The Construction Advantage

Triggering Insurance Coverage In Construction Disputes

By Zachary Brandwein

Eventually, most legal disputes come down to a single, pressing question: who is going to pay for this mess?

The steps taken at the outset of litigation can be critical to resolving this question in your favor down the road.  In construction disputes, most complaints – especially those concerning design defects – should be drafted with the goal of triggering any and all applicable insurance policies.  Consideration of some common provisions in comprehensive general liability (“CGL”) policies can help ensure a thoughtfully pleaded complaint triggers the insurer’s obligations.

First, pleading at least one claim which may be covered under the defendant’s insurance policy is generally sufficient to trigger the insurer’s obligation to defend the entire case. The threshold question when considering insurance coverage is whether the plaintiff’s loss was caused by an “occurrence” as defined in the policy. Assuming that the loss can be considered an “occurrence,” the next issue to consider is whether an exclusion in the policy applies.

Typically, CGL policies exclude coverage for damage which stems from the insured’s work or work product. This “your work” exclusion is often the most important stumbling block to avoid when triggering insurance coverage. It may be possible to avoid the “your work” exclusion by pleading a good faith claim for negligence. Any negligence claim, however, should be thoughtfully and fully plead with an eye toward the underlying facts so as not to leave it vulnerable to a motion to dismiss.

Conversely, pleading an intentional tort such as fraud may be possible under the facts and may open the door for punitive damages, but fraud claims are likely to be excluded under a CGL policy’s “intentional acts” exclusion provision. An attorney must carefully weigh whether pursuing additional damages is worth the risk of not triggering insurance coverage.

Every construction dispute is different, but the question of who ultimately pays to resolve it is universal. It is almost always easier – and better in the long run – to trigger coverage by thoughtfully drafting a complaint than it is to try to amend the complaint to trigger the insurance policy. The moral of the story is to think through this problem before the lawsuit begins, not after it has begun.

Differing Site Conditions Cost Vermont Agency of Transportation $600,000

By Conor Shankman

In 2011, Tropical Storm Irene struck Vermont dumping over 11 inches of rain and causing an estimated $733 million in damage.  As a result of Irene, more than 2,400 roads, 800 homes and businesses and 300 bridges (including historic covered bridges) were destroyed or damaged.

During the recovery effort, W.M. Shultz Construction, Inc.  (Shultz) was hired by the Vermont Agency of Transportation (VTrans) to replace four bridges. Three were completed without incident, but the fourth resulted in a lawsuit, after VTrans denied Shultz’s claim for equitable adjustment and additional money because of the “differing site conditions” it encountered. Bridge #19 was a single-span steel-girder bridge over the White River in Rochester, Vermont. The east abutment was to be placed on a ledge.

After engaging in exploratory drilling to determine the location of this ledge, Shultz discovered “differing site conditions” (i.e. subsurface physical conditions that were materially different than those described in VTrans’ contract plans and specifications). Shultz’s bid had assumed a ledge elevation of 802.5 feet for the bottom footing when, in fact, it was much lower at this particular location. This uneven ledge elevation required Shultz to change its means and methods to support the east abutment, and incur an additional $600,000 in costs.

The project had received some federal funding, and therefore the contract between the parties contained a standardized “differing site conditions provision” as required by 23 C.F.R. § 635.109. The purpose of this provision is to allow contractors to submit more accurate bids by eliminating the need for contractors to inflate bids to account for contingencies that may not occur.

Schultz submitted its claim for equitable adjustment first to VTrans, where it was denied, and then to the Vermont Transportation Board, which granted Shultz’s claim. VTrans then appealed that decision to the Vermont Supreme Court. At all three levels of review, Shultz’s differing-site-conditions claim was evaluated under the so-called Stuyvesant test. To be entitled to an equitable adjustment under this test, a contractor must prove by a preponderance of the evidence that:

• “the conditions indicated in the contract differ materially from those it encounters during performance”;
• “[t]he conditions actually encountered” were “reasonably unforeseeable based on all the information available to the contractor at the time of bidding”;
• “it reasonably relied upon its interpretation of the contract and contract-related documents”; and
• “it was damaged as a result of the material variation between the expected and encountered conditions.”

Stuyvesant Dredging Co. v. United States, 834 F.2d 1576, 1581 (Fed. Cir. 1987). The first Stuyvesant element is a threshold question – the contract must contain “some identification of the conditions to be encountered at the site” – otherwise the claim is invalid.

The Court ultimately found that the contract had incorrectly identified the ledge elevation because the bid documents:

• Repeatedly stated that the approximate elevation of the existing ledge was 802 feet;
• Failed to state that subsurface conditions were unknown, could vary, or were sloped;
• Described the “known fact” that the corresponding abutment for the prior bridge had been poured directly on the ledge; and
• The two soil borings closest to this prior abutment showed ledge elevations of 802.6 feet and 801.2 feet.

Just like the Transportation Board, the Court denied VTrans’ arguments that the bid documents did not indicate any actual depth of ledge, or that they clearly marked the height of ledge as “approximate” or “elevation varies”. As a result, Schultz was awarded increased performance costs of over $600,000.

The lessons learned from this are twofold: For the state agency or developer, before putting a contract out to bid, be confident about what you do know, and explicitly label what you are unsure of. For the general contractor or subcontractor, before bidding a project take careful note of conflicting information in the bid documents, and seek clarity before making a formal submission. For more information on this case, and the proper application of the Stuyvesant test, I recommend reading Vermont Supreme Court’s full decision: W.M. Schultz Constr., Inc. v. Vermont Agency of Transportation, 2018 VT 130, 2018 WL 6427252  (Vt. Dec. 7, 2018).