Liquidation of Castlepoint National Insurance Company

Written by WB&G on August 23, 2017. Posted in Legal Alerts.

On April 1, 2017, the Superior Court of the State of California ordered CastlePoint National Insurance Company ("CastlePoint"), a property and casualty insurer authorized to write insurance in NY, NJ and CT, into liquidation and appointed a Liquidator. CastlePoint consists of numerous other insurers that, prior to liquidation, were merged with or into CastlePoint, including: Tower Insurance Company of New York, Tower National Insurance Company, North East Insurance Company, Preserver Insurance Company, York Insurance Company and Kodiak Insurance Company. All direct insurance policies and contracts of insurance issued by Castlepoint were cancelled at 12:01 a.m. on the 1st day following the effective date of the Order of Liquidation or upon the specified expiration date, whichever is earlier. Claimants are barred from commencing actions against CastlePoint after the date of the liquidation order and pending actions against CastlePoint are stayed under further notice.

Policyholders or claimants may qualify for coverage by a state guaranty association or fund, which are created by state law to provide protection in the event of an insurer’s liquidation. All claims against CastlePoint, along with proof of such claims, must be filed with the Liquidator or a state guaranty association/fund on or before December 31, 2017 (“Claims Bar Date”). A copy of the liquidation order is available here. Additional information about this liquidation, including proof of claim process, is available here.

When Can a Contractor Stop Work for Non-Payment? (New Jersey)

Written by WB&G on August 16, 2017. Posted in Legal Alerts.

A recurring question for construction contractors is whether they can stop work if they have not been paid on time. Contractors need to be very careful about suspending performance for non-payment. If contractors strictly follow the rules, and the terms of the contract, they can protect their rights. However, if contractors stop work prematurely without providing proper notice, or otherwise fail to comply with any applicable laws, they can expose themselves to liability for breach of contract.

When determining whether you have the right to stop work, the first place to look should be the terms of the contract. In many instances, the contract may be the only applicable law.

General Contractor Agreements based on form AIA A201 should include Paragraph 9.7, which provides the following:

[I]f the Owner does not pay the Contractor within seven days after the date established in the Contract Documents … then the Contractor may, upon seven days’ written notice to the Owner and Architect, stop the work until payment of the amount owing has been received.

Subcontractor Agreements based on form AIA A401 should also include Paragraph 4.7, which states as follows:

If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days of the time payment should be made as provided in this Agreement, the Subcontractor may … upon seven days written notice to the Contractor, stop the Work of this Subcontract until payment of the amount owing has been received.

Even if the construction contract is based on an AIA model, it is quite common for parties to modify the terms of Paragraphs 9.7 and 4.7. For example, the notice requirements might be adjusted; the drafting party might tack on additional requirements, or they may remove the provisions altogether. Every contract needs to be analyzed on a case-by-case basis.

The New Jersey Prompt Payment Act

In addition to the terms of the contract, if the project was governed by the laws of New Jersey (either because the project is located in New Jersey, or because there is an enforceable choice of law provision in the contract), a construction contractor’s ability to suspend work may be governed by the Prompt Payment Act. New Jersey’s Prompt Payment Act (“PPA”) applies to most construction contracts in New Jersey, private or public, between owners, prime contractors, subcontractors, and second-tiered sub-subcontractors. The PPA does not apply to certain public construction projects, namely transportation projects, and it also may not apply to lower-tiered sub-subcontractors.

According to the PPA, owners must pay prime contractors within 30 days from the billing date. Once the prime contractor has sent an invoice to the owner, the owner has 20 days to disapprove the invoice (or any part). In order to reject any charge reflected on an invoice, the owner must send the prime contractor a written statement specifying: (1) the amount withheld; and (2) the reason why the owner is withholding payment. If 20 days have passed since the prime contractor has sent the invoice to the owner and the owner has not lodged a dispute, then the invoice has been deemed implicitly “approved and certified.” If the owner has approved of a prime contractor’s invoice, explicitly or implicitly, the owner must tender the payment to the prime contractor within 30 days from the owner’s receipt of the invoice.

The rules for prompt payment of work by a subcontractor are slightly different. If a subcontractor has performed work according to a subcontract and the work has been accepted by the owner or the prime contractor—and there has been no agreement in writing to the contrary—the prime contractor must tender payment to its subcontractor within 10 days after the receipt of payment from the owner. The same rules apply to payments between a subcontractor and a sub-subcontractor. Though, unlike owners, prime contractors and subcontractors are not required to provide a specific reason for withholding payment to their subcontractors and sub-subcontractors.

