An Overview of the Difference Between Indemnity Obligations and Obligations to Provide Additional Insured Coverage
One of the most important risk-shifting devices in a construction contract is the indemnification provision because it protects one party from financial loss and damages arising from future problems occurring during the project. Indemnification is a promise that one party will make good on any loss, damage, or liability incurred by another. There are two parties in an indemnity relationship – an indemnitor and an indemnitee. An indemnitor gives indemnity while the indemnitee receives indemnity. When a duty to indemnify is triggered, the indemnitor undertakes the obligation to cover the loss or damage that has been or might be incurred by the indemnitee. The indemnitor also agrees to assume the responsibility for liability resulting from third-party claims against the indemnitee. For example, an indemnification clause may require a general contractor to indemnify the owner for a claim for damages asserted by a subcontractor’s employee who was injured on the jobsite. If the indemnification clause is not carefully drafted, the indemnitor stands to incur a substantial loss by assuming a responsibility for all risks, including damages arising from the sole negligence of the indemnitee. On the other hand, if an indemnification clause is too broad, it may be declared void and unenforceable under a state’s anti-indemnity law. For example, a state court may decline to enforce an indemnity clause that purports to indemnify a person’s loss from that person’s intentional or willful misconduct. State anti-indemnity legislation emerged to protect subcontractors, lower-tiered subcontractors, and suppliers who are often in a much weaker bargaining position in the negotiation process. These states take the position that overreaching indemnification clauses are against public policy, and thus anti-indemnity statutes place limits on the powerful protections afforded by an indemnification provision. Two common examples of indemnification clauses are contained in standard contract documents called the AIA A201-2007 and ConsensusDocs 200. In section 3.18.1 of AIA A201-2007 (General Conditions), the indemnification provision states in pertinent part: To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, 2 damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18. In other words, under section 3.18.1, the contractor must indemnify and “hold harmless” the owner against claims arising out of the performance of the work by the contractor, a subcontractor, or anyone employed by them and covers the owner’s loss only to the extent that it was caused by such act or omission. Another example of an indemnity clause in contained in ConsensusDocs 200 “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS which is significantly different from the indemnity clause in AIA A201-2007. ConsensusDocs 200, section 10.1.1 states: To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorney’s fees, costs and expenses, that may arise from the performance of the work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor’s percentage of liability for the underlying claim to the extent provided for by the subsection below. 10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Constructor, its officers, directors, members, consul3 tants, agents, and employees, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys fees, costs and expenses, that may arise from the performance of work by the Owner, the Design Professional, or Others, but only to the extent caused by the negligent acts or omissions of the Owner, the Design Professional, or Others. The Owner shall be entitled to reimbursement of any defense costs paid above the Owner’s percentage of liability for the underlying claim to the extent provided for by the subsection above. The ConsensusDocs 200 indemnity obligation is vastly different from the indemnity clause 3.18.1 in AIA A201- 2007 in several ways. First, the duty to indemnify is reciprocal between the contractor and the owner. Contractors and owners are responsible for their own negligence and it covers only insurable risks such as personal injury and property damage. Also, either party is entitled to reimbursement of defense costs paid in excess of that parties’ percentage of liability for their underlying claim. Although often confused for each other, an obligation to provide “additional insured coverage” is not equivalent to an indemnity obligation. Since the ability to indemnify the indemnitee is tied to the indemnitor’s financial ability to pay such losses in the future, standard contract forms contain an added protection in detailed insurance clauses requiring a party to procure insurance coverage. In AIA A201-2007, Article 11 sets forth the contractor’s requirement to purchase and maintain insurance to protect the contractor from claims arising out of its operations and completed operations for which it may be legally liable. Article 11 also requires the contractor to provide commercial general liability (CGL) insurance and identify the owner, owner’s lender, owner’s landlord, the architect, and the architect’s consultants as “additional insureds” for claims caused in whole or in part by the contractor’s negligent acts or omissions. Obtaining additional insured status is accomplished by a written endorsement or amendment to the named insured’s policy. An additional insured