Workplace Accidents and the Additional Insured Clause (Part 2)

A few weeks ago, I posted a blog about the danger of owners and contractors thinking that additonal insured status on a subcontractor's liability policy protected them from being entangled in lawsuits for workplace accidents. Based on the article referenced below, I recommended that the subcontractor be required to obtain an additional insured endorsement for the owner and contractor that does not exclude coverage where the owner's or contractor's negligence, but not the subcontractor's, is alleged. However, sometimes that is simply not something the subcontractor can do.

In that circumstance, owners and contractors have to fall back on a carefully worded indemnification provision in the subcontractor's contract --- and of course, the subcontractor's liability policy must be required to cover contractually assumed liabilities (of which the indemnification obligation is one). David S. White, who provided the resource material for the last blog and for this one, recommends that the indemnification provision be substantially similar to the following (minor editorial changes were made by this writer):

"Subcontractor (S) agrees to indemnify and hold harmless the Owner and
Contractor (O and C) for, from and against all liabilities, claims, penalties,
fines, forfeitures, suits and the costs and expenses incident thereto (including
costs of defense and attorneys' fees), which O or C hereafter may incur or pay
as a result of death or bodily injury to any person, or destruction or damage to
any property, arising out of the construction site or S's operations under this
Contract EVEN IF O OR C IS NEGLIGENT IN WHOLE OR IN PART."

It is important to note that, under some case law (at least in Texas), the last phrase needs to be in capital letters in order for the provision to be enforceable.

As before, thanks to David S. White, Senior Counsel with Thompson & Knight, LLP in Dallas who provided the resource material for this blog in his article on this subject in the January 2007 issue of The Practical Real Estate Lawyer. To purchase the online version of this article, go to www.ali-aba-org and click on "online". (This entry posted by Karen Estelle Carey, a member of Womble Carlyle's Real Estate Development group.)

School System Saves Sales Tax through Interlocal Agreement with County

Under a deal approved by the Wake County (N.C.) Board of Education in March, 2007, the school system may save millions in sales tax from construction projects. By transferring title to property to be constructed or renovated to Wake County, the school system will be able to take advantage of the sales tax rebate enjoyed by county governments. The deal could save the school board an estimated $11 million to $13 million in sales tax from its current $1.056 billion construction program. The county would return the title to the school system within 60 days of closing out projects.

A draft agreement between the County Commissioners and Board of Education may be accessed at http://www.wakegov.com/agendas/2007/march12/08/01agreement.htm. (This entry posted by Liz Riley of Womble Carlyle's construction and real estate practice group.)

New Urbanism Yields Public/Private Teamwork

The Durham, North Carolina City Council approved in principle a $6.1 million incentive package in connection with a major downtown redevelopment project proposed by local developer, Andy Rothschild. The Council's 6-1 vote was taken after hearing complaints from others in the community who had been unsuccessful in seeking such an incentives package. The package approved would include investments in streetscape and property tax rebates. The development is located in a historically African-American neighborhood near North Carolina Central University, whose administration supported the incentives award. If successful, the project will bring a vibrant mixed-use (office, retail, commercial) environment and stimulate business and private investment. The developer still needs additional funds to proceed, and may look to Durham County as another source.

For additional information about this interesting project, see The Herald-Sun, May 7, 2007. (This post published by Laura Luger of Womble Carlyle's real estate development and construction practice group.)

Materials Suppliers Beware: Economic Loss Rule May Not Bar Owners' Negligence Claims

In an opinion that clarified the application of the "economic loss" rule in North Carolina, the North Carolina Court of Appeals affirmed a jury award against the supplier of defective roof trusses where the homeowners who brought the negligence claim had no direct contract with the truss supplier. See North Carolina Lawyers Weekly, 20 NCLW 0145 et seq. and Lord v. Customized Consulting Specialty, Inc., 643 S.E.2d 28 (N.C. App. 2007).