If any payment is delayed according to the requirements under the PPA, the owner must pay the contractor interest on the delayed payment at the prime rate plus 1 percent. The parties can contract for a higher interest rate on delinquent payments.

Suspension of Work by Prime Contractors

If an owner fails to make a timely payment within the statutory 30-day period, has not made a written statement specifying the reasons for withholding, and has not “engaged in a good faith effort to resolve the reason for the withholding” with the contractor, the prime contractor may be able to stop work.

In order to stop work, the prime contractor must provide the owner with written notice and an opportunity to cure. Specifically, the prime contractor must provide written notice to the owner at least 7 days before the prime contractor’s intended suspension of work. If 7 days have passed and the owner has still not cured the delinquent payment, then the contractor may suspend performance without penalty for breach of contract.

Suspension of Work by Subcontractors

If a prime contractor receives payment from the owner but fails to make a timely payment to a subcontractor within the statutory 10-day period after receiving payment, a subcontractor may suspend performance—but only after providing written notice and an opportunity to cure to the party which has failed to make the required payment (potentially the owner, prime contractor, and/or an upstream subcontractor). The subcontractor must provide written notice to such upstream parties at least 7 days before its intended suspension of work. If the subcontractor has provided proper written notice to the non-paying party, and if after 7 days of providing notice the breaching party still has not made the required payment, the subcontractor may suspend performance without penalty for breach of contract.

In Practice

Keep in mind that the New Jersey Prompt Payment Act may apply to your situation, and that sometimes the statute may supersede a written agreement. Sometimes it may be unclear whether the statute applies at all. In such a case, you might have to fall back on the terms of the private contract.

It is crucial that contractors fully understand their contracts. A well-written contract may protect your rights, while a poorly-written contract might be unenforceable—or worse. While many contracts will refer to the AIA language, parties can always agree in writing to different standards for prompt payment, and different procedures for the unpaid contractor to stop work. In that regard, always make sure to consult with an attorney before stopping work because of non-payment, or for any other reason. Even if you have a contractual right to suspend, it is absolutely imperative to give proper notice and take proper steps before doing so. If you do it the right way, you can be in the clear. If you do it the wrong way, you can be found to be in breach of contract and potentially liable for damages.

When Can a Contractor Stop Work for Non-Payment? (Connecticut)

Written by WB&G on June 21, 2017. Posted in Legal Alerts.

A recurring question for construction contractors is whether they can stop work if they have not been paid on time. Contractors need to be very careful about suspending performance due to non-payment. If contractors strictly follow the rules, and the terms of the contract, they can protect their rights. However, if contractors stop work prematurely without providing proper notice, or otherwise fail to comply with any applicable laws, they can expose themselves to liability for breach of contract.

When determining whether you have the right to stop work, the first place to look should be the terms of the contract. In many instances, the contract may be the only applicable law.

General Contractor Agreements based on form AIA A201 should include Paragraph 9.7, which provides the following:

[I]f the Owner does not pay the Contractor within seven days after the date established in the Contract Documents … then the Contractor may, upon seven days’ written notice to the Owner and Architect, stop the work until payment of the amount owing has been received.

Subcontractor Agreements based on form AIA A401 should also include Paragraph 4.7, which states as follows:

If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days of the time payment should be made as provided in this Agreement, the Subcontractor may … upon seven days written notice to the Contractor, stop the Work of this Subcontract until payment of the amount owing has been received.

The Connecticut Statutes

Section 42 of the Connecticut General Statutes (“CGS”) requires prompt payment to construction contractors. Specifically, upon receipt of an invoice from a prime contractor, an owner must tender payment within 30 days. Likewise, the general contractor must pay its subcontractors within 30 days of being paid by the owner, subcontractors must pay their sub-subcontractors within 30 days of being paid by the prime contractor, and so forth down the line. A different section of the CGS, § 4(a)-71, requires the State of Connecticut and its subdivisions to make timely payments to contractors within 45 days of their receipt of the invoices.

