New Laws, New Cases, New Liability!

Jury Awards $41 Million! $10 Million! $6.7 Million!

Can you or your company afford to pay these jury awards? Are you sure your insurance policy will cover you? The sad truth is insurance will not cover every claim, either by definition or due to bad faith denial.  The proof is in the numerous lawsuits of record, especially for bad faith denial of coverage against the insurance companies.

Lawsuit Explosion / Expanding Circle of Liability:

Etched in the fabric of the construction business is the eventuality that you or your company will be named in a lawsuit. Agency law generally holds the principal liable for third parties for its employees' wrongful conduct. (ie: Ca, CC 2330-2339, Ca LC 2750.5). An owner, general or prime contractor is presumed liable for the acts of a licensed contractor that it hired. (ie:Ca LC 2705.5, Sabella v Wisler (1963) 59 C2d 21). The law has refined itself to hold responsible the trades that have control, knowledge or supervision over the construction process. For example, strict liability may expand more and more to the managers who control the construction process, such as a developer and contractor (or construction managers).[1]Huang v. Garner (1984) 157 CA3d 404;Balfour, Guthrie & Co. v. Hansen (1964) 227 CA2d 173). A prime contractor was held liable to subsequent homeowners for wrongful death for negligent installation of a heater. Dow v Holly Mfg (1958) 49 C2d 720. Construction Project Managers or prime contractors may not avoid liability for lack of control or knowledge because it is the essence of their role. Kuntz v. Del E. Webb Constr. Co (1961) 57 C2d 100.

New laws and new cases keep entering the industry. With new laws, come new lawsuits. Lawsuits and new laws could prove to destroy the malprotected or unprotected developer, builder or general contractor. The construction industry is a fertile ground for increased lawsuits and potential personal liability. You can do nothing and just hope you do not get sued, or your insurance will handle it; or you can take action and limit your personal, business and legal risk liability. Many developers, builders or general contractors (and construction managers) are devastated when their trusted insurer denies coverage.  Can your company afford to pay its own legal defense fees and any monies due on a judgment in this current legal environment?  

Can you afford to take a hit for $6.7 million, $10 million, or $41 million?

Lawsuits for construction defects are generally coached as a breach of contract, breach of express or implied warranty, negligence, strict liability or fraud. Intentional or deliberate causes of actions generally allow for punitive damages, which are not normally covered by your CGL insurance policy (Miller v Western Gen Agency 41 CA4th 1144 (1996)). Punitive damages are meant to punish or deter further wanton or reckless conduct. 22 Am Jur 2d Dam 243,245 (LCP 1965), CCC 3294(a). Punitives are allowed in most states in some form, includingCalifornia, New York, Florida, Nevada, Arizona, Texas, etc. Worse yet, generally punitives are not dischargeable in bankruptcy! That's right, you pay and pay for years if necessary. 

No One Is Safe Who Doesn't Prepare!

$6,705,809 was awarded as reimbursement (rights to subrogation) to the insurance company who sued the developer, general, and the subs, including the concrete-sub, plumbing-sub, and grading-sub for alleged defective workmanship, and then demanded reimbursement of money paid on the claim. This is also a rare case where some subs defensed and non-suited, and received attorney fees. (State Farm Fire & Casualty Co. v Newhall Land, et al (3-30-00) PC016315 Pending Appeal). A Gate Fabricator and General Contractor built and partially installed a security gate, which fell and injured a 22-year-old security guard. This cost them $1,470,789.  Williams v Dinwiddle, et al LA No SC046185 (2-18-00).

Builders: Leased Employees!

A 19-year-old "leased" woodworker employee from a builders payroll services company, on his first day, cut off 3 fingers with a saw. The insurance company denied the workers compensation claim, and denied the cabinetmakers demand for legal defense. After years of expense and pain, the insurer was held liable for bad faith for $14,678,090. [2]Diamond Woodworks v Argonaut Ins Co (Santa Ana Ca No 790462. Appeal pending).  Diamond Woodworks, Inc. v. Argonaut Ins. Co., 109 Cal. App. 4th 1020 (2003)

Breach of Contract!  

A manufacturer of tunnel rings held the general contractor and City of San Diego liable for a late change design order to the tune of $3,031,171. The general was 70% negligent, the City 30! [3]Sehulster Tunnels v Pre-Con Corp v Traylor Bros., City of San Diego (5-5-00) No 722543).  Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Oba..., 111 Cal. App. 4th 1328 (2003)

Watch Out! More & More Insurer's May Deny Sub's Coverage, Leaving More For You To Pony Up!

