appeals for the Fourth Circuit, the District Court verdict was upheld.

The Takeaway: A contractor must obtain the consent of its liability insurer before settling a construction defect claim; otherwise, the insurer can deny coverage without having to prove that it suffered any prejudice.

For detailed information regarding the case, click here.

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“Construction Subcontracting – Practical and Legal Tips, Part 2″

In this episode of the Maryland Construction Network (Part 2 of a 2 Part Program) we welcome back to the show Joseph Kovars, an attorney with Ober|Kaler. Joe is a co-chair of Ober|Kaler’s Construction Group. His practice is concentrated in construction and public contracts law, representing contractors, subcontractors, sureties and owners in contract formation and construction disputes involving many types of construction projects. Mr. Kovars is a co-editor and co-author of the recently published book – “Construction Subcontracting – A Comprehensive Practical and Legal Guide” – available here.

A Lien Waiver gives up the right to assert a mechanic’s lien.  Typically given with a pay application.

  • partial
  • full
  • conditional

Some subcontracts require that all lien rights be waived in advance, before any work is done.  In MD, these clauses are illegal.

“Scheduling, Delays, and Coordination” section authored by our speaker, Joe Kovars

Time is money on construction jobs. When a job is delayed, usually everyone loses money. Finger pointing often goes in two or more directions. Project delays result in claims, whether for liquidated or actual damages.  Also, they can lead to contract defaults and terminations and performance bond claims.

Scheduling is an important part of the job and plays a critical role in delay claims. Typically, the construction schedule is prepared by the G.C. Subcontractor input into the schedule is recommended.

Most construction projects are scheduled using CPM or Critical Path Method scheduling. A CPM schedule is based on a network of activities that are needed to build the project. The activities are tied together by logic relationships. If one activity is delayed, depending on the relationships set in the schedule, it may or may not delay the end date of the entire project.

If an activity can slide in time, and not affect the end date, then there is “float.” The chain of activities with zero float (or the least float) is the critical path. If there is zero float, then any delay to a critical path activity results in a day for day delay to project completion.

Scheduling traps for subs to watch out for.

  • Restraints that are not typical, such as “lags” or “leads” or “must finish by” dates
  • Work calendars – 5 day or 6 day work week; winter weather.
  • Resource leveling.
  • Schedule that is $ loaded – tied to pay app.

Many primes hand their subs a printed bar chart, which shows just ES & EF dates and no relationships, no restraints, no float. Subcontractors should ask G.C. for the electronic version and get updates. When job is behind schedule the sub should understand why.

Delay events are usually broken down into two types: excusable delay and nonexcusable delay.

  • Excusable delay is usually delay beyond the fault or control of the party. It entitles that party to a time extension. A time extension gives the party more time to perform and that party can’t be charged with delay damages or have its contract terminated for default.
  • A nonexcusable delay, on the other hand, is one where that party caused or is responsible for delays. It may be tagged with the other party’s delay damages or have its contract terminated.

Excusable delays are compensable or noncompensable.

  • Excusable/Noncompensable delays often include unusually severe weather, strikes, Acts of God, Acts of Terrorists, Acts of War. Get time extension only.
  • Excusable/Compensable delays include delays due to changes in work and delays or interferences by the other party. The innocent party can get compensated for its delay damages, unless the contract provides otherwise.

A “no damages for delay” clause shifts the risk of delays back to the innocent party.

A no damages for delay clause in MD is enforceable with 3 exceptions:

  1. delays due to intentional wrongdoing;
  2. delays due to gross negligence, &
  3. delays due to fraud or misrepresentation.

For more information about the book “Construction Subcontracting – A Comprehensive Practical and Legal Guide”, go to www.ober.com.  Under “News,” there is an article about the book and a link to the ABA website, or e-mail Jack Kovars at jckovars@ober.com.

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