We must caution, however, that although CGS sets forth timelines for payment, it does not grant construction contractors a right to stop work. Rather, CGS only grants unpaid contractors a statutory right to pursue claims against the non-paying party. Accordingly, unpaid contractors will only have a right to suspend performance if that right is contained in their respective contracts, whether based on forms AIA A201, A401, or otherwise. If that right is not in the contract, it does not exist.

In Practice

New York Paid Family Leave

Written by Thomas S. Tripodianos on June 20, 2017. Posted in Legal Alerts.

On April 4, 2016, Governor Andrew M. Cuomo signed into law the legislation enacting New York's Paid Family Leave program, the most comprehensive paid family leave program in the United States. Commencing January 1, 2018, all eligible employees will be able to take time off, while still being paid a portion of their income, to bond with a new child, care for a family member or handle personal matters arising from an immediate family member being called to active duty in the Armed Forces of the United States.

All employers are required to participate in the New York Paid Family Leave program. Upon the renewal of a business's statutory disability benefit, employers will be automatically billed for the New York Paid Family Leave program. Employers have the option to pay for these costs themselves, or they can issue a deduction from their employee's gross incomes. If an employer elects to delegate payment to its employees, the deduction will appear on the employee's pay-stub, which will look similar to a tax deduction. An employer may continue to deduct a qualified employee’s contributions while the employee is on family leave.

Under the New York State Administrative Procedure Act, the proposed regulation is open for a second round of comments from the public. This 30-day comment period will close on June 23, 2017.

Below are the highlights of the current proposed regulation:

A “covered employer” is any employer who employs one or more employees. Sole proprietors and members of limited liability companies are considered “individual business owners,” so long as they are entitled to keep all the profits after taxes, are liable for all losses and do not have any employees.
An employee of a covered employer who works 20 or more hours a week becomes eligible for benefits after 26 consecutive weeks of employment. Any employee of a covered employer who regularly works less than 20 hours a week becomes eligible for benefits after the 175^th day of employment.
Any employee taking weekly leave, regardless of their hours worked, is eligible for the maximum number of weeks of leave in a 52-consecutive week period.
Beginning in 2018 PFL will allow for a qualifying individual to receive 8 weeks off and 50% of their salary during their paid time off. In 2019, this number increases to 10 weeks and 55%. In 2020, the numbers will increase to 60%. Finally, in 2021, the numbers increase to 12 weeks and 67%.
However, in all of these circumstances, the employee may not take home more than the maximum percentage of the NY State Average Weekly Wage. This time off can be used in consecutive weeks or spread out throughout a 52 week period.
PFL benefits are limited to family, and do not cover the employee’s own illness. It provides for leave for bonding with a child in the first 12 months after birth, placement in foster care or adoption, or to care for qualified family members who have a “serious health condition.” This means that some FMLA leave will not qualify for PFL, but PFL will most likely qualify for FMLA leave.
If an employee takes a designated FMLA leave for their own serious health condition, it does not reduce the amount of paid family leave an employee is eligible for.
If an employee refuses to apply for benefits for a qualified family leave under both FMLA and PFL, the employer and the carrier may charge the leave against the maximum duration of leave allowed, so long as the employer has notified the employee of their eligibility for both leaves.
An employer covered by the FMLA that designates a concurrent period of family leave under this regulation may charge an employee’s accrued paid time off “in accordance with the provisions of the FMLA”.
When an employee takes intermittent leave, the employer is permitted to require that the employee provide notice before each day of leave taken.
Disability benefits do not run concurrently with PFL benefits. In essence, an employee can take short-term disability leave before PFL followed by using their PFL benefits.
The employer must continue to provide health insurance benefits while the employee is on leave if the employee receives their benefits through the employer. The employer also must reinstate the employee upon their return from PFL.
Any dispute brought by an employee, employer or carrier is settled through an arbitration system that is on a strict timeline to settle the disputes quickly.

Indemnified For Your Own Negligence? The Loophole Narrows

Written by Gregory J. Spaun on June 15, 2017. Posted in Legal Alerts.

Section 5-322.1 of the General Obligations Law provides that an upstream party to a construction contract, such as an owner or a general contractor, cannot require a downstream contractor or subcontractor to indemnify the upstream party for its own negligence. The rationale is that the upstream party should not, through the use of greater bargaining power, be able to require the downstream party to serve as a substitute for its own insurance carrier. In such a situation, the upstream party would suffer none of the adverse consequences typically associated with its own negligence, such as having to incur the loss or place a claim against its own insurance policy—and the consequences typically associated with a claim, such as having to pay a deductible, having the loss present on a loss run, and having its future premium rates take the loss into consideration and impact its ability to renew (or obtain a replacement for) the policy.