may receive the benefits of the coverage and make a claim directly against the named insured’s insurance company. Companies who are named as additional insureds under a policy are subject to the same policy exclusions and exceptions as the policy holder. In ConsensusDocs 200, the insurance clauses are found under Article 10 under “Indemnity, Insurance, and Bonds.” ConsensusDocs 200 requires that the parties purchase and maintain CGL insurance, employers’ liability insurance, and business automobile liability insurance. However, in contrast with A201, ConsensusDocs 200 contains no requirement to identify any party as an “additional insured.” Rather, the owner has the option to require that the contractor maintain additional liability coverage in the form of providing additional insured status under the CGL policy or an Owners’ and Contractors’ Protective Liability insurance policy at the owner’s expense. Construction projects are risky financial endeavors for all project participants. Both indemnification clauses and additional insured status are a means to manage those risks. A party subject to either of these two devices should consult an attorney to review the contractual language and the applicable insurance policies. An indemnity obligation may be restricted or deemed unenforceable by a state’s anti-indemnity law. Also, an additional insured may be unpleasantly surprised when a claim is denied under a policy exclusion or exception. One thing that is certain is that no one wants to b Public Policy Limitations on Indemnity for Sole or Partial Negligence 771 Contractors often develop standard contracts for use on a variety of projects, tailored most often to the demands and particular needs of the owner and the project involved. Often these standard contracts include indemnification provisions that require the subcontractor to indemnify the general contractor for a variety of claims. Depending on the claims themselves and the state law that governs interpretation and enforcement of the contract, these indemnification clauses may or may not be enforceable in cases where the claims arise from the negligence, gross negligence or willful misconduct of the general contractor. In preparation for beginning a new project and reviewing subcontracts to be used 4 on that job, it is advisable for contractors to review their standard subcontracts and seek advice as to whether the indemnity provisions therein might run into problems of enforcement in the chance of a claim involving negligence. Some states, by statute, have prohibited indemnity clauses that seek to permit a party to the contract to be indemnified when the party is wholly or in part liable. Currently, twenty-six states bar provisions that would indemnify a contractor for its sole or partial fault. An additional seventeen states will not enforce indemnity provisions that provide for indemnity for a contractor’s sole negligence or fault. Many states bar enforcement of indemnity provisions that would indemnify a contractor for its own sole negligence. California, for example, voids such clauses because it would “increase the risk of accidents by removing the general contractor’s incentive to undertake accident-prevention measures involving its own negligence to avoid a risk of harm to third parties.” National Union Fire Ins. Co. v. Nationwide Ins. Co., 69 Cal. App. 4th 709 (Jan. 28, 1999). In National Union Fire Insurance, an employee of a plumbing subcontractor slipped and fell during an inspection of a high-rise construction project. The subcontract contained an indemnity clause that indemnified the general contractor with the exception for losses caused solely by the contractor’s negligence. The court ruled that such a clause would run contrary to public policy because of the disincentive to take accident prevention measures even though it ruled that the general contractor was solely negligent so that the subcontractor would not have been required to indemnify the general contractor. Although there is a strong public policy for contractors to perform safely and to undertake accident-prevention measures, factors other than indemnity protection may influence a contractor’s safety policy; for instance, insurance costs, past performance ratings, and reputation. Some states bar indemnity provisions that would allow a party to be indemnified for their own gross negligence. A contract provision was struck down by a Massachusetts court in CSX Transportation, Inc. v. Massachusetts Bay Transportation Authority, 679 F.Supp.2d 213, where a contractor sought to be indemnified for its own gross negligence. After a wrongful death suit was brought against CSX, and CSX invoked the indemnification provision, the court ruled that public policy prohibited the enforcement of the contract’s indemnity provision. Specifically, the court ruled that the public had an interest in deterring and punishing those who commit gross negligence. That is, by permitting someone who acts with gross negligence to be indemnified is considered, by courts or state legislatures, to be “let off the hook.” Only by making the grossly negligent contractor shoulder the burden of its gross negligence when it happens will contractors be deterred and/or punished for that gross negligence. While the Massachusetts court did not discuss in detail either of these public policies, deterrence against gross negligence does not necessarily require that indemnity