Legal principles hold that the developer (and builder, or general) is in the best position to seek indemnity against subcontractors or material suppliers. [4]Casey v Overhead Door Corp  (1999) 74 CA4th 112. (Overruled in part).  In fact the legal profession encourages such lawsuits against the subs as a principle of risk distribution.[5]La Jolla Village HOA v Sup Ct 212 CA3d 1131 (1989).  (Overruled in part)  The subs (and insurer's) however, seem more weary of the inevitable case of indemnity from a developer and/or general contractor, or for reimbursement from an insurer.  Insurance is becoming more expense and/or unavailable.  Insurer's are denying certain coverage to subs. For example, insurer's may not cover certain defects of the sub's own work, unless it caused damage to another trade's work. For example, water intrusion cases occurring from foundations, concrete or masonry walls and/or roofs is a common allegation in such cases as it often damages insurable work of many other trades.Central Mut Ins Co v Del Mar Beach COA 123 CA3d 916 (1981).

It cost the contractors some $10,683,677 for water intrusion damages for negligent construction and design of the exterior envelope.  The owner sued the general contractor and its architects, who were held jointly and severally liable. In return most of the subcontractors were sued on express contractual indemnity for costs of defense and indemnity, including the masonry-sub, drywall-sub, waterproofing-sub, sheet metal-sub, windows, sealants, etc. Only the consultant-sub and the painting-sub successfully steered clear of liability.  Met Life v Dinwiddle Constr, Nadel Architects, Inc. (cross v. subs) August 14, 00, Orange County Ca. No. 776130, Appeal Pending). In another case the insurance company sued (in bad faith) for reimbursement from the contractors. It cost them $12 million. [6]West Am In v Freeman 46CA4th 1476 (1995). 

Moreover, coverage was also denied as the damages related directly to the cost to repair the subs own defective work, which is not covered under a commercial general liability policy (CGL). Collett v Insurance Co. of the West 64 CA4th 338 (1998). Western Empl. Ins v Arciero & Sons 146 CA3d 1027 (1983). You should also realize that if the sub's defective work damages the sub's  nondirective work, insurance might not cover the loss under the work product exclusion. For example, a contractor whose collapsed retaining wall damaged project downslope units was not covered! Western Empl. Ins v Arciero & Sons 146 CA3d 1027 (1983).

Tip On Insurance Policies & Indemnity Clauses!

Certain insurance policies exclude coverage to subcontractors if the policy excludes coverage for liability assumed by contract or for the insured's employee injuries.  Indemnity law is uncertain or misinterpreted all the time. Since most subcontracts have some form of indemnity clause, the sub may be exposed to liability with no insurance coverage for defense and/or indemnity, leaving the general, builder or developer with less indemnity!Gonzales v R.J. Novick Constr. Co. 20 C3d 798 (1978), 22 CEB Real Prop L Rep 234 (Nov. 1999), CC2782,2778,2778(1), CC-Ca Plaza Assoc. v Paller & Goldstein 51 CA4th 1042 (1996). Moreover, the language contained in your sub's insurance policy, and the language of the indemnity clause in your contracts are key factors to coverage protection. With state statutes holding preemptive transfers of sole negligence to fault-free subs against "public policy" (ie: Ca 2782), language of indemnity clauses become critical. Certain express language (or in equivalent terms) does satisfy an indemnity against liability (ie: Ca CC 2778(1) CC-Ca Plaza Asso v Paller (1996) 51 CA4th 1042). Watch for a smart-sub to add language to the effect that he is not "intending" to be subject to liability which is not covered by insurance! Have your indemnity clauses reviewed by your attorney today! Call us for a free indemnity report!

Watch Out for Claims Made On Sub Policies!

Many subs must for economic necessities cut insurance costs! Moreover, many subs have signed up for claims made policies which may very well leave them (and you) with no coverage. Claims made after the effective policy period on a claims made policy are not covered  (Waller v Truck Ins. Exch. 11CA4th 1 (1995)).

Risk Management Techniques & Insurance Tip!

Since many construction defects are not discovered until long after the job is completed, the developer, general and builder must attempt to expand the available redress-pot by adding the insurance policies of the subs! You may do this by having your subs name you as an additional named insured at least for several years after the completion of the project (ie: 4, 5 or years). Insurance companies are obligated to defend a developer named as additional insured on policies issued after the job was completed, since they were "completed operations" policies. Pardee Constr. Co v. Ins. Co West (2000) 77 CA4th 1340. Obtain actual evidence of insurance policies, certificates and actual endorsements. Seek assurance that the broker/agent has authority to bind the insurance company.  Also, have your Insurance Service Office Inc (ISO) endorsement reviewed by your attorney to determine which endorsement is necessary or appropriate (ie: Pre-1993-2010 Form (for "completed operations" coverage or coverage that continued after completion of the project), the Revised ISO 2010 Form (with coverage for ongoing operations), or an automatic contractually defined coverage.The ISO 2009 may not be appropriate if  "completed operations" are intended to be covered.  Good News! If you are denied coverage for the contractor's injured employee due to "sole negligence" (ie: in Ca, CC 2782), remember there is a duty of coverage because insurance benefits are independent of the contractor's indemnity obligation.Shell Oil Co. v National Union Fire Ins Co (1996) 44 CA4th 1633. Call you attorney for guidance.