When the legislature enacted Section 5-322.1, it left a significant loophole open: the situation where the construction contract requires the downstream contractor to procure insurance and name all upstream parties as additional insureds and insure and hold them harmless for all claims arising out of the downstream party’s work—including claims arising out of the upstream party’s own negligence. I addressed this loophole in a February, 2016 article discussing the case of Burlington Insurance Co. v New York City Transit Auth. (132 AD3d 127, [1^st Dept 2015]). Burlington showed that the loophole wasn’t merely theoretical, and that there were situations where the additional insured party could be the only negligent party (and the contractor who procured the insurance could be entirely without fault), all the while the innocent contractor’s policy is compelled to respond.

By way of reminder, Burlington involved a named insured that was the tunnel borer working for the NYCTA on a subway construction project. The construction contract required the tunnel borer to name the NYCTA and the lessor/owner of the property on which the project was located (which happened to be the City) as additional insureds on its general liability insurance policy, and to and have that insurance carrier hold them harmless from all claims caused in whole or in part by the borer’s work. The contract also required the NYCTA to identify all underground hazards, including buried pipes, cables, etc.

During the project, the tunnel borer bored into a live buried electrical cable, which caused an explosion and a serious injury to borer’s worker. Clearly, the borer had no way of knowing that it was boring into an unmarked electrical cable and, therefore, could not have been negligent. The NYCTA, on the other hand, was negligent in failing to identify the hazard for the borer (and also breached the construction contract in that regard).

Both owner and the NYCTA were additional insureds under the borer’s policy, as was required under the construction contract. Upon the making of the claim, the borer’s carrier accepted the tender of owner’s defense and indemnification. The borer’s carrier also initially accepted the tender of the NYCTA, but only under a reservation of rights. The borer’s carrier later disclaimed as against the NYCTA when it came out that the borer was not negligent. The borer’s carrier ultimately settled the injured worker’s lawsuit on behalf of the owner for $950,000.

When the dust settled, the borer’s carrier, as subrogee of the City/owner, sued the negligent NYCTA to recover the monies it expended in settling the underlying personal injury claim. In doing so, the carrier noted that the proximate cause of the accident was the NYCTA’s sole negligence in failing to mark the cable. In response, the NYCTA counterclaimed for coverage under the borer’s insurance policy.

After discovery, the parties moved for summary judgment. The trial court granted summary judgment to carrier, holding that the NYCTA, as the negligent party, owed it common law indemnification. The Appellate Division, however, reversed. In doing so, it held that the construction contract required the borer to procure insurance covering the NYCTA for bodily injury “caused, in whole or in part, by an act or omission” of the borer. Clearly, although the borer was not negligent, the injury was “caused” by its work—certainly, had the borer not been boring in that particular location, the accident would not have happened. The Appellate Division reasoned that the “caused by” language did not materially differ from the “arising out of” standard, and that since the injury “arose out of” named insured’s work, the additional insured NYCTA was entitled to coverage—even though it was solely negligent.

As a result of the Appellate Division’s holding, because an insurance carrier cannot seek subrogation from its own insured (even an additional insured), the carrier here could not seek to recover its loss from the truly negligent party. In other words, the NYCTA—the sole negligent party—was to be held completely harmless for its own negligence by the borer’s insurance carrier. So, while the NYCTA was to be let off scot-free, and although the borer could not be required to directly indemnify the NYCTA for its negligence, the borer was to suffer with a $1 million loss on its insurance loss run and the corresponding increase in insurance premium (and difficulty in obtaining renewal coverage).

New York’s highest court, the Court of Appeals, granted the carrier leave to appeal, and it reversed the Appellate Division’s holding. In doing so, that court retreated from the “but-for” line of causation that was previously applied to such claims, and adopted the “proximate cause” standard. Proximate cause is a term that denotes a legal causation for which a court will assign liability, as opposed to simply the event which kicked off an improbable series of events which, although the root cause, would be inequitable to hold as the legal cause. The Court held that the parties, by using the word “caused by” as opposed to “arising out of the work of”, evidenced their intent to exclude from coverage the precise situation in Burlington, where the additional insured was solely negligent. Accordingly, although the borer here was the root cause (again, if it hadn’t been boring in that location, the explosion would never have happened), the Court declined to assign legal causation sufficient to allow the solely negligent NYCTA to resort to the innocent contractor’s insurance policy.