provisions go unenforced. Deterrence of grossly negligent actions can be accomplished through market forces. If a contracting party agrees to indemnify another for acts including gross negligence, the risk of that obligation should be assessed and added to the contract price. On the other hand, the public policy of punishment cannot be served by allowing one party to indemnify against another’s gross negligence. In the states that permit enforcement of indemnity provisions for sole or partial negligence, the states often qualify when those provisions will be enforced. Most of these states require that the contract language be clear and unequivocal. In a recent case from Nevada, Reyburn Lawn & Landscape Designers, Inc. v. Plaster Development Co., Inc., 255 P.3d 268 (Nev. 2011), a construction subcontract included an indemnity clause that required the subcontractor to indemnify the general contract for all claims except when the general contractor was found solely negligent. Although the Supreme Court of Nevada recognized the freedom of parties to contract as they see fit, it found that an indemnity provision for sole negligence requires “an express or explicit reference to the indemnitee’s own negligence.” The policy behind requiring express references to the indemnity for the indemnitee’s negligence is designed to protect the indemnifying party. These states will not enforce an ambiguous indemnity provision or one that is silent on the subject. Navigating the enforceability of subcontract clauses on a state by state basis is no easy feat. As can be seen, states do not uniformly enforce indemnity provisions that cover a contractor’s sole or partial negligence. The policies behind the decision not to enforce such provisions are not well spelled out but generally rely upon a desire to incentivize contractors to take accidentprevention measures or to deter bad conduct, such as gross negligence or misconduct. Whether or not these goals are furthered by not enforcing such provisions, contractors should take time to review their standard subcontracts and to seek guidance as to whether their standard indemnity language will be enforced by the Anti-Indemnification Statutes and Their Impact upon Insuring Indemnification Obligations Versus Those of an Additional Insured 772 Construction projects are inherently risky endeavors. A myriad of things that can go wrong range from damaging a tree on neighboring property, to the structural failure of a completed building, and the loss of limb or life. One of the most important reasons one enters into a contract while participating in a construction project is to transfer those types of risks to one or both of the contracting parties. There are a number of contractual mechanisms parties can use to transfer the responsibility of paying for damages caused by the occurrence of such events. Two of the most important contractual risk-allocation methods involve using indemnification and insurance provisions. These two provisions typically overlap in that contracting parties often agree that one party must insure the indemnification obligations it has towards the other party. This is distinguished from including the other party as an additional insured on one’s insurance policy. Contracts with indemnification provisions that have been insured are known as the “insured contract.” This article briefly explores the differences between insuring those two very different types of risks, as well as the potential impact on those obligations of increasingly popular, and often varied, state anti-indemnification statutes. An indemnification provision states that one party agrees to be responsible for another party’s damage to a third party. Thus, the true force of that provision is contingent upon the indemnifying party’s (the indemnitor) financial condition. In other words, indemnification provisions provide assurance, not insurance. Parties often work around this limitation by requiring that the indemnitor insure its indemnification obligations towards the other party (the indemnitee). However, there are downsides to using this approach because it can give rise to complex questions regarding whether the risk transfer actually transferred the risk to the insuring party. Parties need to understand both the benefits and limitations of taking the insure-the-contract approach versus including contractual provisions that require the indemnitor to instead add the indemnitee to its insurance policy as an additional insured. The Insurer’s Duty To Defend The Indemnitee | When one insures an indemnification obligation, that party’s responsibilities are defined by two things: the language in both the insurance policy and the relevant indemnification provision that is in the insured contract. The insurer’s duty to the indemnitee is indirect and derivative of the insured-contract’s indemnification provision. One way the derivative nature of this duty manifests itself in the contracting relationship is when the indemnification provision does not require that the indemnitor defend the indemnitee. Insurers agreeing to insure an indemnification risk will not then have a duty to defend the indemnitee. The difference between the two can often be boiled down to whether or not the relevant indemnification provision includes one word. For example, an indemnification provision that requires the insurer to defend the indemnitee is typically structured as follows: “The