Coinsurance & Builder's Risk Insurance


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Explanation of the problems that the coinsurance provision in many builder's risk insurance policies can pose for the construction professional, and how to avoid them.

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Coinsurance & Builder's Risk Insurance

  1. 1. Construction Law Newsletter Published by the Section on Construction Law of the Oregon State BarISSUE No. 41 October, 2011 1. Builder’s Risk Insurance. UNDERSTANDING COINSURANCE PROBLEMS The most common type of insurance IN BUILDER’S RISK INSURANCE coverage on property while it is under construction is builder’s risk insurance. Builder’s riskSeth Row insurance provides a specialized form of propertyParsons Farnell & Grein loss coverage that specifically applies throughoutLucy Fleck the construction process. A broad builder’s riskWillamette Univ. School of Law policy insures against “all risks of direct physical loss of or damage to” the property covered, Do you understand coinsurance? If so, you including a contractor’s work and the materialsare one of the lucky few. Coinsurance is one of and supplies used in construction of the building.the least-understood concepts in all of insurance Typically, the terms of the construction contractlaw. Attorneys involved with construction will dictate whether the contractor or the propertyprojects need to have at least a working owner is responsible for obtaining builder’s riskunderstanding of coinsurance, because missteps on insurance. Multiple parties are often covered bythe front end with regard to coinsurance can have the policy, including the owner, the contractor, anyserious consequences in the event of a claim. For subcontractors, sub-subcontractors, and financialproperties under construction, coinsurance institutions providing funds for the projecttypically comes into play in connection with (making the term “builder’s risk” something of a“builder’s risk” insurance - insurance purchased to misnomer).cover losses to property during construction. There are several forms of builder’s risk Including a coinsurance clause in a insurance, including (1) basic form, (2) completedbuilder’s risk policy will typically mean lower value form, and (3) reporting form. The basicrates. But in exchange for the lower rate, the form provides a fixed amount of insurance and ispolicyholder takes on some risk of its own: If the commonly paired with a coinsurance clause. Thislimit of insurance that the policyholder specifies is form is undesirable and rarely used. As the valueless than required, then the clause will act to of buildings under construction increases, the limitreduce the amount the policyholder may recover of insurance must also increase; otherwise, thewhen it makes a claim, even if the claim is well coinsurance clause will activate to penalize thebelow limits. Therefore, it is important that insured. The completed value form, which is thebuilder’s risk insurance policyholders take care to most common type of builder’s risk policy,prevent or reduce the risk posed by the determines the limit of insurance by the expectedcoinsurance clause’s penalty. completed value of the project and also includes a coinsurance clause. However, the actual cost of construction will often exceed the original project estimate. Therefore, the completed value ________________________________________ Construction Law Newsletter Issue 41. Page 1
  2. 2. information should be updated if the project’s Property-policy coinsurance is differentactual cost increases beyond the initial estimate. from, but often confused with, coinsurance in theUnder the reporting form, the limit of insurance is medical insurance context. In medical insuranceset high enough to cover the expected complete policies, coinsurance indicates the amounts of avalue and the insured is required to report the bill that the policyholder and the insuranceactual value of the property periodically to the company will pay. For example, if a medicalinsurance company. Coinsurance clauses are not insurance policy includes an 85/15 coinsurancecommon in “reporting” forms of builder’s risk and the bill is $100, the insurance company paysinsurance. $85 and the policyholder pays $15. Although coinsurance terminology in the property insurance 2. What Is Coinsurance? context is similar to the terminology used in the Coinsurance is found in most forms of medical insurance context (for example, aproperty insurance, of which builder’s risk is a builder’s risk insurance policy may state “85%variety. The coinsurance clause typically found in Coinsurance”), the way it applies to delineatethe basic and completed value forms of builder’s responsibility for damage or loss is quite different.risk insurance policies can be a significant sourceof confusion. 3. The Coinsurance Penalty & How Insurance Companies Calculate the Fundamentally, the coinsurance clause is a Penalty.promise by the policyholder to purchase policy As noted above, coinsurance functions as alimits at a certain percentage of the property’s penalty if the property is under-insured. It appliesvalue at the time of loss. If that promise is not when the limit of insurance purchased is less thanmet, the insured will be penalized for under- a specified percentage of the insured’s propertyinsuring the property, which means that the value at the time of the loss. When the amount ofinsured will have to absorb some of the loss itself. insurance the insured is carrying meets or exceeds It is called “coinsurance” because if the penalty the specified percentage, the insured will recoverapplies, the policyholder becomes a “coinsurer” 100% of its claim and will not be penalized by awith the insurance company, in that the coinsurance clause. In that situation, thepolicyholder will be responsible for paying part of coinsurance clause is not activated and does notthe loss, along with the insurance company. reduce the insured’s amount of recovery. To identify a coinsurance clause within a However, when the insured is carrying less thanbuilder’s risk policy, look for phrasing similar to the specified percentage, the coinsurance clausethe following: “Need for Adequate Insurance. We activates and the insured is “penalized.”will not pay a greater share of any loss than the The penalty is best understood through anproportion that the Limit of Insurance bears to the example. Assume that a builder’s risk insurancevalue on the date of completion of the building policy contains a 90% coinsurance clause. Thatdescribed in the Declarations.” Coinsurance is clause means that the insured is required to carryusually set between 80% and 100%. As the insurance of at least 90% of the value of thecoinsurance percentage increases, the amount of property. If the property is valued at $500,000, theinsurance required also increases. An insurance insured must maintain a minimum of $450,000company may explain a coinsurance policy in the insurance on the property; otherwise, thefollowing way: “In exchange for lower rates, you coinsurance clause takes effect and the insuredagree to be insured for at least X% of the will be penalized by not receiving full coverage ifproperty’s value at the time of loss. If you are not, there is a become a coinsurer and share in any partialloss. There is a formula in the policy that tells you The amount of the penalty is determinedyour share: this calculation is commonly referred through a set of two calculations. The firstto as the ‘did over should’ formula.” calculates the percentage of the claim the insured ________________________________________ Construction Law Newsletter Issue 41. Page 2
  3. 3. will be paid by dividing the amount of insurance even increase beyond what was anticipated whenthe insured did carry by the amount that the the insurance was purchased. Therefore, the valueinsured was required to carry at the time of loss. must be regularly monitored and the insurance policy adjusted if necessary to accurately reflect AMOUNT THE INSURER ACTUALLY the property’s value. Otherwise, if a loss occursCARRIED (DID CARRY)/ and the value stated in the insurance policy does AMOUNT THE INSURER IS REQUIRED not match the value of the property at the time ofTO CARRY (SHOULD CARRY) = Y% the loss, the minimum insurance amount indicated Continuing with the example above, if the in the coinsurance clause may not be met. Thisinsured was required to carry a minimum of will cause the coinsurance clause to take effect and$450,000 but was only carrying $400,000 of penalize the insured. Immediately reporting costinsurance (in other words, the construction project overruns so that the insurance policy limit may bewas underinsured), then the “Y” percentage of the raised will reduce the likelihood of underinsuranceclaim the insurance company will pay is 88.9% at the time of loss. The amount of any increased($400,000/$450,000 = 88.9%). premium will usually be much less than the amount of the potential coinsurance penalty. The second calculation applies thispercentage to the insurance claim amount: When reviewing and updating the policy limit of a builder’s risk insurance