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NY District Court Holds Trade Contractor’s Insurer Obligated to Indemnify CM Even Though Trade Contractor Found Not Negligent
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Turner Constr. Co. v. Am. Mfrs. Mut. Ins. Co.
2007 U.S. Dist. LEXIS 32640 (S.D.N.Y. Apr. 30, 2007)
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| Plaintiff Turner Construction Company entered into a construction management agreement with Central Synagogue in Manhattan for renovation work which included the installation of central air conditioning. The HVAC contractor on the project was Trident Mechanical Systems, Inc. During the project, a fire broke out, started by an employee of the roofing contractor who had been using a propane torch. The fire, which ordinarily would have caused minimal damage, was accelerated by exhaust fans that had been installed in the roof, and caused several millions of dollars damage to the landmark Synagogue. The Synagogue’s insurer, Wausau, sued Turner and some of the project’s contractors, to recover amounts it paid the Synagogue. The trial was bifurcated, trying liability first, then damages. Liability was determined as: Turner 50%, the roofing contractor 30%, the general contractor 15%, and Trident 0%. A settlement was reached before the damages portion of the trial began.
Turner brought an action against Trident’s insurer, American Manufacturers Mutual Insurance Company (AMMIC) and its excess insurer, Lumberman’s Mutual Casualty Company (LMCC), seeking a determination that they were required to defend and indemnify Turner in the Wausau and related actions. Pursuant to contract requirements, Trident’s policies named Turner as an additional insured. The AMMIC policy defined “an insured” as any entity to whom Trident was required by contract to provide insurance as afforded by the policy, “but only with respect to liability arising out of ‘your work’ for that insured by you…”. Similarly, the LMCC policy defined “an insured” as any entity to whom Trident was required by contract to provide insurance as afforded by the policy, “but only with respect to liability arising out of ‘your work,’ ‘your product’ and to property owned or used by you.” AMMIC and LMCC moved for summary judgment to dismiss the action. The court granted the motion holding that Trident, the named insured, had been found not liable for the Synagogue fire and that this finding was res judicata.
The Court of Appeals for the Second Circuit vacated and remanded the case, holding that Turner was covered under the policies if Turner’s liability arose out of Trident’s work, that res judicata did not bar Turner’s indemnity claim, and that AMMIC and LMCC were not entitled to summary judgment on Turner’s defense fees. In its remand, the Court of Appeals stated: “the only contract question at issue in Turner’s suit is whether its liability ‘arose out of’ Trident's work … we conclude that the jury verdict favorable to Trident on the issue of negligence cannot, by itself, absolve the insurers of indemnification obligations to Turner.”
On remand, the sole issue before the Court was whether Turner’s liability “arose out of” Trident’s work. Turner moved for summary judgment on its allegation that AMMIC and LMCC had failed and/or refused to defend and indemnify Turner and that Turner was damaged as a result. In turn, AMMIC and LMCC moved for summary judgment, seeking dismissal. The Court rejected AMMIC and LMCC’s argument that there can be no duty to indemnify an additional insured if the named insured has been found not to be liable, holding Trident’s liability immaterial for purposes of considering the motions. In reviewing New York law on the construction of the phrase “arising out of,” the Court noted that proximate causation tests had been rejected. Rather, the phrase had been interpreted to mean “originating from, incident to, or having connection with.” The Court reasoned that “arising out of” does not focus on causation, but instead upon “the general nature of the operation in the course of which the injury was sustained.” Citing to other New York cases finding coverage of an additional insured to be appropriate even where the harm was found to have been attributable only to the negligence of the additional insured, the Court held that liability of a general contractor can arise out of the non-negligent work of a subcontractor where the subcontractor’s work is involved in the injury and that Turner’s liability arose out of Trident’s work. Accordingly, the damages for which Turner was held liable, which had a connection to Trident’s work, were insured by the policies and AMMIC and LMCC had a duty to defend Turner and were required to reimburse the reasonable attorneys’ fees and costs incurred by Turner in defending the underlying actions. Additionally, finding that the duty to indemnify is based on whether the loss is covered by the policy, the Court held AMMIC and LMCC had an obligation to reimburse the settlement amount paid by Turner.