Judge James A Wynn, Jr., writing the opinion for the court explained: "Because the economic loss rule does not operate to bar a negligence claim in the absence of a contract between the parties, we affirm the trial courts' judgment in favor of the plaintiffs." A similar rationale was determinative in Ellis-Don Constr., Inc. v. HKS, Inc., 353 F.Supp. 2d 603 (M.D.N.C. 2004). These decisions help owners who might otherwise direct their affirmative claims for defective construction to the contractor with whom they are in direct contract, while ignoring the potential liability of the suppliers. Often suppliers are brought into lawsuits on claims for indemnity by the contractor, but these cases make clear that good pleading may require the owners to sue the defective material suppliers directly from the outset. Statutes of limitation and repose should be monitored closely, although in the Lord case, the supplier's limitation defense proved to be unsuccessful.

For further discussion on the current state of the "economic loss" rule in North Carolina, see the April 23, 2007 edition of N.C. Lawyers Weekly and materials cited therein. (This entry was published by Laura Luger of Womble Carlyle's construction and real estate development practice group.)

Errant Mail Carrier Delivers News of Missing Rebar

A mail carrier test driving a car in a parking lot crashed into a Matthews, North Carolina elementary school. As a result, school officials discovered over 80 percent of the block walls did not have necessary steel reinforcing bars. The school was completed in 1993, the car vs. wall mishap occurred in 2001, and the school filed suit in October 2004, eleven years after the school was built. Since North Carolina has a six year statute of repose barring stale claims, the school can’t sue the contractor, right? Depends. In Charlotte-Mecklenburg Board of Education v. R.L. Casey, Inc. et al., Mecklenburg County Superior Court No. 04 CVS 18745, the tribunal had to determine whether the contractor committed fraud or willful or wanton negligence – exceptions to the statute of repose.

An AIA contract governed the underlying dispute, so the case was compelled to arbitration. Ultimately, the arbitrator reduced the school’s award 25 percent from $2.1 million to $1.6 million because the school’s architect and engineer agents had at least constructive notice of the deficiencies and had opportunities to do more inspections. The contractor’s superintendent assured the engineer that the steel rebar was in place, so the arbitrator charged the contractor with willful and wanton negligence, for wrongfully concealing evidence and affirmatively representing that the rebar was in place. Hence, no statute of repose limitation.

In February 2007, Mecklenburg County Superior Court entered the arbitration award and both sides appealed. Two weeks ago, the parties settled working out terms for the contractor to pay the school over $1.6 million.

Lessons learned? If you are a contractor who knowingly fails to install rebar in walls and lies about it, don’t expect the courts to let you off the hook after six years. And the lesson for the mail carrier, wear seat belts and find a larger parking lot.

For further information, see the April 30, 2007 edition of NC Lawyer's Weekly. (This entry posted by Ken Michael of Womble Carlyle’s construction and real estate practice group).

Workplace Accidents and the Additional Insured Clause

Owners and contractors depend on being protected for subcontractor employees' workplace accidents by requiring that subcontractors include the owner and contractor as additional insureds on their commercial general liability (cgl) policies. When a subcontractor's employee is injured on the job site and sues the owner and contractor for negligence (since worker's compensation laws normally prevent the employee from suing the subcontractor, its employer), the owner and contractor assume they can tender the defense of the lawsuit to the subcontractor's insurer since the owner and contractor are, after all, additional insureds under the subcontractor's cgl policy.

Insurers were not happy about this arrangement, however, because they ended up incurring defense costs that were out of line with the premiums charged to the subcontractor. The "fix" to this (for endorsements issued after 2004) was to change the additional insured endorsement to exclude coverage where the owner's or contractor's negligence is alleged --- but no claim is made against the subcontractor.

So what should owners and contractors do to protect themselves? Certainly, they should require each subcontractor to provide a copy of the additional insured endorsement on its cgl policy so that the owner and contractor can determine whether the endorsement excludes coverage where the owner's or contractor's negligence, but not the subcontractor's, is alleged. If it does, the owner and contractor can require the subcontractor to obtain an additional insured endorsement that does not exclude this coverage. If that is not possible, or economically not feasible, the owner and contractor may have to rely on a carefully drafted indemnification provision --- which will be the subject of this writer's next blog entry.

Thanks to David S. White, Senior Counsel with Thompson & Knight, LLP in Dallas who provided the resource material for this blog in his article on this subject in the January 2007 issue of The Practical Real Estate Lawyer. To purchase the online version of this article, go to http://www.ali-aba-org/ and click on "online". (This entry posted by Karen Estelle Carey, a member of Womble Carlyle's Real Estate Development group.)