The Construction Advantage – Issue 13

Welcome to the thirteenth edition of The Construction Advantage! In this issue, we bring you cases of expanded insurance coverage in New Hampshire and fraudulent concealment cases from California and Minnesota. We hope that you enjoy our newsletter, and we welcome any comments on this edition or any of our previous issues. 

Insurance for Defective Work Claims?
In Some Cases, the New Hampshire Supreme Court says “Yes”

by David Ray

The standard Commercial General Liability policy available to contractors provides insurance for property damage and personal injury claims against the contractor. All CGL policies include an exclusion for claims seeking property damage that must be “restored, repaired or replaced because [the insured’s] work was incorrectly performed on it.” This exclusion is known as the “your work” exclusion. The most common judicial interpretation of the “your work” exclusion is that unless the defective work caused damage to property other than the work performed by the contractor (for ex., a vehicle on the site or a structure adjacent to the work itself), there is no insurance coverage for defective work claims. Under this interpretation, courts have historically denied insurance coverage for defective work claims when the property damage affects only the project itself.

This interpretation has been pulled back by some courts and there are different rules in various states. In New Hampshire, the Supreme Court recently decided a case that goes against the general rule and will significantly expand the possibility of finding insurance coverage for claims against contractors for faulty work. In Cogswell Farm Condominium Association v. Tower Group, et al., 2015 N.H. LEXIS 3 (Jan. 13, 2015), the court considered whether there was insurance coverage for a claim based on allegations of faulty work by the owners of condominium units against the contractor who constructed them. Specifically, the condo association claimed that the improper installation of ice and water shielding, flashing, siding and vapor barriers had resulted in water damage to the condo units. There was no allegation of damage to property other than the units constructed by the contractor and the contractor’s insurer argued, therefore, that the “your work” exclusion precluded insurance coverage for the claim.

The New Hampshire court disagreed and found that the “your work” exclusion only applied to the damage to particular work claimed to be defective (i.e., the water shielding, etc.) but that there was insurance coverage for the damage to other non-defectively constructed parts of the condo units. Essentially, the court concluded that, if the claim arising from the defective work involves damages beyond the cost of fixing the defective work itself, there is coverage under the standard CGL policy. There is now a much better chance of finding insurance coverage in New Hampshire for defective work claims. If the defective work caused property damage to any other part of the construction project, under the holding of this case, there will be coverage and the contractor will be entitled to a defense for the entire claim and indemnity for the damages to the other parts of the job.

Fraudulent Concealment of Bad Soils Results in Entitlement to Jury Trial 

by Mike Bosse 

Fraudulent concealment claims can allow a claimant to escape the legal bar of a statute of limitations. They are difficult claims to prove in court because you have to prove the undisclosed facts, and sometimes the cover up. Yet, in a case decided by the California Court of Appeals on January 15, 2015, Stofer v. Shappell Industries, the appeals court found that there was a jury trial issue over whether the third owner of a house in San Ramon, California, could maintain a claim against the original contractor for fraudulent concealment. The alleged concealment related to the home being built on unstable and uncompacted “fill” soil with an inadequate foundation that caused numerous defects including cracked floors, walls, ceilings and problems in and around the pool area. 

Stofer, the third owner of the home, sued the original builder in 2010 alleging that the property contained 25 to 30 feet of highly differential fill, with high plasticity, which failed to meet minimum engineering compaction standards. Stofer alleged that she did not become aware the “dramatic changes” in the property until after she purchased the home. The evidence demonstrated that the builder had been informed of the irregular soil conditions on the property in 1992 and 1999 from a soil engineer and he did not take proper precautions into account when the house was constructed in 2002. In particular, the 1992 report stated that “a major area of concern regarding the project is the expansive nature of the native soil and bedrock.” This information was not communicated to the foundation contractor or the first owner of the home, who was having the home built specifically for he and his wife. Although the trial court concluded that Stofer did not have a claim, the appeals court said she had enough evidence to warrant a jury trial. The court focused on the fact that information about the poor soils was not communicated to the foundation contractor and the first owner was not told of the depths or quality of the fill. As a result, the foundation was not constructed with adequate precautions, and the house was damaged to the degree that it was. 

The lesson here is that even if you are past the relevant statute of limitations, all may not be lost. If there is enough evidence that someone knew about the deficiencies and didn’t communicate them, or kept the information hidden, you may still have a claim that can survive in a court action and reimburse you for fixing the damage. Always consult with a lawyer for issues like this, and the faster you do so, the more likely that you will have a claim that can get past a statute of limitations defense.

Surety Unable to Enforce Statute of Limitations Due to Principal’s Fraud

by Asha Echeverria

In Minnesota Laborers Health & Welfare Fund. V. Granite Re, Inc., the Supreme Court of Minnesota held that the equitable doctrine of fraudulent concealment may toll the one-year contractual limitation period for filing suit against a payment bond, even if the surety is not involved in the fraud.  844 N.W. 2d 509 (Minn. 2014). Here, Granite Re served as the surety on a payment bond issued to EnviroTech Remediation Services, Inc. for work on a bridge project in St. Paul. Under a collective bargaining agreement related to the project, EnviroTech was required to make monthly contributions to six employee benefit plans (the “Funds”). Through an audit, the Funds determined that EnviroTech had made payments to employees through checks marked as accounts payable rather than payroll and through envelopes of cash, resulting in a shortfall in the Funds of $245,168. The Funds then made a claim against the Granite Re payment bond. Granite Re denied the claim as time barred by the one-year contractual limitation period for filing suit against the bond. The district court agreed with Granite Re, and granted summary judgment in favor of Granite Re, but the appellate court reversed and the Minnesota  Supreme Court affirmed the appellate court’s holding that fraudulent concealment by EnviroTech, as the principal, tolls the contractual limitation period against the surety, even if the surety was not involved in the fraud. The Minnesota Supreme Court noted that the general language of the bond’s contractual limitation does not preclude coverage upon the principal’s act of fraudulent concealment. The court drops a big hint to sureties suggesting that it would have noted and maybe even enforced bond language if it clearly stated that fraudulent concealment by the principal invalidated the surety’s guarantee of the principal’s obligations. This is something to look out for next time you are securing a payment bond. 

We hope that you have found these tips and pointers in the thirteenth issue of The Construction Advantage helpful to you in your daily business. Each of the attorneys in our Construction Law Practice is available to answer the day to day questions of your business as you work on projects.