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PA Board of Claims Accepts Eichleay Damages Calculation for Home Office Overhead
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Nello Construction Co. v. Commwth of PA, Dept of General Services
(Commonwealth of Pennsylvania, Board of Claims, March 20, 2006)
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| Nello brought claims against the Department of General Services (“DGS”), arising from a contract entered into by Plaintiff and DGS on June 7, 2001, for the construction of a visitors' center, museum, parking lot and other attendant facilities to be built in Beaver County, PA on behalf of the Pennsylvania Historical and Museum Commission. The initial value of the Contract was $ 2,433,000.00 and, with a contractually mandated duration of 335 days from the initial job conference within which to complete the work, the contemplated contract completion date was May 29, 2002. Because of various delays, final inspection on the project did not occur until January 30, 2003, 246 days past the contemplated contract completion date. Plaintiff requested damages of $ 462,010.48 for costs and expenses resulting from construction delays caused by Defendant's actions and inactions.
Plaintiff asserted the following construction delays for which Defendant was liable: (1) delays caused by a change order issued by Defendant shortly after work on the project commenced, which required the installation of a redesigned HVAC system requested by the Pennsylvania Historical and Museum Commission; (2) delays caused by Defendant's failure to promptly issue a change order to allow the excavation of a large portion of the work site in order to remove unsuitable, subsurface soil material and to refill the excavated areas with more stable material; (3) delays caused by Defendant's decision to redesign a part of the building foundation, in order to avoid damaging trees that were located on an adjacent property but whose root systems were encroaching into the project's excavation area; (4) delays caused by Defendant's failure to provide access to a three-phase, permanent electrical power source in a timely manner; and (5) delays caused by Defendant's failure to provide access to a permanent water and sewer system in a timely manner. Plaintiff's claims for damages were not separately assigned and calculated based on each of the foregoing delays, but were instead calculated based on the costs and expenses incurred from May 29, 2002, the original contract completion date, to January 30, 2003, the date of final inspection.
Defendant denied liability for some of the construction delays, contested certain of Plaintiff's damage claims, and asserted a counterclaim for $ 41,620.00 based on Plaintiff's alleged failure to properly install and flush a geothermal well system. Plaintiff presented extensive and specific evidence regarding its costs and expenses that resulted from the extension of Contract work for an additional 246 days past the originally contemplated Contract completion date. Plaintiff’s damages testimony was corroborated by the testimony of Plaintiff's damages expert, who concluded that Plaintiff's extended costs and expenses had resulted from the many construction delays on the project and the manner in which Defendant dealt with change orders. Plaintiff’s expert also noted that the damages claimed by Plaintiff were reasonable and were significantly lower than those that would be produced using the "total cost" method of calculating damages.
Although Defendant contested its liability in regard to some of the delays on the project, it did not offer evidence on damages and did not seriously contest the methodology used by Plaintiff to calculate the extended costs that formed the greatest part of Plaintiff’s claim. The PA Board of Claims accepted Plaintiff’s damages methodology, holding that if a party does not contest a plaintiff's methodology for calculating damages or the evidence supporting the plaintiff's damage claims, that methodology and evidence affords a reasonable basis for awarding damages. Acchione and Canuso, Inc. v. Department of Transportation, 461 A.2d 765 (Pa. 1983).
Defendant did, however, challenge Plaintiff's calculation of its extended home office and administrative costs of $ 90,680.52. Defendant argued that the Board should adopt the formula set forth in Manshul Construction Corp. v. Dormitory Authority to determine Plaintiff’s costs. See Manshul Construction Corp. v. Dormitory Authority, 79 A.D.2d 383 (N.Y. App. Div. 1981). Under the “Manshul” formula, costs are calculated in the following manner: (1) estimate the actual cost of the work done after the scheduled contract completion date by deducting from the contract price the portion allocable to overhead and profit; (2) allocate a percentage of this cost for overhead and allow this as excess overhead due to delay; and (3) add to this a profit percentage based on the excess overhead. Id. at 391-92. By Defendant's calculation, this formula yielded an extended home office and administrative costs figure of $ 57,197.61, compared to Plaintiff's claim for $ 90,680.52.
In contrast, the method used by Plaintiff was modeled on the "Eichleay formula" for calculating home office and administrative overhead costs. This formula seeks a ratio between the billings for the contract at issue to the company's total contract billings during the period of the contract at issue; multiplies this ratio by the total company overhead during the contract period to determine the overhead allocable to the contract at issue; divides this allocable overhead by the actual days of contract performance to determine a daily rate for overhead; then multiplies this daily rate by the number of days of owner-caused delays to find the extended home office overhead/administrative cost attributable to the delay period.