policy, it isAMOUNT OF INSURANCE CLAIM * Y% important to consider replacement costs and In our example, if the amount of damage or market value. Replacement cost estimates areloss being claimed is $300,000, then the insurance influenced by the supply of labor, demand forcompany will only pay 88.9% percent of the labor, and costs of construction materials. Marketclaim: $266,700. This translates into a penalty of value fluctuates with the economy. A decrease in$33,300 for the insured as a result of not carrying market value, as a result of an economic downturn,the amount of insurance required by the may not necessarily reflect a decline in thecoinsurance clause. construction or rebuilding costs. Sometimes there is a conflict between Unless the construction is substantial,other portions of the policy and the coinsurance policyholders should avoid using the constructionclause or an ambiguity in the coinsurance clause loan amount as the limit of property insurance.that could benefit the insured. In that event, The amount of the construction loan is usually lesscoverage counsel may be needed to advocate for than the completed value of the property.the interests of the policyholder. Therefore, using the construction loan amount may result in the coinsurance penalty kicking in if there 4. Reducing the Risk of a Coinsurance is a loss. Penalty In a Builder’s Risk Policy. Finally, insureds may reduce their There are many things an insured can do to likelihood of having to pay a coinsurance penaltyavoid a coinsurance penalty. A major difficulty by including overhead and profit in the completedwith coinsurance clauses is that they apply based value. If overhead and profit are omitted from theon property value at the time of the loss, not when calculation of completed value, they couldthe policy is created or issued. To minimize the potentially account for a serious coinsurancelikelihood that an insured will be penalized by a penalty. The insurance policy must be examinedcoinsurance clause, it is crucial that the builder’s carefully; however, be warned that some insurancerisk insurance policy limit is as accurate as policies instruct policyholders to exclude overheadpossible with regard to value. and profit from the completed value calculation. When property is under construction, thevalue of the property generally increases, and may ________________________________________ Construction Law Newsletter Issue 41. Page 3
  4. 4. 5. Policy “Adders” to Mitigate the Coinsurance Problem. RECEIVERS: A POTENTIAL SOLUTION TO A DISTRESSED PROJECT If coinsurance is a concern, the insuredmay want to contract around it. Insureds mayrequest optional coverage to waive the coinsurance Laurie Hagerclause. An Agreed Amount Clause, Agreed Sussman ShankAmount Endorsement, or Agreed Value OptionalCoverage suspends the coinsurance clause when Here is an increasingly common scenario.the insured carries the amount of insurance that the A developer borrows millions of dollars frominsurance company and the insured agree to be the Lender Bank to finance the construction of a high-property’s actual value. Many insurance end condominium project. The developer owescompanies provide this option at an additional millions of dollars to contractors and suppliers,charge. who have asserted lien claims against the project. Inflation Guard Coverage is another The developer defaults on the construction loancoverage option that may reduce the risk of and cannot pay its contractors and suppliers.underinsurance. Inflation Guard Coverage Before the project is even completed, contractorsautomatically increases the amount of insurance and suppliers begin to file lawsuits in state court toannually by a percentage indicated in the foreclose their lien claims. Lender Bank filesdeclarations. This allows the insurance policy cross and counterclaims to foreclose its trust deed.limit to increase with construction cost increases The unfinished project poses code andand relieves insureds from regularly monitoring, safety violations, and may become damagedupdating, and reporting to their insurance company during the pendency of the complex foreclosureconstruction costs increases. proceedings. Until the project is foreclosed andCONCLUSION sold by the sheriff, the developer still owns the project, but has no financial ability to complete or Although coinsurance clauses create a risk secure it. The project, in its current unfinishedfor policyholders that a claim may not be paid in condition, is worth less than the value of all thefull, there are various ways to reduce that risk. liens and trust deed debt. What can be done toExploring and carefully selecting the form of preserve the project asset to maximize paymentbuilder’s risk insurance, incorporating and under the lien claims and trust deed?negotiating optional coverage mechanisms towaive or reduce the risk of underinsurance, and Lender Bank should consider moving theregularly adjusting the insurance limit to reflect court for appointment of a receiver. Arguably anyincreases in the property’s value will help valid lien claimant with an interest in the projectpolicyholders avoid a coinsurance penalty kicking can provisionally move for the appointment of ain. receiver under ORCP 80B(1), in order to protect its interest in the project. Lender Bank, however, is presumably the party with the most at stake and the best financial ability to advance the receivership costs, which typically are paid to the receiver prior to the sale of the property. Generally, the authority for appointment of the receiver and procedural steps are set out under ORCP 80, and are likely provided for under Lender Bank’s trust deed. Since Oregon does not have a statute outlining powers and ________________________________________ Construction Law Newsletter Issue 41. Page 4
  5. 5. responsibilities of a receiver (compare to license. In Hooker Creek Companies, LLC v.Washington’s Chapter RCW 7.60), a carefully Remington Ranch, LLC, Case No. CV-11-090-MOcrafted receivership order is needed to outline the (D. Or. June 9, 2011), these very issues causedreceiver’s powers and responsibilities, subject to Oregon District Court Judge Mosman to invalidatefurther order or instructions from the court. a construction lien for over five million dollars. Under the authority of the court’s order, This case is currently on appeal before thethe receiver can take measures to protect the U.S. Court of Appeals for the Ninth Circuit, Caseproject that the developer cannot afford to do and No. 11-35566, and if upheld, Judge Mosman’sthat Lender Bank and other lien claimants do not thorough analysis of the text of Oregon’s licensingotherwise have legal authority to do. For instance, statutes in this case could have far reachingthe receivership order can authorize the receiver to the project site from intruders, maintain Facts of the Case and Procedural History:building code compliance, and make necessaryrepairs. Additionally, the receivership order can Remington Ranch, LLC (“Remington”) isgrant the receiver authority to retain contractors the developer and owner of the Remington Ranchand suppliers to complete the unfinished work and project, a multi-million dollar destination resort inincrease the value of the project prior to the Prineville, Oregon. In January of 2010, Remingtonforeclosure sale. Moreover, if the receivership filed Chapter 11 bankruptcy. Prior to theorder authorizes the receiver to sell the property, bankruptcy filing, Hooker Creek Companies, LLCthe receiver may be able to obtain a better price for (“HCC”) filed a claim of construction lien for overthe project than if sold at a sheriff’s sale, thus $5 million for labor, materials, services andincreasing the amount of money Lender Bank and equipment provided to the Remington Ranchlien claimants will receive under their respective project. HCC also filed a lawsuit in Crook Countytrust deed and lien foreclosure claims (after sorting Circuit Court to foreclose its lien. After theout priorities). bankruptcy was filed, Remington and the lender for the project challenged HCC’s lien in the If you represent a secured party involved in Bankruptcy Court on the basis that HCC was nota complex, distressed construction project, you entitled to claim a lien and that it was not properlymay want to consider whether seeking a licensed with the CCB.receivership order is an appropriate remedy tomaximize payment opportunities from the project. HCC was the parent company to several subsidiary construction companies, including Hooker Creek Asphalt & Paving, LLC (“HCAP”). HCC argued that, although it was the general contractor for the project, it was the material NEW RULING CONCERNING supplier only and did not provide any of the labor CONTRACTOR LICENSING AND LIEN RIGHTS for the Remington Ranch project. HCC’s work on the Remington Ranch project related to initialShannon Raye Martinez excavation, road work and infrastructure work.Saalfield Griggs HCC claimed that all labor was provided by HCAP. The construction contract ambiguously In recent years, the Construction provided that “Hooker Creek” was the contractingContractors Board (“CCB”) has fined hundreds of for failing to follow CCB licensing Although an addendum to the contractrequirements. Many of these licensing issues relate named HCC as the general contractor, HCCto the type of work performed by the contractor applied for a license with the CCB after it filed itsand the question of who holds the construction claim of construction lien, but before it filed suit ________________________________________ Construction Law Newsletter Issue 41. Page 5