Contractor shall defend, indemnify and hold the Owner, its officers, officials, employees and volunteers harmless from any and all claims, injuries, damages, losses or suits including attorney fees, arising out of or in connection with the performance of this Agreement, except for injuries and damages caused by the sole negligence of the Owner.” If the provision does not contain a reference to “defending” the indemnitee, the insurer is not required to provide a defense. In a number of different ways, this stands in stark contrast to insuring a party as an additional insured. Unless expressly excluded or limited in the additional insured endorsement to the primary insured’s insurance policy, the insurer has the duty to defend the additional insured. Also, the insurer’s cost of defending does not count against the policy limits because it is a separate duty. In contrast, the insurer’s cost of defense of the indemnitee counts directly towards the insurance policy’s limits thereby decreasing the funds available to cover any eventual liability. Another significant difference between insurance coverage as an additional insured and an indemnitee arises when there is a conflict of interest between the insuring party and the insured party. Typically, when there is a conflict between an additional insured and the insured party, the insurer will simply assign different counsel for each insured party. This may not be the case when there is a conflict between the indemnitee and the indemnitor. In those cases, the insurance company can include a provision in the coverage that states there is no duty to insure the indemnitee. For these reasons, it is very important that the contracting parties carefully review the language in the insured contract to determine its impact on the indemnitor’s insurer’s duties and vice versa. The Role of Anti-Indemnification Statutes | Insure- the-indemnity clauses have taken on a special significance in the wake of most states enacting some variation of what are called “anti-indemnification statutes.” States’ anti-indemnification statutes differ dramatically in how they limit the degree to which parties can transfer risk amongst themselves using indemnification clauses. They do that in a number of different ways depending on which state’s law governs the insured contract. Some states, such as Alaska, California and Georgia, have anti-indemnification statutes that prohibit “broad” indemnification when the indemnitor must indemnify the indemnitee even when they are solely at fault. Other states, such as Connecticut, Illinois and New York, prohibit broad indemnification, as well as “limited” indemnification which occurs when the indemnitee is partially or concurrently at fault. One must carefully review the relevant state’s antiindemnification statute to ensure that the indemnification provision in an insured contract does not conflict with that statute. If the insured’s indemnification provision is prohibited by that state’s anti-indemnification statute, that statute effectively bars coverage because the provision is void. This is what occurred in Transcontinental Insurance Company v. National Union Fire Insurance Company of Pittsburgh, 662 N.E.2d 500 (1996). In that case, the court found that a contractor was not obligated to indemnify its subcontractor whose employee was injured when some scaffolding collapsed because the indemnification provision required the subcontractor to indemnify the contractor for its own negligence which is prohibited by Illinois law. The importance of factoring in a state’s anti-indemnification statute into how one decides whether to use an insure-the-indemnity versus an additional insured approach is most obvious in those states that prohibit broad indemnification. In those states, one cannot be obligated to indemnify the other party for their sole fault but can be obligated to insure them as an additional insured. Texas, for example, bars indemnification when the indemnitee’s negligence causes the harm but recognizes additional insured coverage for additional insureds in such cases if the insured contract requires both sides to secure equal amounts of liability coverage for the other. See, e.g., Mid-Continental Casualty Company v. Swift Energy Company 206 F.3d 487 (5th Cir. 2000). The court in Mid-Continental found that an insurer who had no indemnification obligation was obligated to insure a contractor hired by an oil driller when one of the contractor’s employees was injured even though the contractor was negligent. This is but one example demonstrating why choosing an additional-insured approach over insure-the-contract can have a huge impact on whether the relevant risk has been successfully transferred to the other party. It is impossible in this short article to touch upon, much less discuss, the wide ranging issues related to insuring indemnification duties, additional insureds and the impact of anti-indemnification clauses on those two types of insured risks. Some of those issues are straightforward but there are many others whose complexity can only be understood through in-depth study. In short, when writing, entering into, and/or interpreting insured contracts that have insured indemnification and additional insured provisions, it is imperative that one seek counsel from a risk management expert regarding one’s rights and duties. Risk management experts such as insurance professionals and attorneys have the