This Board, while recognizing that neither method of calculation is perfect, chose to use Plaintiff’s “Eichleay-based” calculation. In dicta, the Board stated that the Eichleay formula has the benefit of using actual dollar and cent figures of the contractor to determine an actual ratio of overhead to contract billings for a period relevant to the contract at issue. In other words, if the contractor provides reliable company-wide figures for a period relevant to the contract, the Board can determine the overhead percentage that it actually experienced on a company-wide basis during the contract period and could reasonably expect from the project at issue. The Board also noted that the Eichleay formula has been criticized because, among other things, overhead experienced on other projects during a surrounding time period may have been adversely or beneficially affected by several other outside factors such that the overall ratio is not necessarily indicative of the overhead experienced on the contract at issue.
The Board contrasted the Manshul formula with the Eichleay formula, stating that the Manshul formula does not require the variable that may be introduced by work experience on other contracts. However, the Manshul formula does require certain assumptions be made which include assumptions as to the total overhead and profit margin (15% in Manshul) and a further assumption that overhead and profit are to be equally divided.
Using Plaintiff’s “Eichleay-based” methodology, the Board entered judgment in favor of Plaintiff in the sum of $ 544,881.23, consisting of $ 458,678.58 in aggregate extended cost damages; $ 83,648.29 in prejudgment interest on the amount of aggregate extended cost damages; and reimbursement of certain additional costs incurred due to Defendant’s delays.
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Georgia Court Enforces Limitation of Damages Clause in Engineering Agreement
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Lanier at McEver, L.P. v. Planners and Engineers Collaborative, Inc,
2007 GA App LEXIS 539 (Ga. Ct. App., May 16, 2007)
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| In this case, the Court of Appeals of Georgia affirmed a decision limiting an owner/developer’s damages against the project engineer to the fees paid for the engineer’s services.
The court held that a damages limitation clause that limits the amount of damages an engineer could possibly pay to an owner/developer is neither a violation of public policy nor an unenforceable penalty. Lanier, was the owner/developer of an apartment complex. Lanier hired the defendant engineering firm PEC, to design various aspect of the apartment complex, including the storm sewer and sanitary sewer drainage and management system. The engineering agreement contained a limitation of liability provision stating that the total aggregate liability of PEC and its subconsultants to Lanier “shall not exceed PEC’s total fee for services rendered on this Project.” Following construction of the Project according to the plans and specifications prepared by PEC, problems arose with the storm water system that required modification and repair by the owner. As a result, Lanier sued PEC for negligent design, breach of express contractual warranty and litigation expenses.
PEC filed a motion for partial summary judgment based on the contractual limit on the damages Lanier could recover to the amount of fees it paid PEC. The trial court agreed, granted the partial summary judgment motion and concluded that the limitation of liability clause was enforceable.
On appeal, the Georgia Court of Appeals affirmed. The Court found no conflict between the damages limitation clause and public policy. The clause did not release PEC from all liability, but rather was only a limit on any potential recovery. Moreover, the damages limitation clause did not prohibit a third party who might suffer injuries as a result of PEC’s design or construction from recovering against PEC. Finally, the clause was not a liquidated damages penalty, but merely a cap on the damages that a trier of fact could potentially award. In sum, the damages limitation clause did not release the engineer from liability for wrongful conduct, permit negligent design or release the engineer from liability for damages to persons or property caused by the engineer’s actions. Instead, the clause merely limited the Owner’s potential recovery to the fee it paid its engineer for its work on the project.
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PA Court Rules Coverage For Defectively Manufactured Wheel Barred By “Business Risk” Exclusion of CGL Policy
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Plasticert, Inc. v. Westfield Insurance Company
2007 Pa.Super 124, 2007 Pa.Super.LEXIS 820 (Pa.Super Ct., May 1, 2007)
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| Plasticert manufactures thermoplastic wheels used in gravity flow product lines. A customer sued it because wheels that the customer purchased were breaking and cracking, and were determined not to have been manufactured to the customer’s specifications.
Plasticert carried general commercial liability (“CGL”) insurance and an umbrella policy both issued by Westfield Insurance Company. Plasticert filed a declaratory judgment action against Westfield, to determine, inter alia, coverage under the policies. The trial court determined, and the parties conceded, that the exclusionary language in both policies was similar so that the outcome of the instant matter would be the same under both policies.
Coverage was triggered under either policy in the event of an “occurrence” that resulted in “property damage”. The trial court concluded that the facts alleged in the underlying lawsuit fit within the definitions of “occurrence” and “property damage”, but nonetheless found that the exclusion “n”, the “Sistership Exclusion,” barred coverage and granted judgment on the pleadings in favor of Westfield.
Plasticert appealed the trial court’s decision arguing the trial court committed an error of law in applying the “Sistership Exclusion” denying Plasticert coverage and legal defense costs.
The Superior Court’s decision turned on exclusion “k” (the business risk exclusion) of the CGL policy which excluded coverage for “property damage” to “your product” "arising out of it or any part of it.” The Superior Court applied Pennsylvania case law addressing similar policy language and concluded that “CGL policies are designed to provide coverage where a defect in the insured’s work causes personal injury or damage to the property of a third party.” Because the underlying complaint asserted that Plasticert’s wheels failed to perform to specifications, consistently shattering under normal use, and does not allege that the failure of the wheels resulted in personal injury or damage to any property other than the wheels themselves, the business risk exclusion applied, barring coverage for Plasticert’s failure to deliver wheels that conformed to contract specifications.
The Superior Court also rejected Plasticert’s argument that because it obtained a defective component part from another company the exclusion should not apply, stating that Plasticert’s contractual obligation was to deliver wheels conforming to its customer’s specifications and that it was precluded from obtaining coverage for its failure to ensure that a component part of its wheels met the customer’s terms.
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NY District Court Enforces Liquidating Agreement Between Owner And Surety That Permitted Owner To Retain Recovery Obtained From Third Party To Satisfy Owner’s Claim For Damages Against Surety
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Menorah Home and Hosp. for the Aged and Infirm v. Fireman’s Fund Ins. Co.
2007 U.S. Dist. LEXIS 27684 (E.D.N.Y., April 13, 2007)
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| The District Court for the Eastern District of New York held that a liquidating agreement between an Owner and a Surety was valid and enforceable, even though it permitted the Owner to retain any recovery it obtained from the third-party, rather than having money pass-through to the surety.
The case arose out of a project to build and renovate facilities for Menorah Home and Hospital for the Aged and Infirm (“Owner”). The Owner entered into a contract with J.A. Jones Construction Group, LLC (“Jones”) for the Project. When Jones defaulted, Fireman’s Fund Insurance Company (“FFIC”), Jones’ surety, took over and completed the Project. The Owner subsequently sued FFIC alleging that FFIC had breached its performance bond obligations by failing to complete the Project in a timely manner and correct deficiencies in the work performed by Jones.
FFIC asserted a counterclaim against the Owner for damages that it incurred in repairing a boiler/chiller that FFIC alleged was damaged as a result of the failure to maintain the equipment, and not as a result of Jones’ deficient work. The Owner filed a third-party complaint against The Trane Company (“Trane”) alleging that Trane was responsible for the damages, as it had breached its service contract with the Owner by failing to properly inspect, maintain and repair the equipment.
The Owner and FFIC subsequently settled all of their claims, except those relating to the boiler/chiller. With respect to the boiler/chiller claim, the parties entered into a liquidating agreement, which provided that the Owner accepted liability for the improper maintenance of the boiler chiller. The agreement provided that the Owner’s liability was fixed and liquidated in such an amount as the Owner was able to recover from Trane. Finally, the agreement provided that the Owner could retain any recovery it obtained from Trane as further compensation for the delay damages it incurred as a result of FFIC’s actions.
Liquidating agreements must contain three elements: (1) impose liability upon an intermediary for a damaged party’s increased costs, thereby providing the intermediary with a basis for legal action against the responsible party; (2) a liquidation of liability in the amount of the intermediary’s recovery against the responsible party; and (3) a provision for the pass-through of that recovery to the damaged party.