  6. 6. to foreclose its lien. HCAP was licensed with the Holding and Effect on Oregon ConstructionCCB well before the construction contract was Law:signed. Judge Mosman disagreed with HCC, and Judge Perris of the U.S. Bankruptcy Court invalidated its entire claim of construction lien asfor the District of Oregon invalidated HCC’s a matter of law. This decision may seem simple onconstruction lien on the grounds that the company its face – HCC contracted to provide labor, andwas not properly licensed under ORS 701.131, and was not properly licensed. However, Judgetherefore, was not entitled to a valid construction Mosman’s opinion analyzes ORS 701.131 in morelien. See Remington Ranch, LLC v. Hooker Creek detail than any prior case, and potentially impactsCompanies, LLC, Case No. 10-3093-elp (Bankr. the future interpretation of this statute in general.Or. 2010). HCC then appealed Judge Perris’ Judge Mosman quickly dispelled HCC’sopinion and order to the U.S. District Court. argument that it qualified for the safe harbor underIssues: ORS 701.131(2)(a)(B), and found that the statute requires a contractor to obtain the license prior to None of the parties disputed that HCC was perfecting its construction lien. Additionally,not licensed prior to filing its construction lien. Judge Mosman determined that HCAP’s licenseHCC argued four points: (1) it was not a could not be attributed to HCC because Oregoncontractor required to obtain a license under ORS law clearly prevents the performance of701.131(1); (2) if the court found it was a construction work through another entity’s license.“contractor,” then HCC qualified for the safe See OAR 812-003-0100harbor under ORS 701.131(2)(a)(B) because itobtained a license before it foreclosed its lien; (3) Judge Mosman focused his analysis on theHCAP’s license should be attributed to HCC text of ORS 701.131(1), and HCC’s argumentsbecause HCAP is a wholly owned subsidiary; and that it was not a “contractor,” and was thus(4) at a minimum, the materials, equipment and entitled to a lien for materials, services andservices portion of the lien should be held valid, equipment. Ultimately, by looking at the interplaysince a license is not required for these types of of the text of ORS 701.010(3), 701.005(5)(a) andconstruction services. ORS 701.131(1), Judge Mosman held that HCC must be considered a “contractor” for the entire ORS 701.131(1) requires all “contractors” project, and may not exempt portions of its workto be licensed with the CCB at the time of from the licensing requirements.contracting for the work, and continuously duringthe performance of the work. An important ORS 701.131(1) states that a contractorstatutory consequence of a contractor’s failure to may not perfect a construction lien for “workmeet the licensing requirements is the prohibition subject to this chapter.” Judge Mosman interpretedagainst perfection of a construction lien. this provision to mean that an unlicensed “contractor” simply may not perfect a construction In ORS 701.005(5)(a), a “contractor” is lien, regardless of whether any specific workdefined as, “a person that, for compensation or performed was “subject to this chapter.” In thiswith the intent to sell, arranges or undertakes or case, HCC was a “contractor” under ORSoffers to undertake or submits a bid to construct, 701.005(5)(a) because HCC did not simplyalter, repair, add to, subtract from, improve, provide materials without fabricating them into theinspect, move, wreck or demolish, for another, any project, and thus did not qualify for any of thebuilding, highway, road, railroad, excavation or exemptions to licensure in ORS 701.010.other structure, project, development orimprovement attached to real estate, or to do any Prior to Judge Mosman’s ruling, it seemedpart thereof.” apparent that CCB regulations and Oregon statutes required contractors to be separately licensed, and ________________________________________ Construction Law Newsletter Issue 41. Page 6
  7. 7. general contractors could not rely on the licenses minority and women owned businesses (hereafterof their affiliated companies or subcontractors. “MBEs” and “WBEs” and collectivelyJudge Mosman’s decision confirms this and “M/WBEs”). Such studies compare thefurther clarifies that an unlicensed contractor could availability of M/WBEs in the local geographiclose its lien rights for all work provided under the area to their actual use and then determine if therecontract, even if not performed by such contractor is a legally significant disparity between those twoand including the materials and equipment rental figures. In the absence of such a study, publicprovided by the contractor. agencies do not have legally sufficient evidence to Additionally, it is important to note that establish race conscious measures and must ensure their actions are race and gender neutral. WhatJudge Mosman’s ruling is limited to constructionliens. Judge Mosman found that ORS 701.131(1) follows is a general overview of the law in regardis “not a restriction of a party’s right to sue in to disparity studies followed by a generalizedgeneral, but instead limits only the extraordinary discussion of the study’s results.privileges bestowed on those who strictly comply As you are aware, government efforts towith the requirements of lien perfection.” As a help MBEs and WBEs over the past three decadesresult, the question remains as to whether a have resulted in a multiplicity of lawsuits as wellcontractor who fails to meet the CCB licensing as a voluminous number of court decisions andrequirements would still have the right to sue for law review articles. It is beyond the scope of thisbreach of contract for all or part of the work, even article to differentiate between federal, state andthough they would lost their right to a construction city affirmative action programs, the differentlien for any of the work provided. legal standards that may be applicable to each or the variety of approaches used by different consultants when conducting such studies. Nonetheless we can make some generalizations. PORTLAND’S DISPARITY STUDY The starting point for legal analysis is City of Richmond v. J.A. Croson Co., 488 US 469James Van Dyke (1989), in which the Court invalidatedChief Deputy City Attorney Richmond’s minority contracting preference planCity of Portland 1 under the Equal Protection Clause of the 14th Amendment. The Richmond plan required prime The City of Portland and Portland contractors to ensure at least 30 percent of theDevelopment Commission (PDC) hired a contract dollars went to one or more MBEs.consultant in 2009 to conduct a “disparity study” Applying a standard of “strict scrutiny,”concerning the City’s and PDC’s construction the court held the plan violated the Equalcontracts and their construction-related Protection Clause because Richmond lackedprofessional service contracts. sufficient evidence to show it had become a A disparity study is a court-approved “passive participant” in a system of racialmethod to help public agencies decide whether exclusion practiced by some in the localthere is a legal basis for programs to assist construction industry. In the absence of sufficient evidence, the Richmond failed to prove it had a “compelling governmental interest” to take race1 Portions of this article were based on research and conscious measures to address the perceivedcase summaries provided by Holland & Knight, LLP. problem. In addition, the court found Richmond’sThe author acknowledges and appreciates its plan was flawed because it was not “narrowlycontribution. The comments in this article reflect mypersonal opinions and do not represent official policyof the City of Portland. ________________________________________ Construction Law Newsletter Issue 41. Page 7