As can be garnered from the title of this article, even with this holding the loophole is still not closed. Although the Court of Appeals deemed the term “caused by” in the insurance policy to require “proximate” (legal) causation, the Court specifically referenced the freedom to negotiate the terms of a policy. In that regard, the Court of Appeals noted that if that negotiation had resulted in a policy with “arising out of” language, such would be indicative that the parties would nevertheless still intend to cover the situation where the solely negligent party would be covered under the innocent party’s policy, and the result would have been the same as in the Court below.

As with the previous article on the subject, the lesson remains that the loophole is not merely theoretical, and that although a non-negligent party cannot be forced to directly indemnify a negligent party for such negligence, it can still be required to procure insurance (using “arising out of” language) that would cover that negligence with no consequences to the truly negligent party—and suffer the resulting effects of having to do so. Various trade organizations are currently lobbying the state legislature to completely close this loophole. In the meantime, it would be advisable to consult with experienced construction counsel to review your construction contracts while they are still in the negotiation stage to try to tailor the insurance provisions so that they only cover situations arising out of the contractee’s negligence.

A Surety’s Right to Choose a Completion Contractor

Written by Frank Gramarossa on May 12, 2017. Posted in Legal Alerts.

Once a surety accepts responsibility to complete a defaulted contractor’s work pursuant to its obligations under a performance bond, does the surety have an absolute right to use any completion contractor of its choice? What if the surety wants to use the defaulted contractor to complete the remaining scope of work? This very issue was recently analyzed by the Appellate Division, First Department.

Here, the general contractor filed a claim against the surety of two performance bonds issued to a project’s demolition subcontractor, promising to complete the work in the event that the subcontractor defaulted on its subcontracts with the general contractor.¹ The general contractor terminated the subcontractor for several reasons, which the subcontractor hotly disputed. Generally, these reasons stemmed from the removal of a standpipe and the unavailability of the only source of water to put out a fire. The surety attempted to retain the defaulted subcontractor as its completion contractor, and the general contractor refused to allow the subcontractor to return to the jobsite. The general contractor demanded that the surety find a different contractor, and the surety refused. The general contractor then filed suit in Supreme Court for breach of the performance bond, demanding that the Court direct the surety to fulfill its obligations under the bond and complete the work using a contractor other than the defaulted subcontractor.

The trial court found that the general contractor, not the surety, had breached the performance bonds by refusing to allow the surety to choose its own completion contractor—even though the surety wanted to engage the defaulted subcontractor. The trial court specifically held that the general contractor deprived the surety of its ability to protect itself by retaining the completion contractor of its own choosing, as was specifically provided for in the bond. The court held that the general contractor’s action was a material breach of the bond. Therefore, the surety’s nonperformance was excused and, as a result, the surety was granted summary judgment against the general contractor. The general contractor appealed the trial court’s ruling, and ultimately prevailed on appeal.

The Appellate Division, First Department ruled that the trial court “erred in dismissing the claim asserted by [] the general contractor on the construction project and obligee of the performance bonds and that [the] surety thereof, breached the bonds.” The Appellate Division held that “the bonds expressly required [the surety’s] replacement of [the subcontractor] to be in accordance with [the] subcontracts”. Crucially, those subcontracts incorporated by reference the prime contract between the general contractor and the owner, which required the prior written approval of both the general contractor and the owner for any replacement contractor—including the selection of the defaulted subcontractor to complete its own work after being terminated. Therefore, the general contractor was well within its rights to prohibit the surety from using the defaulted subcontractor as the completion contractor. As a result of this finding, the Appellate Division ordered that the general contractor, not the surety, be granted summary judgment based on the surety’s breach of the performance bonds.

It should be noted that the performance bonds at issue were the standard form at the time, AIA Document A311. This standard form has since been replaced by the AIA Document A312, which allows a surety to either arrange for the defaulted contractor to complete the contract, with consent of the owner, or obtain completion bids from qualified contractors “acceptable to the Owner”. Thus, the new form of bond itself now explicitly requires the consent of the obligee in choosing a completion contractor.