experience and knowledge needed to ensure that the contractual relationship is structured in a manner that best addresses all of the relevant risk management needs. There are too many pitfalls to ignore seeking advice. Even a short consultation can make a world of difference down the road should you need to enforce an indemnification provision or call upon your coverage as an additional insured. Jay R. Houghton firstname.lastname@example.org (800) 832-6946 Member of the State Bar of California 7 ISO 2013 Additional Insured Endorsements Revisions - What the Construction Industry Needs to Do 773 New risks associated with recent revisions to the standard ISO Additional Insured endorsements language have not been addressed by many in the construction industry. Although these revisions occurred in April of 2013, many participants in the construction industry have failed to take adequate measures to protect themselves from the risks associated with these revisions. In general, an additional insured endorsement is a way for an insured party to give direct coverage rights to an additionally insured party. This basic concept is limited by several factors, the most universal of which is the specific language of the policy and the additional insured endorsement. By far the most common forms utilized in the insurance industry for additionally insured endorsements are the forms generated by the Insurance Services Office (ISO). In April of 2013, the ISO made several revisions to its standard forms, three of which significantly affect additional insureds in the construction industry. No Broader than Required | The ISO added a provision to the additional insured endorsement which makes the construction contract an integral part of the additional insured endorsement. The effect of this revision may be a reduction in coverage for the additional insured. Generally, contracts within the construction industry require a “downstream party” to add an “upstream party” as additionally insured. For example, a subcontractor is generally required to add the contractor as additionally insured under the subcontract agreement. The new ISO April 2013 language provides as follows: “the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.” Thus the subcontract requirement to add the contractor as an additional insured, not the subcontractor’s insurance policy, determines the scope of coverage. As the new language suggests, the insurance industry will now look directly to the construction contract to determine the scope of coverage. This creates the risk that a party will inadvertently limit the additional insured coverage, preventing an occurrence from being covered when it otherwise would have been. For example, when a general contractor prepares a subcontract, typically the general contractor attaches an insurance exhibit listing the required insurance. Because the additional insured endorsement looks to the requirements of the contract to determine the scope of coverage, the insurance exhibit now defines the coverage provided by the endorsement. This despite the fact that the general contractor’s insurance exhibit was probably not created with the anticipation that it would become an integral part of an additional insured endorsement. To protect themselves from unforeseen risks, upstream parties should draft the insurance requirements in their contracts with the knowledge that the contract will determine the scope of coverage provided by an additional insured endorsement. When drafting the requirements, the provision must be clear and concise and include an exhaustive list of all insurance necessary for the project. If the insurance requirements in the contract are anything less, the additional insured is opening the door for the insurance company to deny coverage. Whichever Is Less | Similar to the scope limitations, the ISO also added language which may limit coverage amounts. Within the construction industry, contracts often stipulate the amounts of coverage required. Prior to the April 2013 ISO revisions, if the contract required certain policy limits, these limits did not serve to restrict coverage. For example, if a contract between ABC Contractor and XYZ Subcontractor required that XYZ Subcontractor maintain $1,000,000 of general liability but XYZ Subcontractor actually maintained $2,000,000, ABC Contractor would have access to the full $2,000,000 of additional insured coverage. Because this situation creates the possibility of a windfall for the additionally insured party who gets more coverage than bargained for, the April 2013 ISO revisions restrict the insurance requirements to only those required in the contract: If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance: (1) required by the contract or agreement; or (2) available under the applicable Limits of Insurance shown in the Declarations, whichever is less. The new ISO language creates the risk that an upstream party leaves some insurance money on the table. In the above example, the new ISO language would limit ABC Contractor’s insurance coverage to $1,000,000 as required in the contract, despite the fact that XYZ Subcontractor actually maintains $2,000,000 in general liability coverage. Essentially, ABC Contractor has left $1,000,000 of insurance coverage on the table. The new ISO language also creates the risk of a lapse in coverage between per occurrence liability and aggregate liability. For example, assume XYZ Subcontractor was required to maintain $1,000,000 in per occurrence liability coverage and $5,000,000 in aggregate liability coverage. However, XYZ Subcontractor actually maintains $2,000,000 in per occurrence and $5,000,000 in aggregate liability coverage. Under the new ISO language, XYZ Subcontractor’s per occurrence liability is now capped at $1,000,000, however, XYZ Subcontractor’s aggregate liability would not be triggered until after their $2,000,000 in per occurrence liability. Thus, the new language has created a gap in coverage from $1,000,000 in per occurrence until $2,000,000 when the aggregate liability is triggered. To protect themselves from these risks, upstream parties must accurately forecast the required project insurance and modify contractual language to address the new ISO language. If the contract contains specific policy limits, the upstream party must ensure that the limits fit the particular needs of the project and ensure that the downstream party strictly complies with these limits. In addition, rather than placing specific insurance coverage amounts, the upstream party should consider requiring coverage amounts which do not delineate between per occurrence and aggregate liability amounts. For example, a contractor could require a subcontractor to maintain a minimum of $5,000,000 in combined per occurrence and aggregate liability coverage. Only to the Extent Permitted by Law | The last revision superficially appears more innocuous than its counterparts: “The insurance afforded to such additional insured only applies to the extent permitted by law.” However, this revision ties the additionally insured endorsements to many states’ anti-indemnity laws, which could render the additional insured requirement void. The vast majority of states have enacted some form of anti-indemnity law. These statutes invalidate contractual provisions requiring indemnification of certain acts. If the indemnification provision violates the statute, the entire indemnification provision may be rendered void. Before the ISO 2013 revisions, the effect that voiding an indemnification provision had on a requirement to provide additional insured coverage was uncertain. However, the ISO’s revisions appear to directly link the additional insured endorsement to the anti-indemnification provisions. Thus, there is an increased risk that if the indemnity provision is found void, so too will the additionally insured endorsement. Contracting parties can use two methods to protect themselves from this risk. First, the upstream party can clearly delineate between the indemnity provisions and the requirement for an additional insured endorsement. The goal is to strengthen the important distinction that an additional insured endorsement is a separate contractual requirement and independent from any indemnification requirements. Second, the upstream party can ensure that any indemnification provision complies with the antiindemnity law where the project is located. It is essential that the contracting parties do not use “form contracts” across state lines without tailoring the contract’s additional insured requirements to each state’s laws. Doing so may render the indemnity requirement and additionally insured requirement void. Conclusion | The 2013 ISO additional insured endorsement revisions create additional risks that need to be recognized within the construction industry. The simplest way to be protected from the new revisions is to insist that an additional insured endorsement be on a pre-2013 version of the ISO form. However, some insurance companies no longer use pre-2013 forms and, even if they do, they may charge an increased premium. Whatever the reason may be, if the ISO 2013 form is used, the importance of clear and concise contract drafting of the additional insured endorsements clause and the indemnity clause cannot be overstated. Nicholas Ceavers email@example.com 954-769-5326 Member of the State Bar of Florida Contract’s Notice Provision Bars Claim for Extra Work 774 The United States Court of Federal Claims recently held that a contractor’s claim for additional compensation for a change should be denied because the contractor failed to satisfy its contract’s written notice requirements. K-Con Building Systems, Inc. v. The United States, 114 Fed. Cl. 595 (2014). K-Con contracted with the United States Coast Guard to design and build a prefabricated structure at a Coast Guard station. The contract contained a standard FAR Changes clause requiring, among other things, that the contractor give written notice of a Contracting Officer’s directive that constitutes a change to the contract within 9 20 days of receiving any such directive; and then assert its right to an adjustment in the contract price or schedule within 30 days of submitting that 20-day notice. The primary issue in K-Conn was whether certain of the Coast Guard’s comments on the 35% and 50% design submittals constituted changes to the contract entitling the contractor to a time extension. This was important because the contractor finished the project more than six months late and was facing significant liquidated damages. The Coast Guard sent the contractor its 35% and 50% design-submittal review comments on April 13, 2004, and June 1, 2004, respectively. The contractor agreed to incorporate those comments into its design. Approximately 14 months later, on July 28, 2005, the contractor sent the Coast Guard