  8. 8. tailored” to remedy that discrimination. 2 “Narrow study may be time-consuming, but is nottailoring” includes consideration of race and analytically difficult.gender neutral measures. Data gathering and analysis of data to Since Croson, disparity studies have determine MBE availability is more complex. Tobecome the principal method to develop proof that determine “availability,” the City’s and PDC’sthe government’s contracting process has been consultant used an “enhanced custom census”tainted by unlawful racial discrimination. The two approach. First, historical data was used tomain components of a disparity study are 1) determine the geographic areas from which thestatistical data and 2) anecdotal information. The City and PDC draws its contractors, which wasstatistical portion of the study gathers and analyzes determined to be five Oregon counties and twodata showing the availability and utilization of Washington counties. 3 Second, the consultantM/WBEs in the local market area. The anecdotal obtained information from Dun & Bradstreet onportion of the study consists of interviews with all businesses using the 8-digit industry codespersons in the construction industry to determine if most related to City construction and construction-they have experienced racial discrimination. related professional services contracts and subcontracts. That effort produced approximately The data showing availability and 8,130 listings.utilization is analyzed to determine if there is astatistically significant disparity between the Third, the consultant attempted to conductavailability of M/WBEs in the marketplace telephone interviews with all of the firms on thecompared to their actual utilization. If a list created through Dun & Bradstreet records. Ofsignificant disparity exists and that disparity is the 8,130 firms listed, approximately 5,900 hadcoupled with anecdotal evidence showing accurate, working telephone numbers, and contactdiscrimination, courts permit an inference of was successfully made with 3,726 firms. Of thosediscriminatory exclusion from the marketplace and firms, 1,700 stated they were not interested inpermit the government to take appropriate, but participating in an interview. The remaining 2,000“narrowly tailored” remedial action. firms were interviewed. The interviews concerned such topics as interest in, and capacity for, City What amount of disparity is statistically and PDC projects, firm qualifications, firmsignificant? Some courts have found a specialization, the largest contract performed instatistically significant disparity when a minority the past five years, the length of time in business,group receives 80% or less of the expected amount and the racial, ethnicity and gender makeup ofof contracts dollars it otherwise should receive firm ownership. Only firms that consented to havebased its presence in the marketplace. Rothe interviews were used to generate data for theDevelopment Corp v. US Department of Defense, actual study.545 F3d 1023 (Fed. Cir. 2008). In other words, ifMBEs should receive 10% of all contract dollars Next, the consultants took that informationbased on their availability in the marketplace and and performed an analysis of the “relativethey receive less than 8%, that difference (20%) is capacity” of MBE and WBE firms. Relativestatistically significant. capacity refers to the ability of a firm to take on work. Clearly, smaller firms have less capacity to Data gathering for M/WBE utilization is take on large projects, or multiple small projectsrelatively straightforward since it depends on simultaneously, than larger firms and thus are lesshistorical records showing to whom contracts and “available.” Studies that fail to take “relativesubcontracts were awarded. This portion of the2 3 While racial programs may be subject to “strict The relevant market area was comprised ofscrutiny”, programs addressed to gender may be Columbia, Washington, Yamhill, Clackamas,subject to “intermediate scrutiny.” Multnomah, Clark and Skamania counties. ________________________________________ Construction Law Newsletter Issue 41. Page 8
  9. 9. capacity” into account have been criticized by appears prudent for disparity studies to at leastsome courts as insufficiently reliable. Rothe, account for relative capacity in their conclusions. 5supra. Indeed, the Supreme Court’s decision in The result of this “relative capacity” Croson to focus on current statistical data appearsanalysis was a decrease in overall availability for to reflect a judgment to take the playing field as itMBE and WBE firms when compared to their is found as opposed to where it “would” be ifpresence in the marketplace. For example, initial discrimination had never existed. If one cannotinterviews showed that the total number of MBE presume racial discrimination held down thefirms in the area comprised 5.7% of the market availability of MBEs in the heart and capital of thewhile WBE firms (white women owned only) Confederate States of America, it seems unlikelycomprised 12.9% of the market, for a combined the Supreme Court will do so of 18.6%. PDC and the City currently are examining After relative capacity was taken into the results of their disparity studies. Generallyaccount, however, the actual availability of MBE speaking, City results showed some disparities forfirms across the entire spectrum of City prime certain prime contracts and for certaincontracts dropped from 5.7% to 1.9%. It is subcontracts in certain, but not all, categories ofimportant to remember that availability based on contracts, such as contracts awarded without“relative capacity” is a “dollar weighted” average, application of the City’s current Good Faithwhich takes contract size into account. 4 Efforts program. 6 The average availability of MBEs over the In contrast, PDC’s results showedentire spectrum of City contracts, however, is not statistically significant disparities in itsthe only picture presented by the data. For “sponsored” construction projects. Sponsoredexample, while the average availability for MBE projects are those where PDC provided financialcontractors over all City contracts was 1.9%, the support or loans to a developer, but did notavailability for all subcontracted work was found actually execute the construction be 4.8%. Thus, there are far more available As a result of the disparity study, the CityMBEs for subcontract work on City projects than and PDC, together with citizen advisory groups,the average availability numbers portray. are in the process of examining a wide range of its Critics of the “relative capacity” approach existing procedures and policies to see if the Cityto determining availability note that MBE firms can remove barriers to the entry and advancementmay be smaller and unable to perform a greater of MBE and WBE firms. It is anticipated thatquantity of work as a result of historical or current changes to City programs, and new programs, mayracial discrimination. That, of course, may well be begin to take shape beginning after February oftrue. Until the Supreme Court or other circuit 2012.courts reach different conclusions, however, it In summary, my best guess is that you will see changes to City programs designed to assist4 MBE and WBE firms next year because the The study separated PDC and the City whendetermining availability. The data in this article refers disparity study shows there has been statisticallyto availability for City contracts only. Availability and significant disparity in the contracts awarded tousage for PDC contracts was different. This should 5not be surprising since the City and PDC undertake I am not a statistician so there may be other analyticaldifferent types of contracts. PDC is focused on urban methods to take this into account. 6renewal and often is involved with the development of The Good Faith Efforts program requires contractorsproperty. The City has far more sewer and water to make good faith efforts to give opportunities tocontracts, road contracts and other infrastructure minority and women owned businesses by contactingcontracts than PDC. them in advance of submitting a bid. ________________________________________ Construction Law Newsletter Issue 41. Page 9
  10. 10. MBE and some WBE firms and those awarded to complaint does not settle. If the complaint doesmajority-owned firms. The extent of those not settle, the parties must go to court and thechanges, for now, remains undetermined. As CCB will base its decisions on the resultingthose programs come into shape I will give you an judgment.update on what to expect from the City’s bidding Agency staff still must determine if theand contract process. complaint is within the CCB’s jurisdiction and how much of the judgment should be paid by the contractor’s bond. To avoid hearings on these issues, the legislation provided that these decisions CHANGES TO THE CCB are orders not in a contested case. This type of DISPUTE RESOLUTION SERVICES order may be challenged in circuit court, rather than in an administrative hearing. (See OregonWilliam J. Boyd Attorney General’s Administrative Law Manual,Oregon Construction Contractors Board Part V, 192 – 202 (January 1, 2008). Agency rules provide that the party challenging this kind of CCB order must file a petition for reconsideration On July 1, 2011 the Construction before filing in circuit court. OAR 812-004-1260.Contractors Board (CCB) Dispute ResolutionServices (DRS) program changed dramatically. To implement SB 939, the CCB adoptedThis change was necessary because of the recent amendments to its administrative rules. Most ofsharp slowdown in construction that resulted in a the new rules are in OAR 812-004-1001 throughsignificant drop in the number of licensed and the fees paid to the CCB. To See also the following article by Alanadjust to this drop in revenue, the legislature made Mitchell on these changes.significant cutbacks in the CCB’s budget for theDRS program. In order to accomplish this, thelegislation eliminated the cost to send DRS files tothe Office of Administrative