The moral of the story: when dealing with performance bond issues such as this one, a contractor must be aware of all of the bond’s pertinent provisions, including those incorporated by reference in any applicable contracts. As highlighted by the appellate court a party that is unaware of its rights and obligations may make decisions that result in costly and protracted litigation. Good legal counsel can help you in advising you as to the pertinent provisions of both bonds and contracts, and how to operate in accordance with those provisions.

¹The performance bonds are the standard form, AIA Document A311. The AIA has since replaced the A311 with the A312.

Do You Know About the Notice Provisions in Your Contract?

Written by WB&G on April 11, 2017. Posted in Legal Alerts.

There are many provisions in a construction contract which must be adhered to. However, few of these provisions are so easy to overlook—and so costly when you do—as the provisions requiring you to notify your upstream contractor or owner of any claims you have relating to the contract. The case of Adonis Construction, LLC v. Battle Construction, Inc. (103 AD3d 1209 [4^th Dept 2013]) serves as a warning to those who fail to pay attention to those provisions.

Adonis Construction was a subcontractor to Battle Construction, the prime contractor on a building renovation. During the course of the work, Adonis was directed by Battle’s superintendent to remove certain walls (which were not included in the plans for removal). The removal of the walls was in error, which error was discovered at a meeting several weeks later. Adonis was not aware at the time that it removed the walls that the construction plans showed that those walls were to be left intact. Approximately six weeks after Adonis learned that the walls were removed in error, and following Battle’s notice to Adonis that it would back-charge Adonis for the cost of replacing the walls, Adonis submitted a claim to Battle requesting payment for removing the walls. The claim also requested payment for extra work related to a concrete floor and the removal of light fixtures.

With respect to the work on the concrete floor and the removal of the light fixtures, the court noted that Adonis’ subcontract provided that it was bound by the terms of the prime contract. The prime contract required approval of extra work before it was commenced, “but in no event any later than three days from the event giving rise to the claim.” Because of Adonis’ failure to timely notify Battle, Adonis was barred from pursuing the concrete floor and light fixture portion of its claim.

With respect to the wall removal portion of the claim, the court looked to the subcontract. The subcontract provided “Subcontractor shall, within five days of receiving a direction or encountering a condition, it regards as a change, alteration or extra work, submit to Contractor a written cost or credit proposal; otherwise, Subcontractor shall be bound by such increase or credit as Contractor is able to obtain from Owner. Subcontractor waives any claim against Contractor for compensation law equitable adjustment for any claims, changes or extra work, except to the extent the same is allowed and paid to Contractor by the Owner.” The court found that where the parties have set down their agreement in a clear, complete document, a writing should be enforced according to its terms. Since the subcontract governing demolition work requires strict compliance with the notice provisions, such compliance is a condition precedent to recovery in an action seeking compensation for extra work. The court concluded that Adonis was obligated to seek compensation for the extra work pursuant to the terms of the contract when it learned that a removal of the walls constituted extra work, and that Adonis failed to do so in a timely manner. Because conditions precedent will be strictly enforced, the clear direction by Battle’s superintendent to Adonis with respect to removal of the walls was not sufficient to excuse Adonis’ failure to comply with the notice provisions of the contract.

CONCLUSION:

Your contract (and any contracts incorporated into that contract) can contain a number of provisions that can be easily overlooked, including crucial notice provisions. It is important that you read all of the contract documents and be knowledgeable of the deadlines they impose. If you have any questions about your obligations under the contract, or how best to preserve your rights, you should consult with counsel.

Does Your Builder’s Risk Policy Really Cover What You Need to Build?

Written by Gregory J. Spaun on March 17, 2017. Posted in Legal Alerts.

First party property insurance has been around for centuries, generally dating back to the aftermath of the Great Fire of London in 1666. Property coverage is a great way to cover a completed structure from the usual perils of fire and weather, et cetera. However, what if the property you wish to insure is an incomplete construction project? It is well known that construction is, by its nature, perilous. Further, a typical first party property insurance policy will not cover incomplete structures or construction activities. Enter, builder’s risk insurance.

Builder’s risk insurance is a specialty type of property insurance specifically designed to cover the extra risks that may befall a property under construction. Builder’s risk insurance is also available to a contractor. This is important because a contractor who is under an obligation to safeguard the property during construction (and is concomitantly liable for any damage that occurs to that property) does not have any traditional insurable interest in such property because it is not the owner.