Trane filed a motion for summary judgment on the basis that the liquidating agreement between the Owner and FFIC was invalid and thus the Owner was barred from asserting FFIC’s boiler/chiller claim against Trane. Trane argued that the agreement was invalid because it did not contain the required pass-through provision because it provided that the intermediary (the Owner) could retain the money that it recovered from Trane (the responsible party), rather than passing it on to FFIC (the damaged party). The District Court held that the required pass-through was achieved because any recovery by the Owner satisfied FFIC’s delay damage obligations to the Owner. The Court held that the agreement could not be invalidated based on what was essentially “an accounting issue” between the Owner and FFIC.
The Court also held that the validity of a liquidating agreement depends not on the damaged party’s assertion of blame against the responsible party, but rather on the assertion of liability against the intermediary that “liquidates” the damaged party’s claim. Finally, the Court held that the liquidating agreement was valid even though FFIC, an insurance carrier, had an alternative avenue of recovery against Trane in the form of an equitable subrogation claim. The Court held that the existence of an alternative avenue of recovery cannot be used as a shield of liability by the responsible party.
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Tenth Circuit Holds Supplier Delay Does Not Excuse Contractor Delay Under Force Majeure Clause; Holds Liquidated Damages Provision Allows For Apportionment Of Damages Where Owner Responsible for Some Delays
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Hutton Contacting Company, Inc. v. City of Coffeyville
2007 U.S. App. LEXIS 9914, (10th Cir., April 30, 2007)
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| Contractor contracted to construct power and fiber-optic lines for the City. Upon completion of the project, the City refused to pay the final balance of the contract price, claiming that it was entitled to the funds as liquidated damages because the project was not completed on time. The Contractor sued to obtain the unpaid contract balance. The trial court ordered the City to pay the Contractor the retainage due minus $85,000 in liquidated damages. On appeal, the United States Court of Appeals for the Tenth Circuit, applying Kansas law, considered: 1) whether the contract’s force-majeure clause excused the Contractor for delays caused by late deliveries from its pole supplier; 2) whether the contract’s liquidated-damages provision was enforceable; and 3) whether the contract’s liquidated damages provision allowed the District Court to apportion delays between the Contractor and the City.
The Contractor asserted that the delay to the project was excused, relying on the contract’s force-majeure clause. The force-majeure clause stated:
"The time for Completion of Construction shall be extended for the period of any reasonable delay which is due exclusively to causes beyond the control and without the fault of [the Contractor], including Acts of God, fires, floods, and acts or omissions of [the City] with respect to matters for which [the City] is solely responsible."
The Contractor asserted that any delay resulting from the supplier’s late delivery of poles was excusable where it was “beyond the control and without the fault of [the Contractor].” The District Court rejected the argument on the ground that the Contractor could be charged with fault in selecting its supplier. On appeal, the Circuit Court affirmed the District Court’s conclusion, holding that the “most reasonable interpretation of the phrase ‘fault of [the Contractor]’ in the force majeure clause is ‘fault of [the Contractor] and those to whom it delegates its responsibilities under the contract’”. Accordingly, the delays were not excused as force majeure.
The Contractor also asserted that the contract’s liquidated damages provision was not enforceable because it was a penalty. Under Kansas law, the courts weigh two considerations when evaluating the enforceability of liquidated damages provisions. First, whether “the amount is reasonable in view of the value of the subject matter of the contract and of the probable or presumptive loss in case of breach.” Second, whether “the nature of the transaction is such that the amount of actual damage resulting from the default would not be easily and readily determinable.” The Court noted that there is some doubt under Kansas law as to whether Kansas law solely evaluates the reasonableness of the liquidated damages provision prospectively from the time of contract formation, or whether Kansas law also retroactively compares the liquidated damages provision with the actual damages suffered. The City argued that the Circuit Court should only look from the single perspective of reasonableness measured from the time of contract formation. The Contractor asked the Court to consider the actual damages the City may have suffered. The Circuit Court affirmed the District Court’s decision without deciding how Kansas law determines the reasonableness of a liquidated damages provision. The Court found that even if the Court agreed with the Contractor and compared the City’s actual damages to the liquidated damages provision, the liquated damages provision would have been reasonable.