Hearings for a SIGNIFICANT CHANGES TO THE CCBcontested case hearing or arbitration if a party DISPUTE RESOLUTION PROGRAMchallenged an order issued by the CCB. Thestatutory amendments necessary to accomplish thisare in Senate Bill 939, sections 38 through 73. Alan Mitchell Mitchell Law Office For complaints filed on and after July 1,2011, DRS will provide only mediation services.If the parties do not settle the complaint, the 2011 Senate Bill 939 has made significantcomplainant must go to court and obtain a court changes to the Dispute Resolution Program of thejudgment before DRS can send it to the Oregon Construction Contractors Board (CCB).contractor’s surety for payment (that process may This article discusses some of those changes. Forinvolve a contractual arbitration). Essentially, the more information, check the CCB’s web site.CCB is using the court system to establish liability Sections 38 through 73 of this bill set outand damages, rather than an administrative process major changes to the CCB’s Dispute Resolutionbacked up with an administrative hearing. procedures. The bill was passed on July 6, 2011 Processing CCB complaints is relatively and took effect that date. Section 54 expresslyunchanged through the on-site meeting where the states a legislative intent that these statutoryCCB Investigator Mediator meets with the parties changes may be applied retroactively in order toat the job site to mediate the complaint and process CCB complaints filed on or after July 1,prepare a report of his or her observations if the 2011. ________________________________________ Construction Law Newsletter Issue 41. Page 10
  11. 11. Prior to this bill, processing a CCB Practitioners should also note that many ofcomplaint first involved an on-site mediation and these changes have a “sunset” date of July 1, 2017.investigation. If that did not lead to a settlement, Thus for CCB complaints filed on or after July 1,then the CCB would issue a proposed order and, 2017, Sections 56 through 72 of SB 939 reinstatefrequently, refer the complaint to the Office of most of the laws in effect prior to July 1, 2011,Administrative Hearings (particularly if one of the including the CCB’s ability to use the Office ofparties wanted to contest the proposed order). Administrative Hearings and the ability of anUnder this bill, the second and third steps have owner to obtain a stay of a construction lienbeen eliminated. Thus, the CCB complaint process foreclosure is essentially a “mediation-only” program. For CCB complaints filed on or after July1, 2011, ORS 701.145(5) has been amended toprovide that, if the parties do not settle a complaint CASE LAW UPDATESunder CCB-assisted mediation efforts, then thecomplainant must file a circuit court action (which D. Gary Christensencould be a small claims action) or an arbitration Jeffrey Sagalewiczagainst the contractor. Once the complainant Miller Nashobtains a final judgment (which could includeconverting an arbitration award into a judgment), 1. ARBITRATION: PUBLIC POLICYthe CCB will issue a determination ordering the FAVORING BINDING ARBITRATION OFcontractor’s surety to pay that portion of the DISPUTES REQUIRES THAT ANjudgment that is within the CCB’s jurisdiction. AMBIGUOUS ARBITRATIONThose determinations will be orders that are not AGREEMENT BE INTERPRETED AScontested case orders. BINDING, ABSENT OTHER EVIDENCE OF One additional change is that the CCB will THE PARTIES’ conduct mediations for all complaints, not Gemstone Builders, Inc. v. Stutz, 245 Or App 91just owner versus prime contractor disputes. In this (2011).regard, the bill expressly authorizes telephonemediations (new ORS 701.145(4)). Plaintiff contractor sued defendant owners for breach of contract, unjust enrichment, and Yet another impact of these changes is that fraud. Defendants moved to compel arbitrationa CCB Final Order can no longer be recorded to under the construction contract, but the trial courtcreate a judgment lien (again, this is for denied defendants’ motion. Defendants appealed,complaints filed on or after July 1, 2011). This is and the Court of Appeals reversed.because the CCB will not be issuing those orders.That ability had been set out in ORS 701.153, The Court of Appeals analyzed thewhich cross-referenced ORS 205.125 and 201.126. language of the contract to determine whether there was an agreement to arbitrate the dispute and Two other impacts of these changes are the whether any arbitration clause was binding.repeal of ORS 701.148 (which allowed the CCB to Plaintiff argued that the contract languagerequire that OAH hearings were held as referring to arbitrating disputes was inconsistent,arbitrations – since there are no OAH hearings, and thus should not be enforced. For example,this is no longer needed) and ORS 87.058 (which plaintiff argued that the contract’s attorney feeallowed a property owner, in certain situations, to clause, which stated that “[i]f there is cause forobtain a stay of a construction lien foreclosure suit, dispute, or action, both parties agree toaction by filing a complaint with the CCB – now submit to arbitration * * * prior to entering intothat CCB complaints will be decided judicially, the case of suit” was incompatible with terms inthere is no reason for this procedure). ________________________________________ Construction Law Newsletter Issue 41. Page 11
  12. 12. which the parties agreed that the contractor could 2. ATTORNEY FEES: A PREVAILINGpursue any remedy afforded at law or in equity for DEFENDANT MAY RECOVER ATTORNEYstrict foreclosure. But the Court of Appeals read FEES UNDER A PREVAILING PARTYthe latter term as referring to remedies only, not ATTORNEY FEE CLAUSE EVEN IF Athe proper forum to pursue the remedy. THIRD PARTY IS BILLED FOR THE FEES The Court of Appeals also rejected AND PAYS THEM UNDER A SEPARATEplaintiff’s argument that if the language of the AGREEMENT WITH THE fee clause were intended to apply to all Menasha Forest Products Corp. v. Curry Countydisputes, then the parties’ agreement in the Title, 350 Or 81, 249 P3d 1265 (2011).warranty section of the contract that required them Plaintiff Menasha Forest Productsto first submit any warranty dispute to arbitration Corporation filed a declaratory judgmentwould be rendered redundant. But any resulting concerning a title insurance policy issued byredundancy did not create an ambiguity for the Transnation Title Insurance Company in connectionCourt of Appeals. with an escrow closed by Curry County Title, Inc. Having decided that the agreement to (“CCT”). Menasha’s escrow contract with CCTarbitrate was unambiguous, the court considered included a prevailing party attorney fees clause thatwhether the agreement to arbitrate was binding. applied to all claims arising out of the escrow. CCTSeveral clauses in the contract referred to and Transnation were jointly represented in defensearbitrating disputes “prior to” initiation of any suit, of the action and, under a separate indemnificationsuggesting that the agreement was not binding. agreement between the CCT and Transnation,But the attorney fees term also specifically stated Transnation was billed and paid all attorney fees inthat decisions from the arbitrator would be binding connection with the action.on both parties. Ultimately, defendants prevailed on the Because the provisions are inconsistent declaratory judgment action, and the trial courtwith each other, the Court of Appeals held that the awarded them attorney fees jointly. The Court ofcontract was ambiguous. But it was not too Appeals reversed, accepting Menasha’s argumentambiguous to enforce. Instead, because the record that CCT was not entitled to recover fees because itcontained no extrinsic evidence of the parties’ did not expend or incur any fees in defense of theintent concerning binding arbitration, the court action. Transnation had paid the attorney fees and,turned to maxims of construction to resolve the because of the indemnification agreement, CCTambiguity. The court found clear policies favoring was not liable to pay them in the first place.arbitration as an alternative to litigation and not a CCT and Transnation appealed to thestep to prolong it. Based on these policies, the Oregon Supreme Court who agreed with the trialCourt of Appeals held that the ambiguity would be court. The court rejected Menasha’s argument thatresolved in favor of binding arbitration. CCT was required to show that it had paid or wasAccordingly, the trial court erred when it failed to required to pay attorney fees in defense of the actioncompel binding arbitration. in order to recover them under the contract language. Instead, the Supreme Court identified that CCT’s entitlement to attorney fees must be analyzed separately from the indemnity agreement between CCT and Transnation. The court went on to hold that CCT incurred attorney fees because it was liable to pay them notwithstanding the indemnity agreement. For example, had Transnation not paid the attorney fees under the indemnity agreement, CCT was still liable to the ________________________________________ Construction Law Newsletter Issue 41. Page 12