Like many policies, builder’s risk policies are increasingly subject to exclusions. These exclusions have been created as carriers gain experience with the product and carve out. New York’s courts dealt with two of these exclusions in the recent case of Lend Lease (US) Construction LMB, Inc. v Zurich American Insurance Company (___NY3d___, 2017 WL 572478, 2017 NY Slip Op 01141 [February 14, 2017]). The facts of Lend Lease will be familiar to many in the Tri-State area, as they arise out of Superstorm Sandy and the crane which was left dangling over West 57^th Street in its wake. The crane was erected in such a way that parts of the crane (where it was anchored to the building) would remain in place, as a part of the building, long after the crane was dismantled and the building was occupied. These elements would not have been designed into the building but for the plan to use this particular tower crane. Prior to construction and the erection of the crane, a builder’s risk program was put in place, with defendant Zurich American having the lead policy.

Immediately after the storm, a claim was placed against the builder’s risk policy to cover, amongst other things, the damage to the crane. Zurich denied the claim on two principal grounds: 1) that the crane was not a covered “temporary work”, as parts of that crane were designed into the building and were to remain after occupancy; and 2) the crane constituted a contractor’s tool, which was excluded from coverage. Lend Lease commenced a lawsuit, seeking a judgment declaring that Zurich had the obligation to cover this loss since the crane was neither designed to be a permanent part of the building, nor did it constitute a contractor’s tool. Zurich counterclaimed, seeking its own declaratory judgment to the opposite effect based on the reasons cited in its disclaimer.

Shortly after the lawsuit was started, motions and cross-motions for summary judgment were made. The contractors contended both that the crane was a temporary work and, therefore, covered under the policy, and that it did not constitute a contractor’s tool (which would remove it from such coverage). The contractors also argued that a finding that the crane was either a permanent work or a contractor’s tool would require reading those policy definitions so broad as to improperly render coverage illusory, in violation of public policy. The insurers countered that the policies were clear that as the components of the crane were (concededly) permanent, and that the crane constituted a tool, there was no coverage. The trial court ruled that the motions were premature, and that there were questions of fact, amongst others, as to whether the crane could be considered a permanent structure.

Both sides appealed the decision, redoubling their arguments to the Appellate Division. Unlike the trial court, the appellate court found that the crane was not a temporary structure, and that it was a contractor’s tool. As to the first ground, the Appellate Division held that the crane was not an incidental structure since the “‘[b]uilding was specifically designed to incorporate the Tower Crane during construction’ and the crane’s design and erection involved an ‘in-depth process’ that had to be approved by a structural engineer. Moreover, once it was integrated into the structure of the building, the custom designed tower crane, rather than serving a minor or subordinate role, was used to lift items such as concrete slabs, structural steel and equipment, was integral and indispensable, not incidental, to the construction of the 74–story high-rise, which could not have been built without it”. With regard to the second ground, the court not only relied on the contract defining the crane as “equipment”, it noted that “[t]he tower crane is assembled when the project starts, disassembled and completely removed when the project is complete, and then moved to the next job” and, thus, meets the definition of a tool. The Appellate Division’s holding, however, was not unanimous. Two dissenting judges found that the language in the policy was ambiguous. Accordingly, giving the insured the benefit of any doubts in the language, the dissenters not only found that the crane was, indeed, a temporary structure included in the ambit of coverage, but that the crane cannot be found to be both a temporary structure and a tool without improperly rendering coverage illusory. The importance of the two-judge dissent is that it not only showed the division on the issue, but it gave the contractors the right to a further appeal without having to seek permission of the Court of Appeals.

Although the contractors did seek that further appeal, they did not fare any better. While the Court of Appeals found that the crane was not a permanent structure (and, therefore, coverable under the “temporary works” provision), such was not sufficient to salvage coverage from the Court of Appeals’ holding that the crane constituted a contractor’s tool. In so holding, the Court of Appeals noted that the language of the tools exclusion also included machines and machinery, and held that the crane clearly qualified as such. As to the argument that such a broad definition would impermissibly render coverage illusory, the Court of Appeals posited that since there was still coverage for items such as scaffolding, temporary buildings, formwork, shoring, fences and the like, the exclusion did not impermissibly “swallow the policy”.

