Our first case for the month of June comes from the Tenth District Court of Appeals for Ohio. A subcontractor submitted a quote to provide concrete to the contractor who was ultimately awarded a project with ODOT, but ODOT selected asphalt instead of concrete. ODOT’s decision to select the “more expensive, less efficient, less durable, and more intrusive material” was challenged by the subcontractor and a contractors’ association. Our second case also comes from the United States Court of Appeals for the Seventh Circuit, where an exclusion in an insurance policy limited an insurance company’s duty to defend and indemnify a private owner for damages to an adjacent property.

Disappointed Prospective Subcontractors Must Submit Bids or Have a Special Interest to Challenge a Contract Award

In most competitive bids for a construction project, there is at least one disappointed bidder. For every disappointed bidder, there are typically multiple disappointed subcontractors. When can a subcontractor that submits a quote to a contractor sue a public owner over the award of a contract? The Tenth District Court of Appeals for Ohio answered this question in Ohio Concrete Construction Ass’n v. Ohio Dep’t of Trans., 2009-Ohio-2400.

In Ohio Concrete, an association representing concrete contractors requested that ODOT include concrete as a paving alternative in a highway construction project. ODOT agreed to allow concrete as an alternate paving material and required each prime contractor to submit bids for both concrete and asphalt. A concrete subcontractor submitted a quote to a contractor who was ultimately awarded the highway construction contract. However, ODOT selected asphalt as the paving material for the project instead of concrete.The subcontractor sued ODOT claiming ODOT selected a “more expensive, less efficient, less durable, and more intrusive” product than concrete and that ODOT’s decision was based on “systematic and intentional bias in favor of asphalt over concrete….” The subcontractor sought a temporary restraining order preventing ODOT from proceeding with the project. ODOT asked the court to determine whether the subcontractor or the association had standing to sue

ODOT over the award of a construction project. The court considered whether the subcontractor had standing to sue either as a subcontractor seeking to obtain work on the project, or as a taxpayer with a special interest in the funds to be used in the project. The court also considered whether the concrete association had standing as an association representing concrete contractors in Ohio. The court first considered the subcontractor’s argument that it had standing as a subcontractor seeking to obtain work on a public construction contract.

The court stated that, as a general rule, disappointed prospective subcontractors must submit a bid on a project to have standing to challenge the award of a public construction contract.

The subcontractor pointed to case law stating that subcontractors do have standing to challenge conditions of a bid. However, the key difference between the case law provided by the subcontractor and this case was the timing of the challenge. In the cases provided by the subcontractor, the challenges to bid conditions came before the award of the contract. Here, the award of the contract had already occurred.

Next, the court considered the subcontractor’s argument that it had standing as a taxpayer with a special interest in the funds to be used in the project. First, the subcontractor claimed it had a special interest because ODOT violated statutory requirements to award to the lowest bidder. The court, however, stressed that ODOT deemed asphalt to be cheaper than concrete in this case. Since ODOT did award to the lowest bidder, there was no special interest and therefore no standing.

The subcontractor then claimed it had a special interest in the form of a property interest in the contract and the subcontractor was specifically harmed when ODOT chose asphalt over concrete. The court indicated that the subcontractor needed to show it was harmed in a way specifically different from the general public. Because the bid did not specifically name the subcontractor, and the subcontractor did not have an enforceable letter of intent, the subcontractor had no basis for a claim to a property right.

Regarding the standing of the association representing concrete contractors, the court announced that “an association has standing on behalf of its members when its members otherwise would have standing to sue in their own rights, the interests it is trying to protect are germane to the organization’s purpose, and the participation of individual members is not necessary to either the claim asserted or the relief requested.” Since the court determined the subcontractor did not have standing, the association did not have standing.

No Duty to Defend: Contractor- Subcontractor Exemption Eliminates Insurance Company’s Duty to Defend

In April 2009, the United States Court of Appeals for the Seventh Circuit issued its opinion in Nautilus Ins. Co. v. 1452-4 N. Milwaukee Ave., LLC, 562 F.3d 818, concluding that property damage claims resulting from faulty excavation work by a private owner’s contractors and subcontractors were excluded from coverage under the owner’s insurance policy due to a specific exclusion within the policy. As a result, the court held that the insurance company had no duty to defend (or indemnify) the owner for any property damage claims against it.

In Nautilus, a private owner hired contractors and subcontractors to complete excavation work on the owner’s property. The contractors and subcontractors botched the excavation and caused property damage to a restaurant on the neighboring property. Lawsuits were filed in state court against the private owner, contractor and subcontractor alleging negligence, negligent hiring and statutory notice claims.

After the private owner’s insurance company denied coverage, the insurance company filed a complaint for declaratory relief in federal court to determine whether the property damage claims in the state court complaints were excluded from coverage under the insurance company’s general liability policy. The federal district court ruled against the insurance company on the grounds that the exclusions in the owner’s insurance company were not applicable. On appeal, the lower court’s decision was reversed.

The Seventh Circuit’s analysis began and ended with the so-called “contractor-subcontractor exclusion” in the insurance company’s general liability policy. This excluded from coverage property damage “arising out of operations performed for [the owner] by contractors or subcontractors [the owner] hire[s].”

Because all of the claims in the state court lawsuits involved property damage arising from the faulty excavation work performed by the owner’s contractors and subcontractors, coverage was properly denied. As a result, the insurance company had no duty to defend or indemnify the insured owner. This case reaffirms the importance of knowing and understanding the terms and conditions of your insurance policies. Make sure to talk to your insurance broker if you have any questions.