  13. 13. attorney for those fees. Menasha was not entitled to 4. DAMAGES: EXTENDED HOMEthe benefit of the indemnification agreement. OFFICE OVERHEAD DAMAGES ARE The court also rejected Menasha’s argument DISTINCT FROM UNABSORBED HOMEthat Transnation was not entitled to a joint award of OFFICE OVERHEAD DAMAGES ANDattorney fees because it was not a party to the EXPERT OPINION BASED ON THEescrow agreement. The court found, however, that EICHLEAY FORMULA CANNOT BE USEDthe relationship between Transnation and CCT with TO ESTABLISH EXTENDED HOMErespect to the issuance of the title policy was one of OFFICE OVERHEAD DAMAGES.principal and agent. As such, Transnation was a Stellar J Corp. v. Smith & Loveless, Inc., 2010 WLproper party to enforce the attorney fee right in the 4791740 (D Or Nov 18, 2010).contract, particularly given that Menasha set forth In a federal breach-of-contract action inno evidence that the agency relationship between which the general contractor plaintiff soughtTransnation and CCT did not extend to enforcing recovery from a subcontractor defendant forthe escrow agreement. “extended home office overhead” damages, the3. ATTORNEY FEES/INSURANCE: subcontractor filed a motion for partial summaryATTORNEY FEES MAY BE AWARDED judgment against those damages and prevailedUNDER ORS 742.061 ONLY AGAINST before the Magistrate Judge. On review, theINSURERS WHO DELIVER THEIR district court affirmed the grant of partial summaryINSURANCE POLICY OR ISSUE IT FOR judgment dismissing the claim for overheadDELIVERY IN OREGON. damages because plaintiff had asserted a claim for extended home office overhead losses but itsMorgan v. Amex Assurance Co., 242 Or App 665 expert had supported that claim by application of(2011). the Eichleay formula, which is used to calculate Attorney fees against insurers may be “unabsorbed” home office overhead losses. Theawarded when claims are not settled within six general contractor failed to show that its home-months after proof of loss is filed under office overhead was not a fixed expense or that itORS 742.061. However, that statute is subject to actually suffered additional home-office overheadORS 742.001, which limits that chapter’s expenses due to the subcontractor’s delay in itsapplication to “insurance policies delivered or work.issued for delivery in” Oregon. In an automobile The court distinguished unabsorbed andinsurance claim action in which judgment was extended overhead claims, noting that to recoverissued against the insurer and in favor of an extended home-office overhead costs, the generalOregon plaintiff arising from an automobile contractor was required to show “added overheadaccident in Oregon, the trial court held that no costs, which exceed its normally incurred fixedattorney fees could be awarded to the plaintiff expenses attributable to ongoing businessbecause the defendant was a Washington resident operations [because] * * * a contractor may still bewhose Washington insurance policy had been able to complete the work without incurringdelivered to her in Vancouver. The court of ‘added’ overhead costs” (quoting West v. All Stateappeals affirmed, finding that ORS 742.061 is Boiler, Inc., 146 F3d 1368, 1378-79 n4 (Fed Circontrolled by ORS 742.001, including its 1998).limitation of application to Oregon insurancepolicies. The district court further held that it was appropriate for the court to adjudicate only a portion of the contractor’s damages claim via summary judgment, rather than the entire damages claim, under Fed R Civ P 56. ________________________________________ Construction Law Newsletter Issue 41. Page 13
  14. 14. 5. INSURANCE/ADDITIONAL from whether the alleged losses are covered by theINSURED: THE “FOUR CORNERS” RULE policy. The homeowner and general contractor, toIS INAPPLICABLE TO DETERMINE properly plead their claims, need not plead factsWHETHER THE PARTY SEEKING relating to the subcontractor’s relationship withCOVERAGE IS IN FACT AN “INSURED” the manufacturer’s insurer or its status under thePARTY UNDER THE POLICY. manufacturer’s insurance policy.Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 237 The considerations underlying the four-Or App 468 (2010), rev den., 349 Or 602 (2011). corners rule have no application to the preliminary question of a party’s status as an insured under the A stucco manufacturer’s liability insurance policy. Looking to the stipulated facts before thepolicy purported to cover distributors under a court, including extrinsic facts, the court affirmed“vendors endorsement” for all “vendors of the the trial court’s declaration that the subcontractor[manufacturer],” but “only with respect to ‘bodily was an insured under the vendor endorsement.injury’ or ‘property damage’ arising out of ‘your The court went on to determine coverage of theproducts’ * * * which are distributed or sold in the claims (applying the four-corners rule) andregular course of the vendor’s business.” A affirming the allocation of defense costs tohomeowner sued its general contractor for losses Gemini.resulting from leaking and mold caused by crackedstucco. The general contractor, in turn, broughtthird-party claims against the subcontractor that 6. INSURANCE/ASSIGNMENT OFhad sold and installed the stucco and against the CLAIM: AN EXCESS POLICY OFstucco manufacturer. The subcontractor was a INSURANCE “FOLLOWS FORM” TO THEdistributor of the manufacturer’s stucco product. UNDERLYING PRIMARY POLICY ONLYThe manufacturer’s insurer, Gemini Insurance, TO THE EXTENT THAT IThowever, denied the subcontractor’s tender of UNAMBIGUOUSLY INCORPORATES ITSdefense under the policy. In a declaratory TERMS. ALSO, AN INSURED MAYjudgment action to determine Gemini’s duty to VALIDLY SETTLE WITH A CLAIMANT BYdefend, the trial court held that the subcontractor ASSIGNING THE INSURED’S RIGHTSwas an insured under the vendor’s endorsement AGAINST ITS INSURER, WHO HASand Gemini appealed. DENIED THE CLAIM, UNDER ORS 31.825. On appeal, Gemini did not dispute the Portland School Dist. v. Great American Ins. Co.,subcontractor’s status as a distributor but claimed 241 Or App 161, rev den. 350 Or 573 (2011).that the facts necessary to establish that it fellwithin coverage under the vendors endorsement A contractor negligently caused a firecould not be found within the “four corners” of the while reroofing Binnsmead Middle School incomplaint, third-party complaint, or insurance Portland in 2003. The contractor’s primarypolicy. It objected to extraneous evidence used to liability insurer settled to the limits of its coverage,establish the subcontractor’s status as an insured, leaving more than $1 million in damages to collectrelying on the familiar recitation of the “four- from the contractor’s excess liability carrier, whocorners rule” in Ledford v. Gutoski, 319 Or 397 denied the claim outright. The school district and(1994). The Court of Appeals rejected the contractor entered into a settlement agreementsubcontractor’s apparent concession that the four- under which the school district would sue thecorners rule applied and held that that rule has no contractor in negligence for the remainingapplication in determining the preliminary damages and the contractor would stipulate toquestion whether the subcontractor was an entry of a judgment against it, confessing its“insured” under the policy at all. The question of negligence. After entry of the judgment, theinsured status under a policy is analytically distinct contractor would, in exchange for a release, assign ________________________________________ Construction Law Newsletter Issue 41. Page 14
  15. 15. its rights against its excess insurer to the school Thus, the statute preserved the insured’s claimdistrict, who would then pursue recovery under against the excess insurer in the hands of the schoolthat policy. This process intended to follow the district.requirements of ORS 31.825, which permits 7. INSURANCE/BINDERS: A WRITTENassignments of claims against insurers by INSURANCE POLICY MAY NOT EXCLUDEjudgment-debtors in exchange for releases. CLEAR AND EXPRESS TERMS OF AN When the school district sued the excess EARLIER ORAL BINDER.insurer on claims obtained through the assignment, ADDITIONALLY, AN INSURED MAYthe insurer argued that (a) the excess policy RECOVER ATTORNEY FEES UNDER ORSbenefitted from an anti-assignment provision 742.061 IN CONNECTION WITH AN ORALfound in the underlying primary insurance policy BINDER OF INSURANCE.through a “follow form” clause that purportedly Stuart v. Pittman, 350 Or 410, 255 P3d 482adopted the terms and conditions of the underlying (2011).policy by reference, and (b) ORS 31.825 does notallow assignments of claims against insurers In connection with building a new home,obtained through a pre-judgment settlement plaintiff purchased a course-of-constructionagreement with the insured. The Court of Appeals insurance policy through defendant Ronaldupheld the trial court’s judgment awarding the Pittman, an insurance broker. Plaintiff requestedschool district judgment against the excess insurer coverage that would provide “safety net” orfor the remaining damages. “catch-basin” coverage that would apply “in all instances that something