Warning! Litigation Strategy!

Naming all-the-subs in lawsuits with the blind hope of adding more insurance coverage to the pot may backfire on you as more sub policies are denied coverage for many reasons. An uninsured sub may have the effect of hurting your payout ratio (increase percentage fault of named parties). Get the right legal advice before running with a sue-all-the-subs strategy!  Further, consider reviewing the potential bad faith denial of all insurance policies denied with a bad faith coverage attorney.

The general contractor and the worker's employer were sued along with the concrete-sub and safety rebar cap supplier for injuries to a negligent iron-worker who fell some 40 feet impaling himself on vertical rebar with only 8' rated rebar safety caps. The jury awarded $1,285,000.  The supplier of the protective rebar caps settled prior to trial.  Seth Filgo v Lusardi Const Co. San Diego No 730162 May 2, 2000. (Appeal not found Pending). The developer and architects/engineers (who settled before trial for $1,000,000) were sued along with the concrete-sub, and the mix suppliers (found liable for $1,750,482) for negligent construction, deterioration and defects in concrete footings, foundations and slabs due to alleged UBC violations regarding maximum water-to-cement ratios for concrete exposed to sulfate-containing soils.  [7]Allen Peters, et al, v. Brighton-Brannon, et al. Santa Ana No 765177 Nov.23, 99. (Affirmed:  2003 Cal. App. Unpub. LEXIS 4164 (2003))

Bad Faith Denial of Insurance Coverage & Punitive Damages:

Insurance companies may defend you under a reservation of rights, and then seek reimbursement from you of all amounts paid to defend, settle and/or satisfy the claim. Or, at times, insurance companies deny claims and leave you out in the cold with respect to your legal defense and indemnity. Many of these denial cases result in bad faith wrongful denial of coverage (Egan v Mutual Of Omaha Ins 24 C3d 809, Gruenberg v Aetna Ins 9 C3d 566 (1973)) by the insurance company, but the denials keep coming anyway! In this circumstance, you will have to fend for yourself, and then sue your insurance company for breach of contract and bad faith. If you survive this ordeal, most don't, you may see redress. Some insurance companies have been hit with multimillion-dollar verdicts.

For example, a jury gave $41,897,797 to a silent partner of a general contractor's construction company sued for defective and unfinished work and fraud, who was denied coverage in bad faith in part for not being a named insured! Plaintiff was forced to file bankruptcy, he lost his home, his license, his business, and ultimately he suffered a heart attack! Stay tuned; this one is on a vigorous appeal with case consolidations and extensions of time. [8]Hanstad v. Truck Insurance Exchange BC 156849 LA Central May 10, 2000, (5-10-00, Appeal Pending 10-11-2001). (2002 Cal. App. Unpub. LEXIS 8605 (2002))

Plaintiff, a small-mid sized construction management firm was awarded $1,962,000 by a jury against a sub's bonding company and a concrete-sub constructing public school parking garages and building foundations for failing to properly man the job and complete the concrete work timely. The sub's bonding company denied coverage and was a named defendant for bad faith, after plaintiff refused to sign a Takeover Agreement limiting coverage to stated bond penalty amount. Bonding co. later nonsuited with responsibility to pay. (Lewis Jorge Construction Mgt v Tely Construction, Am. Moto.Ins.Co.(12-7-99) Santa Ana No 789768 Appeal Pending (Confidential Settlement Conference due 10-29-01)).

Warning re Workers Compensation & Bad Faith!  

Watch out as more and more insurance companies deny coverage when the applicant merely alleges (1) a serious or willful violation (ie: Ca LC 4553), and/or (2) wrongful discharge (ie: Ca LC 132a). Regardless of the truth, the law facially allows the insurance company to deny coverage (ie: Ca IC 11611) if the lawyer for the claimant alleges such wrongful conduct. The law is not certain in this area and more cases need to test such denials. States, like California, that have statutes that expressly allow for "additional compensation" may see more litigation. Meanwhile, you pay out of your pocket! Call for our free worker's compensation denial report!

Special Warning On Selection of Material And Strict Liability For Moving Slabs & Cracks!