a claim letter stating that a time extension was appropriate because of changes to the contract. Then, on December 15, 2006, the contractor sent a second claim letter in which it explained the basis of the alleged changes. The issue before the Court of Federal Claims was whether the contractor had provided the Coast Guard with written notice in conformance with the changes clause. Given that the contractor agreed to incorporate the review comments and the length of time that had passed between the receipt of the review comments and submittal of the claim letters, the court found that the contractor had not complied with the notice provision. The court stated that, in order “[t]o recover on its claim that the Coast Guard ordered changes to the contract without providing any compensation for those changes, [the contractor] must show that it complied with the requirements of the contract’s changes clause.” Finding that the contractor had failed to do so, the court denied the claim. Is K-Con Anomalous? | The crux of the court’s decision is the adequacy or inadequacy of K-Con’s notice to the government of circumstances giving rise to a constructive change. Such notice requirements are found in virtually all construction contracts. Strict notice requirements in construction contracts are often relaxed by courts based on the conduct of the parties. Such courts focus their analyses, for purposes of enforcement of the notice requirements, on principles of actual knowledge, prejudice, and waiver, to prevent a strict interpretation from defeating an equitable result. Courts have opined that adopting a severe and narrow application of a contract’s notice requirements are out of tune with the language and purpose of the notice provisions and that notice provisions shall not be applied technically and illiberally where the government is aware of the operative facts. See Hoel-Steffen Constr. Co. v. United States, 456 F.2d 760, 767-68 (Ct. Cl. 1972). Given the liberal interpretation of such clauses, compliance is often determined by whether the notice given satisfies the purposes of the clause. Thus, if contracting officials have knowledge of the facts or problems that form the basis of a claim and are able to perform necessary factfinding and decision-making, courts have often found that the government is not prejudiced by the contractor’s failure to strictly adhere to the notice requirements of the contract. This liberalization is not limited to federal construction contracts. Similar principles have been applied in state and private construction contracts wherein the parties may modify or waive notice requirements by their course of conduct throughout the project. In Nat Harrison Associates, Inc. v. Gulf States Utilities Co., 491 F.2d 578 (5th Cir. 1974), the court opined that notwithstanding a strict notice requirement, consistent actions of both parties may be found to constitute a waiver, and the contractor may recover additional compensation despite noncompliance with the contract. The court posited several situations which may form the basis for waiver of written notice requirements, including: (1) when the extra work was necessary and had not been foreseen; (2) when the changes were of such magnitude that they could not be supposed to have been made without the knowledge of the owner; (3) when the owner was aware of the additional work and made no objection to it; and (4) when there was a subsequent verbal agreement authorizing the work. In Nat Harrison, the contractor sought additional compensation for the additional manpower and equipment it was directed to use to maintain the original work schedule, despite owner-caused delays. The court found that the owner waived the notice requirement because it was aware of the additional work and made no objection to it; accordingly, the contractor was entitled to seek such additional compensation. Many of the factual scenarios outlined in Nat Harrison constituting waiver are dependent upon the owner’s involvement in the project and the particular work for which the contractor seeks additional compensation. In Ronald Adams Contractor, Inc. v. Miss. Transp. Comm’n, 777 So. 2d 649, 653-54 (Miss. 2000), the contractor sought additional compensation for work that it considered to be a site condition which materially differed from those indicated in the contract. It was undisputed that the contractor failed to comply with the written notice requirements of the contract upon discovery of the site condition. The court, however, allowed the contractor to pursue its claim for additional compensation because the owner had actual knowledge of the site condition and had already been investigating the condition; accordingly, the court opined that any such notice would have been useless. Conclusion | The specific facts in K-Con influenced the court to conclude that the lack of timely notice by the contractor could not be excused or waived. For example, the contractor apparently agreed to incorporate the proposed changes into the design without objection, and later (much later) first gave notice of the claim. If the contractor had contemporaneously noted that it felt the proposals were changes to the design, the result might have been different. In dealing with claims and contract requirements, courts often look to the essence of th agreement’s procedures to see if the practical objective has been achieved. In K-Con, that was not the result.