This decision, which generated a vociferous dissent at the mid-level appellate court, leaves one to wonder the exact extent to which a construction project is actually insured under a builder’s risk policy. While the Court of Appeals was able to put together a short list of covered items—which was just long enough to get the policy beyond the “illusory” threshold—the important (and expensive) items would seem to fall outside of the ambit of coverage. Accordingly, contractors would be well advised to seek counsel of their attorneys and insurance professionals at the time insurance is procured to see to it that the items which the contractor needs insured actually are covered under their insurance policies.

NYS Department of Labor Posts Disbarred Contractor List

Written by Thomas S. Tripodianos on February 14, 2017. Posted in Legal Alerts.

The New York Department of Labor has posted a list of contractors and subcontractors disbarred from work with state, municipal or public bodies for failure to pay prevailing wages, falsifying payroll records or kicking back wages or supplements.

Here is the criteria to be included on the list:

Under Article 8 and Article 9 of the NYS Labor Law, a contractor, sub-contractor and/or its successor shall be debarred and ineligible to submit a bid on or be awarded any public work or public building service contract/sub-contract with the state, any municipal corporation or public body for a period of five (5) years from the date of debarment when:

Two (2) final determinations have been rendered within any consecutive six-year (6) period determining that such contractor, sub-contractor and/or its successor has WILLFULLY failed to pay the prevailing wage and/or supplements; or
One (1) final determination involves falsification of payroll records or the kickback of wages and/or supplements.

Even if you are not engaged in public work you might want to add this database to you tool box when vetting potential contractors and subcontractors.

https://dbr.labor.state.ny.us/EDList/searchResults.do

What Constitutes an “Undertaking” Under Lien Law Section 5

Written by WB&G on November 29, 2016. Posted in Legal Alerts.

A recent decision surrounding the highly publicized and litigated project known as B2, a 34-story modular building containing 350 residential units, provides an opportunity to interpret the language of Lien Law § 5, which states that a private developer on public land must post a bond or other undertaking guaranteeing prompt payment to a contractor.

In furtherance of the project, Skanska USA Bldg. Inc. (“Skanska”) and Atlantic Yards B2 Owner, LLC (“B2 Owner”) entered into a “Construction Management and Fabrication Services Agreement” (the “CM Agreement”). After terminating the CM Agreement via a 146-page letter, Skanska commenced suit against, among others, B2 Owner and its parent company, Forest City Ratner Companies, LLC (“Forest City”). In relevant part, Skanska alleges that B2 Owner and/or Forest City (the private developer) breached the CM Agreement by failing to post a bond (pursuant to Lien Law § 5) to guarantee B2 Owner’s performance under the CM Agreement. In response, B2 Owner and Forest City moved to dismiss.

The lower court granted the motion to dismiss. On appeal, the Appellate Division, First Department, affirmed the ruling. In affirming, the Appellate Division undertook an analysis of the guarantee provided by a Forest City affiliate, and the following language contained in Lien Law § 5:

Where no public fund has been established for the financing of a public improvement with estimated cost in excess of two hundred fifty thousand dollars, the chief financial officer of the public owner shall require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor, his or her subcontractors and to all persons furnishing labor or materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement.

The Appellate Division rejected Skanska’s argument that the guarantee provided by an affiliate of Forest City did not comply with the law because it is not equivalent to a bond “or other form of undertaking”. The guarantee stated that B2 Owner would “cause Substantial Completion of the Improvements and perform the Development Work,” including “to fully and punctually pay and discharge any and all costs, expenses and liabilities incurred for or in connection with the Guaranteed Work, including, but not limited to, the costs of construction, equipping and furnishing the Guaranteed Work”.

The Appellate Division stated that the guarantee provided follows the letter of the statute in that it guarantees prompt payment to contractors. The fact that alternative or seemingly better “undertakings” may have been available, such as a letter of credit (as the dissent notes), is irrelevant. The public owner, Empire State Development Corporation, was satisfied with the guarantee, as was the Appellate Division. It should be noted that the Appellate Division did not address Skanska’s ability to enforce the guarantee as a third-party beneficiary, thereby leaving open the question of proper pursuit of the undertaking.

While this case provides an interesting analysis and decision with regard to compliance with Lien Law § 5, the waters remain murky as to what type of “undertaking” will actually satisfy the statute. Given that two of the Appellate Division Judges provided a dissenting opinion, Skanska has the right to appeal to the highest court in the State, the New York Court of Appeals. Thus, please stay tuned for further developments with regard to the interpretation of Lien Law § 5.