Strict liability has the same effect as being in the path of a B-1 or B-52 on a cluster raid. All in its path pay, Innocent or Guilty! That's right, not only developers, builders, generals and manufacturers may be held responsible for strict liability without fault for defects relating to design, selection of materials and construction installation. For example, once a developer/contractor is sued for strict liability, a concrete-sub will be sued to indemnify the developer/contractor for a defective foundation slab, which moved and deformed with extensive cracks! (Watch this potentially growing area of liability!) Stearman v Centex Homes (2000) 78 CA4th 611; [9]La Jolla Village HOA v Sup Ct (1989) 212 CA3d 1131. Strict Liability generally allows for punitive damages. Barrett v Sup Ct (1990) 222 CA3d 1176), San Francisco Unified Sch Dist. v. WR Grace (1995) 37 CA4th 1318.

What Can I Do? Protections From Business and Personal Liability:

I know first hand the distress suffered by subcontractors when they seek the right attorney to save their lives from personal liability or corporate wipeout! My latest successful war story comes from a subcontractor (concrete/masonry).  He was denied coverage on a claims made policy (insurance sales broker/agent liability?) in a multi million-dollar case, the graverman of which was couched around negligent waterproofing. On the face of it, my "innocent" client stood to lose everything he had owned or controlled by his small business corporation. However, my client had earlier implemented a multi-entity business approach as a means to enhanced protection from liability. He had another two entities, which owned his valuable equipment, vehicles, real estate and large cash balances. These entities were not sued. Fortunately, I was successful in extricating him with a zero liability while all other defendants paid over $1,600,000. However, it cost my client dearly to pay me out of his "pocket" by the hour for my legal services.  But he continues with success!

Are you protected from personal liability? Who did you hire to protect yourself from personal liability? While your CPA is primarily used for tax reasons, you may not be aware of the great risk of business and personal liability by keeping your business in your personal or partnership name, a dba name, or assets in your spouses name or in your living trust. A business in your personal or partnership name, or a dba name is subject to 100% personal liability loss! Also assets held in your living trust do not protect your assets from the reach of creditors. (Ca. Prob. Code, Sections 18200, 15304 (a), 15304 (b). Your CPA will usually say, all you need is insurance! But the painful truth is insurance does not cover all types of lawsuits and potential liability. What happens if your insurance company denies your claim for legal defense and indemnity? Are your assets really safe from lawsuits, and creditors? Can you really afford to pay legal fees out of your own pocket? If all of your assets are in your small business corporation, they are subject to 100% loss by judgment creditor foreclosure and liquidation. If your business is a sole proprietorship or partnership, your personal assets (and partners') are vulnerable to 100% loss in the event of a judgment against your business or you, your partner(s), your spouse, or co-owners). Remember your personal assets subject to loss include (with some restrictions) your business equipment, cash, tools, and trucks, your personal $1,000,000 IRA, your $850,000 home, your $45,000 bank account, your CD's, brokerage accounts, mutual funds and other toys.  Should your goal be to merely save taxes, or to protect your empire and save taxes as well?

Every year that I teach the ContractorsClub.Com seminars, I hear more and more actual stories of sad business and personal losses (usually told by seemingly "innocent" contractors).  If you're waiting for the politicians to save you, you¿re making a big mistake. So wake up subcontractors! The answer is not to merely seek "tax" advice from your CPA, but to get protection from lawsuits and new laws! Honestly, can you afford to bankroll that contingency, and survive? Are you even aware what it may cost to defend a lawsuit? $100,000 to $300,000 more or less, is common.

First, seek the advice of a qualified and experienced attorney who protects contractors or small businesses, both in estate and business liability protection. Second, seek the advice of a qualified insurance expert who acknowledges that policies do not always cover every type of lawsuit that you might incur in the construction industry, and that insurance companies, at times, do in fact deny coverage. I pass no judgment against insurance companies with that statement. Remember, some acts, whether seemingly innocent or not, are not covered by all policies, or are against the law or public policy to cover, and are simply uninsurable.

Third, learn what techniques or devices are available to help solve this problem. As I can only mention a few of them here since such detail is beyond the scope of this article, I refer you to learn more about these in my article entitled "The 13 Secrets To The Rich Or Informed"(TM)©.  First of all, you must understand that there are only two categorical types of activities (including assets, businesses, or conduct).  They are Risky and Safer! Not Safe! Nothing is 100% safe from the potential list of legal and government predators that circle your life everyday. With that said, personal liability is reduced or eliminated by using integrated entities (such as the Corporation, Limited Liability Company, etc.) to run or hold your Risky or Safer activities. You must never put all of your eggs in one basket, and you must never unintentionally mix your Risky and Safer activities and baskets!  Of course there are rules, techniques and experience trade secrets that will govern the formation, integration and implementation of your baskets.

 Common techniques or devices:

The techniques or devices commonly used in business and estate planning include, but are not limited to those listed in the chart below.