goes wrong during The excess policy did not use the term construction.” Pittman agreed to procure the“follows form,” common insurance parlance for coverage and did not communicate anythe incorporation of coverage by an excess policy. limitations. During the course of construction, a Instead, it stated: “Except for the terms, storm damaged plaintiff’s partially-completeconditions, definitions and exclusions of this house. Although the storm occurred several[excess] policy, the coverage provided by this months after the oral binder of insurance waspolicy will follow the [underlying primary liability given, the insurer had still not delivered a policy topolicy].” The trial and appellate courts found that plaintiff. Plaintiff made a claim on the policy andthis clause was not sufficiently clear to incorporate Pittman told him that the damage should bean anti-assignment clause that was located in the covered. However, the written policy that was“terms and conditions” section of the primary eventually issued to plaintiff included an exclusionliability policy and not the “coverage” provisions. for the type of damage that plaintiff suffered, soBecause the language was ambiguous about the insurer denied the claim.whether all of the terms or just the coverage termsof the underlying policy were to be incorporated, it Plaintiff sued Pittman and the insurer forapplied the maxim that the policy would be breach of contract and prevailed at the trial court.construed against the drafter. On appeal, the Court of Appeals accepted defendants’ argument that, under ORS 742.043, Additionally, the school district and insured plaintiff’s request for “safety net” coverage wascontractor were held to have correctly followed the not sufficiently clear and express to supersede therequirements of ORS 31.825 in the process set out written exclusions in the their settlement agreement. Although the partiescontemplated a suit and entry of a judgment in the Plaintiff appealed, and the Supreme Courtagreement, no enforceable release was given to the reversed. Under ORS 742.043, oral binderscontractor and no enforceable assignment of rights include all the normal terms of the policy,was given to the school district until after the including endorsements and exceptions except asjudgment against the contractor had been entered. superseded by clear and express terms of the oral ________________________________________ Construction Law Newsletter Issue 41. Page 15
  16. 16. binder. Applying the analysis prescribed in PGE Insurance Company. State Farm accepted thev. Bureau of Labor and Industries, the Supreme tender, but American Family did not.Court held that to be sufficiently clear and express, Thereafter, State Farm brought a declaratoryterms of the oral binder must not be vague or judgment action against American Family seeking aobscure. Here, a request for “safety net” or declaration that American Family was obligated to“catch-basin” coverage in “all instances that defend Edgewater and contribute to the cost ofsomething goes wrong” was not vague or obscure; defense incurred by State Farm. The trial courtthe language essentially referred to an “all-risk- ruled in State Farm’s favor, concluding that thepolicy.” Because there was evidence in the record claim alleged a time period covered by Americanfrom which the jury could reasonably conclude Family’s policy, an occurrence as defined by thethat plaintiff had requested a policy different from policy, and damages covered by the policy.that eventually expressed in the written policy, thetrial court did not err. American Family appealed and the Court of Appeals reversed. On appeal, American Family The Supreme Court also affirmed the trial asserted that the allegations of the complaint failedcourt’s grant of attorney fees under ORS 742.061. to allege property damage within the terms of the Defendants had argued that plaintiff was not policy because the allegations did not specifyentitled to attorney fees because the statute only resulting damage beyond damage to the work itself.applied to written policies, not oral binders. But The court focused on whether the homeowners’the Supreme Court rejected the argument on two complaint against Edgewater, without amendment,grounds. First, the jury’s conclusion that there would allow them to offer evidence and recoverwas an enforceable oral binder of insurance meant damages for injury to property other than the EIFSthat, under ORS 742.043, the written policy issued cladding defendants was deemed to include all the termsof the oral binder. Second, the Supreme Court To answer the question, the court analyzedrelied on prior precedent that allowed attorney fees the pleading rules under ORCP 18 B.under oral binders. Compensatory damages for injury to real property are divided into categories of general and special (or collateral) damages. General damages naturally and8. INSURANCE/DUTY TO DEFEND: AN necessarily result from the injury alleged, whereasINSURER’S DUTY TO DEFEND DOES NOT special damages may flow naturally from the injury,ARISE WHEN THE ALLEGATIONS OF but not necessarily. General damages are notTHE COMPLAINT FAIL TO required to be pled with specificity, but specialSPECIFICALLY PLEAD THAT THE damages are. If the exact nature of special damagesRESULTING DAMAGE COVERED BY THE is not pled with specificity, the court will excludePOLICY NECESSARILY RESULTED FROM evidence of them and preclude recovery on them.THE DEFECTS ALLEGED IN THE Upon review of the homeowners’COMPLAINT. complaint, the court concluded that none of theState Farm Fire & Casualty v. American Family allegations of property damage extended beyondMutual, 242 Or App 60, 253 P3d 65 (2011). EIFS cladding itself. It further concluded that, Homeowners asserted a claim against although water damage to other buildingEdgewater Homes, Inc., for breach of contract, components may naturally result from defects in the EIFS cladding, water intrusion was not a “necessarybreach of implied warranties, and negligence arisingout of the construction of an EIFS cladding system result” of the defect. Because the homeownersat their home. Edgewater tendered the claim to its failed to specifically plead resulting losses asinsurers, plaintiff State Farm Fire & Casualty special damages, their complaint did not triggerCompany and defendant American Family Mutual coverage for resulting property damage under American Family’s policy. ________________________________________ Construction Law Newsletter Issue 41. Page 16
  17. 17. 9. INSURANCE/SUBROGATION: The analysis under the indemnity andINSURER WHO PAID UNDER POLICY IS contribution theories turned on the same facts.NOT ENTITLED TO RECOVER AGAINST Because of the policy limitations period, the otherOTHER INSURERS UNDER THEORIES OF insurers owed no legal obligation to pay the policyCONTRIBUTION, INDEMNITY, AND when Fireman’s Fund made payment in 2005.SUBROGATION WHEN THE OTHER Although both indemnity and contribution claimsINSURERS WERE NOT LIABLE AT THE have their own separate statute of limitationsTIME THE INSURER MADE PAYMENT period, a plaintiff cannot recover unless itBECAUSE OF LIMITATION PERIODS IN discharged a duty owed by the party from whom itTHE OTHER INSURERS’ POLICIES. seeks indemnity or contribution. Claims for indemnity and contribution cannot revive theFireman’s Fund Insurance Company v. United underlying statute of limitations when it ran beforeStates Fidelity and Guaranty Company, No. CV- the insurer made the payment for which it is seeking09-263-HU, 2010 WL 1959148 (D Or May 17, contribution and indemnity.2010). The Fireman’s Fund Insurance Company 10. NEGLIGENCE: A PLAINTIFF MAYinsured a building under a policy period beginning PURSUE A CLAIM FOR NEGLIGENTJuly 1, 2000. The owner of the building CONSTRUCTION NOTWITHSTANDING Adiscovered water damage that had been occurring CONTRACTUAL RELATIONSHIP WITHsince construction of the building in 1998. THE BUILDER IF THE PLAINTIFFFireman’s Fund eventually paid under its policy ALLEGES THAT THE BUILDERand brought an action against other insurers who UNREASONABLY CAUSED FORESEEABLEhad insured the property after construction and PROPERTY DAMAGE AND THEbefore the Fireman’s Fund’s policy went into CONTRACT DOES NOT ELIMINATE THEeffect. Fireman’s Fund asserted claims for CONTRACTOR’S LIABILITY FORequitable contribution, common law indemnity, COMMON LAW NEGLIGENCE. IN SUCHand equitable subrogation. The other insurers CASES, THE STATUTE OF LIMITATIONSmoved for summary judgment, which the court ON THE NEGLIGENCE CLAIM IS TWOgranted. YEARS FROM DISCOVERY OF THE DAMAGE. All of the other insurers’ policies had Abraham v. T. Henry Construction, Inc., 350 Or 29,language that included a limitations period that 249 P3d 534 (2011), recons. denied (May 5, 2011).required all actions for property damage under therespective policies to be brought within two years Plaintiffs hired defendants to build a home,from the date of the damage. Moreover, the which was substantially completed in 1998. Moreapplicable policy language did not include a than six years later, plaintiffs discovered waterdiscovery rule. Accordingly, under the language damage and brought claims against defendants forof the contracts, the prior insurers could not have breach of contract and negligent construction. Thebeen liable under the policies for a claim that was negligent construction claim was based on threebrought before June 30, 2002, two years from the theories: common law negligence, violation of aexpiration of the latest policy period. In this case, duty created by a special relationship, andhowever, the insured did not assert a claim until negligence per se based upon violation of the2003. Because under the law of subrogation, Oregon Building Code.Fireman’s Fund was subject to all of the policy Defendants moved for summary judgmentdefenses that would be valid against the owner, the against the contract claim because it was notlimitations defense was valid against Fireman’s brought before the six-year statute of limitationsFund. had expired, and against the negligence claim because plaintiffs and defendants did not stand in a ________________________________________ Construction Law Newsletter Issue 41. Page 17