The Contractor also argued that the District Court was incorrect in apportioning delay between the Contractor and the City rather than denying the City all liquidated damages. The Contractor asserted that because the District Court had found that the City breached and was responsible for some delays, the City was not entitled to any liquidated damages for untimely performance. Essentially, once a party violates a contract’s terms, it has abrogated all the terms of the contract and cannot enforce its rights thereunder. The Circuit Court stated that Kansas contract law follows the parties’ intentions rather than formalism. Accordingly, the Circuit Court sought a reasonable interpretation of the parties’ agreement. The Court held, “apportionment of damages based on fault comports with modern notions of fairness, as reflected, for example, in the near-universal adoption of comparative responsibility in tort actions.” Accordingly, the damages for delay should be imposed for only those delays for which the Contractor was responsible. However, the remedy was not abrogated altogether on the ground that a portion of the delay caused by the City.
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NY Court Disallows Recovery For Additional Work Performed Pursuant To Oral Modification Because Contract Required Written Change Orders
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Charles T. Driscoll Masonry Reconstruction Co., Inc. v. County of Ulster
2007 N.Y. App. Div. LEXIS 6068 (N.Y. App. Div., May 17, 2007)
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| The Appellate Division of the Supreme Court of New York held that a construction contract must be enforced according to its terms and, therefore, oral modifications of an agreement which specifically calls for modifications to be in writing will be unenforceable. Although recognizing that written modification clauses may be waived based upon the conduct of the parties, the court found that the conduct of the parties in this case did not support a waiver.
The County of Ulster, New York retained Charles T. Driscoll Masonry Reconstruction Company, Inc. to perform, among other things, window installation and External Foam Insulation System (“EFIS”) repair. The contract price included a $8,000 contingency allowance available only upon the execution of a signed change order. Based upon complaints by the County about the uniformity of the sealant over the EFIS, Driscoll agreed to perform a sample application of sealant using a different product and procedure. Driscoll and the County also orally agreed to change the product being used to clean mold off the façade of the building. These items of additional or changed work were performed by oral agreement only and without a written change order.
A rocky relationship between the parties continued until the contract was terminated by the County prior to the completion of the project. At that time, Driscoll submitted a payment requisition for work performed in areas of the building which were completely finished. Driscoll claimed there was also additional work performed in areas which were not completely finished (i.e. not all the painting was completed) and for amounts incurred pursuant to the oral modifications. The County disputed the amount owed and Driscoll instituted an action claiming breach of contract and quantum meruit.
The trial court found that the County breached the contract and owed Driscoll for the portion of work completed and for additional work performed pursuant to the oral modifications. The County appealed the trial court’s decision and the Appellate Division affirmed in part and reversed in part the trial court’s ruling.
Specifically, the Appellate Division first affirmed the award for breach of the original contract citing to the trial testimony which supported a finding that the work performed by Driscoll was not defective and, therefore, there was no basis for the County to terminate the contract. Next, the Appellate Division reversed the trial court’s award of damages for work performed without a written, signed change order. Because the parties’ contract expressly stated that any payments from the contingency allowance for additional or changed work would only be permitted via a written change order, the Appellate Division held that oral modifications were not enforceable.
In rendering its ruling, the court recognized the proposition that clauses requiring written modifications could be waived in certain circumstances, but declined to find that such a waiver occurred here. Relying on Austin v. Barber, 227 A.D.2d 826, 828 (1996), the court opined that waiver exists if “the conduct of the parties demonstrates an indisputable mutual departure from the written agreement and the changes were clearly requested by [defendant] and executed by [plaintiff].” Applying this standard to facts at hand, the court recognized that there was clear evidence that the County agreed that the additional work should be done. The court, however, distinguished the present facts from that of cases finding waiver such that Driscoll was repeating work it already performed and which work was contemplated under the original contract. In cases finding waiver, the court noted that the additional work requested via oral modification was typically work clearly outside the scope of the original written agreement. The court further explained that the additional work performed by Driscoll was due to the County’s dissatisfaction with the original work and it was not clear that the County anticipated compensating Driscoll for the additional work. Lastly, the court found the existence of at least two other written change orders from the same time period to be detrimental to a finding that the written modification clause was waived.
Similar to its refusal to find a waiver of the written amendment requirement, the court declined to permit Driscoll to recover under a quantum meruit theory. Because the additional work performed was not based upon an agreement which “constitute[d] ‘a qualitative change in the nature of the work outside the contemplation of the contract” quantum meruit was not appropriate. Thus, Driscoll was without a remedy with respect to the additional work performed pursuant to its oral modifications with the County.
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