  18. 18. special relationship to each other. The trial court economic harm, whereas plaintiffs’ harm in thisentered judgment in favor of defendants on both case involved property With respect to the negligence claim, the Finally, without mentioning Jones, thetrial court held that under Jones v. Emerald Pacific Supreme Court held that the parties did not modifyHomes, Inc., 188 Or App 471 (2003), a homeowner or eliminate the common law duty to avoidwho contracts with a builder cannot assert a foreseeable injury simply by including in thenegligence claim absent a special relationship with contract language that the contractor must completethe contractor, and there is no special relationship its work in a workmanlike manner and comply withbetween a homeowner and a contractor. building codes. Such a contractual promise exists The Court of Appeals affirmed the decision whether or not it was included in the contract, so aon the contract claim, but reversed on the breach of the promise could give rise to bothnegligence claim. First, the Court of Appeals held contract and tort liability. Because plaintiffs hadthat when a construction contract merely alleged that defendants unreasonably causedincorporates a general obligation of reasonable care, foreseeable property damage and the parties’Jones correctly requires that the plaintiff must show contract did not eliminate defendants’ common lawa standard of care independent of the contract duties, plaintiffs were entitled to proceed on thearising from a special relationship, statute, or negligence claim.administrative rule. Plaintiffs’ arms-length contract Although not asked to determine thewith defendants to build the home, however, did not limitations period for a claim arising out of propertycreate the type of special relationship that could damage caused by negligent construction, thesupport the negligence claim. But the Court of Supreme Court included in a footnote that theAppeals also held that the Oregon Building Code applicable statute was ORS 12.110. Under ORScreated a standard of care independent of the 12.110, tort claims must be brought within twocontract, thus plaintiffs’ allegations that their years from the date they accrue, which the courtdamage arose from defendants’ violations of the said was normally upon discovery, limited only byBuilding Code supported a negligence claim. the statute of repose in ORS 12.135. Defendants appealed and the Supreme Because the court was not asked to decideCourt affirmed, though on different grounds. The this issue, plaintiffs moved for reconsideration. InSupreme Court first noted that tort liability based on particular, plaintiffs asserted that the footnote couldcommon law duty to avoid foreseeable injury to foreclose application of the six-year limitationsothers exists whether or not the parties are in period under ORS 12.080(3) (injury to an interest ofcontract, unless the contract modifies or eliminates another in real property) for claims of negligentthe common law duty. Parties do not waive construction. The Supreme Court, however,common law tort rights merely by entering into a refused to modify its opinion.contract. 11. PRESERVATION OF ERROR: THE The Supreme Court then rejected PLAIN ERROR EXCEPTION TO ORCP 59 Hdefendants’ argument that, under Georgetown IS NARROWLY CONSTRUED.Realty v. The Home Ins. Co.¸ 313 Or 97 (1992), aparty to a contract could only bring a tort claim State v. Guardipee, 239 Or App 44, 243 P3d 149arising out of a breach of contract if a special (2010).relationship existed that created an independent Counsel for defendant in this criminal casestandard of care. The Supreme Court distinguished proposed a jury instruction to which the StateGeorgetown because it was a case in which a party objected. The court accepted the State’s positionseeking economic loss had to stand in a special and refused to give the jury instruction. Defenserelationship to recover for negligently-caused counsel failed to raise the objection again after the jury was instructed as required by ORCP 59 H(1). ________________________________________ Construction Law Newsletter Issue 41. Page 18
  19. 19. On appeal, the defendant asserted that the court should not be given was not enough. Accordingly,could still review the failure to give the the court did not consider the merits of whetherinstruction, notwithstanding the failure to comply the instruction was proper.with ORCP 59 H, because of the court’s ability to 13. WAGE AND HOUR: A GENERALreview a plain error on the face of the record. The CONTRACTOR IS NOT THE “EMPLOYER”court rejected defendant’s argument, holding that OF ITS SUB-SUBCONTRACTOR’Sonly in narrow and rare circumstances would the EMPLOYEES UNDER APPLICABLE WAGEcourt circumvent the broad conclusive effect of AND HOUR LAWS, WHEN THEORCP 59 H. The case at hand did not present the EMPLOYEES PERFORM FRAMING WORKfacts to which deviation from the rule would be ON ONLY ONE OF THE GENERALwarranted. CONTRACTOR’S PROJECTS.12. PRESERVATION OF ERROR: Gonzales v. Sterling Builders, Inc., No. 08-CV-OBJECTIONS TO JURY INSTRUCTIONS 943-BR, 2010 WL 1875620 (D Or, May 6, 2010).UNDER ORCP 59 H MUST BESUFFICIENTLY SPECIFIC TO ALLOW General contractor LC Construction andTRIAL COURT TO CORRECT ALLEGED Remodeling, Inc., contracted with SterlingERROR. Builders, Inc., to provide framers for a construction project. Sterling Builders, in turn,Hammer v. Fred Meyer Stores, Inc., 242 Or App subcontracted with Hammer Construction, LLC, to185, 255 P3d 598, rev. den., 350 Or 716 (2011). provide the framers to perform the work on the Plaintiff was injured in defendant’s store project. Although LC Construction paid Sterlingwhen removing product from an end-cap display. Builders all periodic payments due under theBefore the case was sent to the jury, plaintiff asked contract, the framers walked off the projectthat the jury be given a res ipsa loquitur asserting they had not been paid. Later, several ofinstruction. Defendant objected, contending that the framers initiated claims under the Fair Laborthe instruction was not warranted by the evidence, Standards Act (“FLSA”) and Oregon’s wage andthat the instruction failed to address the element of hour laws.exclusive control, and that the instruction The court granted summary judgment inimproperly burdened the defendant to prove the favor of LC Construction because plaintiffs failedabsence of its own negligence. The court gave the to establish that they were employees under theinstruction anyway, after which defendant multi-factored tests to determine employee statusobjected, again restating that the evidence did not under the FLSA. Gonzales provides thesupport the res ipsa loquitur instruction and practitioner a detailed framework for how a courtasserting that the case should have gone to the jury could approach all the factors in a wage and houron a regular negligence instruction. case. With respect to issues that may be The Court of Appeals held that defendant applicable in a broad number of cases, the courtfailed to properly preserve any error with respect held that a general contractor’s authority to set theto the jury instructions. Defendant’s post-jury overall schedule for a construction project did notinstruction objection was not sufficiently equate to having the authority to supervise andparticular to allow the trial court an opportunity to control a particular subcontractor’s employee’scorrect the error. Based on its review of the work conditions.record, the Court of Appeals held that nothing in The court also held that, because this wasdefendant’s objections before or after the giving of the only LC Construction project that the plaintiffsthe res ipsa loquitur instruction informed the had worked on, plaintiffs could not show that theyjudge how the instruction failed to address an were the equivalent of LC Construction employeesessential element of the doctrine or otherwise was based on being moved from work site to work site.inaccurate. Generally arguing that the instruction ________________________________________ Construction Law Newsletter Issue 41. Page 19